SKY FINANCIAL GROUP INC - 10-Q Quarterly Report

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, 2004

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

Incorporation or Organization)

(IRS Employer

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 ¨

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 105,603,185 at July 31, 2004.

SKY FINANCIAL GROUP, INC.

INDEX


		Page Number
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets June 30, 2004 and December 31, 2003	3

	Condensed Consolidated Statements of Income Three and six months ended June 30, 2004 and 2003	4

	Condensed Consolidated Statements of Changes in Shareholders’ Equity Three and six months ended June 30, 2004 and 2003	5

	Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2004 and 2003	6

	Notes to Condensed Consolidated Financial Information	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	33

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 2.	Changes in Securities and Use of Proceeds	35

Item 3.	Defaults Upon Senior Securities	35

Item 4.	Submission of Matters to a Vote of Security Holders	35

Item 5.	Other Information	35

Item 6.	Exhibits and Reports on Form 8-K	35

SIGNATURES		37

EXHIBIT INDEX		38

PART I. FINANCIAL INFORMATION

Item 1.

Condensed Financial Statements

SKY FINANCIAL GROUP, INC.

Condensed Consolidated Balance Sheets (Unaudited)


*(Dollars and shares in thousands)*	June 30, 2004			December 31, 2003
Assets
Cash and due from banks	$	223,255		$	251,364
Interest-earning deposits with financial institutions		27,100			22,808
Loans held for sale		15,834			28,062
Securities available for sale		2,541,687			2,511,369
Total loans		8,794,596			8,643,862
Less allowance for credit losses		(125,661	)		(124,943	)

Net loans		8,668,935			8,518,919
Premises and equipment, net		145,315			153,285
Goodwill		198,322			185,859
Core deposits and other intangibles, net		48,264			51,155
Assets of discontinued operations		—			874,765
Accrued interest receivable and other assets		373,171			348,609

Total assets	$	12,241,883		$	12,946,195

Liabilities
Deposits
Non-interest bearing deposits	$	1,297,942		$	1,233,272
Interest-bearing deposits		7,484,259			7,282,261

Total deposits		8,782,201			8,515,533
Securities sold under repurchase agreements and federal funds purchased		844,738			994,896
Debt and Federal Home Loan Bank advances		1,291,123			1,310,975
Junior subordinated debentures owed to unconsolidated subsidiary trusts		145,584			164,806
Liabilities of discontinued operations		—			822,498
Accrued interest payable and other liabilities		138,029			138,911

Total Liabilities		11,201,675			11,947,619

Shareholders’ Equity
Serial preferred stock, $10.00 par value; 10,000 shares authorized; none issued		—			—
Common stock, no par value; 150,000 shares authorized; 93,420 and 92,485 shares issued in 2004 and 2003		789,815			764,860
Retained earnings		293,727			234,000
Treasury stock; 45 and 42 shares in 2004 and 2003		(742	)		(742	)
Accumulated other comprehensive income (loss)		(42,592	)		458

Total Shareholders’ Equity		1,040,208			998,576

Total Liabilities and Shareholders’ Equity	$	12,241,883		$	12,946,195

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

SKY FINANCIAL GROUP, INC.

Condensed Consolidated Statements of Income (Unaudited)


*(Dollars and shares in thousands, except per share data)*	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Interest Income
Loans, including fees	$	121,404	$	125,799	$	244,497	$	241,500
Securities
Taxable		26,453		23,987		52,161		49,806
Non-taxable		82		314		201		463
Federal funds sold and other		88		129		189		179

Total interest income		148,027		150,229		297,048		291,948

Interest Expense
Deposits		31,779		37,518		64,101		75,878
Borrowed funds		13,561		15,690		28,457		28,679

Total interest expense		45,340		53,208		92,558		104,557

Net Interest Income		102,687		97,021		204,490		187,391
Provision for Credit Losses		11,020		8,325		17,685		15,825

Net interest income after provision for credit losses		91,667		88,696		186,805		171,566

Non-Interest Income
Brokerage and insurance commissions		13,451		10,815		27,759		21,406
Service charges and fees on deposit accounts		11,107		9,489		20,749		18,094
Trust services income		4,101		3,652		8,206		6,991
Mortgage banking income		6,879		13,884		12,324		23,242
Net securities gains		2,877		83		4,405		560
Other income		11,194		9,160		19,575		16,576

Total non-interest income		49,609		47,083		93,018		86,869

Non-Interest Expense
Salaries and employee benefits		43,740		41,083		87,938		79,473
Occupancy and equipment expense		13,436		11,890		26,310		23,726
Merger, integration and restructuring expense		—		3,486		346		3,486
Amortization expense		1,943		1,704		3,850		3,124
Other operating expense		23,179		21,958		42,357		38,883

Total non-interest expense		82,298		80,121		160,801		148,692

Income From Continuing Operations Before Income Taxes		58,978		55,658		119,022		109,743
Income Taxes From Continuing Operations		18,777		18,836		38,869		37,088

Income From Continuing Operations		40,201		36,822		80,153		72,655
Income From Discontinued Operations, net of tax of $0 and $369 and $10,105 and $498 for three months and six months ended 2004 and 2003, respectively		—		687		18,725		924

Net Income	$	40,201	$	37,509	$	98,878	$	73,579

Income From Continuing Operations per Common Share
Basic	$	.43	$	.41	$	.86		.83
Diluted		.43		.41		.85		.82
Income From Discontinued Operations per Common Share
Basic		—		.01		.20		.01
Diluted		—		.01		.20		.01
Income per Common Share
Basic	$	.43		.42		1.06		.84
Diluted		.43		.42		1.05		.83

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

SKY FINANCIAL GROUP, INC.

(Unaudited)

Condensed Consolidated Statements of Changes in Shareholders’ Equity


*(Dollars in thousands, except per share data)*	Three Months Ended June 30,						Six Months Ended June 30,
*(Dollars in thousands, except per share data)*	2004			2003			2004			2003
Balance at beginning of period	$	1,066,157		$	842,302		$	998,576		$	832,433
Comprehensive income
Net income		40,201			37,509			98,878			73,579
Other comprehensive loss		(58,243	)		(3,813	)		(43,050	)		(12,398	)

Total comprehensive income (loss)		(18,042	)		33,696			55,828			61,181

Common cash dividends		(19,602	)		(18,012	)		(39,150	)		(35,473	)
Shares issued for stock option exercises		7,137			1,705			12,759			2,051
Common shares issued to acquire Spencer-Patterson		—			—			7,637			—
Common shares issued to acquire EOB, Inc.		4,558			—			4,558			—
Common shares issued to acquire Metropolitan Financial Corp.		—			55,294			—			55,294
Fractional shares and other items		—			25			—			(476	)

Balance at end of period	$	1,040,208		$	915,010		$	1,040,208		$	915,010

Common cash dividend per share	$	.21		$	.20		$	.42		$	.40

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

SKY FINANCIAL GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


*(Dollars in thousands, except share data)*	Six Months Ended June 30,
*(Dollars in thousands, except share data)*	2004			2003
Operating Activities
Net cash provided from continuing operations	$	92,946		$	56,159
Net cash provided from (used for) discontinued operations		15,165			(1,183	)

Net cash provided from (used for) operations		108,111			54,976

Investing Activities
Net (increase) decrease in interest bearing deposits in other banks		(4,292	)		3,960
Net decrease in federal funds sold					11,100
Securities available for sale:
Proceeds from maturities and payments		434,599			910,102
Proceeds from sales		112,054			92,006
Purchases		(643,003	)		(1,144,073	)
Proceeds from sales of non-mortgage loans		14,838			447,499
Net increase in loans		(184,664	)		(599,356	)
Purchases of premises and equipment		(2,251	)		(5,623	)
Proceeds from sales of premises and equipment		187			380
Proceeds from sales of other real estate		1,790			3,920
Proceeds from sale of discontinued operations, net of cash sold		71,441			—
Net cash received in acquisitions		—			48,394
Other items		—			(154	)

Net cash provided used for investing activities from continuing operations		(199,301	)		(231,845	)
Net cash used for investing activities from discontinued operations		(26,126	)		(79,116	)

Net cash used for investing activities		(225,427	)		(310,961	)

Financing Activities
Net increase in deposit accounts		266,668			142,933
Net increase (decrease) in federal funds and repurchase agreements		(150,158	)		104,685
Net increase (decrease) in borrowings under bank lines of credit		(60,216	)		9,752
Net increase (decrease) in short-term FHLB advances		(125,000	)		30,000
Proceeds from issuance of debt and long-term FHLB advances		199,022			50,580
Repayment of debt and long-term FHLB advances		(45,847	)		(104,213	)
Cash dividends and fractional shares paid		(39,150	)		(35,949	)
Proceeds from issuance of common stock		12,759			2,051

Net cash provided from financing activities from continuing operations		58,078			199,839
Net cash provided from financing activities from discontinued operations		31,129			96,179

Net cash provided from financing activities		89,207			296,018

Net increase (decrease) in cash and due from banks		(28,109	)		40,033
Cash and due from banks at beginning of period		251,364			253,172

Cash and due from banks at end of period		223,255			293,205
Less cash at discontinued operations		—			(13,877	)

Cash at year end, net of discontinued operations	$	223,255		$	279,328

Supplemental Disclosures
Interest paid	$	90,804		$	104,276
Income taxes paid		16,300			49,331
Non-cash transactions
Common shares issued to acquire Spencer-Patterson.		7,637
Common shares issued to acquire EOB, Inc.		4,558
Common shares issued to acquire Metropolitan					55,294

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

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 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 an 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 June 30, 2004, and its results of operations and cash flows for the periods presented. In accordance with US GAAP for interim financial information, these statements do not include certain information and footnote disclosures required for complete annual financial statements. Sky Financial’s Annual Report for the year ended December 31, 2003, contains consolidated financial statements and related notes which should be read in conjunction with the accompanying condensed 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.

The condensed consolidated financial statements, notes to the condensed consolidated financial statements and statistical information reflect the results of Sky Financial Solutions, which was sold on March 31, 2004, in discontinued operations, unless otherwise noted.

New Accounting Pronouncements

On March 9, 2004, the SEC issued Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments” (SAB 105). This bulletin was issued to inform registrants of the SEC’s view that the fair value of the recorded loan commitments, that are required to follow derivative accounting under FAS 133, Accounting for Derivative Instruments and Hedging Activities, should not consider the expected future cash flows related to the associated servicing of the future loan. The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The adoption of this Staff Accounting Bulletin in the second quarter of 2004 did not have a material impact on Sky Financial.

In March 2004, the Financial Accounting Standards Board ratified the consensus reached by the Emerging Issues Task Force in Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-1). EITF 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless: (a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for a forecasted recovery of fair value up to (or beyond) the cost of the investment; and (b) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between the investment’s cost

and its fair value. EITF 03-1 is effective for Sky Financial in the third quarter of 2004. Gross unrealized losses on available for sale securities was $66,530 at June 30, 2004. Sky Financial is continuing to evaluate the impact of EITF 03-1. The amount of other than temporary impairment to be recognized, if any, will be dependent on market conditions and management’s intent and ability at the time of the evaluation to hold underwater investments until a forecasted recovery in the fair value up to and beyond the adjusted cost.

In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued AICPA Statement of Position No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (SOP 03-3), to address accounting for differences between the contractual cash flows of certain loans and debt securities and the cash flows expected to be collected when loans or debt securities are acquired in a transfer and those cash flow differences are attributable, at least in part, to credit quality. As such, SOP 03-3 applies to such loans and debt securities acquired in purchase business combinations and does not apply to originated loans. The application of SOP 03-3 limits the interest income, including accretion of purchase price discounts, that may be recognized for certain loans and debt securities. Additionally, SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield or valuation allowance, such as the allowance for loan and lease losses. Subsequent to the initial investment, increases in expected cash flows generally should be recognized prospectively through adjustment of the yield on the loan or debt security over its remaining life. Decreases in expected cash flows should be recognized as impairment. SOP 03-3 is effective for loans and debt securities acquired in fiscal years beginning after December 15, 2004, with early application encouraged. The impact of this new pronouncement is not expected to be material to Sky Financial’s financial condition, results of operations, or cash flows.

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):


	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Net income, as reported	$	40,201	$	37,509	$	98,878	$	73,579
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		630		532		1,260		1,064

Pro forma net income	$	39,571	$	36,977	$	97,618	$	72,515

Earnings per share:
Basic – as reported	$	.43	$	.42	$	1.06	$	.84

Basic – pro forma	$	.42	$	.41	$	1.05	$	.83

Diluted – as reported	$	.43	$	.42	$	1.05	$	.83

Diluted – pro forma	$	.42	$	.41	$	1.04	$	.82

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 financial services 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. Note 1 (Summary of Significant Accounting Policies), note 4 (Loans and Allowance for Credit Losses) and note 20 (Mortgage Banking Activity), of the 2003 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, 2003.

4.	Mergers, Acquisitions and Divestitures

Community Banking

On July 1, 2004, Sky Financial acquired Second Bancorp Incorporated (Second Bancorp), a $2.1 billion bank holding company headquartered in Warren, Ohio, and its wholly-owned subsidiary Second National Bank by acquiring all of the outstanding capital stock of Second Bancorp for an aggregate purchase price of approximately $315,000. Second Bancorp shareholders received approximately 12,200 shares of Sky Financial common stock.

On October 19, 2003, Sky Financial acquired GLB Bancorp, Inc. (GLB), a $225 million bank holding company headquartered in Mentor, OH, and its wholly-owned subsidiary Great Lakes Bank, by acquiring all of the outstanding capital stock of GLB for an aggregate purchase price of $43,263 including direct acquisition costs of $191. GLB shareholders received 1,717 shares of Sky Financial common stock.

On April 30, 2003, Sky Financial acquired the outstanding capital stock of 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, for a purchase price of $81,294, including direct acquisition costs of $673. Metropolitan shareholders received 2,887 shares of Sky Financial common stock and $25,327 in cash. The acquisitions of Second Bancorp, GLB and Metropolitan complement Sky Financial’s operations in northeastern Ohio by enhancing its presence in the Cleveland metropolitan area and other areas of northeastern Ohio.

Sky Financial accounted for the acquisitions of Metropolitan and GLB as purchases and included their results from the effective date of the acquisition.

The following (unaudited) pro forma consolidated results of operations have been prepared as if the acquisitions of Metropolitan and GLB occurred at the beginning of 2003. The pro forma results of operations for all other acquisitions completed as of June 30, 2004, are not significant and, accordingly, are not presented.


	Three Months Ended June 30, 2003		Six Months Ended June 30, 2003
Net interest income	$	102,140	$	204,509
Income from continuing operations		30,792		68,361
Earnings per share from continuing operations – Basic		.34		.76
Earnings per share from continuing operations – Diluted		.34		.76

This pro forma information is not necessarily indicative of the results that actually would have been obtained if the operations had been combined as of the beginning of the periods presented and is not intended to be a projection of future results.

Financial Service Affiliate Acquisitions

On April 1, 2004, Sky Financial acquired EOB, Inc., a group benefit insurance agency headquartered in Canton, Ohio for 177 shares of Sky Financial common stock and $516 in cash.

On January 5, 2004, Sky Financial acquired Spencer-Patterson Insurance Agency, a full-service professional liability, personal and commercial agency headquartered in Findlay, Ohio, for 297 shares of Sky Financial common stock and $743 in cash.

On July 8, 2003, Sky Financial acquired Insurance Buyer’s Service Agency, Inc., a professional liability, personal and commercial insurance agency headquartered in Boardman, Ohio, for 164 shares of Sky Financial common stock.

All of the purchases completed in 2004 and 2003 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. Disclosures of the pro forma results of the acquisitions of the financial service affiliates are immaterial to Sky Financial’s consolidated financial statements.

Discontinued Operations

On March 31, 2004, Sky Financial completed the sale of its dental financing affiliate, Sky Financial Solutions. Sky Financial Solutions has been reported as a discontinued operation and the condensed consolidated financial statements as of December 31, 2003 and for the three and six months ended June 30, 2003 have been reclassified to reflect this presentation. Sky Financial Solutions results of operations for the three months ended June 30, 2004 and 2003 included revenues of $0 and $8,353, respectively, and pre-tax net income of $0 and $1,086, respectively. Results of operations for the six months ended June 30, 2004 and 2003 included revenues of $38,714 and $16,470, respectively and pre-tax net income of $28,830 and $1,494, respectively. Revenues and pre-tax income for the six months ended June 30, 2004 included a pre-tax gain on the sale of Sky Financial Solutions of $30,578 ($19,876 after-tax).

The major classes of assets and liabilities included in the condensed consolidated balance sheets as of December 31, 2003 are as follows:


Assets
Cash	$	91,763
Net loans		763,408
Other assets		19,594

Total assets	$	874,765

Liabilities
Debt	$	799,990
Accrued interest payable and other liabilities		22,508

Total liabilities	$	822,498

5.	Securities Available for Sale

The unrealized gains and losses and estimated fair values at June 30, 2004 and December 31, 2003 are as follows:


June 30, 2004	Estimated Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. Treasury and U.S. Government agencies	$	198,151	$	750	$	(3,007	)
Obligations of state and political subdivisions		18,081		107		(56	)
Corporate and other securities		65,887		1,955		(249	)
Mortgage-backed securities		2,122,762		3,410		(61,965	)

Total debt securities available for sale		2,404,881		6,222		(65,277	)
Marketable equity securities		43,474		3,929		(1,253	)
FHLB, FRB and Banker’s Bank Stock		93,332		—		—

Total securities available for sale	$	2,541,687	$	10,151	$	(66,530	)


December 31, 2003	Estimated Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. Treasury and U.S. Government agencies	$	326,158	$	2,748	$	(508	)
Obligations of state and political subdivisions		22,337		164		(33	)
Corporate and other securities		69,446		3,011		—
Mortgage-backed securities		1,955,606		15,090		(15,620	)

Total debt securities available for sale		2,373,547		21,013		(16,161	)
Marketable equity securities		45,862		6,337		(938	)
FHLB, FRB and Banker’s Bank Stock		91,960		—		—

Total securities available for sale	$	2,511,369	$	27,350	$	(17,099	)

Loans

The loan portfolios are as follows:


	June 30, 2004		December 31, 2003
Real estate loans:
Construction	$	379,361	$	491,086
Residential mortgage		2,171,757		2,045,317
Non-residential mortgage		3,037,875		2,896,116
Commercial, financial and agricultural		2,510,871		2,440,442
Installment loans		694,732		770,901

Total loans	$	8,794,596	$	8,643,862

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


	June 30, 2004		December 31, 2003
Non-accrual loans	$	95,674	$	81,979
Restructured loans		575		599

Total non-performing loans	$	96,249	$	82,578

Non-accrual loans include $26,600 of loans that are secured by pools of commercial leases for which payment is over 90 days past due. See Note 15 “Commitments and Contingencies” for additional discussion.

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:


	June 30, 2004		December 31, 2003
Borrowings under bank lines of credit	$	—	$	60,216
Borrowings under FHLB lines of credit		1,124,604		1,084,133
Subordinated note, 5.35%, due April 2013		50,000		50,000
Subordinated note, 6.125%, due October 2012		65,000		65,000
Subordinated note, 7.08%, due January 2008		50,000		50,000
Junior subordinated debentures owed to unconsolidated subsidiary trusts:
Due February 2027 at 9.875%		27,351		27,765
Due June 2027 at 10.20%		23,958		24,491
Due May 2030 at 9.34%		63,347		64,955
Due June 2029 at 9.50%		—		16,667
Due October 2033 at 4.09% (variable)		30,928		30,928
Capital lease obligation		1,052		1,117
Other items		467		509

Total borrowings	$	1,436,707	$	1,475,781

The amount of junior subordinated debentures owed to unconsolidated 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 borrowings to a variable rate based on LIBOR plus a spread, resulting in a lower effective rate paid on the borrowings. See Note 13 for further discussion of derivative instruments.

8.	Other Comprehensive Income (Loss)

Other comprehensive income (loss) consisted of the following:


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
Securities available for sale:
Unrealized securities gains (losses) arising during period	$	(87,815	)	$	2,149		$	(55,223	)	$	(9,479	)
Reclassification adjustment for (gains) losses included in income		2,877			(83	)		4,405			(560	)

		(84,938	)		2,066			(50,818	)		(10,039	)

Cash flow hedge derivatives
Change in fair value of cash flow hedge derivatives		(4,667	)		(8,709	)		(16,031	)		(10,642	)
Amounts reclassified to interest expense		—			777			616			1,607

		(4,667	)		(7,932	)		(15,415	)		(9,035	)

Net unrealized gain (loss)		(89,605	)		(5,866	)		(66,233	)		(19,074	)
Tax effect		31,362			2,053			23,183			6,676

Total other comprehensive income (loss)	$	(58,243	)	$	(3,813	)	$	(43,050	)	$	(12,398	)

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 June 30, 2004 and 2003, 1,402 and 2,260 weighted average 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, 2004 and 2003, 50 and 1,430 weighted average shares, respectively, under option were excluded from the diluted earnings per share calculation as they were anti-dilutive.


	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Numerator:
Income From Continuing Operations	$	40,201	$	36,822	$	80,153	$	72,655
Income From Discontinued Operations		—		687		18,725		924

Net income	$	40,201	$	37,509	$	98,878	$	73,579

Denominator:
Weighted-average common shares outstanding (basic)		93,322		89,057		93,140		88,064
Effect of stock options		992		602		1,134		568

Weighted-average common shares outstanding (diluted)		94,314		89,659		94,274		88,632

Income From Continuing Operations per share
Basic	$	.43	$	.41	$	.86	$	.83
Diluted		.43		41		.85		.82
Income from Discontinued Operations per share:
Basic		—		.01		.20		.01
Diluted		—		.01		.20		.01
Earnings per share:
Basic	$	.43	$	.42	$	1.06	$	.84
Diluted		.43		.42		1.05		.83

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 June 30, 2004, 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 and Sky Bank’s capital ratios are presented in the following table:


	Actual				Minimum Required For Capital Adequacy Purposes				Required to be Well Capitalized Under Prompt Corrective Action Regulations
June 30, 2004	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital to risk-weighted assets
Sky Financial	$	1,246,300	13.0	%	$	769,389	8.0	%	$	961,736	10.0	%
Sky Bank		1,053,323	11.3			744,237	8.0			930,296	10.0
Tier I capital to risk-weighted assets
Sky Financial	$	983,022	10.2	%	$	384,694	4.0	%	$	577,042	6.0	%
Sky Bank		860,876	9.3			372,118	4.0			558,177	6.0
Tier I capital to average assets
Sky Financial	$	983,022	8.3	%	$	474,595	4.0	%	$	593,244	5.0	%
Sky Bank		860,876	7.4			467,716	4.0			584,645	5.0

	Actual				Minimum Required For Capital Adequacy Purposes				Required to be Well Capitalized Under Prompt Corrective Action Regulations
December 31, 2003	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital to risk-weighted assets
Sky Financial	$	1,194,121	11.8	%	$	807,852	8.0	%	$	1,009,815	10.0	%
Sky Bank		1,009,529	11.2			723,302	8.0			904,127	10.0
Tier I capital to risk-weighted assets
Sky Financial	$	908,756	9.0	%	$	403,926	4.0	%	$	605,889	6.0	%
Sky Bank		820,683	9.1			361,651	4.0			542,476	6.0
Tier I capital to average assets
Sky Financial	$	908,756	7.3	%	$	500,565	4.0	%	$	625,707	5.0	%
Sky Bank		820,083	7.1			460,498	4.0			575,622	5.0

11.

Goodwill and Intangible Assets

Goodwill at June 30, 2004 and December 31, 2003 was $198,322 and $185,859 respectively. Sky Financial recorded $7,533 in goodwill as a result of the Spencer-Patterson acquisition and $4,930 as a result of the EOB, Inc. acquisition. Management is still reviewing the valuations of certain assets and liabilities and may adjust goodwill once these assessments are completed. Goodwill is reviewed annually for impairment. Sky Financial completed this review during the second quarter of 2004 and determined that goodwill was not impaired.

Net other intangible assets at June 30, 2004 and December 31, 2003 were $48,264 and $51,155, respectively. These assets consist primarily of core deposits intangibles and are being amortized in accordance with Sky Financial’s policy. For the years ended December 31, 2004 through 2008, estimated future amortization expense is estimated to be approximately $7,700 per year.

12.

Line of Business Reporting

Sky Financial manages and operates two major lines of business: community banking and financial services. Community banking includes lending and related services to businesses and consumers, mortgage banking and deposit-gathering. Other financial services consists of non-banking companies engaged in 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 merger, integration and restructuring charges 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 June 30, 2004 and 2003 is included in the following tables:


Three months ended June 30, 2004	Community Banking		Financial Services Affiliates			Parent And Other			Total
Net interest income	$	103,402	$	129		$	(844	)	$	102,687
Provision for credit losses		11,040		(20	)		—			11,020

Net interest income after provision		92,362		149			(844	)		91,667
Non-interest income		31,949		16,379			1,281			49,609
Non-interest expense		67,975		13,203			1,120			82,298

Income from continuing operations before income taxes		56,336		3,325			(683	)		58,978
Income taxes from continuing operations		19,024		1,358			(1,605	)		18,777

Net income from continuing operations	$	37,312	$	1,967		$	922		$	40,201

Goodwill at April 1, 2004	$	152,214	$	41,894		$	—		$	194,108
Net activity		—		4,214			—			4,214

Goodwill at June 30, 2004	$	152,214	$	46,108		$	—		$	198,322

Average assets	$	11,892,256	$	100,041		$	122,124		$	12,114,421
Depreciation and amortization		5,258		285			204			5,747


Three months ended June 30, 2003	Community Banking		Financial Services Affiliates			Parent and Other			Total
Net interest income	$	97,903	$	90		$	(972	)	$	97,021
Provision for credit losses		8,100		225			—			8,325

Net interest income after provision		89,803		(135	)		(972	)		88,696
Non-interest income		32,552		13,622			909			47,083
Non-interest expense		65,768		10,949			3,404			80,121

Income (loss) from continuing operations income taxes		56,587		2,538			(3,467	)		55,658
Income taxes from continuing operations		19,095		911			(1,170	)		18,836

Net income (loss) from continuing operations	$	37,492	$	1,627		$	(2,297	)	$	36,822

Goodwill at April 1, 2003	$	79,051	$	29,905		$	—		$	108,956
Net activity		52,642		—			—			52,642

Goodwill at June 30, 2003	$	131,693	$	29,905		$	—		$	161,598

Average assets	$	11,257,865	$	72,793		$	155,332		$	11,485,990
Depreciation and amortization		5,074		234			177			5,485

Selected segment information for the six months ended June 30, 2004 and 2003 is included in the following tables:


Six months ended June 30, 2004	Community Banking		Financial Services Affiliates		Parent And Other			Total
Net interest income	$	205,827	$	295	$	(1,632	)	$	204,490
Provision for credit		17,510		175		—			17,685

Net interest income after provision		188,317		120		(1,632	)		186,805
Non-interest income		57,112		34,004		1,902			93,018
Non-interest expense		135,081		25,511		209			160,801

Income from continuing operations before income taxes		110,348		8,613		61			119,022
Income taxes from continuing operations		37,203		3,489		(1,823	)		38,869

Net income from continuing operations	$	73,145	$	5,124	$	1,884		$	80,153

Goodwill at January 1, 2004	$	152,214	$	33,645	$	—		$	185,859
Net activity		—		12,463		—			12,463

Goodwill at June 30, 2004	$	152,214	$	46,108	$	—		$	198,322

Average assets	$	11,822,278	$	95,878	$	151,072		$	12,069,228
Depreciation and amortization		10,547		524		393			11,464


Six months ended June 30, 2003	Community Banking		Financial Services Affiliates			Parent and Other			Total
Net interest income	$	187,846	$	221		$	(676	)	$	187,391
Provision for credit losses		15,375		450			—			15,825

Net interest income after provision		172,471		(229	)		(676	)		171,566
Non-interest income		58,546		26,709			1,614			86,869
Non-interest expense		122,605		21,499			4,588			148,692

Income (loss) from continuing operations income taxes		108,412		4,981			(3,650	)		109,743
Income taxes from continuing operations		36,422		1,997			(1,331	)		37,088

Net income (loss) from continuing operations	$	71,990	$	2,984		$	(2,319	)	$	72,655

Goodwill at January 1, 2003	$	79,119	$	29,657		$	—		$	108,776
Net activity		52,574		248			—			52,822

Goodwill at June 30, 2003	$	131,693	$	29,905		$	—		$	161,598

Average assets	$	10,711,348	$	73,709		$	147,415		$	10,932,472
Depreciation and amortization		9,743		465			369			10,577

13.

Derivative Instruments and Hedging Activities

Sky Financial’s hedging policies permit the use of interest rate swaps, caps and floors to manage interest rate risk or to hedge specified assets and liabilities.

Fair Value Hedges

Sky Financial uses interest rate swap agreements to hedge a portion of its fixed rate borrowings. The interest rate swaps effectively convert the fixed rate of interest on $108,600 of the junior subordinated debentures owed to unconsolidated subsidiary trusts and $215,000 of advances to the Federal Home Loan Bank of Cincinnati to variable rate based on LIBOR plus a spread as defined in the agreements. The interest rate swaps involve no exchange of principal either at inception or maturity and have maturities and call options identical to the trust preferred security agreements. The arrangements have been designated as fair value hedges and both the change in the fair value of the hedges and the hedged transactions are reflected in earnings. Because the hedging arrangement is considered highly effective, changes in the interest rate swaps’ fair values exactly offset the corresponding changes in the fair value of the junior subordinated debentures and FHLB advances and, as a result, the changes in the fair value do not result in an impact on net income.

Cash Flow Hedges

Sky Financial has entered into amortizing interest rate swaps to fix the rate on its $40,000 of variable rate advances with the Federal Home Loan Bank of Cincinnati. Under the terms of the arrangements, Sky Financial pays a fixed rate of interest and receives a variable rate based on LIBOR. The swaps are considered to be highly effective. Accordingly, any change in the swap’s fair value is recorded in other comprehensive income, net of tax.

Interest Rate Caps

During 2002, Sky Financial entered into two interest rate cap arrangements, and paid $1,456 to hedge its interest risk on $48.6 million of federal funds purchased. The interest rate caps are designed to offset the impact of changes in the federal funds purchased rate above the weighted average stated rate of 5.90%, and, as such, are considered to be highly effective. Any changes in the intrinsic values are recorded in other

comprehensive income. Changes in the time value of the interest rate caps, which are excluded from the assessment of hedge effectiveness, increased interest expense by $110 in the first half of 2004 and 2003. No deferred gains or losses in accumulated other comprehensive income at June 30, 2004 are expected to be reclassified to earnings in 2004.

The following table presents the contract/notional and fair value amounts of all derivative transactions at June 30, 2004 and December 31, 2003:


	June 30, 2004					December 31, 2003
	Contractual/ Notional		Fair Value			Contractual/ Notional		Fair Value
Interest rate swaps
Fair value hedges	$	323,600	$	2,440		$	108,600	$	5,129
Cash flow hedges		40,000		(121	)		40,000		91
Interest rate caps		48,600		514			48,600		728

Derivative instruments	$	412,200	$	2,833		$	197,200	$	5,948

14.

Merger, Integration and Restructuring Expense

The following is a summary of activity in the merger, integration and restructuring liability for the six months ended June 30, 2004:


Beginning balance	$	2,523
Accruals		346
Cash payments		(1,050	)

Ending balance	$	1,819

Sky Financial recorded merger, integration and restructuring expense during the first quarter of 2004 associated with the sale of Sky Financial Solutions.

15.

Commitments and Contingencies

Sky Financial is involved in litigation with three insurance companies who issued surety bonds or insurance policies as security for four related loans aggregating $26,600. The subject loans are secured by pools of commercial leases, the payments under which are guaranteed by the surety bonds. Sky Financial is engaged in litigation with these insurance companies to enforce the payment obligations, as are a number of other banks nationwide. After consultation with legal counsel, management believes that the credits are well secured and the prospects for recovery of all principal and interest are good. The entire portfolio has been placed on non-accrual status pending outcome of the litigation.

A schedule of significant commitments at June 30, 2004 follows:


Commitments to extend credit	$	2,577,706
Standby letters of credit		324,743
Letters of credit		2,184

The Sky Financial Solutions sales agreement contains a contingency based upon future charge-offs between Sky Financial and the acquirer that may result in an adjustment to increase or decrease the sales price in future periods. Based on historical experience and expected future performance, management does not believe that this provision will have a significant impact on future earnings, cash flows, or financial position.

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, 2004 and 2003

Results of Operations

Diluted earnings per common share for the second quarter of 2004 was $.43 ($.43 basic), compared to $.42 ($.42 basic) for the same period in 2003. Net income for the second quarter of 2004 was $40,201, an increase of $2,692 over the second quarter of 2003 net income of $37,509. Return on average equity (ROE) and return on average assets (ROA) were 15.25% and 1.33%, respectively, for the second quarter of 2004, compared to 16.78% and 1.29%, respectively, in 2003.

Diluted earnings per common share from continuing operations for the second quarter of 2004 was $.43 ($.43 basic), as compared to $.41 ($.41 basic) for the same period in 2003. Income from continuing operations for the second quarter of 2004 was $40,201, an increase of $3,379 over the second quarter of 2003 net income from continuing operations of $36,822. Sky Financial’s net income from continuing operations during the second quarter of 2004 includes the results of Metropolitan, which was acquired in May 2003 and GLB, which was acquired in October 2003. The results of second quarter of 2003 were impacted by merger, integration and restructuring expenses of $3,486 ($2,265 after-tax), which impacted diluted earnings per share by $.03. ROE and ROA on a continuing operations basis were 15.25% and 1.33%, respectively, for the second quarter of 2004, compared to 16.47% and 1.29%, respectively, in 2003.

Business Line Results

Sky Financial’s two major lines of business include community banking and financial services. Community banking includes lending and related services to businesses and consumers, mortgage banking and deposit-gathering. Financial services consists of non-banking companies engaged in trust and wealth management, insurance and other financial-related services. Sky Financial’s business line results for the second quarter ended June 30, 2004 and 2003 are summarized in the table below.


	Net Income (Loss)
Quarter Ended June 30,	2004		2003
Community Banking	$	37,312		37,492
Financial Services Affiliates		1,967		1,627
Parent and Other		922		(2,297	)

Consolidated Total	$	40,201	$	36,822

The lower community banking net income in the second quarter of 2004 as compared to the same period of the previous year is mainly due to lower mortgage banking income, offset by the net positive impact from acquisitions. The second quarter 2004 reflects higher net interest income, service charges and fees on deposits and gains on sale of securities. These increases were more than offset by a decrease in mortgage banking income and an increase in employee expenses and other operating expenses. The efficiency ratio for the community banking segment was 49.92% for the second quarter of 2004 compared to 50.10% in the second quarter of 2003. The 2004 community banking results reflect a ROE of 15.48% and a ROA of 1.26% compared to 17.63% and 1.34%, respectively, in the second quarter of 2003.

The financial service affiliates’ net income increased as compared to 2003 from growth in brokerage and insurance commissions as a result of increased sales and acquisitions.

integration and restructuring charges and a lower effective rate on income taxes during the second quarter of 2004 as compared to the same period in the previous year.

Net Interest Income

Net interest income for the second quarter of 2004 was $102,687, an increase of $5,666 or 5.8% from $97,021 in the second quarter of 2003. Net interest income, the difference between interest income earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, is the most significant component of Sky Financial’s earnings. Net interest income is affected by changes in the volumes, rates and composition of interest-earning assets and interest-bearing liabilities. Average earning assets increased 5.2% from the second quarter last year, with strong growth in average loans, increasing 6.6% from last year, which included organic growth of 3.3% and the impact of Metropolitan and Great Lakes. Average deposits were up 4.3% from the same quarter last year, however, decreased 1.7% when excluding the impact of Great Lakes and Metropolitan. Sky Financial’s net interest margin for the three months ended June 30, 2004 was 3.69%, consistent with last quarter and an increase of 3 basis points from second quarter a year ago. The higher net interest margin primarily reflects the improvements in funding mix and pricing, despite the lower rate environment versus last year.

The following table reflects the components of Sky Financial’s net interest income for the three months ended June 30, 2004 and 2003. Rates are computed on a tax equivalent basis and non-accrual loans have been included in the average balances.


	Three Months Ended June 30, 2004						Three Months Ended June 30, 2003
(Dollars in thousands)	Average Balance		Interest Income/ Expense		Rate		Average Balance		Interest Income/ Expense		Rate
Assets
Interest-earning assets:
Interest-bearing deposits in banks	$	36,385	$	87	.96	%	$	30,839	$	88	1.14	%
Federal funds sold		885		2	.91			1,084		3	.98
Securities		2,570,976		27,347	4.28			2,497,796		25,164	4.04
Loans and loans held for sale		8,663,780		121,403	5.64			8,189,863		125,799	6.16

Total interest-earning assets		11,272,026		148,839	5.31			10,719,582		151,054	5.65

Assets from discontinued operations		—						694,027

Noninterest-earning assets		842,395						766,408

Total assets	$	12,114,421					$	12,180,017

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Demand deposits	$	239,174		385	.65		$	215,687		370	.69
Savings deposits		3,554,212		5,948	.67			3,344,855		8,683	1.04
Time deposits		3,724,467		25,446	2.75			3,806,940		28,464	3.00

Total interest-bearing deposits		7,517,853		31,779	1.70			7,367,482		37,517	2.04
Short-term borrowings		788,596		4,035	2.06			882,223		4,978	2.26
Junior Subordinated Debentures/ Trust Preferred Securities		163,503		1,823	4.48			152,419		1,604	4.22
Debt and FHLB advances		1,145,664		7,703	2.70			1,032,097		9,109	3.54

Total interest-bearing liabilities		9,615,616		45,340	1.90			9,434,221		53,208	2.26

Liabilities of discontinued operations		—						654,790
Noninterest-bearing liabilities		1,438,287						1,194,492
Shareholders’ equity		1,060,518						896,514

Total liabilities and equity	$	12,114,421					$	12,180,017

Net interest income (tax equivalent basis)			$	103,499					$	97,846

Net interest rate spread (tax equivalent basis)					3.41	%					3.39	%

Net interest margin, (interest income, taxable equivalent basis, to interest earning assets)					3.69	%					3.66	%

Provision for Credit Losses

The provision for credit losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents management’s assessment of the estimated probable credit losses inherent in Sky Financial’s loan portfolio which have been incurred at each balance sheet date. The provision for credit

losses increased $2,695 or 32.4% to $11,020 in the second quarter of 2004 compared to $8,325 in the second quarter of 2003. The higher provision for credit losses in the second quarter of 2004 was due to higher net charge-offs and strong growth in the loan portfolio. Net charge-offs were $10,402 or 0.48% (annualized) of average loans during the three months ended June 30, 2004, compared to $7,075 or 0.35% (annualized) for the same period in 2003.


	June 30, 2004		December 31, 2003		June 30, 2003
Allowance for credit losses as a percentage of loans	1.43	%	1.45	%	1.46	%
Allowance for credit losses as a percentage of non-performing loans	130.56	%	151.30	%	140.11	%

See section titled “Non-Performing Assets” of management’s discussion and analysis regarding $26,600 of non-performing loans backed by sureties.

Non-Interest Income

The change in non-interest income reflects an increase in securities gains, the impact of acquisitions and the emphasis of Sky Financial on expanding its profitable fee-based businesses offset by a decrease in mortgage banking revenues. Non-interest income for the second quarter of 2004 was $49,609, an increase of $2,526 or 5.4% from $47,083 for the same quarter of 2003. Brokerage and insurance commissions revenues of $13,451 during the second quarter of 2004, represented an increase of $2,636 or 24.4% from the same period in 2003, reflecting growth from both acquisitions and increased sales. Service charges for the second quarter of 2004 were $11,107, up $1,618 or 17.1% from the second quarter of 2003 primarily due to deposit growth from acquisitions. Other income increased to $11,194 in the second quarter of 2004, up from $9,160 in the same quarter last year due to gains on the sales of SBA and other commercial loans. For the second quarter of 2004, securities gains were $2,877, an increase of $2,794 from the same period last year. Mortgage banking income was $6,879 during the second quarter of 2004, a decrease of $7,005 or 50.5%, due primarily to a decrease in loan originations as compared to the same period of 2003.

Non-Interest Expense

The change in non-interest expense is primarily attributed to additional costs as a result of the Metropolitan and Great Lakes acquisitions partially offset by a decrease in merger, integration and restructuring charges. Non-interest expense for the second quarter of 2004 was $82,298, an increase of $2,177 or 2.7%, from $80,121 reported for the same quarter of 2003. Salary and other employee costs were $43,740, up $2,657 or 6.5% as compared to the second quarter of 2003 due to an increase in full time equivalent employees, mostly from acquisitions. Occupancy and equipment costs were $13,436, up $1,546 or 13.0% compared to the same period of 2003 and other operating expenses were $25,122, up $1,460 or 6.2% as compared to the second quarter of 2003, both due primarily to acquisitions. Merger, integration and restructuring charges were recognized in the second quarter of 2003 due to the acquisition of Metropolitan. The efficiency ratio was 53.75% for the second quarter of 2004, down from 55.8% for the same quarter last year.

Income Taxes

The provision for income taxes for the second quarter of 2004 decreased $59 to $18,777 from $18,836 for the same period in 2003. The effective tax rate decreased to 31.8% in the second quarter of 2004 as compared to 33.8% for the same period in 2003. The decrease in the effective tax rate is primarily due to the resolution of certain tax contingencies in conjunction with the completion of various audits of previous open tax years by the Internal Revenue Service.

Six Months Ended June 30, 2004 and 2003

Results of Operations

Diluted earnings per common share for the six months ended June 30, 2004 was $1.05 ($1.06 basic), compared to $.83 ($.84 basic) for the same period in 2003. Net income for the first half of 2004 was $98,878, an increase of $25,299 over the first half of 2003 net income of $73,579. Return on average equity (ROE) and return on average assets (ROA) were 18.99% and 1.59%, respectively, for the first half of 2004, compared to 17.06% and 1.28%, respectively, in 2003.

Sky Financial sold Sky Financial Solutions, its dental finance operation during the first quarter of 2004. The operating results of Sky Financial Solutions has been reclassified as income from discontinued operations for all periods presented. Income from discontinued operations, including the gain on the sale, resulted in earnings of $.20 per diluted share ($.20 basic) during the first quarter of 2004.

Diluted earnings per common share from continuing operations for the first half of 2004 was $.85 ($.86 basic), as compared to $.82 ($.83 basic) for the same period in 2003. Income from continuing operations for the first half of 2004 was $80,153, an increase of $7,498 over the first half of 2003 net income from continuing operations of $72,655. Sky Financial’s net income from continuing operations during the first half of 2004 includes the results of Metropolitan, which was acquired in April 2003, and GLB, which was acquired in October 2003. The results of 2003 were impacted by merger, integration and restructuring expenses of $3,486 ($2,265 after-tax), which impacted diluted earnings per share by $.03, as compared to merger, integration and restructuring expenses of $346 ($225 after-tax) for the six months ended June 30, 2004. ROE and ROA on a continuing operations basis were 15.39% and 1.34%, respectively, for the first half of 2004, compared to 16.85% and 1.34%, respectively, in 2003.

Business Line Results

Sky Financial’s two major lines of business include community banking and financial services. Community banking includes lending and related services to businesses and consumers, mortgage banking and deposit-gathering. Financial services consists of non-banking companies engaged in trust and wealth management, insurance and other financial-related services. Sky Financial’s business line results for the six months ended June 30, 2004 and 2003 are summarized in the table below.


	Net Income (Loss)
Six Months Ended June 30,	2004		2003
Community Banking	$	73,145	$	71,990
Financial Services Affiliates		5,124		2,984
Parent and Other		1,884		(2,319	)

Consolidated Total	$	80,153	$	72,655

The higher community banking net income in the first half of 2004 as compared to the same period of the previous year is mainly due to acquisitions completed during the last year. As a result, the first half of 2004 reflects higher net interest income, service charges and fees on deposits and gains on sale of securities. These increases were partially offset by a decrease in mortgage banking income and an increase in employee expenses and other operating expenses. The efficiency ratio for the community banking segment was 51.05% for the first half of 2004 compared to 49.45% in the first half of 2003. The 2004 community banking results reflect a ROE of 15.18% and a ROA of 1.24% compared to 18.09% and 1.36%, respectively, in the first half of 2003.

The financial service affiliates’ net income increased as compared to 2003 from growth in brokerage and insurance commissions as a result of increased sales and acquisitions.

Parent and other includes the net funding costs of the parent company and intercompany billings to other affiliates for shared services. The increase in net income for parent and other is due to decreased merger, integration and restructuring charges and a lower effective rate on income taxes during the second quarter of 2004 as compared to the same period in the previous year.

Net Interest Income

Net interest income for the first half of 2004 was $204,490, an increase of $17,099 or 9.1% from $187,391 in the first half of 2003. Net interest income, the difference between interest income earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, is the most significant component of Sky Financial’s earnings. Net interest income is affected by changes in the volumes, rates and composition of interest-earning assets and interest-bearing liabilities. Average earning assets increased 9.8% from the first half of last year, with strong growth in average loans, increasing 11.9% from last year, which included organic growth of 2.5% and the addition of Metropolitan and Great Lakes. Average deposits were up 7.8% from the same period last year. Sky Financial’s net interest margin for the six months ended June 30, 2004 was 3.69%, a decrease of 4 basis point from last year. The lower net interest margin primarily reflects the impact of the extended low rate environment and the incremental effect of the acquisitions.

The following table reflects the components of Sky Financial’s net interest income for the six months ended June 30, 2004 and 2003. Rates are computed on a tax equivalent basis and non-accrual loans have been included in the average balances.


	Six Months Ended June 30, 2004						Six Months Ended June 30, 2003
(Dollars in thousands)	Average Balance		Interest Income/ Expense		Rate		Average Balance		Interest Income/ Expense		Rate
Assets
Interest-earning assets:
Interest-bearing deposits in banks	$	35,093	$	175	1.00	%	$	29,475	$	134	.92	%
Federal funds sold		3,025		14	.93			1,455		7	1.03
Securities		2,510,057		54,025	4.33			2,376,861		51,849	4.40
Loans and loans held for sale		8,678,024		244,497	5.67			7,812,994		241,500	6.23

Total interest-earning assets		11,226,199		298,711	5.35			10,220,785		293,490	5.79

Assets of discontinued operations		432,839						674,735
Noninterest-earning assets		843,029						711,687

Total assets	$	12,502,067					$	11,607,207

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Demand deposits	$	238,975		735	.62		$	183,531		642	.71
Savings deposits		3,555,541		12,321	.70			3,180,886		17,026	1.08
Time deposits		3,687,489		51,045	2.78			3,733,478		58,210	3.14

Total interest-bearing deposits		7,483,005		64,101	1.72			7,097,895		75,878	2.16
Short-term borrowings		888,612		9,283	2.10			827,595		9,322	2.27
Junior Subordinated Debentures/ Trust Preferred Securities		164,181		3,839	4.70			134,566		3,234	4.85
Debt and FHLB advances		1,114,339		15,335	2.77			906,919		16,123	3.59

Total interest-bearing liabilities		9,650,137		92,558	1.93			8,966,975		104,557	2.35

Liabilities of discontinued operations		405,903						635,232
Noninterest-bearing liabilities		1,398,969						1,135,368
Shareholders’ equity		1,047,058						869,632

Total liabilities and equity	$	12,502,067					$	11,607,207

Net interest income (tax equivalent basis)			$	206,153					$	188,933

Net interest rate spread (tax equivalent basis)					3.42	%					3.44	%

Net interest margin, (interest income, taxable equivalent basis, to interest earning assets)					3.69	%					3.73	%

Provision for Credit Losses

losses increased $1,860 or 11.8% to $17,685 in the first half of 2004 compared to $15,825 in the first half of 2003. The higher provision for credit losses in the second quarter of 2004 was due to higher net charge-offs and strong growth in the loan portfolio. Net charge-offs were $16,968 or 0.39% (annualized) of average loans during the six months ended June 30, 2004, compared to $14,327 or 0.37% (annualized) for the same period in 2003.

See section titled “Non-Performing Assets” of management’s discussion and analysis regarding $26,600 of non-performing loans backed by sureties.

Non-Interest Income

The change in non-interest income reflects the impact of acquisitions and the emphasis of Sky Financial on expanding its profitable fee-based businesses offset by a decrease in mortgage banking revenues. Non-interest income for the first half of 2004 was $93,018, an increase of $6,149 or 7.1% from $86,869 for the first half of 2003. Non-interest income growth was most significant in brokerage and insurance commissions, with revenues of $27,759 during the first half of 2004, an increase of $6,353 or 29.7% from the same period in 2003, reflecting growth from both acquisitions and increased sales. Service charges for the first half of 2004 were $20,749, up $2,655 or 14.7% from the first half of 2003 primarily due to deposit growth from acquisitions. Other income increased to $19,575 in the first half of 2004 , up from $16,576 for the same period of 2003 due to gains on the sales of SBA and other commercial loans. For the first half of 2004, securities gains were $4,405, an increase of $3,845 from the same period last year. Mortgage banking income was $12,324 during the first half of 2004, a decrease of $10,918 or 46.7%, due primarily to a decrease in loan originations as compared to the same period of 2003.

Non-Interest Expense

The change in non-interest expense is primarily attributed to additional costs as a result of the Metropolitan and Great Lakes acquisitions, partially offset by lower merger, integration and restructuring expenses. Non-interest expense for the first half of 2004 was $160,801, an increase of $12,109 or 8.1%, from $148,692 reported for the same period of 2003. Salary and other employee costs were $87,938, up $8,465 or 10.7% as compared to the first half of 2003 due to an increase in full time equivalent employees, mostly from acquisitions. Occupancy and equipment costs were $26,310, up $2,584 or 10.9% compared to the same period of 2003 and other operating expenses were $42,357, up $3,474 or 8.9% as compared to the first half of 2003, both due primarily to acquisitions. Merger, integration and restructuring charges of $346 were recognized in the first half of 2004 due to the sale of Sky Financial Solutions as compared to $3,486 recognized in the same period of 2003 due to the acquisition of Metropolitan. The efficiency ratio was 53.75% for the first half of 2004, down from 53.91% for the same period last year.

Income Taxes

The provision for income taxes for the first half of 2004 increased $1,781 to $38,869 from $37,088 for the same period in 2003. The effective tax rate decreased to 32.6% for the first half of 2004 as compared to 33.8% for the same period in 2003. The decrease in the effective tax rate is primarily due to the resolution of certain tax contingencies in conjunction with the completion of various audits of previous open tax years by the Internal Revenue Service.

Balance Sheet

At June 30, 2004, total assets were $12,241,883, a decrease of $704,312 from December 31, 2003. This decrease was primarily attributable to the sale of Sky Financial Solutions, which had assets of $874,765 at December 31, 2003. Assets from continuing operations increased $170,453 from December 31, 2003, due primarily to an increase in loans of $150,374, an increase in securities available for sale of $30,318 due to investment purchases, an increase in goodwill of $12,463 due to the purchase of Spenser-Patterson and EOB, Inc. and an increase in other assets of $24,553, due to net changes in interest receivable and various other asset accounts. The increases were partially offset by a decrease in cash and interest bearing deposits of $23,817

and loans held for sale of $12,228. The change in loans includes a decrease in portfolio loans of $115,975 at Sky Bank that were sold with Sky Financial Solutions. After excluding these portfolio loans, the loan balance grew organically by $266,349. The decrease in loans held for sale is due to lower mortgage origination volumes.

The net growth in assets was funded primarily by growth in total deposits, up $266,668, due primarily to organic growth. Debt decreased $189,233, due to the payoff of the line of credit and a junior subordinated debenture owed to an unconsolidated subsidiary trust as well as payments on repurchase agreements and federal funds purchased, offset by an increase in borrowings on FHLB advances.

Shareholders’ equity totaled $1,040,208 at June 30, 2004, increasing $41,632 from December 31, 2003. Common stock increased $24,955, mainly due to $7,637 of stock issued to Spencer-Patterson shareholders, $4,558 of stock issued to EOB, Inc. shareholders and $12,760 of shares issued for stock from option exercises. Net retained earnings (net income less cash dividends) for the six months ended June 30, 2004 totaled $59,728. Accumulated other comprehensive income decreased by $43,050, primarily due to a decrease in the market value of securities available for sale.

Non-Performing Assets

The following table presents the aggregate amounts of non-performing assets and respective ratios on the dates indicated.


	June 30, 2004			December 31, 2003			June 30, 2003
Non-accrual loans	$	95,674		$	81,979		$	86,793
Restructured loans		575			599			1,266

Total non-performing loans		96,249			82,578			88,059
Other real estate owned		10,766			10,441			6,840

Total non-performing assets	$	107,015		$	93,019		$	94,899

Loans 90 days or more past due and not on non-accrual	$	12,841		$	13,841		$	11,809
Non-performing loans to total loans		1.09	%		.96	%		1.03	%
Non-performing assets to total loans plus other real estate owned		1.22			1.08			1.12
Allowance for credit losses to total non-performing loans		130.56			151.30			140.11
Loans 90 days or more past due and not on non-accrual to total loans		.15			.16			.14

Performing loans where some concerns exist as to the ability of the borrower to comply with present loan repayment terms, excluding non-performing loans, approximated $92,247 and $98,312 at June 30, 2004 and December 31, 2003, respectively, and are being closely monitored by management and the Boards of Directors of the subsidiaries. The amount included in these loans results from an evaluation, on a loan-by-loan basis, of loans classified as “doubtful” and “substandard” but are not included in the non-performing loan category. 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 currently performing. 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.

Included in non-accrual loans at June 30, 2004 are $26,600 of loans that are secured by pools of commercial leases for which payment is over 90 days past due. These loans are guaranteed by surety bonds or insurance policies. Sky Financial is engaged in litigation with the insurance companies to enforce their payment obligations, as are a number of other banks nationwide. After consultation with its counsel as to the strength of its position, Sky believes that the credits are well secured and the prospects for recovery of all principal and interest are good.

Allowance for Credit Losses

The following table presents a summary of Sky Financial’s credit loss experience for the three and six months ended June 30, 2004 and 2003:


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
Balance of allowance at beginning of year	$	125,043		$	106,923		$	124,943		$	106,675
Loans charged-off:
Real estate		(2,549	)		(1,706	)		(4,398	)		(3,419	)
Commercial and agricultural		(5,027	)		(2,951	)		(6,961	)		(4,406	)
Installment and credit card		(4,917	)		(4,331	)		(9,441	)		(9,879	)
Other loans		(4	)		(79	)		(45	)		(164	)

Total loans charged-off		(12,497	)		(9,067	)		(20,845	)		(17,868	)

Recoveries
Real estate		480			371			868			419
Commercial and agricultural		530			322			743			609
Installment and credit card		1,085			1,299			2,267			2,513

Total recoveries		2,095			1,992			3,878			3,541

Net loans charged-off		(10,402	)		(7,075	)		(16,967	)		(14,327	)
Provision charged to operating expense		11,020			8,325			17,685			15,825
Reserve of acquired institution		—			15,205			—			15,205

Balance of allowance at end of period	$	125,661		$	123,378		$	125,661		$	123,378

Ratio of net charge-offs to average loans Outstanding		.48	%		.35	%		.39	%		.37	%

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 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, macro 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, 2004 and December 31, 2003.


	June 30, 2004		December 31, 2003
Real estate	$	48,171	$	46,670
Commercial, financial and agricultural		40,761		39,967
Installment and credit card		25,048		26,519
Construction		3,762		2,295
Unallocated		7,919		9,492

Total	$	125,661	$	124,943

Discontinued Operations

Net income from discontinued operations was $18,725 during the first half of 2004 versus $923 during the same period in 2003 due primarily to the after-tax gain of $19,876 recognized from the sale of Sky Financial Solutions. The Sky Financial Solutions sales agreement contains a contingency based upon future charge-offs between Sky Financial and the acquirer that may result in an adjustment to increase or decrease the sales price in future periods. Based on historical experience and expected future performance, management does not believe that this provision will have a significant impact on future earnings, cash flows, or financial position.

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. To meet the needs of the clients and to manage the risk of the bank, financial institutions have developed innovative ways to meet clients needs while at the same time manage both liquidity and interest rate risk. This is being done through liquidity management and the balance of deposit growth and alternative sources of borrowing.

In addition to maintaining a stable core deposit base, Sky Financial’s banking subsidiary maintains adequate liquidity primarily through the use of investment securities and unused borrowing capacity. At June 30, 2004 securities and other short term investments with maturities of one year or less totaled $13,331. In addition, the mortgage-backed securities provide an estimated cash flow of approximately $472,000 over a twelve-month timeframe. The banking subsidiary 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, 2004, the banking subsidiary had total credit availability with the FHLB of $1,221,487, of which it had outstanding borrowings of $1,124,604.

During 2004, Sky Financial renegotiated an agreement with non-affiliated financial institutions which enabled Sky Financial to borrow up to $100,000 through May 30, 2005. There were no borrowings under this agreement at June 30, 2004.

Sky Financial enters into derivative contracts under which it is required to either receive cash or pay cash to counterparties depending on changes in interest rates. Derivative contracts are carried at their fair value on the consolidated balance sheet with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. The contracts are primarily interest rate swaps and cash is settled quarterly.

A schedule of significant commitments at June 30, 2004, follows:


Commitments to extend credit	$	2,577,706
Standby letters of credit		324,743
Letters of credit		2,184

Sky Financial currently does not have an authorization from the Board of Directors to repurchase shares.

Since Sky Financial is a holding company and does not conduct operations, its primary sources of liquidity are dividends paid to it by its banking subsidiary and borrowings from outside sources. For the banking subsidiary, regulatory approval is required in order to pay dividends in excess of the subsidiary’s 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 subsidiary, without prior regulatory approval, were limited to $53,605 at June 30, 2004.

Asset/Liability Management

Closely related to liquidity management is the management of interest rate risk. Sky Financial manages its rate sensitivity position to avoid wide swings in its net interest margin due to changes in market rates. At June 30, 2004, Sky Financial’s gap position, the difference between the dollar value of interest rate sensitive assets and interest rate sensitive liabilities, was positive for six months and one year and remained within Sky Financial’s Asset/Liability Committee (ALCO) guidelines. Therefore Sky Financial does not expect to experience any significant fluctuations in its net interest margin as a consequence of changes in market 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), acquisition, reorganization and divestiture 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 integration of acquisitions; difficulties in realizing expected cost savings from acquisitions; difficulties associated with data conversions in acquisitions; 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.

Sarbanes-Oxley Act of 2002

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, which contains important new requirements for public companies in the area of financial disclosure, internal controls and corporate governance. We do not anticipate any significant changes in the operations of and reporting by Sky Financial as a result of the Act. In accordance with the requirements of the Sarbanes-Oxley Act, written certifications for this quarterly report on Form 10-Q by the chief executive officer and the chief financial officer accompany this report as filed with the SEC. See “Controls and Procedures” for Sky Financial’s evaluation of disclosure controls and procedures.

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 effect 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 Committee (ALCO) at the consolidated level. This committee monitors interest rate risk through sensitivity analysis, whereby it measures potential changes in future earnings and the fair market values of 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, 2004 and December 31, 2003. 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 applied these interest rate shocks to its financial instruments up 300, 200 and 100 basis points and down 100 basis points. Down 300 and 200 basis points were not measured due to the low probability of such a decline.

The following table presents the potential ratio of Sky Financial’s interest rate sensitive assets (i.e. assets that will mature or reprice within a specific time period) divided by its interest rate sensitive liabilities (i.e. liabilities that will mature or reprice within a specific time period), commonly referred to as the “interest rate sensitivity gap” or “gap”, over a six-month time period and a twelve-month time period.


	June 30, 2004		ALCO Max		Guidelines Min
Six Month	109.8	%	125	%	95	%
Twelve Month	104.0		125	%	95	%

The following table presents an analysis of Sky Financial’s sensitivity to changes in market rates based on annual net interest income and the economic value of equity (EVE) due to sudden and sustained changes in market rates.


	June 30, 2004		December 31, 2003		ALCO Guidelines
One Year Net Interest
Income Change
+300 Basis points	1.9	%	1.6	%	—	%
+200 Basis points	1.5		1.3		(10.0	)
+100 Basis points	0.7		.7		(5.0	)
-100 Basis points	(2.9	)	(2.9	)	(5.0	)
Economic Value of Equity
+300 Basis points	(17.9	)	(18.0	)	—
+200 Basis points	(11.4	)	(11.0	)	(15.0	)
+100 Basis points	(5.3	)	(4.7	)	(10.0	)
-100 Basis points	3.2		1.6		(10.0	)

The projected volatility of net interest income and the economic value of equity at June 30, 2004 and December 31, 2003 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.

Sky Financial also utilizes interest rate swaps and caps to effectively manage it interest rate risk. At June 30, 2004, the fair values of Sky Financial’s derivative arrangements aggregated $2,833 on contracts with notional amounts of $412,200.

Item 4.

Controls and Procedures

The management of Sky Financial is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934. As of June 30, 2004, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Sky Financial’s disclosure controls and procedures. Based on that evaluation, management concluded that Sky Financial’s disclosure controls and procedures as of June 30, 2004 were effective in ensuring that information required to be disclosed in this Quarterly Report on Form 10-Q were recorded, processed, summarized and reported within the time period required by the United States Securities and Exchange Commission’s rules and forms.

Management’s responsibilities related to establishing and maintaining effective disclosure controls and procedures include maintaining effective internal controls over financial reporting that are designed to produce reliable financial statements in accordance with accounting policies generally accepted in the United States of America. Management has assessed Sky Financial’s system of internal control over financial reporting as described in “Internal Control – Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of June 30, 2004, its system of internal control over financial reporting met those criteria.

There have been no significant changes in Sky Financial’s internal controls or in other factors that could significantly affect internal controls subsequent to June 30, 2004.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

Between August 2000 and December 2001, Sky Bank provided financing to a commercial borrower and its affiliated entities for the purchase of three separate portfolios of commercial lease pools, and a warehouse line of credit to finance lease pools. During 2001, Metropolitan Bank and Trust Company, which was merged with Sky Bank on May 16, 2003, provided similar financing to the same commercial borrower and its affiliated entities. These loans, with a current outstanding balance of $26,600, are secured by assignments of the payment streams from the underlying leases, surety bonds or insurance policies, and a limited guarantee from the sole member of the commercial borrower.

Upon default of these commercial loans, Sky Bank (and its predecessor Metropolitan) made demand for payment from Illinois Union Insurance Company (“IU”), RLI Insurance Company (“RLI”), and Royal Indemnity Company (“Royal”) under the relevant surety bonds and insurance policies. IU, RLI, and Royal (collectively, the “Sureties”) have failed to make the payments required under the surety bonds and insurance policies. As a result, in the spring of 2002, Sky filed suit against each of the Sureties seeking to enforce Sky Bank’s rights under the surety bonds and insurance policies issued by the Sureties in connection with the commercial lease pools. Sky’s complaints claim breach of contract, bad faith and allege that the Sureties are liable for the payments due to Sky under the terms of the bonds and are estopped from asserting fraud as a defense to paying any claims under the bonds. A similar suit was filed by Metropolitan in June, 2002. In October, 2002, the suits were consolidated for pretrial purposes with more than 35 other lawsuits involving similar claims in the United States District Court for the Northern District of Ohio, Eastern Division, under the Federal Multi-district Litigation (“MDL”) Rules.

On January 31, 2003, Sky Bank and the other Claimants in the MDL Proceeding (MDL 02CV16000, Docket No. 1490) filed a consolidated Motion for Judgment on the Pleadings (the “Motion”) seeking a determination that the Sureties are liable, as a matter of law, under the relevant surety bonds and insurance policies. The Motion is pending with the MDL Court and discovery in the MDL Proceeding is underway.

The key defense of the Sureties in denying Sky Bank’s claims under the surety bonds is that they were fraudulently induced by the originator of the commercial leases to issue the surety bonds in the first instance. The Sureties have also asserted related defenses that the underlying equipment leases are invalid, usurious, or otherwise unenforceable. Sky Bank believes that none of these defenses can defeat Sky Bank’s claims under the surety bonds, which, in the view of Sky Bank, provide for absolute and unconditional guarantees of payment.

Sky Bank believes that the language of the surety bonds (and in the case of IU, the insurance policies) clearly provides that the Sureties are responsible to Sky Bank, as the Obligee or Named Insured under the bonds, for the underwriting of the lessees and leases, including all issues of fraud, and that the Sureties waived any defense of fraud to claims under the bonds. Sky Bank also believes that the surety bonds make it clear that the Sureties were responsible for the performance of the originator of the leases as sub-servicer of the leases. Finally, Sky Bank believes that the surety bonds provide that if the Obligee or Named Insured fails to receive a payment due under a lease from the sub-servicer, a default under the lease occurs, and the Sureties’ payment obligations are triggered. Relevant excerpts from the RLI and Royal surety bonds are set forth below:

The Surety is responsible to the Obligee for the individual underwriting of each lessee and Lease, including but not limited to, all related credit matters, issues of fraud, bankruptcy and the accurate and timely performance by any sub-servicer designated by Surety, and Surety shall assert no defenses to any claim under this Bond as a result of any of the foregoing. This Lease Bond and the Surety’s obligation constitute an unconditional and absolute guarantee of payment, not collection. If the Obligee fails to receive a payment under the Lease from the Surety, as servicer, or from any sub-servicer, on the scheduled due date, a default under the Lease occurs. Upon such default, the Surety shall have thirty (30) days to cause the default to be remedied. The Surety shall make payment on this bond to Obligee upon receipt of demand from Obligee, within this 30 day period.

Relevant excerpts from the IU insurance policies are set forth below:

The issuance of this endorsement shall represent the Company’s approval of the individual underwriting and execution and delivery of each Lease, including, but not limited to, all related credit matters, issues of fraud, bankruptcy, validity, legality and enforceability and the Company shall pay all claims hereunder unconditionally and assert no defenses to any claim under this endorsement as a result of any of the foregoing or based on any act or omission of the master-servicer or sub-servicer. If the named insured fails to receive a payment under the lease from the lessee…then default under the lease occurs. Upon such default, the Company shall have thirty (30) days to cause the default to be remedied. Upon the passage of such 30-day period, then the Company shall make payment hereunder to the named insured in immediately available funds.

Furthermore, Sky Bank believes that as a further inducement to Sky Bank to extend credit, the Sureties issued representation letters and legal opinions which confirmed the validity and enforceability of its surety bonds, and in effect acknowledged the assignment of the bonds to Sky Bank.

Sky Financial has reviewed the relevant matters of fact and law with its special counsel and believes that it has substantial and meritorious claims against the Sureties, due in part to the fact that, under the

terms of the bonds, the Sureties undertake the responsibility for all credit matters and any fraud that may have occurred in the underwriting of the credit, and waive all defenses associated with the bonds, including defenses of fraud. Sky Financial has and will continue to vigorously assert all the rights and remedies available to it to obtain payment under the bonds. While the ultimate outcome of this matter cannot be determined at this time, Sky Financial management does not believe that the outcome of any of these pending legal proceedings will materially affect the consolidated financial position or results of operations of Sky Financial.

Second Bancorp, which was acquired by Sky Financial on July 1, 2004, provided similar financing with a current outstanding balance of $7,800 which has been assumed by Sky Financial in the acquisition. Second Bancorp is a party to the MDL 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 consolidated 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


Exhibit No.		Description

(10.1)		Employment Agreement between Sky Financial and Marty E. Adams

(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 9 “Earnings Per Share” on page 13 of Sky Financial’s Form 10-Q for June 30, 2004.

(31.1)		Rule 13a - 14(a)/15d-14(a) Certification of Chief Executive Officer

(31.2)		Rule 13a - 14(a)/15d-14(a) Certification of Chief Financial Officer

(32.1)		Section 1350 Certification of Chief Executive Officer.

(32.2)		Section 1350 Certification of Chief Financial Officer.

(b) Reports on Form 8-K

Current report on Form 8-K dated April 21, 2004, reporting Sky Financial’s first quarter results.

Current report on Form 8-K dated May 19, 2004, announcing Sky Financial’s intention to redeem all of its 9.50% Junior Subordinated Deferrable Interest Debentures due June 30, 2029.

Current report on Form 8-K dated May 20, 2004, filing investor slides presented to the Lehman Brothers 2004 Financial Services Conference.

Current report on Form 8-K/A dated May 28, 2004, amending the current report on Form 8-K filed May 19, 2004, in order to disclose the relevant record dates relating to its redemption of Metropolitan Capital Trust II.

Current report on Form 8-K dated June 1, 2004, announcing the sale of Sky Access, Inc., an Internet service provider, to EarthLink.

Current report on Form 8-K dated June 3, 2004, announcing the retirements of Edward J. Reiter and Robert E. Spitler from its board of directors.

Current report on Form 8-K dated July 2, 2004, announcing the completion of its acquisition of Second Bancorp Incorporated, Warren, Ohio, including its wholly-owned subsidiaries.

Current report on Form 8-K dated July 6, 2004, restating certain financial information at December 31, 2003 and 2002 and for each of the three years ended December 31, 2003, 2002 and 2001 for the effect of reclassifying Sky Financial Solutions as a discontinued operation.

Current report on Form 8-K dated July 22, 2004, reporting Sky Financial’s second quarter results.

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 5, 2004

SKY FINANCIAL GROUP, INC.

EXHIBIT INDEX


Exhibit No.	Description	Page Number

(10.1)	Employment Agreement between Sky Financial and Marty E. Adams

(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 9 “Earnings Per Share” on page 13 of Sky Financial’s Form 10-Q for June 30, 2004.

(31.1)	Rule 13a - 14(a)/15d-14(a) Certification of Chief Executive Officer

(31.2)	Rule 13a - 14(a)/15d-14(a) Certification of Chief Financial Officer

(32.1)	Section 1350 Certification of Chief Executive Officer.

(32.2)	Section 1350 Certification of Chief Financial Officer.

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