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 June 30, 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 82,241,561 at July 31, 2001.
SKY FINANCIAL GROUP, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
June 30, 2001 and December 31, 2000.............................. 3
Consolidated Statements of Income
Three months ended June 30, 2001 and 2000 and
Six months ended June 30, 2001 and 2000........................ 4
Condensed Consolidated Statements of Changes in
Shareholders' Equity
Three months ended June 30, 2001 and 2000 and
Six months ended June 30, 2001 and 2000........................ 5
Condensed Consolidated Statements of Cash Flows
Six 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 ............................ 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk .............................................. 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 29
Item 2. Changes in Securities.............................................. 29
Item 3. Defaults Upon Senior Securities.................................... 29
Item 4. Submission of Matters to a Vote of Security Holders................ 30
Item 5. Other Information.................................................. 30
Item 6. Exhibits and Reports on Form 8-K................................... 30
SIGNATURES................................................................... 31
EXHIBIT INDEX................................................................ 32
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SKY FINANCIAL GROUP, INC.
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except share data) June 30, December 31,
2001 2000
- -------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 270,192 $ 266,359
Interest-earning deposits
with financial institutions 19,088 17,725
Loans held for sale 30,511 13,984
Securities available for sale 1,856,790 1,846,517
Total loans 6,222,627 5,916,098
Less allowance for credit losses (98,296) (93,261)
---------- ----------
Net loans 6,124,331 5,822,837
Premises and equipment 109,425 115,029
Accrued interest receivable and other assets 304,776 304,351
---------- ----------
TOTAL ASSETS $8,715,113 $8,386,802
========== ==========
LIABILITIES
Deposits
Non-interest-bearing deposits $ 769,684 $ 757,483
Interest-bearing deposits 5,326,645 5,134,449
---------- ----------
Total deposits 6,096,329 5,891,932
Securities sold under repurchase
agreements and federal funds purchased 715,119 702,985
Debt and Federal Home Loan Bank advances 1,037,725 933,444
Obligated mandatorily redeemable capital
securities of subsidiary trusts 108,600 108,600
Accrued interest payable
and other liabilities 125,177 140,151
---------- ----------
TOTAL LIABILITIES 8,082,950 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;
84,015,797 and 84,015,577 shares
issued in 2001 and 2000 597,239 597,723
Retained earnings 54,843 26,599
Treasury stock; 1,584,896 and
607,633 shares in 2001 and 2000 (28,031) (10,491)
Unearned ESOP (300) (300)
Accumulated other comprehensive income (loss) 8,412 (3,841)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 632,163 609,690
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $8,715,113 $8,386,802
========== ==========
The accompanying notes are an integral part of the financial statements.
SKY FINANCIAL GROUP, INC.
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, Three Months Ended Six Months Ended
except per share data) June 30, June 30,
2001 2000 2001 2000
- ---------------------------------------------------------------------------------------
Interest Income
Loans, including fees $130,886 $123,463 $263,162 $242,949
Securities
Taxable 29,061 26,465 58,291 53,179
Nontaxable 494 2,175 1,038 4,427
Federal funds sold and other 621 409 1,280 694
-------- -------- -------- --------
Total interest income 161,062 152,512 323,771 301,249
-------- -------- -------- --------
Interest Expense
Deposits 57,270 53,349 117,545 103,942
Borrowed funds 24,047 23,721 49,704 45,565
-------- -------- -------- --------
Total interest expense 81,317 77,070 167,249 149,507
-------- -------- -------- --------
Net Interest Income 79,745 75,442 156,522 151,742
Provision for Credit Losses 8,568 4,733 15,224 9,070
-------- -------- -------- --------
Net Interest Income After
Provision for Credit Losses 71,177 70,709 141,298 142,672
-------- -------- -------- --------
Other Income
Trust services income 3,749 3,736 7,455 7,468
Service charges and fees on
deposit accounts 7,628 6,695 14,537 12,993
Mortgage banking income 6,054 2,901 10,706 5,610
Brokerage & insurance commissions 5,253 6,332 14,027 12,842
Collection agency fees -- 491 -- 1,279
Net securities gains 443 665 1,368 847
Net gains on sales of
commercial financing loans -- 3,863 -- 7,225
Other income 7,221 7,768 14,426 14,804
-------- -------- -------- --------
Total other income 30,348 32,451 62,519 63,068
-------- -------- -------- --------
Other Expense
Salaries and employee benefits 30,794 28,176 61,999 58,266
Occupancy and equipment expense 9,001 9,189 18,218 18,601
Other operating expense 18,365 19,778 37,182 37,682
-------- -------- -------- --------
Total other expenses 58,160 57,143 117,399 114,549
-------- -------- -------- --------
Income Before Income Taxes 43,365 46,017 86,418 91,191
Income taxes 14,133 14,518 28,349 28,586
-------- -------- -------- --------
Net Income $ 29,232 $ 31,499 $ 58,069 $ 62,605
======== ======== ======== ========
Earnings Per Common Share
Basic $ 0.35 $ 0.37 $ 0.70 $ 0.74
Diluted $ 0.35 $ 0.37 $ 0.70 $ 0.73
The accompanying notes are an integral part of the financial statements.
SKY FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
(Dollars in thousands, Three Months Ended Six Months Ended
except per share data) June 30, June 30,
2001 2000 2001 2000
- --------------------------------------------------------------------------------
Balance at beginning of period $622,446 $571,127 $609,690 $566,331
Comprehensive income
Net income 29,232 31,499 58,069 62,605
Other comprehensive income(loss) 4,871 (1,122) 12,253 (3,250)
-------- -------- -------- --------
Total comprehensive income 34,103 30,377 70,322 59,355
Common cash dividends (14,873) (15,378) (29,855) (30,963)
Treasury shares acquired (11,220) (12,634) (20,001) (23,421)
Treasury shares issued 1,759 294 2,513 1,957
Fractional shares & other items (52) 272 (506) 799
-------- -------- -------- --------
Balance at end of period $632,163 $574,058 $632,163 $574,058
======== ======== ======== ========
Common cash dividends per share $ 0.18 $ 0.18 $ 0.36 $ 0.36
The accompanying notes are an integral part of the financial statements.
SKY FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
(Dollars in thousands) June 30,
2001 2000
- --------------------------------------------------------------------------------
Net Cash From Operating Activities $ 37,080 $ 47,218
--------- ---------
Investing Activities
Net (increase) decrease in interest-bearing
deposits in other banks (1,363) 1,585
Net increase in federal funds sold -- (16,400)
Securities available for sale:
Proceeds from maturities and payments 413,211 186,647
Proceeds from sales 74,400 15,811
Purchases (475,177) (170,365)
Proceeds from sales of loans 13,682 4,225
Net increase in loans (331,731) (158,809)
Purchases of premises and equipment (4,069) (8,995)
Proceeds from sales of premises and equipment 3,016 606
Proceeds from sales of other real estate 1,475 2,169
--------- ---------
Net cash from investing activities (306,556) (143,526)
--------- ---------
Financing Activities
Net increase in deposit accounts 204,397 29,731
Net increase in federal funds
and repurchase agreements 12,134 8,234
Net increase (decrease) in borrowings
under bank lines of credit 77,808 (40,000)
Net increase (decrease) in
short-term FHLB advances 20,000 (43,700)
Proceeds from issuance of debt
and long-term FHLB advances 84,495 278,000
Repayment of debt and long-term
FHLB advances (78,022) (185,626)
Cash dividends and fractional shares paid (30,015) (31,124)
Proceeds from issuance of common stock 2,513 1,957
Treasury stock purchases (20,001) (23,421)
--------- ---------
Net cash from financing activities 273,309 (5,949)
--------- ---------
Net decrease in cash and due from banks 3,833 (102,257)
Cash and due from banks at beginning of year 266,359 380,980
--------- ---------
Cash and due from banks at end of period $ 270,192 $ 278,723
========= =========
Supplemental Disclosures
Interest paid $ 169,403 $ 152,523
Income taxes paid 25,832 30,100
The accompanying notes are an integral part of the financial statements.
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 northern West Virginia. Sky
Financial also operates businesses relating to commercial finance lending,
insurance, trust and other related financial services.
The accounting and reporting policies followed by Sky Financial conform to
accounting principles generally accepted in the United States 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 June 30, 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
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No.141, "Business Combinations". SFAS
No.141 requires all business combinations within its scope to be accounted for
using the purchase method, rather than the pooling-of-interests method of
accounting. The provisions of this Statement apply to all business combinations
initiated after June 30, 2001.
Also in June 2001, the FASB issued SFAS No.142, "Goodwill and Other Intangible
Assets", which addresses the accounting for such assets arising from prior and
future business combinations and acquisitions. Upon the adoption of this
Statement, goodwill arising from business combinations will no longer be
amortized, but rather will be assessed regularly for impairment, with any such
impairment recognized as a reduction to earnings in the period identified. Other
identified intangible assets, such as core deposit intangible assets, will
continue to be amortized over their estimated useful lives. Sky Financial is
required to adopt this Statement on January 1, 2002 and early adoption is not
permitted. Sky Financial has not yet assessed the impact of SFAS No.142 on its
financial statements.
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
$2,746 in other comprehensive income in the first six months of 2001.
2. Mergers, Acquisitions and Divestitures
On July 11, 2001, Sky Financial announced that it has reached a definitive
agreement with Standard Federal Bank, Troy, Michigan, to purchase ten branch
offices in northwest Ohio. Sky Bank will acquire the branch facilities and
assume approximately $300,000 of deposit liabilities, while Standard Federal
Bank will retain substantially all loans associated with the branches. The
transaction should be completed in the fourth quarter of 2001, pending
regulatory approvals.
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
June 30, 2001 and December 31, 2000 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
June 30, 2001 Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Treasury and U.S.
Government agencies $ 567,963 $ 8,015 $ (2,022) $ 573,956
Obligations of states and
political subdivisions 39,497 321 (233) 39,585
Corporate and other
securities 74,691 259 (3,889) 71,061
Mortgage-backed
securities 1,050,452 14,153 (1,301) 1,063,304
---------- ---------- -------- ----------
Total debt securities
available for sale 1,732,603 22,748 (7,445) 1,747,906
Marketable equity
securities 108,500 7,121 (6,737) 108,884
---------- ---------- -------- ----------
Total securities
available for sale $1,841,103 $ 29,869 $(14,182) $1,856,790
========== ========== ======== ==========
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
========== ========== ======== ==========
4. Loans
The loan portfolios are as follows:
June 30, 2001 December 31, 2000
- --------------------------------------------------------------------------------
Real estate loans:
Construction $ 248,183 $ 210,135
Residential mortgage 1,585,657 1,663,111
Non-residential mortgage 1,649,288 1,575,907
Commercial, financial and
agricultural 1,818,595 1,568,766
Installment and credit card loans 904,292 884,750
Other loans 16,612 13,429
---------- ----------
Total loans $6,222,627 $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:
June 30, 2001 December 31, 2000
- --------------------------------------------------------------------------------
Borrowings under bank lines of credit $ 151,486 $ 73,678
Asset backed notes
Class A-1 Due December 2011 at 6.425% 37,198 --
Class A-2 Due December 2011 at 6.95% 45,000 --
Borrowings under FHLB lines of credit 749,331 805,581
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 1,643 1,668
Other items 3,067 2,517
---------- ----------
Total borrowings $1,146,325 $1,042,044
========== ==========
Expected final payment dates for the asset backed notes listed above are October
2005, for Class A-1 notes and July 2009, for Class A-2 notes.
SFS's warehouse line of credit is included under bank lines of credit and was
$101,486 at June 30, 2001 as compared to $73,678 at December 31, 2001. 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 the warehouse line that is used to fund the
loan originations at SFS.
6. Other Comprehensive Income
Other comprehensive income consisted of the following:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
- --------------------------------------------------------------------------------
Securities available for sale:
Unrealized securities gain (loss)
arising during period $ 7,020 $(1,058) $22,963 $(4,150)
Reclassification adjustment for
(gains)losses included in income (443) (665) (1,368) (847)
------- ------- ------- -------
6,577 (1,723) 21,595 (4,997)
------- ------- ------- -------
Cash flow hedge derivatives:
Adoption of SFAS No. 133 -- -- (1,231) --
Unrealized gains (losses) on
cash flow hedge derivatives 916 -- (1,515) --
------- ------- ------- -------
916 -- (2,746) --
------- ------- ------- -------
Net unrealized gain (loss) 7,493 (1,723) 18,849 (4,997)
Tax effect (2,622) 601 (6,596) 1,747
------- ------- ------- -------
Total other comprehensive income $ 4,871 $(1,122) $12,253 $(3,250)
======= ======= ======= =======
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. 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 June 30, 2001 and 2000,
1,651,000 and 3,090,000 weighted shares, respectively, under option were
excluded from the diluted earnings per share calculation as they were
anti-dilutive. For the six months ended June 30, 2001 and 2000, 1,956,000 and
2,994,000 weighted shares, respectively, under option were excluded from the
diluted earnings per share calculation as they were anti-dilutive.
Earnings per share data have been restated for the 10% stock dividend 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 Six Months Ended
June 30, June 30,
2001 2000 2001 2000
- --------------------------------------------------------------------------------
Numerator:
Net income $ 29,232 $ 31,499 $ 58,069 $ 62,605
=========== =========== =========== ===========
Denominator:
Weighted-average
common shares
outstanding (basic) 82,694,000 84,900,000 82,919,000 85,141,000
Effect of stock options 587,000 358,000 504,000 381,000
----------- ----------- ----------- -----------
Weighted-average
common shares
outstanding (diluted) 83,281,000 85,258,000 83,423,000 85,522,000
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.35 $ 0.37 $ 0.70 $ 0.74
Diluted 0.35 0.37 0.70 0.73
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 June
30, 2001, that Sky Financial and its banks meet all capital adequacy
requirements to which they are subject.
Sky Financial and its banks have been notified by their respective regulators
that, as of the most recent regulatory examinations, each is regarded as well
capitalized under the regulatory framework for prompt corrective action.
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.
June 30, 2001 December 31, 2000
- -------------------------------------------------------------------------------
Total adjusted average assets
for leverage ratio $8,461,434 $8,219,701
Risk-weighted assets and
off-balance-sheet financial
instruments for capital ratio 7,116,813 6,831,698
Tier I capital 682,524 676,934
Total risk-based capital 824,803 825,118
Leverage ratio 8.1% 8.2%
Tier I capital ratio 9.6 9.9
Total capital ratio 11.6 12.1
Capital ratios applicable to Sky Financial's banking subsidiaries at
June 30, 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 6.6 8.6 10.7
Sky Bank - Mid Am Region 6.7 8.3 11.8
Sky Bank - Ohio Bank Region 7.4 9.6 11.8
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 June 30, 2001, Sky Financial had repurchased approximately
1,805,000 shares of common stock pursuant to its 2000 repurchase program.
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 second quarter of 2001
operating earnings by $2,670 compared to the second quarter last year. The new
program at SFS reduced operating earnings for the six months ended June 30, 2001
by $4,980 compared to the same period last year.
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.
Selected segment information for the three months ended June 30, 2001 and 2000
is included in the following tables:
Financial Sky Parent
Three Months Ended Community Service Financial and
June 30, 2001 Banking Affiliates Solutions Other Total
- --------------------------------------------------------------------------------
Net interest income $ 78,800 $ 336 $ 1,850 $ (1,241) $ 79,745
Provision for
credit losses 6,139 425 2,004 -- 8,568
---------- ------- -------- -------- ----------
Net interest income
after provision 72,661 (89) (154) (1,241) 71,177
Other income 20,828 8,529 458 533 30,348
Other expenses 45,385 7,282 3,884 1,609 58,160
---------- ------- -------- -------- ----------
Income (loss) before
income taxes 48,104 1,158 (3,580) (2,317) 43,365
Income taxes 16,064 511 (1,271) (1,171) 14,133
---------- ------- -------- -------- ----------
Net income (loss) $ 32,040 $ 647 $ (2,309) $ (1,146) $ 29,232
========== ======= ======== ======== ==========
Period-end assets $8,304,583 $61,100 $238,668 $110,762 $8,715,113
Depreciation and
amortization $ 2,981 $ 334 $ 139 $ 1,138 $ 4,592
Financial Sky Parent
Three Months Ended Community Service Financial and
June 30, 2000 Banking Affiliates Solutions Other Total
- --------------------------------------------------------------------------------
Net interest income $ 77,304 $ 369 $ 237 $ (2,468) $ 75,442
Provision for
credit losses 4,674 59 -- -- 4,733
---------- ------- -------- -------- ----------
Net interest income
after provision 72,630 310 237 (2,468) 70,709
Other income 18,029 11,209 4,268 (1,055) 32,451
Other expenses 44,350 10,541 3,898 (1,646) 57,143
---------- ------- -------- -------- ----------
Income (loss) before
income taxes 46,309 978 607 (1,877) 46,017
Income taxes 14,661 $ 359 246 (748) 14,518
---------- ------- -------- -------- ----------
Net income (loss) $ 31,648 $ 619 $ 361 $ (1,129) $ 31,499
---------- ------- -------- -------- ----------
Period-end assets $7,937,481 $45,730 $ 21,447 $106,328 $8,110,986
Depreciation and
amortization $ 3,256 $ 195 $ 138 $ 1,115 $ 4,704
Selected segment information for the six months ended June 30, 2001 and 2000 is
included in the following tables:
Financial Sky Parent
Six Months Ended Community Service Financial and
June 30, 2001 Banking Affiliates Solutions Other Total
- --------------------------------------------------------------------------------
Net interest income $ 155,208 $ 721 $ 3,074 $ (2,481) $ 156,522
Provision for
credit losses 11,210 575 3,439 -- 15,224
---------- ------- -------- -------- ----------
Net interest income
after provision 143,998 146 (365) (2,481) 141,298
Other income 38,473 21,081 1,014 1,951 62,519
Other expenses 89,970 17,932 7,559 1,938 117,399
---------- ------- -------- -------- ----------
Income (loss) before
income taxes 92,501 3,295 (6,910) (2,468) 86,418
Income taxes 30,797 1,410 (2,458) (1,400) 28,349
---------- ------- -------- -------- ----------
Net income (loss) $ 61,704 $ 1,885 $ (4,452) $ (1,068) $ 58,069
========== ======= ======== ======== ==========
Period-end assets $8,304,583 $61,100 $238,668 $110,762 $8,715,113
Depreciation and
amortization $ 5,986 $ 711 $ 281 $ 2,290 $ 9,268
Financial Sky Parent
Six Months Ended Community Service Financial and
June 30, 2000 Banking Affiliates Solutions Other Total
- --------------------------------------------------------------------------------
Net interest income $ 155,029 $ 681 $ 441 $ (4,409) $ 151,742
Provision for
credit losses 8,935 135 -- -- 9,070
---------- ------- -------- -------- ----------
Net interest income
after provision 146,094 546 441 (4,409) 142,672
Other income 33,595 23,000 7,984 (1,511) 63,068
Other expenses 89,329 21,015 7,526 (3,321) 114,549
---------- ------- -------- -------- ----------
Income (loss) before
income taxes 90,360 2,531 899 (2,599) 91,191
Income taxes 28,514 903 371 (1,202) 28,586
---------- ------- -------- -------- ----------
Net income (loss) $ 61,846 $ 1,628 $ 528 $ (1,397) $ 62,605
========== ======= ======== ======== ==========
Period-end assets $7,937,481 $45,730 $ 21,447 $106,328 $8,110,986
Depreciation and
amortization $ 6,656 $ 363 $ 278 $ 2,153 $ 9,450
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Dollars in thousands, except per share data)
Three Months Ended June 30, 2001 and 2000
Results of Operations
Earnings for the second quarter of 2001 was $29,232, a decrease of $2,267
compared to the second quarter of 2000 operating earnings of $31,499. Diluted
operating earnings per common share for the second quarter of 2001 was $.35
($.35 basic), as compared to $.37 ($.37 basic) for the same period in 2000. The
second 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 $2,670, or $.03
per diluted share, compared to the second quarter last year. For the second
quarter of 2001, return on average equity (ROE) and return on average assets
(ROA), also impacted by the new program, were 18.67% and 1.38%, respectively,
compared to 21.97% and 1.58%, respectively, in 2000.
Business Line Results
Sky Financial's business line results for the second quarter ended
June 30, 2001 and 2000 are summarized in the table below.
Net Income (Loss)
Quarter Ended June 30, 2001 2000
- -------------------------------------------------------------------
Community Banking $32,040 $31,648
Financial Service Affiliates 647 619
Sky Financial Solutions, Inc. (2,309) 361
Parent and Other (1,146) (1,129)
------- -------
Consolidated Total $29,232 $31,499
======= =======
The community banking net income for the second quarter of 2001 increased
slightly from 2000 second quarter earnings. This was primarily due to increases
in net interest income and mortgage banking income, that was offset by a higher
provision for credit losses and an increase in other expenses. The efficiency
ratio was 45.2% for the second quarter of 2001 compared to 45.5% in the second
quarter of 2000. The 2001 community banking results reflect a ROE of 21.87% and
a ROA of 1.58% compared to 21.60% and 1.56%, respectively, in the second quarter
of 2000.
Sky Financial Solutions earnings decreased for the second quarter of 2001 as
compared to the same period in 2000. The second 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
$2,670 compared to the second quarter of 2000.
The financial service affiliates' earnings reflect Sky Financial's strategies to
improve the profitability contribution of these businesses. For the second
quarter of 2001, earnings remained level as compared to the same period for
2000. For the second quarter of 2001, revenues decreased $2,680 as compared to
2000, primarily due to the sale of Sky Financial's independent broker/dealer
business during the first quarter of 2001, partially offset by commissions at
Meyer & Eckenrode which was acquired in July of 2000.
Parent and other includes the net funding costs of the parent company and all
significant non-recurring items of income and expense. For the second quarter of
2001, earnings remained level as compared to the same period for 2000.
Net Interest Income
Net interest income for the second quarter of 2001 was $79,745, an increase of
$4,303 or 6% from $75,442 in the second 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 7% from the
second quarter last year, with continued strong growth in average loans,
increasing 8% from last year and average deposits increasing 5% from the same
quarter last year. Sky Financial's net interest margin for the three months
ended June 30, 2001 was 4.05%, an increase of 2 basis points from last quarter,
but down 14 basis points from the second 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.
The following table reflects the components of Sky Financial's net interest
income for the three months ended June 30, 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
June 30, 2001 June 30, 2000
- --------------------------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------
Interest-earning assets
Interest-earning deposits $ 14,434 $ 293 8.14% $ 11,954 $ 205 6.90%
Federal funds sold and other 24,200 328 5.44 6,457 104 6.48
Securities 1,850,250 29,918 6.49 1,816,009 30,112 6.67
Loans 6,092,795 131,392 8.65 5,606,181 124,231 8.91
---------- -------- ---------- --------
Total interest-earning assets 7,981,679 161,931 8.14 7,440,601 154,652 8.36
-------- --------
Non-earning assets 522,991 558,918
---------- ----------
Total assets $8,504,670 $7,999,519
========== ==========
Interest-bearing liabilities
Demand deposits $ 159,353 $ 1,096 2.76% $ 165,984 $ 888 2.15%
Savings deposits 1,882,379 9,705 2.07 1,837,712 11,107 2.43
Time deposits 3,276,652 46,469 5.69 3,007,499 41,354 5.53
---------- -------- ---------- --------
Total interest-bearing deposits 5,318,384 57,270 4.32 5,011,195 53,349 4.28
Short-term borrowings 679,431 7,157 4.23 652,937 8,718 5.37
Trust preferred securities 108,600 2,615 9.66 108,600 2,624 9.72
Debt and FHLB advances 925,653 14,275 6.19 797,880 12,379 6.24
---------- -------- ---------- --------
Total interest-bearing liabilities 7,032,068 81,317 4.64 6,570,612 77,070 4.72
-------- --------
Non-interest-bearing liabilities 844,555 852,225
Shareholders' equity 628,047 576,682
---------- ----------
Total liabilities and equity $8,504,670 $7,999,519
========== ==========
Net interest income, fully
taxable equivalent and
Net interest spread $ 80,614 3.50% $ 77,582 3.64%
======== ========
Net interest income, fully
taxable equivalent to
earning assets 4.05% 4.19%
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 $3,835 or 81% to $8,568 in the second
quarter of 2001 compared to $4,733 in the second quarter of 2000. The higher
provision for credit losses in the second 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 $5,930 or 0.39% (annualized) of
average loans during the three months ended June 30, 2001, compared to $4,545 or
0.32% (annualized) for the same period in 2000.
June 30, December 31, June 30,
2001 2000 2000
- ------------------------------------------------------------------
Allowance for credit losses
as a percentage of loans 1.58% 1.58% 1.57%
Allowance for credit losses
as a percentage of
non-performing loans 376.50 434.58 492.99
Other Income
Other income for the second quarter reflects the full completion of Sky
Financial's restructuring of its fee-based businesses during the past year.
Other income for the second quarter of 2001 was $30,348, a decrease of $2,103 or
7% from the $32,451 in the same period last year. The decline was primarily due
to a decrease of $3,863 due to the impact of eliminating gains on sale of
commercial financing loans at SFS, a decrease in brokerage and insurance
commissions which included a decline of $3,618 due to the sale of Sky
Financial's independent brokerage business completed in March of this year, and
a decrease of $491 in collection agency fees due to the sale of Sky Financial's
collection agency in the fourth quarter of last year.
Excluding the results from businesses sold over the past year and the impact of
eliminating the gains on sale of loans at SFS, other income for the second
quarter of 2001 was $30,348, an increase of $1,145 or 4% from the $29,203 for
the first quarter of 2001, and an increase of $5,869 or 24% from $24,479 in the
same period last year. Mortgage banking income, driven by significantly
increased origination volumes, was $6,054 for the second quarter of 2001, an
increase of $3,153, or 109% from the second quarter last year. Service charges
on deposits for the second quarter of 2001 were $7,628, an increase of $933, or
14%, from the same quarter last year.
Other Expense
Other expense for the second quarter of 2001 was $58,160 compared to $59,239
last quarter, and $57,143 in the second quarter last year. From the second
quarter last year, the increase was primarily in salaries and employee benefits
due to higher "performance-based" compensation costs. The efficiency ratio, on
an operating basis, was 52.41% for the first quarter of 2001, improved versus
54.24% last quarter and up from 51.93% for the same quarter last year. The
increase in the efficiency ratio for the second quarter of 2001 as compared to
the same period last year is primarily related to lower current revenues
resulting from the implementation of the new program at SFS.
Income Taxes
The provision for income taxes for the second quarter of 2001 decreased $385 to
$14,133 from $14,518 for the same period in 2000. The effective tax rate for the
three months ended June 30, 2001 was 32.6% as compared to 31.5% 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.
Six Months Ended June 30, 2001 and 2000
Results of Operations
Operating earnings for the six months ended June 30, 2001 was $57,657, a
decrease of $4,948 compared to $62,605 for the same period in 2000. Diluted
operating earnings per common share for the six months ended June 30, 2001 was
$.70 ($.69 basic), as compared to $.74 ($.73 basic) for the same period in 2000.
The six months ended June 30, 2001, 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 $4,980, or $.06 per diluted share, compared to the same
period last year. On an operating basis, return on average equity (ROE) and
return on average assets (ROA), also impacted by the new program, were 18.73%
and 1.38%, respectively, for the six months ended June 30, 2001, compared to
21.91% and 1.58%, respectively, in 2000.
On a reported basis, net income for the six months ended June 30, 2001 was
$58,069, a decrease of $4,536 compared to $62,605 for the same period in 2000.
Diluted earnings per common share for the six months ended June 30, 2001 was
$.70 ($.70 basic), as compared to $.74 ($.73 basic) for the same period in 2000.
Business Line Results
Sky Financial's business line results for the six months ended June 30, 2001 and
2000 are summarized in the table below.
Net Income (Loss)
Six Months Ended June 30, 2001 2000
- ---------------------------------------------------------------
Community Banking $61,704 $61,846
Financial Service Affiliates 1,885 1,628
Sky Financial Solutions, Inc. (4,452) 528
Parent and Other (1,068) (1,397)
------- -------
Consolidated Total $58,069 $62,605
======= =======
The community banking net income for the six months ended June 30, 2001 remained
level with earnings for the same period in 2000. This was primarily due to an
increase in mortgage banking income, that was offset by a higher provision for
credit losses and an increase in income taxes. The efficiency ratio was 46.0%
for the six months ended June 30, 2001 compared to 46.4% for the same period in
2000. The 2001 community banking results reflect a ROE of 21.61% and a ROA of
1.54% compared to 21.37% and 1.59%, respectively, for the same period in 2000.
Sky Financial Solutions earnings decreased for the six months ended June 30,
2001 as compared to the same period in 2000. The 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 2001 operating earnings
$4,980 compared to the same period in 2000.
The financial service affiliates' earnings reflect Sky Financial's strategies to
improve the profitability contribution of these businesses. For the six months
ended June 30, 2001, earnings increased $257 or 16% compared to the same period
for 2000. For the six months ended June 30, 2001, revenues decreased $1,919 as
compared to 2000, primarily due to the sale of Sky Financial's independent
broker/dealer business during the first quarter of 2001, partially offset by
commissions at Meyer & Eckenrode which was acquired in July of 2000.
Parent and other includes the net funding costs of the parent company and all
significant non-recurring items of income and expense. For the six months ended
June 30, 2001, earnings increased $329 compared to the same period for 2000. The
reason for the improvement in parent and other business segment is in the first
quarter of 2001, Sky Financial completed the sale of its independent brokerage
business.
Net Interest Income
Net interest income for the six months ended June 30, 2001 was $156,522, an
increase of $4,780 or 3%, as compared to $151,742 for the same period in 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 7%
from the first half of last year, with continued strong growth in average loans,
increasing 8% and average deposits increasing 4% from the same period last year.
Sky Financial's net interest margin for the six months ended June 30, 2001 was
4.04%, down 19 basis points from the same period last year. The decrease in net
interest margin from last year resulted primarily from higher funding costs, due
to rising interest rates over the latter half of 2000.
The following table reflects the components of Sky Financial's net interest
income for the six months ended June 30, 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) Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
- -------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------
Interest-earning assets
Interest-earning deposits $ 14,943 $ 529 7.14% $ 13,905 $ 474 6.86%
Federal funds sold and other 27,625 751 5.48 7,430 220 5.95
Securities 1,822,712 60,103 6.65 1,831,147 60,367 6.63
Loans 6,035,079 264,164 8.83 5,564,099 244,381 8.83
---------- -------- ---------- --------
Total interest-earning assets 7,900,359 325,547 8.31 7,416,581 305,442 8.28
-------- --------
Non-earning assets 535,423 565,480
---------- ----------
Total assets $8,435,782 $7,982,061
========== ==========
Interest-bearing liabilities
Demand deposits $ 150,005 $ 2,024 2.72% $ 148,110 $ 1,573 2.14%
Savings deposits 1,869,335 21,888 2.36 1,850,148 21,726 2.36
Time deposits 3,242,654 93,633 5.82 3,000,832 80,643 5.40
---------- -------- ---------- --------
Total interest-bearing deposits 5,261,994 117,545 4.50 4,999,090 103,942 4.18
Short-term borrowings 688,348 15,817 4.63 639,970 16,494 5.18
Trust preferred securities 108,600 5,201 9.66 78,929 3,834 9.77
Debt and FHLB advances 903,379 28,686 6.40 834,288 25,237 6.08
---------- -------- ---------- --------
Total interest-bearing liabilities 6,962,321 167,249 4.84 6,552,277 149,507 4.59
-------- --------
Non-interest-bearing liabilities 852,720 855,212
Shareholders' equity 620,741 574,572
---------- ----------
Total liabilities and equity $8,435,782 $7,982,061
========== ==========
Net interest income, fully
taxable equivalent and
Net interest spread $158,298 3.47% $155,935 3.69%
======== ========
Net interest income, fully
taxable equivalent to
earning assets 4.04% 4.23%
Provision for Credit Losses
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 $6,154 or 68% to $15,224 in the six months
ended June 30, 2001 compared to $9,070 for the same period in 2000. The higher
provision for credit losses in the six months ended June 30, 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 $10,189 or
0.34% (annualized) of average loans during the six months ended June 30, 2001,
compared to $7,802 or 0.28% (annualized) for the same period in 2000.
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. On a reported basis, six months ended June 30, 2001
other income decreased $549 as compared to the same period for last year. The
decline was primarily due to a decrease of $7,225 due to the impact of
eliminating gains on sale of commercial financing loans at SFS, a decrease in
brokerage and insurance commissions which included a decline of $5,367 due to
the sale of Sky Financial's independent brokerage business completed in March of
this year, and a decrease of $1,279 in collection agency fees due to the sale of
Sky Financial's collection agency in the fourth quarter of last year.
Other income for the six months ended June 30, 2001, excluding non-recurring
gains and revenues from businesses sold or redesigned over the past year was
$59,551, an increase of $12,688 or 27% from the $46,863 for the same period in
2000. Other income growth was most significant in mortgage banking income, up
$5,096 or 91%, service charges on deposit accounts, up $1,544 or 12% and
insurance commissions, primarily attributable to Meyer & Eckenrode, an insurance
agency acquired during the third quarter of 2000. Mortgage banking income
increased due to significant increases in origination volumes in the more
favorable interest rate environment compared to the prior year.
Other Expense
Other expense for the six months ended June 30, 2001 was $117,399, an increase
of $2,850 or 3%, from the $114,549 reported for the same period in 2000. The
increase was primarily in salaries and employee benefits due to higher
"performance-based" compensation costs. The efficiency ratio was 53.32% for the
six months ended June 30, 2001, up from 52.30% for the same period last year,
with the increase primarily related to lower current revenues resulting from the
implementation of the new program at SFS.
Income Taxes
The provision for income taxes for the six months ended June 30, 2001 decreased
$237 to $28,349 from $28,586 for the same period in 2000. The effective tax rate
for the six months ended June 30, 2001 was 32.8% as compared to 31.3% 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 June 30, 2001, total assets were $8,715,113, an increase of $328,311 from
December 31, 2000. The increase was primarily attributable to increases in loans
of $306,529, loans held for sale of $16,527 and securities available for sale of
$10,273. The increases were partially offset by a reduction in premises and
equipment of $5,604 and an increase in allowance for credit losses of $5,035.
The net growth in assets was funded primarily by growth in total deposits, up
$204,397, and an increase in borrowed funds of $116,415. Shareholders' equity
totaled $632,163 at June 30, 2001, increasing $22,473 from December 31, 2000.
Net retained earnings (net income less cash dividends) for the six months ended
June 30, 2001 totaled $28,215. Other comprehensive income increased by $12,253,
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
$17,488 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.
June 30, December 31, June 30,
2001 2000 2000
- --------------------------------------------------------------------
Non-accrual loans $25,029 $20,329 $16,643
Restructured loans 1,079 1,131 1,211
------- ------- -------
Total non-performing loans 26,108 21,460 17,854
Other real estate owned 2,367 2,221 2,450
------- ------- -------
Total non-performing assets $28,475 $23,681 $20,304
======= ======= =======
Loans 90 days or more past due
and not on non-accrual $ 8,582 $10,294 $ 7,422
Non-performing loans to
total loans 0.42% 0.36% 0.32%
Non-performing assets to
total loans plus other
real estate owned 0.46 0.40 0.36
Allowance for credit losses to
total non-performing loans 376.50 434.58 492.99
Loans 90 days or more past due
and not on non-accrual to
total loans 0.14 0.17 0.13
Current loans where some concerns exist as to the ability of the borrower to
comply with present loan repayment terms, excluding non-performing loans,
approximated $41,475 and $48,968 at June 30, 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 June 30, 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 six months ended June 30, 2001 and 2000.
Six Months Ended
June 30,
2001 2000
- ----------------------------------------------------------------
Balance of allowance at beginning of year $ 93,261 $ 86,750
Loans charged-off:
Real estate (853) (798)
Commercial and agricultural (5,797) (4,268)
Installment and credit card (6,916) (6,889)
Other loans -- (453)
-------- --------
Total loans charged-off (13,566) (12,408)
-------- --------
Recoveries:
Real estate 300 651
Commercial and agricultural 1,013 2,068
Installment and credit card 2,032 1,880
Other loans 32 7
-------- --------
Total recoveries 3,377 4,606
-------- --------
Net loans charged-off (10,189) (7,802)
Provision charged to operating expense 15,224 9,070
-------- --------
Balance of allowance at end of period $ 98,296 $ 88,018
======== ========
Ratio of net charge-offs to
average loans outstanding 0.34% 0.28%
Allowance for credit losses
to total loans 1.58 1.57
Allowance for credit losses
to total non-performing loans 376.50 492.99
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 June 30, 2001 and December 31, 2000.
June 30, 2001 December 31, 2000
- --------------------------------------------------------------
Construction $ 1,520 $ 1,132
Real estate 26,602 27,091
Commercial, financial
and agricultural 28,304 21,619
Installment and credit card 24,220 25,606
Other loans 909 1,009
Unallocated 16,741 16,804
------- -------
Total $98,296 $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.
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 June 30, 2001, securities and other
short term investments with maturities of one year or less totaled $65,965. In
addition, the mortgage-backed securities provide an estimated cash flow of
approximately $19,339 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 June 30, 2001,
the banking subsidiaries had total credit availability with the FHLB of
$814,382, of which $749,331 was outstanding.
Sky Financial, through SFS, 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 June 30, 2001, the outstanding balance was $101,486 under
the warehouse line of credit. Term funding of $82,320 was completed in February
2001 through the issuance of collateralized notes in a private placement. As of
June 30, 2001 the outstanding balance was $82,198 under the term funding. An
additional term funding of $104,760 was completed in July 2001 through the
issuance of collateralized notes in a private placement in the 144A market.
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 $33,382 at June 30, 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 June 30, 2001, Sky Financial had borrowings of
$50,000 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 June 30, 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 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 June 30,
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.
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.
June 30, December 31,
2001 2000 Guidelines
- -------------------------------------------------------------
One Year Net Interest
Income Change
+200 Basis points (3.2)% (2.7)% (10.0)%
- -200 Basis points (0.1) 0.6 (10.0)
Net Present Value of
Equity Change
+200 Basis points (27.8) (25.4)% (30.0)%
- -200 Basis points 10.6 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 June 30, 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.
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.
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: August 14, 2001
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 June 30, 2001.