UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 81,812,114 at October 31, 2001.
SKY FINANCIAL GROUP, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
September 30, 2001 and December 31, 2000............... 3
Consolidated Statements of Income
Three months ended September 30, 2001 and 2000 and
Nine months ended September 30, 2001 and 2000........ 4
Condensed Consolidated Statements of Changes in
Shareholders' Equity
Three months ended September 30, 2001 and 2000 and
Nine months ended September 30, 2001 and 2000........ 5
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 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........................................ 30
Item 2. Changes in Securities.................................... 30
Item 3. Defaults Upon Senior Securities.......................... 30
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) September 30, December 31,
2001 2000
- -----------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 226,390 $ 266,359
Interest-earning deposits
with financial institutions 24,848 17,725
Federal funds sold 12,700
Loans held for sale 31,594 13,984
Securities available for sale 1,848,254 1,846,517
Total loans 6,409,123 5,916,098
Less allowance for credit losses (101,172) (93,261)
---------- ----------
Net loans 6,307,951 5,822,837
Premises and equipment 109,415 115,029
Accrued interest receivable and other assets 304,058 304,351
---------- ----------
TOTAL ASSETS $8,865,210 $8,386,802
========== ==========
LIABILITIES
Deposits
Non-interest-bearing deposits $ 738,447 $ 757,483
Interest-bearing deposits 5,462,243 5,134,449
---------- ----------
Total deposits 6,200,690 5,891,932
Securities sold under repurchase
agreements and federal funds purchased 696,661 702,985
Debt and Federal Home Loan Bank advances 1,068,383 933,444
Obligated mandatorily redeemable capital
securities of subsidiary trusts 108,600 108,600
Accrued interest payable
and other liabilities 147,945 140,151
---------- ----------
TOTAL LIABILITIES 8,222,279 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;
84,011,214 and 84,015,577 shares
issued in 2001 and 2000 596,951 597,723
Retained earnings 70,031 26,599
Treasury stock; 2,168,813 and
607,633 shares in 2001 and 2000 (39,567) (10,491)
Unearned ESOP (273) (300)
Accumulated other comprehensive income (loss) 15,789 (3,841)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 642,931 609,690
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $8,865,210 $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 Nine Months Ended
except per share data) September 30, September 30,
2001 2000 2001 2000
- -------------------------------------------------------------------------------
Interest Income
Loans, including fees $132,276 $128,516 $395,438 $371,465
Securities
Taxable 27,666 29,331 85,957 82,510
Nontaxable 438 1,362 1,476 5,789
Federal funds sold and other 363 358 1,643 1,052
-------- -------- -------- --------
Total interest income 160,743 159,567 484,514 460,816
-------- -------- -------- --------
Interest Expense
Deposits 53,557 57,400 171,102 161,342
Borrowed funds 24,143 26,636 73,847 72,201
-------- -------- -------- --------
Total interest expense 77,700 84,036 244,949 233,543
-------- -------- -------- --------
Net Interest Income 83,043 75,531 239,565 227,273
Provision for Credit Losses 9,122 6,094 24,346 15,164
-------- -------- -------- --------
Net Interest Income After
Provision for Credit Losses 73,921 69,437 215,219 212,109
-------- -------- -------- --------
Other Income
Trust services income 3,500 3,952 10,955 11,420
Service charges and fees on
deposit accounts 8,434 6,968 22,971 19,961
Mortgage banking income 5,436 3,103 16,142 8,713
Brokerage & insurance commissions 5,165 8,331 19,192 21,173
Collection agency fees -- 446 -- 1,725
Net securities gains (losses) 1,094 (3,993) 2,462 (3,146)
Net gains on sales of
commercial financing loans -- 361 -- 7,586
Other income 6,908 7,414 21,334 22,218
-------- -------- -------- --------
Total other income 30,537 26,582 93,056 89,650
-------- -------- -------- --------
Other Expense
Salaries and employee benefits 31,540 30,656 93,539 88,922
Occupancy and equipment expense 9,055 9,472 27,273 28,073
Other operating expense 18,328 19,250 55,510 56,932
-------- -------- -------- --------
Total other expenses 58,923 59,378 176,322 173,927
-------- -------- -------- --------
Income Before Income Taxes 45,535 36,641 131,953 127,832
Income taxes 14,882 11,491 43,231 40,077
-------- -------- -------- --------
Net Income $ 30,653 $ 25,150 $ 88,722 $ 87,755
======== ======== ======== ========
Earnings Per Common Share
Basic $ 0.37 $ 0.30 $ 1.07 $ 1.03
Diluted $ 0.37 $ 0.30 $ 1.07 $ 1.03
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 Nine Months Ended
except per share data) September 30, September 30,
2001 2000 2001 2000
- ----------------------------------------------------------------------------------------
Balance at beginning of period $632,163 $574,058 $609,690 $566,331
Comprehensive income
Net income 30,653 25,150 88,722 87,755
Other comprehensive income 7,377 10,073 19,630 6,823
-------- -------- -------- --------
Total comprehensive income 38,030 35,223 108,352 94,578
Common cash dividends (15,494) (15,353) (45,349) (46,316)
Treasury shares acquired (12,741) (20,684) (32,742) (44,105)
Treasury shares issued 881 1,504 3,394 3,461
Shares issued to acquire
Meyer & Eckenrode Insurance
Group, Inc. -- 9,610 -- 9,610
Fractional shares & other items 92 (84) (414) 715
-------- -------- -------- --------
Balance at end of period $642,931 $584,274 $642,931 $584,274
======== ======== ======== ========
Common cash dividends per share $ 0.19 $ 0.18 $ 0.55 $ 0.54
The accompanying notes are an integral part of the financial statements.
SKY FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
(Dollars in thousands) September 30,
2001 2000
- ----------------------------------------------------------------------
Net Cash From Operating Activities $ 93,037 $ 81,682
--------- ---------
Investing Activities
Net increase in interest-bearing
deposits in other banks (7,123) (4,295)
Net increase in federal funds sold (12,700) (3,900)
Securities available for sale:
Proceeds from maturities and payments 655,108 276,979
Proceeds from sales 189,413 272,945
Purchases (806,449) (524,927)
Proceeds from sales of non-mortgage loans 14,074 4,638
Net increase in loans (526,480) (352,414)
Purchases of premises and equipment (7,649) (13,703)
Proceeds from sales of premises and equipment 3,082 783
Proceeds from sales of other real estate 2,611 3,194
Cash acquired through acquisition -- 364
--------- ---------
Net cash from investing activities (496,113) (340,336)
--------- ---------
Financing Activities
Net increase in deposit accounts 308,758 27,175
Net (decrease) increase in federal funds
and repurchase agreements (6,324) 83,351
Net increase in borrowings under
bank lines of credit 65,761 33,049
Net increase (decrease) in
short-term FHLB advances 25,000 (39,200)
Proceeds from issuance of debt
and long-term FHLB advances 189,255 294,126
Repayment of debt and long-term
FHLB advances (145,077) (225,287)
Cash dividends and fractional shares paid (44,918) (46,554)
Proceeds from issuance of common stock 3,394 3,461
Treasury stock purchases (32,742) (44,105)
--------- ---------
Net cash from financing activities 363,107 86,016
--------- ---------
Net decrease in cash and due from banks (39,969) (172,638)
Cash and due from banks at beginning of year 266,359 380,980
--------- ---------
Cash and due from banks at end of period $ 226,390 $ 208,342
========= =========
Supplemental Disclosures
Interest paid $ 245,377 $ 233,342
Income taxes paid 25,832 41,800
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 September 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. The estimated impact of the adoption of SFAS No. 142 is an increase
of $.02 in earnings per share for 2002.
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
$7,411 in other comprehensive income in the first nine months of 2001.
2. Mergers, Acquisitions and Divestitures
On July 11, 2001, Sky Financial agreed with Standard Federal Bank, Troy,
Michigan, to purchase ten branch offices in northwest Ohio. Sky Bank acquired
the branch facilities and assumed approximately $290,000 of deposit liabilities,
while Standard Federal Bank retained substantially all loans associated with the
branches. The transaction was completed on October 27, 2001.
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
September 30, 2001 and December 31, 2000 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
September 30, 2001 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------
U.S. Treasury and U.S.
Government agencies $ 538,075 $12,852 $ (1,365) $ 549,562
Obligations of states and
political subdivisions 35,607 448 (109) 35,946
Corporate and other
securities 76,684 465 (3,354) 73,795
Mortgage-backed
securities 1,056,841 20,928 (237) 1,077,532
---------- ------- -------- ----------
Total debt securities
available for sale 1,707,207 34,693 (5,065) 1,736,835
Marketable equity
securities 109,345 7,238 (5,164) 111,419
---------- ------- -------- ----------
Total securities
available for sale $1,816,552 $41,931 $(10,229) $1,848,254
========== ======= ======== ==========
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:
September 30, 2001 December 31, 2000
- --------------------------------------------------------------------------------
Real estate loans:
Construction $ 273,009 $ 210,135
Residential mortgage 1,772,352 1,663,111
Non-residential mortgage 1,702,240 1,575,907
Commercial, financial and
agricultural 1,927,906 1,568,766
Installment and credit card loans 713,273 884,750
Other loans 20,343 13,429
---------- ----------
Total loans $6,409,123 $5,916,098
========== ==========
The provision for credit losses increased $9,812 or 61% to $24,346 in the nine
months ended September 30, 2001 compared to $15,164 for the same period in 2000.
The higer provision for credit losses was attributable to growth in the loan
portfolio, which now includes loan originations by SFS, and higher net
charge-offs.
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:
September 30, 2001 December 31, 2000
- ------------------------------------------------------------------------------------------
Borrowings under bank lines of credit $ 139,439 $ 73,678
Asset backed notes
2001-A, Class A-1 Due December 2011 at 6.425% 37,092 --
2001-A, Class A-2 Due December 2011 at 6.95% 45,000 --
2001-B, Class A-1 Due July 2012 at 5.55% 54,505 --
2001-B, Class A-2 Due July 2012 at 6.39% 49,760 --
Borrowings under FHLB lines of credit 689,175 805,581
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 1,769 2,517
---------- ----------
Total borrowings $1,176,983 $1,042,044
========== ==========
SFS's warehouse line of credit is included under bank lines of credit and was
$64,439 at September 30, 2001 as compared to $73,678 at December 31, 2000. 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.
The expected final payment dates for the asset backed notes listed above are
included in the following table:
Stated Expected Final
Maturity Date Payment Date
------------- --------------
2001-A, Class A-1 December 2011 October 2005
2001-A, Class A-2 December 2011 July 2009
2001-B, Class A-1 July 2012 July 2005
2001-B, Class A-2 July 2012 April 2007
6. Other Comprehensive Income
Other comprehensive income consisted of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
- ---------------------------------------------------------------------------
Securities available for sale:
Unrealized securities gains
arising during period $17,109 $11,503 $ 40,072 $ 7,353
Reclassification adjustment for
(gains)losses included in income (1,094) 3,993 (2,462) 3,146
------- ------- -------- -------
16,015 15,496 37,610 10,499
------- ------- -------- -------
Cash flow hedge derivatives:
Adoption of SFAS No.133 -- -- (1,231) --
Unrealized losses on
cash flow hedge derivatives (4,665) -- (6,180) --
------- ------- -------- -------
(4,665) -- (7,411) --
------- ------- -------- -------
Net unrealized gain 11,350 15,496 30,199 10,499
Tax effect (3,973) (5,423) (10,569) (3,676)
------- ------- -------- -------
Total other comprehensive income $ 7,377 $10,073 $ 19,630 $ 6,823
======= ======= ======== =======
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 September 30, 2001 and 2000,
1,612,000 and 3,045,000 weighted shares, respectively, and for the nine months
ended September 30, 2001 and 2000, 1,841,000 and 3,211,000 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 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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
- ------------------------------------------------------------------------------
Numerator:
Net income $ 30,653 $ 25,150 $ 88,722 $ 87,755
=========== =========== =========== ===========
Denominator:
Weighted-average
common shares
outstanding (basic) 82,135,000 84,487,000 82,658,000 84,923,000
Effect of stock options 647,000 382,000 551,000 381,000
----------- ----------- ----------- -----------
Weighted-average
common shares
outstanding (diluted) 82,782,000 84,869,000 83,209,000 85,304,000
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.37 $ 0.30 $ 1.07 $ 1.03
Diluted 0.37 0.30 1.07 1.03
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
September 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.
September 30, 2001 December 31, 2000
- --------------------------------------------------------------------------------
Total adjusted average assets
for leverage ratio $8,641,652 $8,219,701
Risk-weighted assets and
off-balance-sheet financial
instruments for capital ratio 7,263,397 6,831,698
Tier I capital 687,937 676,934
Total risk-based capital 832,115 825,118
Leverage ratio 8.0% 8.2%
Tier I capital ratio 9.5 9.9
Total capital ratio 11.5 12.1
Capital ratios applicable to Sky Financial's banking subsidiaries at
September 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 6.5 8.7 10.8
Sky Bank - Mid Am Region 7.1 8.2 11.6
Sky Bank - Ohio Bank Region 6.5 8.5 10.7
In September, 2001, the Board of Directors of Sky Financial reauthorized
management to undertake purchases of up to 2.5%, or approximately 2,000,000
shares of Sky Financial's outstanding common stock over a twelve month period in
the open market or in privately negotiated transactions. Under the 2000
repurchase plan which concluded in September 2001, Sky Financial had repurchased
approximately 2,451,000 shares of common stock.
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. Since eliminating gain on sale, mid-year
2000, SFS has operated at a net loss. As the retained loan portfolio grows in
size, Sky Financial expects the net loss at SFS to reduce and for SFS to return
to profitability during 2003.
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 September 30, 2001 and
2000 is included in the following tables:
Financial Sky Parent
Three Months Ended Community Service Financial and
September 30, 2001 Banking Affiliates Solutions Other Total
- --------------------------------------------------------------------------------------------------
Net interest income $ 81,936 $ 314 $ 2,432 $ (1,639) $ 83,043
Provision for
credit losses 7,139 200 1,783 -- 9,122
----------- ------------ --------- -------- ----------
Net interest income
after provision 74,797 114 649 (1,639) 73,921
Other income 21,296 7,985 664 592 30,537
Other expenses 45,899 6,949 4,883 1,192 58,923
----------- ------------ --------- -------- ----------
Income (loss) before
income taxes 50,194 1,150 (3,570) (2,239) 45,535
Income taxes 16,795 486 (1,286) (1,113) 14,882
----------- ------------ --------- -------- ----------
Net income (loss) $ 33,399 $ 664 $ (2,284) $ (1,126) $ 30,653
=========== ============ ========= ======== ==========
Period-end assets $ 8,379,284 $ 61,348 $ 307,667 $116,911 $8,865,210
Depreciation and
amortization $ 2,980 $ 361 $ 138 $ 1,231 $ 4,710
Financial Sky Parent
Three Months Ended Community Service Financial and
September 30, 2000 Banking Affiliates Solutions Other Total
- --------------------------------------------------------------------------------------------------
Net interest income $ 77,739 $ 282 $ 361 $ (2,851) $ 75,531
Provision for
credit losses 4,064 69 1,961 -- 6,094
----------- ------------ --------- -------- ----------
Net interest income
after provision 73,675 213 (1,600) (2,851) 69,437
Other income 17,485 12,734 852 (4,489) 26,582
Other expenses 44,306 11,738 4,034 (700) 59,378
----------- ------------ --------- -------- ----------
Income (loss) before
income taxes 46,854 1,209 (4,782) (6,640) 36,641
Income taxes 15,301 479 (1,724) (2,565) 11,491
----------- ------------ --------- -------- ----------
Net income (loss) $ 31,553 $ 730 $ (3,058) $ (4,075) $ 25,150
=========== ============ ========= ======== ==========
Period-end assets $ 8,025,669 $ 67,388 $ 73,352 $ 92,336 $8,258,745
Depreciation and
amortization $ 3,159 $ 308 $ 136 $ 1,234 $ 4,837
Selected segment information for the nine months ended September 30, 2001 and
2000 is included in the following tables:
Financial Sky Parent
Nine Months Ended Community Service Financial and
September 30, 2001 Banking Affiliates Solutions Other Total
- --------------------------------------------------------------------------------------------------
Net interest income $ 237,144 $ 1,035 $ 5,506 $ (4,120) $ 239,565
Provision for
credit losses 18,349 775 5,222 -- 24,346
----------- ------------ --------- -------- ----------
Net interest income
after provision 218,795 260 284 (4,120) 215,219
Other income 59,769 29,066 1,678 2,543 93,056
Other expenses 135,869 24,881 12,442 3,130 176,322
----------- ------------ --------- -------- ----------
Income (loss) before
income taxes 142,695 4,445 (10,480) (4,707) 131,953
Income taxes 47,592 1,896 (3,744) (2,513) 43,231
----------- ------------ --------- -------- ----------
Net income (loss) $ 95,103 $ 2,549 $ (6,736) $ (2,194) $ 88,722
=========== ============ ========= ======== ==========
Period-end assets $ 8,379,284 $ 61,348 $ 307,667 $116,911 $8,865,210
Depreciation and
amortization $ 8,966 $ 1,072 $ 419 $ 3,521 $ 13,978
Financial Sky Parent
Nine Months Ended Community Service Financial and
September 30, 2000 Banking Affiliates Solutions Other Total
- --------------------------------------------------------------------------------------------------
Net interest income $ 232,768 $ 962 $ 803 $ (7,260) $ 227,273
Provision for
credit losses 12,999 204 1,961 -- 15,164
----------- ------------ --------- -------- ----------
Net interest income
after provision 219,769 758 (1,158) (7,260) 212,109
Other income 51,081 35,734 8,835 (6,000) 89,650
Other expenses 133,635 32,753 11,560 (4,021) 173,927
----------- ------------ --------- -------- ----------
Income (loss) before
income taxes 137,215 3,739 (3,883) (9,239) 127,832
Income taxes 43,816 1,383 (1,352) (3,770) 40,077
----------- ------------ --------- -------- ----------
Net income (loss) $ 93,399 $ 2,356 $ (2,531) $ (5,469) $ 87,755
=========== ============ ========= ======== ==========
Period-end assets $ 8,025,669 $ 67,388 $ 73,352 $ 92,336 $8,258,745
Depreciation and
amortization $ 9,815 $ 671 $ 414 $ 3,387 $ 14,287
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Dollars in thousands, except per share data)
Three Months Ended September 30, 2001 and 2000
Results of Operations
Operating earnings for the third quarter of 2001 were $30,653, up 10.5% from
$27,746 for the third quarter last year. Diluted operating earnings per common
share for the third quarter of 2001 were $.37 ($.37 basic), up 12% from $.33
($.33 basic) for the same period in 2000. Operating earnings for the third
quarter last year exclude $2,595, or $.03 per diluted share, in after-tax losses
from restructuring the securities portfolio. For the third quarter of 2001,
return on average equity (ROE) and return on average assets (ROA), were 19.23%
and 1.40%, respectively, compared to 18.93% and 1.36%, respectively, in 2000.
Business Line Results
Sky Financial's business line results for the third quarter ended September 30,
2001 and 2000 are summarized in the table below.
Net Income (Loss)
Quarter Ended September 30, 2001 2000
- ----------------------------------------------------
Community Banking $33,399 $31,553
Financial Service Affiliates 664 730
Sky Financial Solutions, Inc. (2,284) (3,058)
Parent and Other (1,126) (4,075)
------- -------
Consolidated Total $30,653 $25,150
======= =======
The community banking net income for the third quarter of 2001 increased from
2000 third 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 44.1% for the third quarter of 2001 compared to 45.9% in the third
quarter of 2000. The 2001 community banking results reflect a ROE of 21.44% and
a ROA of 1.61% compared to 20.67% and 1.58%, respectively, in the third quarter
of 2000.
Sky Financial Solutions loss for the third quarter of 2001 decreased $775 as
compared to the same period in 2000. The third 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 financial service affiliates' earnings for the third quarter of 2001
decreased as compared to the same period for 2000. For the third quarter of
2001, revenues decreased $4,749 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 third quarter of
2001, loss decreased as compared to the same period for 2000. The decrease was
primarily due to $2,595 in after-tax losses from restructuring the securities
portfolio during the third quarter of 2000.
Net Interest Income
Net interest income for the third quarter of 2001 was $83,043, an increase of
$7,512 or 10% from $75,531 in the third 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 8% from the third
quarter last year, with continued strong growth in average loans, increasing 11%
from last year and average deposits increasing 7% from the same quarter last
year. Sky Financial's net interest margin for the three months ended September
30, 2001 was 4.08%, an increase of 3 basis points from both last quarter and the
third 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 September 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
September 30, 2001 September 30, 2000
- -----------------------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------
Interest-earning assets
Interest-earning deposits $ 21,899 $ 220 3.99% $ 20,082 $ 275 5.45%
Federal funds sold and other 13,397 143 4.23 4,638 83 7.12
Securities 1,800,247 28,438 6.27 1,850,773 31,608 6.79
Loans 6,333,621 132,817 8.32 5,691,167 129,079 9.02
---------- -------- ---------- --------
Total interest-earning assets 8,169,164 161,618 7.85 7,566,660 161,045 8.47
-------- --------
Non-earning assets 515,129 564,943
---------- ----------
Total assets $8,684,293 $8,131,603
========== ==========
Interest-bearing liabilities
Demand deposits $ 200,307 $ 586 1.16% $ 135,015 $ 845 2.49%
Savings deposits 1,857,370 8,740 1.87 1,836,492 12,328 2.67
Time deposits 3,344,522 44,231 5.25 3,053,907 44,227 5.76
---------- -------- ---------- --------
Total interest-bearing deposits 5,402,199 53,557 3.93 5,025,414 57,400 4.54
Short-term borrowings 683,413 6,496 3.77 691,319 9,577 5.51
Trust preferred securities 108,600 2,642 9.65 108,600 2,644 9.69
Debt and FHLB advances 990,135 15,005 6.01 889,209 14,415 6.45
---------- -------- ---------- --------
Total interest-bearing liabilities 7,184,347 77,700 4.29 6,714,542 84,036 4.98
-------- --------
Non-interest-bearing liabilities 867,568 833,939
Shareholders' equity 632,378 583,122
---------- ----------
Total liabilities and equity $8,684,293 $8,131,603
========== ==========
Net interest income, fully
taxable equivalent and
Net interest spread $ 83,918 3.56% $ 77,009 3.49%
======== ========
Net interest income, fully
taxable equivalent to
earning assets 4.08% 4.05%
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 $3,028 or 50% to $9,122 in the third
quarter of 2001 compared to $6,094 in the third quarter of 2000. The higher
provision for credit losses in the third 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 $6,246 or 0.39% (annualized) of
average loans during the three months ended September 30, 2001, compared to
$5,930 or 0.39% last quarter, and $2,437 or 0.17% (annualized) for the same
period in 2000. With the projected continuation of a slow economy, Sky Financial
expects net charge-offs to continue higher than levels experienced in 2000.
Sept. 30, December 31, Sept. 30,
2001 2000 2000
- -------------------------------------------------------------------
Allowance for credit losses
as a percentage of loans 1.58% 1.58% 1.58%
Allowance for credit losses
as a percentage of
non-performing loans 381.52 434.58 450.58
Other Income
Other income for the third quarter reflects the full completion of Sky
Financial's restructuring of its fee-based businesses during the past year.
Other income for the third quarter of 2001 was $30,537, an increase of $3,955 or
15% from the $26,582 in the same period last year. The increase was primarily
due to a net securities loss of $3,993 in the third quarter of 2000 due to
restructuring the securities portfolio, an increase of $1,466 in service charges
on deposit accounts and an increase of $2,333 in mortgage banking income. The
increases were partially offset by a decrease of $3,166 in brokerage and
insurance commissions due to the sale of Sky Financial's independent brokerage
business completed in March of this year, and a decrease of $446 in collection
agency fees due to the sale of Sky Financial's collection agency in the fourth
quarter of last year.
Other Expense
Other expense for the third quarter of 2001 was $58,923 compared to $58,160 last
quarter, and $59,378 in the third quarter last year. From the third 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 51.48% for the third quarter of 2001, improved versus 52.41% last
quarter and 55.19% for the same quarter last year. The decrease in the
efficiency ratio for the third quarter of 2001 as compared to the same period
last year is primarily related to higher current revenues resulting from an
increase in net interest income.
Income Taxes
The provision for income taxes for the third quarter of 2001 increased $3,391 to
$14,882 from $11,491 for the same period in 2000. The effective tax rate for the
three months ended September 30, 2001 was 32.7% as compared to 31.4% 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 securities
portfolio in the third quarter of 2000.
Nine Months Ended September 30, 2001 and 2000
Results of Operations
Operating earnings for the nine months ended September 30, 2001 were $88,310, a
decrease of $2,041 compared to $90,351 for the same period in 2000. Diluted
operating earnings per common share for the nine months ended September 30, 2001
were $1.06 ($1.07 basic), as compared to $1.06 ($1.06 basic) for the same period
in 2000. The nine months ended September 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 $4,205, or $.05 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 18.90% and 1.39%, respectively, for the nine months ended
September 30, 2001, compared to 20.90% and 1.50%, respectively, in 2000.
Including an after-tax non-recurring gain of $412 from Sky Financial's sale of
its independent brokerage business in March of this year and $2,595 in after-tax
securities losses from restructuring the securities portfolio last year,
reported net income for the nine months ended September 30, 2001 was
$88,722, an increase of $967 compared to $87,755 for the same period in 2000.
Diluted earnings per common share for the nine months ended September 30, 2001
was $1.07 ($1.07 basic), as compared to $1.03 ($1.03 basic) for the same period
in 2000.
Business Line Results
Sky Financial's business line results for the nine months ended September 30,
2001 and 2000 are summarized in the table below.
Net Income (Loss)
Nine Months Ended September 30, 2001 2000
- ------------------------------------------------------
Community Banking $95,103 $93,399
Financial Service Affiliates 2,549 2,356
Sky Financial Solutions, Inc. (6,736) (2,531)
Parent and Other (2,194) (5,469)
------- -------
Consolidated Total $88,722 $87,755
======= =======
The community banking net income for the nine months ended September 30, 2001
increased slightly as compared to the same period in 2000. This was primarily
due to increases in net interest income, service charges on deposit accounts and
mortgage banking income that were offset by a higher provision for credit losses
and an increase in income taxes. The efficiency ratio was 45.4% for the nine
months ended September 30, 2001 compared to 46.2% for the same period in 2000.
The 2001 community banking results reflect a ROE of 21.55% and a ROA of 1.56%
compared to 21.17% and 1.59%, respectively, for the same period in 2000.
Sky Financial Solutions loss increased for the nine months ended September 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
$4,205 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 nine months
ended September 30, 2001, earnings increased $193 or 8% compared to the same
period for 2000. For the nine months ended September 30, 2001, revenues
decreased $6,668 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 nine months ended
September 30, 2001, losses decreased $3,275 compared to the same period for
2000. The reason for the improvement in parent and other business segment is due
to the after-tax losses of $2,595 to restructure the securities portfolio during
the third quarter of 2000, while in the first quarter of 2001, Sky Financial
completed the sale of its independent brokerage business, recording a gain of
$412 after-tax.
Net Interest Income
Net interest income for the nine months ended September 30, 2001 was $239,565,
an increase of $12,292 or 5%, as compared to $227,273 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 same period last year, with continued strong growth in
average loans, increasing 9% and average deposits increasing 5% from the same
period last year. Sky Financial's net interest margin for the nine months ended
September 30, 2001 was 4.05%, down 12 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 nine months ended September 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) Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
- -------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------
Interest-earning assets
Interest-earning deposits $ 17,287 $ 749 5.79% $ 15,979 $ 649 5.43%
Federal funds sold and other 22,830 894 5.24 6,493 303 6.23
Securities 1,815,141 88,541 6.52 1,837,737 92,075 6.69
Loans 6,135,687 396,981 8.65 5,606,764 373,460 8.90
---------- -------- ---------- --------
Total interest-earning assets 7,990,945 487,165 8.15 7,466,973 466,487 8.34
-------- --------
Non-earning assets 528,584 565,300
---------- ----------
Total assets $8,519,529 $8,032,273
========== ==========
Interest-bearing liabilities
Demand deposits $ 166,976 $ 2,345 1.88% $ 143,714 $ 2,418 2.25%
Savings deposits 1,865,283 30,893 2.21 1,845,562 34,054 2.46
Time deposits 3,276,983 137,864 5.62 3,018,653 124,870 5.53
---------- -------- ---------- --------
Total interest-bearing deposits 5,309,242 171,102 4.31 5,007,929 161,342 4.30
Short-term borrowings 686,685 22,313 4.34 657,211 26,071 5.30
Trust preferred securities 108,600 7,843 9.66 88,892 6,478 9.73
Debt and FHLB advances 932,616 43,691 6.26 852,728 39,652 6.21
---------- -------- ---------- --------
Total interest-bearing liabilities 7,037,143 244,949 4.65 6,606,760 233,543 4.72
-------- --------
Non-interest-bearing liabilities 857,724 848,070
Shareholders' equity 624,662 577,443
---------- ----------
Total liabilities and equity $8,519,529 $8,032,273
========== ==========
Net interest income, fully
taxable equivalent and
Net interest spread $242,216 3.50% $232,944 3.62%
======== ========
Net interest income, fully
taxable equivalent to
earning assets 4.05% 4.17%
Provision for Credit Losses
The provision for credit losses represents the charge to income necessary to
adjust the allowance for loan losses to an amount that represents management's
assessment of the estimated probable credit losses inherent in Sky Financial's
loan portfolio which have been incurred at each balance sheet date. The
provision for credit losses increased $9,182 or 61% to $24,346 in the nine
months ended September 30, 2001 compared to $15,164 for the same period in 2000.
The higher provision for credit losses was attributable to growth in the loan
portfolio, which now includes loan originations by SFS, and higher net charge-
offs. Net charge-offs were $16,435 or 0.36% (annualized) of average loans during
the nine months ended September 30, 2001, compared to $10,239 or 0.24%
(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, nine months ended September 30,
2001 other income increased $3,406 as compared to the same period for last year.
The increase was primarily due to an increase of $7,429 in mortgage banking
income, an increase of $3,010 in service charges on deposit accounts and an
increase of $5,608 in net securities gains. The increase in net securities gains
was due to $2,595 in after-tax losses from restructuring the securities
portfolio in the third quarter of last year. The increases were partially offset
by a decrease of $7,586 due to the impact of eliminating gains on sale of
commercial financing loans at SFS and a decrease of $1,725 in collection agency
fees due to the sale of Sky Financial's collection agency in the fourth quarter
of last year. The decrease in brokerage and insurance commissions of $1,981 due
to the sale of Sky Financial's independent brokerage business completed in March
of this year was partially offset by the purchase of Meyer & Eckenrode in July
of 2000.
Other Expense
Other expense for the nine months ended September 30, 2001 was $176,322, an
increase of $2,395 or 1%, from the $173,927 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 52.69% for the
nine months ended September 30, 2001, an improvement from 53.26% for the same
period last year, due primarily to an increase in total revenues, net interest
income and non-interest income of 2.5%, while expenses grew only 1.4%.
Income Taxes
The provision for income taxes for the nine months ended September 30, 2001
increased $3,154 to $43,231 from $40,077 for the same period in 2000. The
effective tax rate for the nine months ended September 30, 2001 was 32.8% as
compared to 31.4% 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 securities portfolio in the third quarter of 2000.
Balance Sheet
At September 30, 2001, total assets were $8,865,210, an increase of $478,408
from December 31, 2000. The increase was primarily attributable to increases in
loans of $493,025, loans held for sale of $17,610 and federal funds sold of
$12,700. The increases were partially offset by a decrease of $39,969 in cash
and due from banks, a reduction in premises and equipment of $5,614 and an
increase in allowance for credit losses of $7,911. The net growth in assets was
funded primarily by growth in total deposits, up $308,758, and an increase in
borrowed funds of $128,615. Shareholders' equity totaled $642,931 at September
30, 2001, increasing $33,241 from December 31, 2000. Net retained earnings
(net income less cash dividends) for the nine months ended September 30, 2001
totaled $43,373. Other comprehensive income increased by $19,630, 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 $29,076 as
Sky Financial continued to repurchase shares, as authorized by its Board of
Directors, (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.
Sept. 30, December 31, Sept. 30,
2001 2000 2000
------- ------- -------
Non-accrual loans $25,552 $20,329 $19,161
Restructured loans 966 1,131 1,185
------- ------- -------
Total non-performing loans 26,518 21,460 20,346
Other real estate owned 2,849 2,221 2,393
------- ------- -------
Total non-performing assets $29,367 $23,681 $22,739
======= ======= =======
Loans 90 days or more past due
and not on non-accrual $ 8,677 $10,294 $ 9,186
Non-performing loans to
total loans 0.41% 0.36% 0.35%
Non-performing assets to
total loans plus other
real estate owned 0.46 0.40 0.39
Allowance for credit losses to
total non-performing loans 381.52 434.58 450.58
Loans 90 days or more past due
and not on non-accrual to
total loans 0.14 0.17 0.16
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 $39,806 and $48,968 at September 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 September 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 nine months ended September 30, 2001 and 2000.
Nine Months Ended
September 30,
2001 2000
- ----------------------------------------------------------------------
Balance of allowance at beginning of year $ 93,261 $ 86,750
Loans charged-off:
Real estate (1,860) (1,080)
Commercial and agricultural (7,740) (5,560)
Installment and credit card (12,345) (9,489)
Other loans -- (453)
-------- --------
Total loans charged-off (21,945) (16,582)
-------- --------
Recoveries:
Real estate 340 926
Commercial and agricultural 2,099 2,632
Installment and credit card 3,039 2,778
Other loans 32 7
-------- --------
Total recoveries 5,510 6,343
-------- --------
Net loans charged-off (16,435) (10,239)
Provision charged to operating expense 24,346 15,164
-------- --------
Balance of allowance at end of period $101,172 $ 91,675
======== ========
Ratio of net charge-offs to
average loans outstanding 0.36% 0.24%
Allowance for credit losses
to total loans 1.58 1.58
Allowance for credit losses
to total non-performing loans 381.52 450.58
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 September 30, 2001 and December 31, 2000.
September 30, 2001 December 31, 2000
- ------------------------------------------------------------------------------
Construction $ 1,819 $ 1,132
Real estate 27,510 27,091
Commercial, financial
and agricultural 30,926 21,619
Installment and credit card 24,823 25,606
Other loans 1,026 1,009
Unallocated 15,068 16,804
-------- -------
Total $101,172 $93,261
======== =======
Liquidity and Capital Resources
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.
On October 27, 2001, Sky Financial completed its acquisition of ten branch
offices of Standard Federal Bank, Troy, Michigan. Sky Bank assumed approximately
$290,000 of deposit liabilities, while Standard Federal Bank retained
substantially all loans associated with the branches.
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 September 30, 2001, securities and
other short term investments with maturities of one year or less totaled
$67,124. In addition, the mortgage-backed securities provide an estimated cash
flow of approximately $93,332 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
September 30, 2001, the banking subsidiaries had total credit availability with
the FHLB of $751,356, of which $689,175 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 September 30, 2001, the outstanding balance was $64,439
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 September 30, 2001 the outstanding balance was $82,092 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 and as of September 30, 2001, the outstanding balance was $104,265.
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 $30,761 at September 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 September 30, 2001, Sky Financial had borrowings of
$75,000 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 September 30, 2001, Sky
Financial had a manageable positive 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 September
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.
September 30, December 31,
2001 2000 Guidelines
- -----------------------------------------------------------------------
One Year Net Interest
Income Change
+200 Basis points (7.0)% (2.7)% (10.0)%
- -200 Basis points 1.4 0.6 (10.0)
Net Present Value of
Equity Change
+200 Basis points (28.5) (25.4)% (30.0)%
- -200 Basis points 34.9 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 September 30, 2001 and December
31, 2000 fall within the ALCO guidelines.
The preceding 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
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11.1) Statement Re Computation of Earnings Per Common Share
(b) Reports on Form 8-K
Sky Financial filed a report on Form 8-K with the Securities and Exchange
Commission as of July 26, 2001, announcing it has reached a definitive agreement
with Standard Federal Bank, Troy, Michigan, to acquire ten of Standard Federal
Bank's branch offices in northwest Ohio.
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: November 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 September 30, 2001.