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2007 News Releases Sky Financial Group Reports 2006 Fourth Quarter and Year-End Results Downloadable Earnings Release and
BOWLING GREEN -- January 18, 2007 -- Sky Financial Group, Inc. (NASDAQ: SKYF) today reported net income for the fourth quarter of 2006 of $40.1 million, or $.35 per diluted share, compared to $53.7 million, or $.49 per diluted share, for the fourth quarter of 2005. Annualized return on assets and return on equity for the fourth quarter were 0.90% and 8.72%, respectively, compared with 1.39% and 13.89%, respectively, for the same period in 2005. Net income for the fourth quarter of 2005 included income from discontinued operations of $0.4 million. Core operating earnings were $54.1 million for the fourth quarter of 2006 versus $53.7 million for the same period in 2005. Core operating earnings per diluted share for the fourth quarter of 2006 were $.47 versus $.49 for the fourth quarter of 2005. Core operating earnings reflect net income adjusted to exclude certain charges and gains, detailed further below, that are not representative of ongoing operations. For the 2006 fourth quarter, on a core operating earnings basis, annualized return on assets and return on equity were 1.22% and 11.77%, respectively, compared with 1.39% and 13.90%, respectively, for the same period in 2005. Cash operating earnings, which reflect core operating earnings excluding amortization of intangibles, were $56.9 million, or $.49 per diluted share, in the fourth quarter of 2006 compared to $56.3 million, or $.52 per diluted share, in the fourth quarter of 2005. On a cash operating basis, the annualized return on average tangible equity was 21.07% for the fourth quarter of 2006 compared with 23.08% for the same period in 2005. "We are pleased with our strong operating results in 2006," stated Marty E. Adams, chairman, president and chief executive officer. "Growth in our fee businesses and an overall focus on expense control helped us overcome the difficult interest rate environment and achieve improved financial performance for the year. Following our balance sheet restructuring in the fourth quarter, our net interest margin is properly positioned and we are looking forward to our pending merger with Huntington Bancshares in mid-2007." Sky Financial's results of operations for the fourth quarter of 2006 were impacted by several items that management has determined are not indicative of ongoing operations. Sky Financial's net income of $40.1 million, or $.35 per diluted share was impacted by the following items, which are not included in the core operating earnings of $54.1 million or $.47 per diluted share:
For the full year of 2006, Sky Financial reported net income of $190.3 million, or $1.72 per diluted share, versus $182.6 million, or $1.69 per diluted share for the prior year. Annualized return on assets and return on equity for 2006 were 1.18% and 11.56%, respectively, compared with 1.21% and 12.27%, respectively, for the full year of 2005. The net income for 2005 included income from discontinued operations of $0.4 million. The net income for 2006 was negatively affected by a change in the accounting for derivatives. During the second quarter of 2006, Sky Financial identified and corrected immaterial accounting errors related to certain derivative hedging relationships and recorded a loss of $9.9 million ($6.6 million after tax) to correct the cumulative impact of these errors. During the third and fourth quarters of 2006, Sky Financial terminated the affected swaps and recorded a gain of $4.2 million ($2.7 million after tax) recorded as derivative gains on swaps. Core operating earnings were $209.4 million, or $1.89 per diluted share, for the full year of 2006 versus $183.3 million, or $1.70 per diluted share, for the prior year. For the full year 2006, on a core operating earnings basis, annualized return on assets and return on equity were 1.29% and 12.72%, respectively, compared with 1.21% and 12.32% respectively, for the full year of 2005. Cash operating earnings were $219.7 million, or $1.98 per diluted share, for the full year of 2006 compared to $193.0 million, or $1.79 per diluted share, for the prior year. On a cash operating basis, the return on average tangible equity was 21.22% for 2006 compared with 20.38% for the prior year. Fourth Quarter Results Net interest income for the fourth quarter was $143.5 million, up 8.5% from $132.2 million in the fourth quarter of 2005. The net interest margin for the fourth quarter was 3.59%, down 6 basis points from the third quarter of 2006 and 17 basis points from the fourth quarter of 2005. The decrease in the net interest margin performance was primarily the result of the early fourth quarter acquisition of Union Federal Bank, which had a lower net interest margin, partially offset by an improved net interest margin as a result of the mid-fourth quarter balance sheet restructuring activities. During the fourth quarter of 2006, Sky Financial restructured its balance sheet to strengthen capital ratios, maintain a sound interest rate risk position, enhance the net interest margin and improve future earnings following the completion of its recent acquisitions of Union Federal Bank and Perpetual Savings Bank. The restructuring actions resulted in a reduction in total assets, which included the sale of approximately $506 million of available-for-sale, fixed-rate investment securities with an average yield of 3.74% and the elimination of federal funds sold coming from the Union Federal acquisition. With the sale proceeds, Sky Financial paid off approximately $255 million of FHLB advances and $72 million of borrowings, with a combined average cost of 5.92% and reduced federal funds purchased. In addition to de-leveraging the balance sheet, these actions should improve the net interest margin and increase net interest income in the upcoming quarters. Average earning assets increased 13.7% over the fourth quarter of 2005 due to organic growth and acquisitions. Average loans for the quarter increased 14.0% from the same quarter last year, with organic growth contributing 3.1% in addition to the acquisitions. Average deposits grew 20.0% from the fourth quarter of 2005, which included organic growth of 4.9% in addition to the acquisitions. Non-interest revenues on a core-operating basis, excluding non-core operating adjustments recorded during the quarter, were $66.0 million, up 17.4% from $56.2 million in the fourth quarter of 2005. Total non-interest revenues were $55.3 million, down from $56.2 million in the fourth quarter of 2005 and included the following: (1) Pre-tax charges of $19.4 million recorded as net securities gains (losses) related to the balance sheet restructuring; (2) Pre-tax net gains of $4.2 million recorded as other income related to the balance sheet restructuring; (3) Pre-tax gains of $0.5 million related to derivative transactions, primarily as a result of the balance sheet restructuring; (4) A pre-tax gain of $6.7 million related to the sale of an insurance business; (5) Pre-tax charges of $1.7 million related to securities impairment; and (6) Pre-tax charges of $0.8 million related to additional amortization expense from mortgage servicing rights. Compared to the fourth quarter of 2005, service charges on deposits for the fourth quarter of 2006 were up 54.2% from higher volumes in deposit accounts from acquisitions, continued growth in transaction accounts and fee increases on certain types of accounts. In addition, trust services income was up 18.9% from higher trust assets compared to the prior year. Brokerage and insurance commissions were up 14.1%, due mostly to acquisitions in 2006. Other income in the quarter increased 77.3% over the fourth quarter of 2005, due primarily to the gains related to the balance sheet restructuring activities and the sale of an insurance business. Mortgage banking revenues were down 14.4%, mainly due to lower origination and sales revenue, lower recaptures of impairment and higher amortization during the fourth quarter of 2006. The higher amortization during the quarter reflects the additional amortization recorded during the quarter. The fourth quarter non-interest expenses on a core operating basis, excluding the non-core operating adjustments recorded during the quarter, were $117.7 million, up 17.1% or $17.2 million from $100.5 million in the fourth quarter of 2005. Total non-interest expenses for the fourth quarter were $128.6 million compared to $101.1 million in the fourth quarter of 2005 and included the following: (1) Pre-tax charges of $5.1 million of merger, integration and restructuring expenses related to the acquisition of Union Federal Bank and Perpetual Savings Bank; (2) Pre-tax charges of $2.8 million of additional compensation expenses related to the insurance sale; (3) Pre-tax charges of $1.5 million related to additional nonqualified pension expenses due to the increase in price of Sky Financial's common stock related to the announcement of the merger with Huntington Bancshares Incorporated; and (4) Pre-tax charges of $1.5 million related to additional incentive compensation due to the completion of the Union Federal acquisition and conversion. Core operating expenses increased over the fourth quarter of 2005, mainly due to the acquisitions in the fourth quarter of 2006. The efficiency ratio, on a cash operating basis, excluding the core operating adjustments, was 53.87% for the fourth quarter, compared to 51.02% for the same quarter in 2005. Credit Quality The provision for credit losses for the fourth quarter was $10.8 million, increasing from $6.8 million in the same quarter in 2005. The lower provision last year was the result of a reduction in non-performing assets accomplished during the fourth quarter of that year. Net credit losses for the quarter were $12.5 million, or .40% annualized to average total loans, compared to $16.2 million, or .59%, for the fourth quarter of 2005. Net credit losses for the full year of 2006 were $38.7 million, or .34% of average total loans, compared to $61.8 million, or 0.57% for 2005. At December 31, 2006, non-performing loans to total loans was 1.07% versus 1.13% at September 30, 2006 and 1.07% at December 31, 2005. Total non-performing loans at December 31, 2006, were $137.2 million, an increase of $9.9 million from $127.3 million at September 30, 2006 and an increase of $17.7 million from $119.5 million at December 31, 2005. The allowance for credit losses to non-performing loans at December 31, 2006, was 126% versus 113% at September 30, 2006 and 121% at December 31, 2005. Non-performing loans continue to reflect the non-accrual status of $15.4 million of loans with payments guaranteed by surety bonds issued by an insurance company, which remains in litigation. Outlook for 2007 In 2007, Sky projects consistent strong financial performance with continued growth in core operating earnings per share for the year. Organic growth in loans and deposits is targeted between 5% and 7% for the year. The net interest margin will reflect the full benefit of the recent balance sheet restructuring beginning in the first quarter of 2007 and is expected to remain stable throughout the year. Asset quality in 2007 is forecasted to be consistent with 2006, with net charge-offs to total loans projected at 0.35% or below for the year. On a core operating basis and excluding the impact of acquisitions completed during 2006, total non-interest income is expected to grow slightly faster than the targeted organic balance sheet growth, while expenses should grow at a slower rate. In 2007, Sky's results will reflect the continued focus on its strategic priorities. Non-GAAP Financial Measures In addition to results presented in accordance with GAAP, this press release contains certain non-GAAP financial measures. Sky believes that providing certain non-GAAP financial measures provides investors with information useful in understanding Sky's financial performance, its performance trends and financial position. Specifically, Sky provides measures based on "core operating earnings," which excludes merger-related expenses, derivative gains and losses on swaps, balance sheet restructuring charges, gains related to the sale on an insurance business, certain additional employee compensation and benefit costs, and discontinued operations that are not reflective of ongoing operations or not expected to recur. In addition, Sky provides measures based on "cash operating earnings," which further adjusts core operating earnings to exclude the effect of amortization of intangibles. These non-GAAP measures should not be considered a substitute for GAAP basis measures and results. A reconciliation of these non-GAAP measures to the most comparable GAAP equivalent is included in the financial tables. Forward-looking Statement This press release contains certain forward-looking statements, including certain plans, expectations, goals and projections, and including statements about the benefits of the merger between Huntington Bancshares Incorporated ("Huntington") and Sky Financial Group, Inc. ("Sky Financial"), which are subject to numerous assumptions, risks and uncertainties. Actual results could differ materially from those contained or implied by such statements for a variety of factors including: the businesses of Huntington and Sky Financial may not be integrated successfully or such integration may take longer to accomplish than expected; the expected cost savings and any revenue synergies from the merger may not be fully realized within the expected timeframes; disruption from the merger may make it more difficult to maintain relationships with clients, associates, or suppliers; the required governmental approvals of the merger may not be obtained on the proposed terms and schedule; Huntington and/or Sky Financial's stockholders may not approve the merger; changes in economic conditions; movements in interest rates; competitive pressures on product pricing and services; success and timing of other business strategies; the nature, extent, and timing of governmental actions and reforms; and extended disruption of vital infrastructure; other factors described in Huntington's 2005 Annual Report on Form 10-K/A, Sky Financial's 2005 Annual Report on Form 10-K, and documents subsequently filed by Huntington and Sky Financial with the Securities and Exchange Commission ("SEC"). All forward-looking statements included in this letter are based on information available at the time it was written. Neither Huntington nor Sky Financial assumes any obligation to update any forward-looking statement. Additional Information about the Merger and Where to Find It Huntington and Sky Financial will be filing relevant documents concerning the transaction with the SEC, including a registration statement on Form S-4, which will include a proxy statement/prospectus. Stockholders will be able to obtain a free copy of the proxy statement/prospectus, as well as other filings containing information about Huntington and Sky Financial, at the SEC's Internet site: www.sec.gov. Copies of the proxy statement/prospectus and the filings with the SEC that will be incorporated by reference in the proxy statement/prospectus can also be obtained, without charge, by directing a request to Huntington, Huntington Center, 41 South High Street, Columbus, Ohio 43287, Attention: Investor Relations, 614-480-4060; or Sky Financial, 221 South Church Street, Bowling Green, Ohio, 43402. The final proxy statement/prospectus will be mailed to stockholders of Huntington and Sky Financial. Stockholders are urged to read the proxy statement/prospectus, and other relevant documents filed with the SEC regarding the proposed transaction when they become available, because they will contain important information. The directors and executive officers of Huntington and Sky Financial and other persons may be deemed to be participants in the solicitation of proxies in respect of the proposed merger. Information regarding Huntington's directors and executive officers is available in its proxy statement filed with the SEC by Huntington on March 8, 2006. Information regarding Sky Financial's directors and executive officers is available in its proxy statement filed with the SEC by Sky Financial on February 23, 2006. Other information regarding the participants in the proxy solicitation and a description of their direct and indirect interests, by security holdings or otherwise, will be contained in the proxy statement/prospectus and other relevant materials to be filed with the SEC when they become available. About Sky Financial Group, Inc. Sky Financial Group is a $17.7 billion diversified financial holding company. Sky's asset size places it among the 40 largest publicly-held bank holding companies in the nation. Sky operates over 330 financial centers and over 400 ATMs, serving communities in Ohio, Pennsylvania, Michigan, Indiana and West Virginia. Sky's financial service affiliates include: Sky Bank, commercial and retail banking; Sky Trust, asset management services; and Sky Insurance, retail and commercial insurance agency services. Sky is located on the web at www.skyfi.com. ###
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