Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2003

Commission File No. 1-14473

Sky Financial Group, Inc.

(Exact Name of Registrant as Specified in its Charter)

(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 ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x    No ¨

The number of shares outstanding of the Registrant’s common stock, without par value, was 87,085,511 at April 29, 2003.

Table of Contents

SKY FINANCIAL GROUP, INC.

INDEX

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

SKY FINANCIAL GROUP, INC.

Condensed Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except share data)

The accompanying notes are an integral part of the financial statements.

3

Table of Contents

SKY FINANCIAL GROUP, INC.

Condensed Consolidated Statements of Income (Unaudited)

The accompanying notes are an integral part of the financial statements.

4

Table of Contents

SKY FINANCIAL GROUP, INC.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

The accompanying notes are an integral part of the financial statements.

5

Table of Contents

SKY FINANCIAL GROUP, INC.

Condensed Consolidated Statement of Cash Flows

(Unaudited)

The accompanying notes are an integral part of the financial statements.

6

Table of Contents

SKY FINANCIAL GROUP, INC.

Notes to Condensed 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 that owns and operates Sky Bank which is primarily engaged in the commercial and consumer banking business in Ohio, southern Michigan, western Pennsylvania, northern West Virginia and eastern Indiana. 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 in all material respects to accounting principles generally accepted in the United States of America (US GAAP) and to general practices within the financial services industry. The preparation of financial statements in conformity with US GAAP 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, such as mortgage servicing rights, are particularly subject to change.

These condensed consolidated unaudited interim financial statements are prepared without audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of Sky Financial at March 31, 2003, 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. In accordance with US GAAP for interim financial information, these statements do not include certain information and footnote disclosures required for complete annual financial. Sky Financial’s Annual Report for the year ended December 31, 2002, contains consolidated financial statements and related notes which should be read in conjunction with the accompanying consolidated financial statements. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year.

New Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 “Consolidation of Variable Interest Entities” which requires the consolidation of certain special purposes entities (SPE’s) by a company if it determined to be the primary beneficiary of the SPE’s operating activities. The adoption of this interpretation on January 31, 2003 did not have a material impact on Sky Financial.

In December 2002, FASB issued Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires a guarantor to make additional disclosures in its interim and annual financial statements regarding the guarantor’s obligations. In addition, FIN 45 requires, under certain circumstances, that a guarantor recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken when issuing the guarantee. Sky Financial adopted the disclosure requirements for the fiscal year ended December 31, 2002. The adoption of this interpretation did not have a material impact on Sky Financial.

On December 31, 2002, FASB issued SFAS No. 148. “Accounting for Stock-Based Compensation—Transition and Disclosure”, which amends SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 requires disclosure of the pro forma effects of using the fair value based method of accounting for stock-based compensation and requires that these disclosures be included in interim as well as annual financial statements. The disclosure provisions of SFAS No. 148 were adopted on December 31, 2002 and did not have a material impact on Sky Financial.

7

Table of Contents

During the third quarter of 2002, Sky Financial adopted Statement of Financial Accounting Standards (SFAS) No. 147, “Acquisitions of Certain Financial Institutions.” Statement 147 provides for the reclassification of intangible assets associated with certain branch acquisitions to goodwill. In adopting the statement, $16.6 million of intangibles were reclassified to goodwill as of January 1, 2002. Reported earnings for the first six months of 2002 were restated to reflect the non-amortization of the goodwill of approximately $116 per month. Pre-tax net income increased $348 ($226 after-tax) during both the first and second quarter of 2002 as a result of implementing SFAS No. 147.

During 2002, the Sky Financial adopted SFAS No. 143, “Accounting for Asset Retirement Obligations.” This Statement addresses financial accounting and reporting for legal obligations associated with the sale, abandonment, disposal, recycling or other than temporary removal from service of tangible long-lived assets. SFAS No. 143 requires an asset retirement obligation to be recognized at fair value when it is incurred, if a reasonable estimate of its fair value can be made at the time. Otherwise, the obligation should be recorded as soon as its fair value can be reasonably estimated. The adoption of this statement on January 1, 2002, did not have a material impact on Sky Financial.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This Statement eliminates inconsistencies between the required accounting for sale-leaseback transactions. The adoption of SFAS No. 145 during May 2002 did not have a material effect on Sky Financial.

In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses the timing of recognition of a liability for exit and disposal costs at the time a liability is incurred, rather than at a plan commitment date, as previously required by US GAAP. Exit or disposal costs will be measured at the fair value and will be subsequently adjusted for changes in estimated cash flows. This statement, which was adopted on January 1, 2003, did not have a material effect on Sky Financial.

2.  Stock Based Compensation

Sky Financial applies Accounting Principles Board Opinion No. 25 in accounting for stock options and discloses the fair value of options granted as permitted by SFAS No. 123. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the common stock at date of grant.

The following table summarizes the pro forma effects assuming compensation cost for such awards had been recorded based upon the estimated fair value (in thousands, except per share data):

8

Table of Contents

3.  Critical Accounting Policies

The accounting and reporting policies of Sky Financial are in accordance with accounting principles generally accepted within the United States of America and conform to general practices within the banking industry. Accounting and reporting policies for the allowance for credit losses and mortgage servicing rights are deemed critical since they involve the use of estimates and require significant management judgments. Application of assumptions different than those used by management could result in material changes in Sky Financial’s financial position or results of operations. Footnote one (Summary of Significant Accounting Policies) and footnote four (Loans and Allowance for Credit Losses), of the 2002 Annual Report and Form 10-K, provide detail with regard to the Corporation’s accounting for the allowance for loan losses and for mortgage servicing rights. There have been no significant changes in the application of accounting policies since December 31, 2002.

4.  Mergers, Acquisitions and Divestitures

On January 28, 2003, Sky Financial acquired a 51% interest in Access Partners LLP for $373 in cash.

On April 30, 2003, Sky Financial acquired Metropolitan Financial Corp. (Metropolitan), a $1.5 billion savings and loan holding company headquartered in Highland Hills, Ohio, and its wholly-owned subsidiary, Metropolitan Bank and Trust Company. Metropolitan shareholders received approximately 2.9 million shares of Sky Financial common stock and $25,000 in cash.

On October 1, 2002, Sky Financial acquired Three Rivers Bancorp, a $1 billion bank holding company located in Monroeville, Pennsylvania and its wholly-owned subsidiary, Three Rivers Bank and Trust Company (collectively known as Three Rivers). Three River’s shareholders received approximately 4,854,000 shares of Sky Financial common stock and cash of $38,987 in the tax-free exchange.

In April 2002, Sky Financial acquired Value Added Benefits, Ltd., a wholesale insurance agency headquartered in Cleveland, Ohio, for $1.9 million in cash.

In January 2002, Sky Financial completed the acquisition of Celaris Group, Inc., a full service insurance agency headquartered in Bowling Green, Ohio. In connection with the acquisition, Sky Financial paid $1 million in cash and issued .75 million shares of Sky Financial common stock. During the third quarter 2002, Value Added Benefits, Ltd. was merged into Celaris Group, Inc. In December 2002, Celaris Group, Inc. merged with Picton Cavanaugh, Inc. to form Sky Insurance.

All of the purchases completed in 2002 were recorded under the purchase method of accounting and the results of operations of the acquired businesses are included in Sky Financial’s operations from the effective dates of the acquisitions. The pro forma results of operations for these acquisitions had the acquisitions occurred at the beginning of 2002 are not significant and, accordingly, are not presented.

5.  Securities Available for Sale

The unrealized gains and losses and estimated fair values at March 31, 2003 and December 31, 2002 are as follows:

9

Table of Contents

6.  Loans

The loan portfolios are as follows:

The following table presents the aggregate amounts of non-performing loans on the dates indicated:

Non-accrual loans include $22.8 million of loans that are secured by pools of commercial leases for which payment is over 90 days past due were classified as non-performing. See Note 14 “Commitments and Contingencies” for additional discussion.

10

Table of Contents

7.  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:

Sky Financial Solutions’ (SFS) warehouse line of credit is included under bank lines of credit and was $55,859 at March 31, 2003. There were no amounts outstanding at December 31, 2002.

During March 2003, Sky Financial sold $50,000 in subordinated note arrangements in a private transaction pursuant to an applicable exemption from registration under the Securities Act of 1933. Sky Financial will use these proceeds to pay Metropolitan’s shareholders who elect to receive cash as merger consideration in exchange for their common shares. Any remaining proceeds will be used towards paying down $13,960 of Metropolitan subordinated debt.

During September 2002, Sky Bank sold $65,000 in subordinated note arrangements in a private transaction pursuant to an applicable exemption from registration under the Securities Act of 1933. Sky Bank used the proceeds to pay down certain subordinated indebtedness owed to Sky Financial. Sky Financial used some of the proceeds received from Sky Bank to fund the cash payment due Three Rivers Bancorp, Inc. shareholders (see Note 4) and for general working capital purposes.

During May 2002, Sky Financial, through one of its affiliates, issued $150,000 of fixed interest rate asset-backed notes to provide term funding for commercial loans.

11

Table of Contents

The expected final payment dates for the asset-backed notes listed above are included in the following table:

The amount of obligated mandatorily redeemable capital securities of subsidiary trusts represent the par value adjusted for any unamortized discount or other basis adjustments related to hedging the debt with derivative instruments. These hedging relationships exchange the fixed interest rate on the borrowing to variable rate based on LIBOR plus a spread, resulting in a lower effective rate paid on the borrowings. See note 13 for further discussion on derivative instruments.

8.  Other Comprehensive Income

Other comprehensive income consisted of the following:

12

Table of Contents

9.    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 March 31, 2003 and 2002, 2,813,000 and 2,841,000 weighted average shares, respectively, under option were excluded from the diluted earnings per share calculation as they were anti-dilutive.

The weighted average number of common shares outstanding for basic and diluted earnings per share computations were as follows:

10.    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 subsidiary 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 subsidiary 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 bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Management believes, as of March 31, 2003, that Sky Financial and its bank meet all capital adequacy requirements to which they are subject.

Sky Financial and its bank 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 bank 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 subsidiary. Sky Financial’s capital ratios are presented in the following table:

13

Table of Contents

Capital ratios applicable to Sky Financial’s banking subsidiary at March 31, 2003 were as follows:

In September, 2002, the Board of Directors of Sky Financial reauthorized management to undertake purchases of up to 1 million shares of Sky Financial’s outstanding common stock over a twelve month period in the open market or in privately negotiated transactions. There have been no such purchases under the current authorization.

11.    Goodwill and Intangible Assets

Net goodwill at March 31, 2003 and December 31, 2002 was $108,956 and $108,776 respectively. Goodwill is reviewed annually for impairment. Sky Financial will perform this review during the second quarter of 2003.

Net other intangible assets at March 31, 2003 and December 31, 2002 were $42,482 and $43,903, respectively. These assets consist primarily of core deposits intangibles and are continuing to be amortized in accordance with the Sky Financial’s policy. For the years ended December 31, 2003 through 2007, estimated future amortization expense is approximately $3,538 per year.

12.    Line of Business Reporting

Sky Financial manages and operates three major lines of business: community banking, financial services and commercial finance lending through Sky Financial Solutions. 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 services consists of non-banking companies engaged in broker/dealer operations, non-conforming mortgage lending, trust and wealth management, insurance and other financial-related services.

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

14

Table of Contents

items of income and expense company-wide are included in Parent and Other. Substantially all of Sky Financial’s assets are part of the community banking line of business.

Selected segment information for the three months ended March 31, 2003 and 2002 is included in the following tables: