UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
Commission File No. 1-14473
Sky Financial Group, Inc.
(Exact Name of Registrant as Specified in its Charter)
Ohio 34-1372535
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
221 South Church Street, Bowling Green, Ohio 43402
(Address of Principal Executive Offices) (Zip Code)
(419) 327-6300
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
The number of shares outstanding of the Registrant's common stock, without
par value was 82,783,798 at April 30, 2001.
1
SKY FINANCIAL GROUP, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
March 31, 2001 and December 31, 2000..................... 3
Consolidated Statements of Income
Three months ended March 31, 2001 and 2000............... 4
Condensed Consolidated Statements of Changes in
Shareholders' Equity
Three months ended March 31, 2001 and 2000............... 5
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2001 and 2000............... 6
Notes to Consolidated Financial Statements................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................ 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 23
Item 2. Changes in Securities...................................... 23
Item 3. Defaults Upon Senior Securities............................ 23
Item 4. Submission of Matters to a Vote of Security Holders........ 24
Item 5. Other Information.......................................... 24
Item 6. Exhibits and Reports on Form 8-K........................... 24
SIGNATURES.......................................................... 25
EXHIBIT INDEX....................................................... 26
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SKY FINANCIAL GROUP, INC.
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except share data) March 31, December 31,
2001 2000
- -----------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 227,163 $ 266,359
Interest-earning deposits
with financial institutions 17,834 17,725
Federal funds sold 107,000 --
Loans held for sale 41,473 13,984
Securities available for sale 1,773,357 1,846,517
Total loans 5,983,009 5,916,098
Less allowance for credit losses (95,658) (93,261)
---------- ----------
Net loans 5,887,351 5,822,837
Premises and equipment 113,019 115,029
Accrued interest receivable and other assets 301,693 304,351
---------- ----------
TOTAL ASSETS $8,468,890 $8,386,802
========== ==========
LIABILITIES
Deposits
Non-interest-bearing deposits $ 725,138 $ 757,483
Interest-bearing deposits 5,331,958 5,134,449
---------- ----------
Total deposits 6,057,096 5,891,932
Securities sold under repurchase
agreements and federal funds purchased 716,033 702,985
Debt and Federal Home Loan Bank advances 825,240 933,444
Obligated mandatorily redeemable capital
securities of subsidiary trusts 108,600 108,600
Accrued interest payable
and other liabilities 139,475 140,151
---------- ----------
TOTAL LIABILITIES 7,846,444 7,777,112
---------- ----------
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;
84,019,634 and 84,015,577 shares
issued in 2001 and 2000 597,719 597,723
Retained earnings 40,483 26,599
Treasury stock; 1,112,420 and
607,633 shares in 2001 and 2000 (18,997) (10,491)
Unearned ESOP (300) (300)
Accumulated other comprehensive income (loss) 3,541 (3,841)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 622,446 609,690
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $8,468,890 $8,386,802
========== ==========
The accompanying notes are an integral part of the financial statements.
3
SKY FINANCIAL GROUP, INC.
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, Three Months Ended
except per share data) March 31,
2001 2000
- -----------------------------------------------------------------------------------------------------
Interest Income
Loans, including fees $ 132,276 $ 119,486
Securities
Taxable 29,230 26,714
Nontaxable 544 2,252
Federal funds sold and other 659 285
---------- ----------
Total interest income 162,709 148,737
---------- ----------
Interest Expense
Deposits 60,275 50,593
Borrowed funds 25,657 21,844
---------- ----------
Total interest expense 85,932 72,437
---------- ----------
Net Interest Income 76,777 76,300
Provision for Credit Losses 6,656 4,337
---------- ----------
Net Interest Income After
Provision for Credit Losses 70,121 71,963
---------- ----------
Other Income
Trust services income 3,706 3,732
Service charges and fees on
deposit accounts 6,909 6,298
Mortgage banking income 4,652 2,709
Brokerage and insurance commissions 8,774 6,510
Collection agency fees -- 788
Net securities gains 925 182
Net gains on sales of
commercial financing loans -- 3,362
Other income 7,205 7,036
---------- ----------
Total other income 32,171 30,617
---------- ----------
Other Expense
Salaries and employee benefits 31,205 30,090
Occupancy and equipment expense 9,217 9,412
Other operating expense 18,817 17,904
---------- ----------
Total other expenses 59,239 57,406
---------- ----------
Income Before Income Taxes 43,053 45,174
Income taxes 14,216 14,068
---------- ----------
Net Income $ 28,837 $ 31,106
========== ==========
Earnings Per Common Share
Basic $ 0.35 $ 0.36
Diluted $ 0.35 $ 0.36
The accompanying notes are an integral part of the financial statements.
4
SKY FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
(Dollars in thousands, Three Months Ended
except per share data) March 31,
2001 2000
- -----------------------------------------------------------------------
Balance at beginning of period $609,690 $566,331
Comprehensive income
Net income 28,837 31,106
Other comprehensive income (loss) 7,382 (2,128)
-------- --------
Total comprehensive income 36,219 28,978
Common cash dividends (14,982) (15,585)
Treasury shares acquired (8,781) (10,787)
Treasury shares issued 754 1,663
Fractional shares and other items (454) 527
-------- --------
Balance at end of period $622,446 $571,127
======== ========
Common cash dividends per share $ 0.18 $ 0.18
The accompanying notes are an integral part of the financial statements.
5
SKY FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
(Dollars in thousands) March 31,
2001 2000
- ------------------------------------------------------------------------
Net Cash From Operating Activities $ 3,985 $ 21,369
--------- ---------
Investing Activities
Net (increase) decrease in interest-bearing
deposits in other banks (109) 3,521
Net increase in federal funds sold (107,000) (4,900)
Securities available for sale:
Proceeds from maturities and payments 227,865 121,001
Proceeds from sales 42,381 1,044
Purchases (180,968) (67,538)
Proceeds from sales of loans 2,351 2,446
Net increase in loans (73,903) (100,481)
Purchases of premises and equipment (2,896) (5,286)
Proceeds from sales of premises and equipment 1,618 78
Proceeds from sales of other real estate 550 816
--------- ---------
Net cash from investing activities (90,111) (49,299)
--------- ---------
Financing Activities
Net increase in deposit accounts 165,164 40,211
Net increase (decrease) in federal funds
and repurchase agreements 13,048 (6,869)
Net increase (decrease) in borrowings
under bank lines of credit 7,105 (50,000)
Net decrease in short-term FHLB advances (132,000) (115,500)
Proceeds from issuance of debt
and long-term FHLB advances 84,495 160,000
Repayment of debt and long-term
FHLB advances (67,804) (76,653)
Cash dividends and fractional shares paid (15,051) (15,620)
Proceeds from issuance of common stock 754 1,663
Treasury stock purchases (8,781) (10,787)
--------- ---------
Net cash from financing activities 46,930 (73,555)
--------- ---------
Net decrease in cash and due from banks (39,196) (101,485)
Cash and due from banks at beginning of year 266,359 380,980
--------- ---------
Cash and due from banks at end of period $ 227,163 $ 279,495
========= =========
Supplemental Disclosures
Interest paid $ 83,047 $ 73,476
Income taxes paid 2,082 1,000
The accompanying notes are an integral part of the financial statements.
6
SKY FINANCIAL GROUP, INC.
Notes to Consolidated Financial Information (Unaudited)
(Dollars in thousands, except per share data)
1. Accounting Policies
Sky Financial Group, Inc. (Sky Financial) is a financial holding company
headquartered in Bowling Green, Ohio. Sky Financial has three bank subsidiaries
primarily engaged in the commercial and consumer banking business in Ohio,
southern Michigan, western Pennsylvania and West Virginia. Sky Financial also
operates businesses relating to commercial finance lending, insurance, trust and
other financial related services.
The accounting and reporting policies followed by Sky Financial conform to
generally accepted accounting principles and to general practices within the
financial services industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Actual results could differ from those estimates. The
allowance for credit losses and fair values of financial instruments are
particularly subject to change.
These interim financial statements are prepared without audit and reflect all
accruals of a normal recurring nature which, in the opinion of management, are
necessary to present fairly the consolidated financial position of Sky Financial
at March 31, 2001, and its results of operations and cash flows for the periods
presented. Certain amounts in prior financial statements have been reclassified
to conform to the current presentation. The accompanying consolidated financial
statements do not contain all financial disclosures required by generally
accepted accounting principles. Sky Financial's Annual Report for the year ended
December 31, 2000, contains consolidated financial statements and related notes
which should be read in conjunction with the accompanying consolidated financial
statements.
The consolidated financial statements of Sky Financial include the accounts of
Sky Bank, Sky Bank - Mid Am Region, Sky Bank - Ohio Bank Region, Sky Financial
Solutions, Inc. (SFS), Sky Trust, N.A., (Sky Trust), Picton Cavanaugh, Inc.
(Picton), Meyer & Eckenrode Insurance Group, Inc. (Meyer & Eckenrode), and
various other insignificant subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.
New Accounting Pronouncements
Beginning January 1, 2001, a new accounting standard requires 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
fair value hedges are generally 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. Fair value changes involving cash flow hedges are recorded
in other comprehensive income. This standard resulted in a pre-tax reduction of
$3,662 in other comprehensive income in the first quarter of 2001.
7
2. Mergers, Acquisitions and Divestitures
In March 2001, Sky Financial completed the sale of Sky Investments, Inc., its
independent broker/dealer business. The sale resulted in a $634 pre-tax gain.
In December 2000, Sky Financial sold substantially all of the assets of Sky
Asset Management Services, Inc., its collection agency located in Clearwater,
Florida. The sale resulted in a $500 pre-tax loss.
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.
3. Securities Available for Sale
The amortized costs, unrealized gains and losses and estimated fair values at
March 31, 2001 and December 31, 2000 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
March 31, 2001 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------
U.S. Treasury and U.S.
Government agencies $ 512,790 $ 7,334 $ (2,499) $ 517,625
Obligations of states and
political subdivisions 44,541 195 (232) 44,504
Corporate and other
securities 76,194 133 (4,826) 71,501
Mortgage-backed
securities 1,017,880 12,276 (2,089) 1,028,067
---------- ---------- -------- ----------
Total debt securities
available for sale 1,651,405 19,938 (9,646) 1,661,697
Marketable equity
securities 112,843 5,732 (6,915) 111,660
---------- ---------- -------- ----------
Total securities
available for sale $1,764,248 $ 25,670 $(16,561) $1,773,357
========== ========== ======== ==========
December 31, 2000
- -----------------
U.S. Treasury and U.S.
Government agencies $ 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
========== ========== ======== ==========
8
4. Loans
The loan portfolios are as follows:
March 31, 2001 December 31, 2000
- --------------------------------------------------------------------------------
Real estate loans:
Construction $ 225,546 $ 210,135
Residential mortgage 1,615,298 1,663,111
Non-residential mortgage 1,595,619 1,575,907
Commercial, financial and
agricultural 1,645,084 1,568,766
Installment and credit card loans 886,053 884,750
Other loans 15,409 13,429
---------- ----------
Total loans $5,983,009 $5,916,098
========== ==========
5. Borrowings
Sky Financial's debt, Federal Home Loan Bank (FHLB) advances and obligated
mandatorily redeemable capital securities of subsidiary trusts are comprised of
the following:
March 31, 2001 December 31, 2000
- --------------------------------------------------------------------------------
Borrowings under bank lines of credit $ 80,783 $ 73,678
Asset backed notes 82,320 --
Borrowings under FHLB lines of credit 608,409 805,581
Subordinated note, 7.08%, January 2008 50,000 50,000
Obligated mandatorily redeemable capital
securities of subsidiary trusts
Due February 2027 at 9.875% 25,000 25,000
Due June 2027 at 10.20% 23,600 23,600
Due May 2030 at 9.34% 60,000 60,000
Capital lease obligations 1,668 1,668
Other items 2,060 2,517
-------- ----------
Total borrowings $933,840 $1,042,044
======== ==========
6. Other Comprehensive Income
Other comprehensive income consisted of the following:
Three Months Ended
March 31,
2001 2000
- --------------------------------------------------------------------------
Securities available for sale:
Unrealized securities gain (loss)
arising during period $15,943 $(3,092)
Reclassification adjustment for
(gains) losses included in income (925) (182)
------- -------
15,018 (3,274)
Cash flow hedge derivatives:
Adjustment for adoption of SFAS No. 133 (1,231) --
Unrealized loss on cash flow hedge derivatives (2,431) --
------- -------
(3,662) --
------- -------
Net unrealized gain (loss) 11,356 (3,274)
Tax effect (3,974) 1,146
------- -------
Total other comprehensive income (loss) $ 7,382 $(2,128)
======= =======
9
7. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of shares outstanding during the period, as restated for 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. For the three months
ended March 31, 2001 and 2000, 2,261,000 and 2,898,000 weighted shares,
respectively, under option were excluded from the diluted earnings per share
calculation as they were anti-dilutive.
Earnings per share data have also been restated for the 10% stock dividends
declared in October 2000 and paid in November 2000.
The weighted average number of common shares outstanding for basic and
diluted earnings per share computations were as follows:
Three Months Ended
March 31,
2001 2000
- ------------------------------------------------------------
Numerator:
Net income $ 28,837 $ 31,106
=========== ===========
Denominator:
Weighted-average common
shares outstanding (basic) 83,144,000 85,382,000
Effect of stock options 421,000 403,000
----------- -----------
Weighted-average common
shares outstanding (diluted) 83,565,000 85,785,000
=========== ===========
Earnings per share:
Basic $ 0.35 $ 0.36
Diluted 0.35 0.36
8. Capital Resources
The Federal Reserve Board (FRB) has established risk-based capital guidelines
that must be observed by financial holding companies and banks. Failure to meet
specified minimum capital requirements can result in certain mandatory actions
by primary regulators of Sky Financial and its bank subsidiaries that could have
a material effect on Sky Financial's financial condition or results of
operations. Under capital adequacy guidelines, Sky Financial and its bank
subsidiaries must meet specific quantitative measures of their assets,
liabilities and certain off balance sheet items as determined under regulatory
accounting practices. Sky Financial's and its banks' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors. Management believes, as of March
31, 2001, that Sky Financial and its banks meet all capital adequacy
requirements to which they are subject.
10
Sky Financial and its banks have been notified by their respective regulators
that, as of the most recent regulatory examinations, each is regarded as well
capitalized under the regulatory framework for prompt corrective action. Such
determinations have been made evaluating Sky Financial and its banks under Tier
I, total capital, and leverage ratios. There are no conditions or events since
these notifications that management believes have changed any of the well
capitalized categorizations of Sky Financial and its bank subsidiaries.
The following table presents the capital ratios of Sky Financial.
March 31, 2001 December 31, 2000
- ------------------------------------------------------------------------------
Total adjusted average assets
for leverage ratio $ 8,320,154 $ 8,219,701
Risk-weighted assets and
off-balance-sheet financial
instruments for capital ratio 6,853,763 6,831,698
Tier I capital 683,324 676,934
Total risk-based capital 829,869 825,118
Leverage ratio 8.2% 8.2%
Tier I capital ratio 10.0 9.9
Total capital ratio 12.1 12.1
Capital ratios applicable to Sky Financial's banking subsidiaries at
March 31, 2001 were as follows:
Total
Tier I Risk-based
Leverage Capital Capital
- ------------------------------------------------------------------------------
Regulatory Capital Requirements
Minimum 4.0% 4.0% 8.0%
Well-capitalized 5.0 6.0 10.0
Bank Subsidiaries
Sky Bank 6.4 8.6 10.8
Sky Bank - Mid Am Region 6.3 7.8 11.3
Sky Bank - Ohio Bank Region 7.0 9.3 11.5
In September, 2000, the Board of Directors of Sky Financial reauthorized
management to undertake purchases of up to an additional 5% (or approximately
4.2 million shares) of Sky Financial's outstanding common stock over a twelve
month period in the open market or in privately negotiated transactions. The
shares reacquired are held as treasury stock and reserved for use in future
stock dividends and use in its stock option plans or general corporate purposes.
As of March 31, 2001, Sky Financial had repurchased approximately 1,213,000
shares of common stock pursuant to its 2000 repurchase program.
11
9. Line of Business Reporting
Prior to the third quarter of 2000, Sky Financial reported two major lines of
business: community banking and financial service affiliates. In the third
quarter of 2000, management began reporting the results of its commercial
finance lending affiliate, Sky Financial Solutions, separately from its other
financial service affiliates. Prior periods were restated for comparability.
Community banking includes lending and related services to businesses and
consumers, mortgage banking and deposit-gathering. Commercial finance lending
includes specialized lending to health care professionals, primarily dentists.
Other financial service affiliates consist of non-banking companies engaged in
broker/dealer operations, non-conforming mortgage lending, collection
activities, trust and wealth management, insurance and other financial-related
services.
Sky Financial retains in its loan portfolio the commercial financing loans to
health care professionals originated through its subsidiary, SFS, which in
periods prior to the third quarter of 2000 had been sold upon origination to
investors in the secondary market. The implementation of the new program and the
elimination of gain on sale accounting treatment reduced first quarter of 2001
operating earnings by $2,310 compared to the first quarter last year. Sky
Financial has entered into amortizing interest rate swaps, whereby it pays a
fixed rate of interest and receives a variable rate. The swap is designed to fix
the rate on the borrowings of a warehouse line that is used to fund the loan
originations at SFS.
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.
12
Selected segment information for the three months ended March 31, 2001 and 2000
is included in the following tables:
Financial Sky Parent
Three Months Ended Community Service Financial and
March 31, 2001 Banking Affiliates Solutions Other Total
- --------------------------------------------------------------------------------
Net interest income $ 76,408 $ 385 $ 1,224 $ (1,240) $ 76,777
Provision for
credit losses 5,071 150 1,435 -- 6,656
------- ------- -------- -------- ----------
Net interest income
after provision 71,337 235 (211) (1,240) 70,121
Other income 17,645 12,552 556 1,418 32,171
Other expenses 44,585 10,650 3,675 329 59,239
------- ------- -------- -------- ----------
Income (loss) before
income taxes 44,397 2,137 (3,330) (151) 43,053
Income taxes 14,733 899 (1,187) (229) 14,216
------- ------- -------- -------- ----------
Net income (loss) $29,664 $ 1,238 $ (2,143) $ 78 $28,837
======= ======= ======== ======== ==========
Period-end assets $8,120,562 $62,956 $176,586 $108,786 $8,468,890
Depreciation and
amortization $ 3,005 $ 377 $ 142 $ 1,152 $ 4,676
Financial Sky Parent
Three Months Ended Community Service Financial and
March 31, 2000 Banking Affiliates Solutions Other Total
- --------------------------------------------------------------------------------
Net interest income $ 77,725 $ 312 $ 204 $ (1,941) $ 76,300
Provision for
credit losses 4,261 76 -- -- 4,337
---------- ------- -------- -------- ----------
Net interest income
after provision 73,464 236 204 (1,941) 71,963
Other income 15,566 11,791 3,716 (456) 30,617
Other expenses 44,979 10,474 3,628 (1,675) 57,406
---------- ------- -------- -------- ----------
Income (loss) before
income taxes 44,051 1,553 292 (722) 45,174
Income taxes 13,853 544 125 (454) 14,068
---------- ------ -------- -------- ----------
Net income (loss) $ 30,198 $ 1,009 $ 167 $ (268) $ 31,106
========== ======= ======== ======== ==========
Period-end assets $7,853,661 $47,079 $ 23,668 $106,886 $8,031,294
Depreciation and
amortization $ 3,400 $ 168 $ 140 $ 1,038 $ 4,746
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Dollars in thousands, except per share data)
Three Months Ended March 31, 2001 and 2000
Results of Operations
Operating earnings for the first quarter of 2001 was $28,425, a decrease of
$2,681 compared to the first quarter of 2000 operating earnings of $31,106.
Diluted operating earnings per common share for the first quarter of 2001 was
$.34 ($.34 basic), as compared to $.36 ($.36 basic) for the same period in 2000.
The first quarter results reflect the implementation by Sky Financial of its new
program to retain in its loan portfolio the commercial financing loans to health
care professionals originated through its subsidiary, Sky Financial Solutions,
Inc., which in prior periods had been sold upon origination to investors in the
secondary market. The implementation of the new program and the elimination of
gain on sale accounting treatment reduced operating earnings by $2,310, or $.03
per diluted share, compared to the first quarter last year. On an operating
basis, return on average equity (ROE) and return on average assets (ROA), also
impacted by the new program, were 18.79% and 1.38%, respectively, for the first
quarter of 2001, compared to 21.85% and 1.57%, respectively, in 2000.
On a reported basis, net income for the first quarter of 2001 was $28,837, a
decrease of $2,269 over the first quarter of 2000 net income of $31,106. Diluted
earnings per common share for the first quarter of 2001 was $.35 ($.35 basic),
as compared to $.36 ($.36 basic) for the same period in 2000. In March 2001, Sky
Financial completed the sale of its independent broker/dealer business realizing
an after-tax non-recurring gain of $412.
Business Line Results
Sky Financial's business line results for the first quarter ended
March 31, 2001 and 2000 are summarized in the table below.
Net Income (Loss)
Quarter Ended March 31, 2001 2000
- ----------------------------------------------------------------
Community Banking $29,664 $30,198
Financial Service Affiliates 1,238 1,009
Sky Financial Solutions, Inc. (2,143) 167
Parent and Other 78 (268)
------- -------
Consolidated Total $28,837 $31,106
======= =======
14
The community banking net income for the first quarter of 2001 decreased
slightly from 2000 first quarter earnings. This was primarily due to a decrease
in net interest income and a higher provision for credit losses, that was offset
by an increase in mortgage banking income. The decrease in net interest income
reflects the impacts of a narrower net interest spread and the reallocation of
capital to the parent company at year-end 2000. The efficiency ratio was 47.0%
for the first quarter of 2001 compared to 47.2% in the first quarter of 2000.
The 2001 community banking results reflect a ROE of 21.34% and a ROA of 1.50%
compared to 21.14% and 1.56%, respectively, in the first quarter of 2000.
Sky Financial Solutions earnings decreased for the first quarter of 2001 as
compared to the same period in 2000. The first quarter 2001 results reflect Sky
Financial's program to retain in its loan portfolio the commercial financing
loans to health care professionals originated through its subsidiary, SFS, which
in periods prior to the third quarter of 2000 had been sold upon origination to
investors in the secondary market. The implementation of the new program and the
elimination of gain on sale accounting treatment reduced operating earnings
$2,310 compared to the first quarter of 2000.
The financial service affiliates' earnings reflect Sky Financial's strategies to
improve the profitability contribution of these businesses. For the first
quarter of 2001, earnings increased $229 as compared to 2000, primarily due to
earnings increases from insurance commissions at Meyer & Eckenrode and Picton,
partially offset by higher expenses at Sky Trust. For the first quarter of 2001,
revenues increased $761 as compared to 2000, primarily due to increases in
insurance commissions at Meyer & Eckenrode and Picton.
Parent and other includes the net funding costs of the parent company and all
significant non-recurring items of income and expense. The reason for the
improvement in parent and other business segment is in March, 2001, Sky
Financial completed the sale of its independent broker/dealer business realizing
an after-tax non-recurring gain of $412.
Net Interest Income
Net interest income for the first quarter of 2001 was $76,777, an increase of
$477 or 1% from $76,300 in the first quarter of 2000. Net interest income, the
difference between interest income earned on interest-earning assets and
interest expense incurred on interest-bearing liabilities, is the most
significant component of the Company's earnings. Net interest income is affected
by changes in the volumes, rates and composition of interest-earning assets and
interest-bearing liabilities. Average earning assets increased 6% from the first
quarter last year, with continued strong growth in average loans, increasing 8%
from last year. Average deposits, up 3.5% from the same quarter last year grew
at an annualized rate of 6% in the first quarter. Sky Financial's net interest
margin for the three months ended March 31, 2001 was 4.03%, an increase of 3
basis points from fourth quarter of 2000, but down 23 basis points from the
first quarter a year ago. The net interest margin improvement from last quarter
resulted primarily from loan and deposit growth, improving both the earning
asset and funding mix.
15
The following table reflects the components of Sky Financial's net interest
income for the three months ended March 31, 2001 and 2000. Rates are computed on
a tax equivalent basis and non-accrual loans have been included in the average
balances.
SKY FINANCIAL GROUP, INC.
Average Balance Sheets and Net Interest Margins (Unaudited)
(Dollars in thousands) Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
- ------------------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------
Interest-earning assets
Interest-earning deposits $ 15,457 $ 236 6.19% $ 15,857 $ 169 4.29%
Federal funds sold and other 31,088 423 5.52 8,403 116 5.55
Securities 1,794,868 30,185 6.82 1,846,285 30,355 6.61
Loans 5,976,722 132,772 9.01 5,522,017 120,150 8.75
---------- -------- ---------- ---------
Total interest-earning assets 7,818,135 163,616 8.49 7,392,562 150,790 8.20
---------- ----------
Non-earning assets 547,993 572,043
---------- ----------
Total assets $8,366,128 $7,964,605
========== ==========
Interest-bearing liabilities
Demand deposits $ 140,553 $ 928 2.68% $ 130,237 $ 685 2.12%
Savings deposits 1,856,145 12,183 2.66 1,862,584 10,619 2.29
Time deposits 3,208,279 47,164 5.96 2,994,165 39,289 5.28
---------- -------- ---------- ---------
Total interest-bearing deposits 5,204,977 60,275 4.70 4,986,986 50,593 4.08
Short-term borrowings 697,364 8,660 5.04 627,003 7,776 4.99
Trust preferred securities 108,600 2,586 9.66 49,259 1,210 9.88
Debt and FHLB advances 880,858 14,411 6.63 870,695 12,858 5.94
---------- -------- ---------- ---------
Total interest-bearing liabilities 6,891,799 85,932 5.06 6,533,943 72,437 4.46
-------- ---------
Non-interest-bearing liabilities 860,976 858,200
Shareholders' equity 613,353 572,462
---------- ----------
Total liabilities and equity $8,366,128 $7,964,605
========== ==========
Net interest income, fully
taxable equivalent and
Net interest spread $ 77,684 3.43% $ 78,353 3.74%
======== =========
Net interest income, fully
taxable equivalent to
earning assets 4.03% 4.26%
16
Provision for Credit Losses
The provision for credit losses represents the charge to income necessary to
adjust the allowance for loan losses to an amount that represents management's
assessment of the estimated probable credit losses inherent in Sky Financial's
loan portfolio which have been incurred at each balance sheet date. The
provision for credit losses increased $2,319 or 53% to $6,656 in the first
quarter of 2001 compared to $4,337 in the first quarter of 2000. The higher
provision for credit losses in the first quarter of 2001 was attributable to
growth in the loan portfolio, which now includes loan originations by SFS, and
higher net charge-offs. Net charge-offs were $4,259 or 0.29% (annualized) of
average loans during the three months ended March 31, 2001, compared to $3,257
or 0.24% (annualized) for the same period in 2000.
March 31, December 31, March 31,
2001 2000 2000
- -------------------------------------------------------------------------------
Allowance for credit losses
as a percentage of loans 1.60% 1.58% 1.58%
Allowance for credit losses
as a percentage of
non-performing loans 344.25 434.58 374.33
Other Income
The change in other income reflects the emphasis of Sky Financial on expanding
its profitable fee-based businesses, divesting its under-performing businesses
and the redesign of SFS. Other income for the first quarter of 2001, excluding
non-recurring gains and the impact of eliminating gains on the sales of loans at
SFS, was $31,537, an increase of $4,282 or 16% from the $27,255 for the same
quarter of 2000. On a reported basis, first quarter 2001 other income increased
$1,554 as compared to the same period for last year. Other income growth was
most significant in insurance commissions, up $2,264, or 35%, primarily
attributable to Meyer & Eckenrode, an insurance agency acquired during the third
quarter of 2000, and mortgage banking income, up $1,943 or 72%, and net
securities gains, up $743. Mortgage banking income increased due to significant
increases in origination volumes in the more favorable interest rate environment
compared to the prior year. The increases were partially offset by collection
agency fee income decreasing from $788 to zero due to the sale of Sky Asset
Management Services, Inc. in the fourth quarter of 2000. In addition, the first
quarter of 2001 included $2,335 in commission revenue from Sky Investments,
Inc., which was sold effective March 16, 2001.
Other Expense
Other expense for the first quarter of 2001 was $59,239, an increase of $1,833
or 3%, from the $57,406 reported for the same quarter of 2000. The efficiency
ratio was 54.24% for the first quarter of 2001, up from 52.68% for the same
quarter last year, with the increase primarily related to lower current revenues
resulting from the implementation of the new program at SFS.
17
Income Taxes
The provision for income taxes for the first quarter of 2001 increased $148 to
$14,216 from $14,068 for the same period in 2000. The effective tax rate for the
three months ended March 31, 2001 was 33.0% as compared to 31.1% for the same
period in 2000. The higher effective tax rate is mainly due to a reduction in
tax-exempt interest income resulting from a restructuring of the investment
portfolio in the third quarter of 2000.
Balance Sheet
At March 31, 2001, total assets were $8,468,890, an increase of $82,088 from
December 31, 2000. The increase was primarily attributable to an increase in
federal funds sold of $107,000, an increase in loans held for sale of $27,489
and continued growth in loans, up $66,911 to $5,983,009. The increases were
partially offset by a reduction in securities available for sale of $73,160 and
a decrease in cash and due from banks of $39,196. The net growth in assets was
funded primarily by growth in total deposits, up $165,164, and was partially
offset by a decrease in borrowed funds of $95,156. Shareholders' equity totaled
$622,446 at March 31, 2001, increasing $12,756 from December 31, 2000. Net
retained earnings (net income less cash dividends) for the three months ended
March 31, 2001 totaled $13,855. Other comprehensive income increased by $7,382,
primarily due to an increase in the market value of securities available for
sale. The increases were offset mainly by a net increase in treasury stock of
$8,027 as Sky Financial continued to repurchase shares, as authorized by its
Board of Directors, for issuance in future stock dividends and stock option
plans (see Condensed Consolidated Statement of Changes in Shareholders' Equity
and Note 8).
Non-Performing Assets
The following table presents the aggregate amounts of non-performing assets and
respective ratios on the dates indicated.
March 31, December 31, March 31,
2001 2000 2000
- ----------------------------------------------------------------------
Non-accrual loans $26,697 $20,329 $21,842
Restructured loans 1,090 1,131 1,621
------- ------- -------
Total non-performing loans 27,787 21,460 23,463
Other real estate owned 2,164 2,221 3,664
------- ------- -------
Total non-performing assets $29,951 $23,681 $27,127
======= ======= =======
Loans 90 days or more past due
and not on non-accrual $ 9,011 $10,294 $ 7,099
Non-performing loans to
total loans 0.46% 0.36% 0.42%
Non-performing assets to
total loans plus other
real estate owned 0.50 0.40 0.49
Allowance for credit losses to
total non-performing loans 344.25 434.58 374.33
Loans 90 days or more past due
and not on non-accrual to
total loans 0.15 0.17 0.13
18
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 $41,832 and $48,968 at March 31, 2001 and December 31, 2000,
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. These loans
require close monitoring despite the fact that they are performing according to
their terms. Such classifications relate to specific concerns relating to each
individual borrower and do not relate to any concentrated risk elements common
to all loans in this group.
As of March 31, 2001, Sky Financial did not have any loan concentrations
which exceeded 10% of total loans.
Allowance for Credit Losses
The following table presents a summary of Sky Financial's credit loss
experience for the three months ended March 31, 2001 and 2000.
Three Months Ended
March 31,
2001 2000
- ---------------------------------------------------------------
Balance of allowance at beginning of year $93,261 $86,750
Loans charged-off:
Real estate (410) (348)
Commercial and agricultural (2,515) (2,012)
Installment and credit card (3,365) (3,682)
Other loans -- --
------- -------
Total loans charged-off (6,290) (6,042)
------- -------
Recoveries:
Real estate 224 472
Commercial and agricultural 735 1,321
Installment and credit card 1,059 987
Other loans 13 5
------- -------
Total recoveries 2,031 2,785
------- -------
Net loans charged-off (4,259) (3,257)
Provision charged to operating expense 6,656 4,337
------- -------
Balance of allowance at end of period $95,658 $87,830
======= =======
Ratio of net charge-offs to
average loans outstanding 0.29% 0.24%
Allowance for credit losses
to total loans 1.60 1.58
Allowance for credit losses
to total non-performing loans 344.25 374.33
19
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 revision 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.
The following table sets forth Sky Financial's allocation of the allowance
for credit losses as of March 31, 2001 and December 31, 2000.
March 31, 2001 December 31, 2000
- --------------------------------------------------------------------------------
Construction $ 1,378 $ 1,132
Real estate 27,086 27,091
Commercial, financial
and agricultural 23,935 21,619
Installment and credit card 25,561 25,606
Other loans 955 1,009
Unallocated 16,743 16,804
-------- ---------
Total $ 95,658 $ 93,261
======== =========
Liquidity
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 in 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.
20
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 March 31, 2001, securities and
other short term investments with maturities of one year or less totaled
$224,818. In addition, the mortgage-backed securities provide an estimated cash
flow of approximately $33,099 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 March 31, 2001,
the banking subsidiaries had total credit availability with the FHLB of
$815,272, of which $608,409 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. At March 31, 2001, the outstanding balance
was $45,783 under the warehouse line of credit. Term funding of $82,320 was
arranged in February 2001 through the issuance of collateralized notes in a
private placement.
Since Sky Financial is a holding company and does not conduct operations, its
primary sources of liquidity are borrowings from outside sources and
dividends paid to it by its subsidiaries. For the banking subsidiaries,
regulatory approval is required in order to pay dividends in excess of the
subsidiaries' earnings retained for the current year plus retained net
profits for the prior two years. As a result of these restrictions,
dividends that could be paid to Sky Financial by its bank subsidiaries,
without prior regulatory approval, were limited to $30,446 at March 31, 2001.
In February, 2001, Sky Financial renegotiated an agreement with unrelated
financial institutions which enabled Sky Financial to borrow up to $95,000
through March 5, 2002. At March 31, 2001, Sky Financial had borrowings of
$35,000 under this agreement.
Asset/Liability Management
Closely related to liquidity management is the management of interest-earning
assets and interest-bearing liabilities. Sky Financial manages its rate
sensitivity position to avoid wide swings in net interest margins and to
minimize risk due to changes in interest rates. At March 31, 2001, Sky
Financial had a manageable negative gap position and therefore does not
expect to experience any significant fluctuations in its net interest income
as a consequence of changes in interest rates. See also Item. 3,
"Quantitative and Qualitative Disclosures About Market Risk."
Forward-Looking Statements
This report includes forward-looking statements by Sky Financial relating to
such matters as anticipated operating results, 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
21
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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, 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 March 31,
2001 and December 31, 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.
22
The following table 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.
March 31, December 31,
2001 2000 Guidelines
- ------------------------------------------------------------------------
One Year Net Interest
Income Change
+200 Basis points (3.9)% (2.7)% (10.0)%
- -200 Basis points 0.8 0.6 (10.0)
Net Present Value of
Equity Change
+200 Basis points (23.6) (25.4)% (30.0)%
- -200 Basis points 22.9 34.0 (30.0)
The projected volatility of net interest income and the net present value of
equity rates to a +/- 200 basis points change at March 31, 2001 and
December 31, 2000 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
23
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of Sky Financial Group, Inc. held April
18, 2001, ballot totals for the election of six (6) Class III Directors to serve
a three-year term until the Annual Meeting of Shareholders in 2004; one (1)
Class I Director to serve the remainder of the term until the Annual Meeting of
Shareholders in 2002; and one (1) Class II Director to serve the remainder of
the term until the Annual Meeting of Shareholders in 2003 were as follows:
Class III Directors
Term Expires 2004 FOR WITHHELD
- -----------------------------------------------------------------
Richard R. Hollington, Jr. 63,623,162 1,169,584
Fred H. Johnson, III 63,740,195 1,052,551
Gerard P. Mastroianni 63,776,248 1,016,498
James C. McBane 63,821,411 971,335
Robert E. Spitler 63,595,994 1,196,752
Joseph N. Tosh, II 63,641,888 1,150,858
Class I Director
Term Expires 2002 FOR WITHHELD
- -----------------------------------------------------------------
D. James Hilliker 63,822,114 970,632
Class II Director
Term Expires 2003 FOR WITHHELD
- -----------------------------------------------------------------
Marty E. Adams 63,774,154 1,018,592
Total shares voted were 64,792,746 or 77.95% of the outstanding shares.
The following incumbent Class I and Class II Directors who were not nominees for
election at the April 18, 2001 Annual Meeting were as follows:
Jonathan A. Levy George N. Chandler, II
Thomas J. O'Shane Robert C. Duvall
Edward J. Reiter Gregory L. Ridler
C. Gregory Spangler Emerson J. Ross, Jr.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11.1) Statement Re Computation of Earnings Per Common Share
(b) Reports on Form 8-K
Not applicable.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SKY FINANCIAL GROUP, INC.
/s/ Kevin T. Thompson
Kevin T. Thompson
Executive Vice President / Chief Financial Officer
DATE: May 15, 2001
25
SKY FINANCIAL GROUP, INC.
EXHIBIT INDEX
Exhibit No. Description Page Number
(11.1) Statement Re Computation of Earnings
Per Common Share
The information required by this exhibit
is incorporated herein by reference from
the information contained in Note 7
"Earnings Per Share" on page 11 of Sky
Financial's Form 10-Q for March 31, 2001.
26