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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
__ TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________TO _________.
Commission File Number : 0-15624
SECOND BANCORP INCORPORATED
(Exact name of registrant as specified in charter)
Ohio 34-1547453
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
108 MAIN AVENUE SW, WARREN, OHIO 44481
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 330.841.0123
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of each exchange
Title of each class on which registered
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, no par value
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(Title of Class)
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 periods 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy of information
statements, incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant as of March 15, 2001 as reported on the NASDAQ National Market
System, was approximately $164,387,493. Shares of Common Stock held by each
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 15, 2001, the registrant had outstanding 10,000,760 shares of Common
Stock
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders' meeting to be held
on May 8, 2001 are incorporated by reference into Part III.
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PART I.
ITEM 1. BUSINESS
GENERAL
Second Bancorp Incorporated, ("Second Bancorp") is a one-bank holding
company which owns the Second National Bank of Warren ("Second National"), a
Warren, Ohio based commercial bank. Operating through thirty-five branches and
one loan production office, Second National offers a wide range of commercial
and consumer banking and trust services primarily to business and individual
customers in various communities in a nine county area in northeastern Ohio. At
December 31, 2000, Second Bancorp had consolidated total assets of $1.55
billion, deposits of $1.4 billion and shareholders' equity of $117 million.
Second National focuses its marketing efforts primarily on local
independent commercial and professional firms, the individuals who are the
owners and principals of such firms as well as the low-to-moderate to upper
income retail customers in Second National's trade areas. In recent years,
Second Bancorp has emphasized increased commercial, direct consumer and real
estate lending as well as market area expansion.
PEOPLE
Small Business Administration (SBA) recognized Second National for
achieving the top position in SBA loan volume among community lenders in the
Cleveland District. During the SBA's fiscal 2000, Second National originated 86
loans representing $9,000,000. SBA lending is integral to Second National's
commitment to assisting business growth within our communities.
Second National continued to serve the credit needs of its communities
through loans, investments and education. With a belief that community
development is good business, emphasis was placed on, community development
lending, particularly affordable housing. In 2000, Second National extended more
than $5.5 million in community development loans.
Second National participated in a variety of lending projects,
financing more than 80 units of affordable housing for low-to-moderate-income
families in Mahoning and Trumbull Counties. Second National also provided
financing for projects relating to housing for senior citizens and mentally
disabled individuals, as well as a youth program for low-income children. In
addition, Second National provided the lead construction financing for a brand
new educational facility for a community organization in Warren. We also
participated in financing various small business mini-loan programs in Trumbull,
Mahoning and Portage Counties.
PRODUCTS & SERVICES
We have made a commitment to increase our level of core deposits. To
achieve that goal, core deposit generation was elevated to an official line of
business on a par with commercial banking, retail, trust and real estate. . .
and we have launched a new product line of personal and business deposit
accounts.
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PERSONAL SAVINGS ACCOUNTS
Our comprehensive savings account program features a plan for every
need and every lifestyle. Included in this family of deposit generation
products:
SuperSavers Club for Kids: a plan that helps young people learn good
savings habits; Holiday Savings: an interest-bearing account that gives
customers the year-round ability to prepare for the holidays; Passbook Savings:
highlighted by transactions done with the personal service of a teller;
Statement Savings: providing unlimited ATM transactions and quarterly
"snapshots" of all activity within the account; Prime Time Savings: a tiered
interest account designed to accommodate the needs of customers who are
depending on effective use of long term savings; Money Market Savings: another
tiered interest account designed to enable ready access to funds and to ensure
increased earnings based on increased savings; ELITE Investment Account:
providing a good investment plus the benefits of liquidity combined with the
convenience of ATM and checkbook access.
PERSONAL CHECKING ACCOUNTS
Our totally free Essential Checking account, with no maintenance fees
and no minimum balance, is a solid basic checking plan. Choice Checking is also
a good basic option that provides extra benefits including debit card use and a
line of credit. For customers who maintain a minimum balance and who want to
earn interest on their money, we offer Interest Checking. Relationship Checking
addresses the needs of customers with other accounts at the Bank, providing the
opportunity to earn more interest based on higher balances. Prime Time Checking
is an optimum choice, offering tiered interest and numerous other benefits to
those seeking to enjoy the results of a lifetime of solid money management.
BUSINESS SAVINGS/CHECKING ACCOUNTS
Business needs are varied. Second National provides both savings and
checking options developed to meet specialized requirements based on a company's
size and financial situation.
Savings account plans include: Business Statement Savings featuring a
quarterly summary of all savings activity; Business Money Market Savings
enabling tiered interest earning according to the savings balance maintained;
and Business ELITE Investment Account, an interest-bearing savings account
translating higher balances into higher yields.
Checking account selections feature Small Business Checking for
companies that do not carry a high balance and have minimal check-writing needs.
Flex Business Checking provides a tiered earnings credit allowance to businesses
that carry a higher balance and write a large number of checks. Small Business
Interest Checking helps qualified organizations earn interest without carrying a
large balance or writing many checks. The Flex Business Interest Checking plan
enables a company to earn tiered-interest based on account balances.
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SECOND NATIONAL LAUNCHES ONLINE BANKING
Second National Bank customers may now log on to
www.secondnationalbank.com where they will discover not only the Bank's
informational Web site, but also additional interactive pages enabling them to
enroll in Second National Bank's online banking services. Customers can perform
numerous personal banking functions electronically from the convenience and
privacy of their home computers.
Second National's online banking package is easy-to-use, safe,
reliable, and private, enabling customers around-the-clock access to their
accounts whenever and wherever they log onto the Internet.
The Internet is, of course, a quickly changing world. Future plans for
online banking at Second National already reflect forward vision. Possible
enhancements to initial online banking options include the ability to open
deposit accounts online, to initiate consumer and mortgage loan applications,
online viewing of credit card accounts, check ordering, check image viewing, and
corporate cash management services.
Internet-based banking is not intended to replace the high level of
service and close personal relationships for which Second National is known. We
are, and always will be, a local-delivery, local decision-making bank in which
face-to-face human interactions remain very important. Just like ATM's, debit
cards, and the interactive voice response unit (IVR), online banking represents
another alternative delivery channel through which our customers can do their
banking more conveniently. Interactive online banking is a logical extension of
our eagerness to meet the needs of our customers, a growing number of whom place
value on the ability to conduct business electronically.
OUR CALL CENTER: AT FULL POWER!
One of the key "crossroads" in positive customer service is the Second
National Bank Call Center. Our focus is on making the Call Center its own sales
and profitability center. As a vital link to increasing sales volume and
customer satisfaction, the Call Center offers a full range of services including
the IVR for automated account information and transactions, automated bill
payment, and the opportunity for direct service from personal bankers. One
measure of the Call Center's success is the fact that, of an average 54,000
calls per month to the IVR, 75 percent have been handled via automated response
with no need of transfer to a personal banker, well above the industry average.
FORWARD THINKING AND FORWARD MOVEMENT FROM OUR TRUST DEPARTMENT
Second National Bank's Trust Department continues to be ranked, by
objective industry analysts, as among the best money managers in the entire
country.
As a trust division we have been, and are, a traditional provider of
fiduciary services with a focus on administration of estates, trust and
qualified employee benefit plans. As we move forward we will maintain our
current level of expertise in those areas of activities, while also creating a
synergy between Trust, Private Banking and Investment Center clients to become a
more relationship-based financial services provider.
The employee benefits area of our Trust Department continues to grow.
Employee benefit accounts produce 25 percent of the revenues of the department
and revenue from employee benefit accounts has grown nearly 75 percent in the
last five years. Planned upgrades in participant accounting software and the
addition of a daily valuation service for 401(k) plans should result in
significant increases in employee benefit assets and revenues in the future.
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A CONTINUING HIGH LEVEL OF PERFORMANCE FROM THE INVESTMENT CENTER
Second National Bank's Investment Center is living up to its
designation as a key contributor to the Bank's non-interest income. Sales from a
wide variety of mutual funds, annuities, stocks, bonds and insurance increased
by 30 percent over last year.
The 2000 Summit Club Chairman's Award by AIM Distributors, Inc. was
given to Second National's Investment Center manager for achieving the highest
level of professional excellence and for being among AIM's top national
producers.
PRIVATE BANKING STRENGTHENED WITH A HIGH-YIELD LIQUID INVESTMENT ACCOUNT
Our expanding marketplace resulted in increased staffing for Second
National Bank's Private Banking Center. We also added to our broadening
selection of products with a high-yield deposit product, the personal Select
Sweep account. By sweeping account balances into investment options, the new
account delivers higher interest rates, greater flexibility, and potential tax
advantages. From the Bank's perspective, the new product also makes us more
competitive and increases fee income.
COMMERCIAL LENDING DIVISION ENTERS THE LEASING BUSINESS
Our new leasing program is intended to meet the diverse equipment needs
for commercial, professional, and medical clients- from copiers, telephone
systems and food preparation equipment to air compressors, security systems and
forklifts. The program, offered by Second National through CashFlow LEASE, is
available to creditworthy business customers with no maximum or minimum loan
account. This new service provides competitive advantages, enhances current
relationships, adds fee income and creates new opportunities for cross selling.
NEW SMALL BUSINESS CHECKING ACCOUNT RESPONSIVE TO SMALL COMPANY NEEDS
The Small Business Checking Account is designed to meet the needs of
small businesses and practicing professionals --such as doctors, dentists and
lawyers - as well as "mom & pop" shops that populate Second National's
marketplace. This account requires a lower minimum balance and carries fewer
fees than the corporate checking account. The new product is particularly
important in that it provides the Bank an added strength within the competitive
small business marketplace.
KNOWLEDGE
The acquisition and effective use of knowledge is a two-part process.
In the progress reports which follow you will see examples of our willingness to
examine and re-examine ourselves for the purpose of establishing maximum
operational efficiency. You will also see a reflection of our dedication to
knowing our customers and their diverse needs. In both categories of knowledge,
well-informed decisions have guided us along paths of selecting precise
technologies to assist us in optimizing our performance and our ability to bring
ideal products and services to market.
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FINANCIAL INFORMATION SERVICES (FIS)
FIS is an advanced server/PC-based Financial Information Service that
supports growth, efficiency and flexibility. We have implemented FIS as a
state-of-the-art, line of business reporting capability covering each of the
organization's five lines of business: retail, trust, mortgage, commercial
banking and deposit generation.
FIS combines general ledger data with information from various
application systems to provide a detailed understanding of the Bank's financial
position and potential. It is based on mathematical interrelationships, that
encompass information such as current yields, runoff, new loans, interest rate
indices, fees, spreads and volumes. FIS includes a comprehensive new budgeting
and forecasting system, providing the ability to forecast on an 18-month time
horizon, and to continuously update those forecasts as market conditions change.
The ultimate and powerful value of FIS is that it allows us to manage our
business "by the numbers". Doing so focuses on responsibility and
accountability, the basis for healthy growth. FIS gives us the muscle and the
flexibility to keep on budget and, at the same time, to respond quickly to
market opportunities. This is truly proactive management made possible by
application of a comprehensive financial information system that is rare in a
bank our size.
NEW PIPELINE SYSTEM MAKES MORTGAGE LENDING MORE EMPLOYEE AND CUSTOMER FRIENDLY
The installation in all retail banking centers and loan origination
offices of a new Windows - based pipeline management system has brought
state-of-the-art capabilities to Second National Bank's Mortgage Loan
Department. MortgageFlex is a completely integrated processing system that
streamlines the entire mortgage loan process. This results in greater capacities
and flexibility leading to increased productivity and decreased day-to-day
maintenance. Using the latest software and hardware, MortgageFlex eliminates
manual processes, minimizes data entry, and facilitates the tracking of
documents - all of which significantly impact employee efficiency and customer
service. The reliability, automation, and elimination of handwork made possible
by MortgageFlex will help the Real Estate Department reach its goal of approving
all mortgage loans within 10 days.
Also in 2000, we began underwriting all mortgage loans using automated
underwriting systems from Freddie Mac and Fannie Mae. This should enhance credit
quality and help us achieve better pricing on the sale of mortgage loans.
NEW LOAN DOCUMENT PREPARATION MEANS QUICK DECISIONS FOR LOAN CUSTOMERS
LoanPro, a new consumer loan document preparation system, eliminates
handwriting applications, typing of final documents and faxing for approvals.
Bank employees taking consumer loan applications simply input customer
information into their computers.
The LoanPro system automatically retrieves credit bureau reports and
prepares and prints the loan application and closing documents at the applicable
banking center. This results in a 50 percent improvement in turnaround time - a
highly desirable outcome for customers who want quick answers to loan requests.
An equally important aspect of LoanPro is the ability to upload or
download customer information to or from the Bank's core processing system. This
permits quick retrieval of information on current customers and timesavings in
gathering new information.
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THE RIGHT CHOICES IN TECHNOLOGY RESULT IN NEW EFFICIENCIES AND OPPORTUNITIES
Among the many advances made in technology at Second National Bank during 2000
are:
Communications Network Upgrade. This enhancement enabled us to add both
MortgageFlex and LoanPro transmissions to our system plus provided Bankwide
e-mail and Internet connectivity without the expense of a T-1 wide area network
and without increasing network operating expenses.
An upgrade to our TellerPro system for teller workstations provided major
enhancements to features and functions including the store-and-forward feature.
A retail sales tracking system became operational late in 2000 and includes a
comprehensive report mechanism for all retail banking systems.
Significant progress was made in enhancing our Relationship Management System
which provides a critical data-mining tool as the Bank moves farther into
customer-profiling, profitability and relationship fee assessment.
An enhancement to the Collection Management System added an auto-dialer for the
purpose of expediting hands-free contact while talking with delinquent loan
customers.
Automated statement rendering is an efficiency made possible through existing
image processing modules plus the addition of optical mark recognition (OMR)
technology. This allows statements to be delivered directly from the computer
room to the mailroom. A new mail-processing machine reads the OMR markings on
the statement and collates, folds and inserts statement stuffers if desired, and
meters mail for delivery.
COMMUNICATION
The fourth cornerstone for progress is the ability to share within our
organization, and with those whom we serve, the many benefits in products and
services available through Second National Bank.
BRAND POSITIONING
Second National launched an extensive advertising campaign in the year
2000, including television, radio, outdoor, and newspaper coverage, to build
awareness of Second National and strengthen the Bank's brand position in both
existing and new markets. As a $1.5 billion institution, it was imperative that
Second National adopt a mass media approach to external communications to
successfully and efficiently reach and influence individuals in our greatly
expanding service area and to position Second National Bank as the leader among
our competitors.
The yearlong campaign was designed to illustrate the superior level of
service at the Bank that is both unparalleled and unexpected in a banking
relationship. Timed with and supported by statement stuffers, point-of-sale
materials and direct mail, the ad campaign was part of an integrated marketing
plan focusing on specific products and services throughout the year to support
employees' one-on-one sales efforts. The marketing program had a two-fold
objective: to make the Second National Bank name recognizable in the minds of
consumers and to entice the customer into calling or visiting Second National.
The result was an average of 40 percent of our new customers who said they
visited a Second National banking center because they were prompted by the new
promotion.
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NEW LOOK, MORE SERVICE AT THE HOWLAND BANKING CENTER
At Second National we communicate with more than words. Our actions
also communicate a commitment to enhanced customer service. One such example is
the newly constructed addition to our Howland Banking Center. To effectively
facilitate increased customer traffic, a building addition was constructed to
house the center's relocated drive-up ATM and night depository. Moving the ATM
also enabled construction of a third drive-thru lane.
A NEW BANKING EXPERIENCE AT SECOND NATIONAL BANK'S TRUST DEPARTMENT
Customers visiting Second National Bank's Trust Department located on
High Street in Warren, Ohio, will discover the next generation of banking
experience: The CyberCafe. Created within a comfortable, quiet atmosphere,
Second National Bank's CyberCafe features online computers where customers can
access worldwide Web sites to check e-mail, take a look at the market, read the
daily paper, call toll-free anywhere in Ohio, or just sit down and relax with a
fresh cup of coffee.
RECOGNITION OF LEADERSHIP
Second Bancorp, Inc. was ranked 53rd in the Plain Dealer 100, a ranking
of the top 100 publicly traded companies in Ohio. The Cleveland daily newspaper
measures companies by performance and size, including return to shareholders,
return on average equity, percent change in revenue, increase in profit margin,
and total revenue. Second Bancorp last appeared on the list in 1996 at 90th.
Warren's Tribune Chronicle 2000 Reader's Choice Awards voted Second National
Bank the "Best of the Best" in the banking category.
Second Bancorp has no significant industry segments which require disclosure.
MARKET AREA
Second National's primary market area consists of Trumbull, Ashtabula,
Portage, Jefferson, Mahoning, Summit, Medina, Stark and the southeast portion of
Cuyahoga counties in the northeastern corner of Ohio, to the east and south of
the Cleveland metropolitan area. The market area's economy is heavily influenced
by the manufacturing sector with an emphasis on steel, auto manufacturing and a
variety of related and smaller industries. The area has benefited from an
extensive transportation system comprised mainly of railroad and trucking
systems.
COMPETITION
There is significant competition in the financial services industry in
northeastern Ohio among commercial banks. As a result of deregulation of the
financial services industry, Second Bancorp also competes with other providers
of financial services such as savings and loan associations, credit unions,
commercial finance companies, brokerage and securities firms, insurance
companies, commercial finance and leasing companies and the mutual fund
industry. Some of Second Bancorp's competitors, including certain regional bank
holding companies which have operations in Second Bancorp's market area, have
substantially greater resources than Second Bancorp, and as such, may have
higher lending limits and may offer other services not available through Second
National. Second Bancorp also faces
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significant competition, particularly with respect to interest rates paid on
deposit accounts, from well-capitalized local thrift institutions. Second
National competes on the basis of rates of interest charged on loans, the rates
of interest paid on funds, the availability of services and responsiveness to
the needs of its customers.
REGULATION
Second Bancorp is a one bank financial holding company and is regulated
by the Federal Reserve Bank (the "FRB"). Second National is a national bank and
is regulated by the Office of the Comptroller of the Currency (the "OCC"), as
well as the Federal Deposit Insurance Corporation (the "FDIC"). Dramatic changes
have developed over the past several years regarding minimum capital
requirements for financial institutions. A listing of the minimum requirements
for capital and Second Bancorp's capital position as of December 31, 2000 and
1999 are presented in footnote 13 of Item 8; Financial Statements and
Supplementary Data and is hereby incorporated by reference.
Second Bancorp is subject to regulation under the Bank Holding Company
Act of 1956, as amended (the "Act"). The Act requires the prior approval of the
Federal Reserve Board for a bank holding company to acquire or hold more than a
5% voting interest in any bank, and restricts interstate banking activities. The
Act allows interstate bank acquisitions anywhere in the country and interstate
branching by acquisition and consolidation in those states that have not opted
out by January 1, 1997. Among the states where Second Bancorp may acquire banks
are Ohio and Pennsylvania. The Act restricts nonbanking activities to those
which are determined by the Federal Reserve Board to be closely related to
banking and a proper incident thereto. The Act does not place territorial
restrictions on the activities of nonbank subsidiaries of bank holding
companies. The Act also regulates transactions between Second Bancorp and Second
National and generally prohibits tie-ins between credit and other products and
services.
Second National is subject to regulation under the National Banking Act
and is periodically examined by the OCC and is subject, as a member bank, to the
rules and regulations of the FRB. Second National is an insured institution and
member of the Bank Insurance Fund ("BIF") and also has approximately $409
million in deposits acquired through acquisitions of savings and loan
institutions that are insured through the Savings Association Insurance Fund
("SAIF"). As such, Second National is also subject to regulation by the FDIC.
Establishment of branches is subject to approval of the OCC and geographic
limits established by state law.
THE GRAHAM-LEACH-BLILEY ACT
The enactment of the Graham-Leach-Bliley Act of 1999 (the "GLB Act"')
represents a pivotal point in the history of the financial services industry.
The GLB Act sweeps away large parts of a regulatory framework that had its
origins in the Depression Era of the 1930s. Effective March 11, 2000, new
opportunities were available for banks, other depository institutions, insurance
companies and securities firms to enter into combinations that permit a single
financial services organization to offer customers a more complete array of
financial products and services. The GLB Act provides a new regulatory framework
for regulation through the financial holding company, which will have as its
umbrella regulator the Federal Reserve Board. Functional regulation of the
financial holding company's separately regulated subsidiaries will be conducted
by their primary functional regulator. The GLB Act makes satisfactory or above
Community Reinvestment Act compliance for insured depository institutions and
their financial holding companies necessary in order for them to engage in new
financial activities. The GLB Act provides a federal right to privacy of
non-public personal information of individual customers.
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FIRREA
FIRREA restructures the regulation, supervision and deposit insurance
of savings and loan associations and federal savings banks whose deposits were
formerly insured by the Federal Savings and Loans Insurance Corporation
("FSLIC"). FSLIC was replaced by the Savings Association Insurance Fund ("SAIF")
administered by the FDIC. A separate fund, the Bank Insurance Fund ("BIF"),
which was essentially a continuation of the FDIC's then existing fund, was
established for banks and state savings banks. An acquired thrift generally
would be required to continue its deposit insurance with the SAIF unless
significant exit and entrance fees were paid in connection with a conversion to
BIF insurance.
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") substantially revised the bank regulatory and funding provisions of
the Federal Deposit Insurance Act and several other federal banking statutes.
Among other things, FDICIA requires federal banking agencies to broaden the
scope of regulatory corrective action taken with respect to banks that do not
meet minimum capital requirements and to take such actions promptly in order to
minimize losses to the FDIC. FDICIA established five capital tiers: "well
capitalized"; "adequately capitalized"; "undercapitalized"; "significantly
capitalized"; and "critically undercapitalized" and imposes significant
restrictions on the operations of a depository institution that is not in either
of the first two of such categories. A depository institution's capital tier
will depend upon the relationship of its capital to various capital measures. A
depository institution will be deemed to be "well capitalized" if it
significantly exceeds the minimum level required by regulation for each relevant
capital measure, "adequately capitalized" if it meets each such measure,
"undercapitalized" if it is significantly below any such measure and "critically
undercapitalized" if it fails to meet any critical capital level set forth in
regulations. An depository institution may be deemed to be in a capitalization
category that is lower than is indicated by its actual capital position if it
receives an unsatisfactory examination rating or is deemed to be in an unsafe or
unsound condition or to be engaging in unsafe or unsound practices.
Under regulations adopted under these provisions, for a depository
institution to be well capitalized it must have a total risk-based capital ratio
of at least 10%, a Tier I risk-based capital ratio of at least 6% and a Tier I
leverage ratio of at least 5% and not be subject to any specific capital order
or directive. For a depository institution to be adequately capitalized, it must
have a total risk-based capital ratio of at least 8%, a Tier I risk-based
capital ratio of at least 4% and a Tier I leverage ratio of at least 4% (or in
some cases 3%). Under the regulations, a depository institution will be deemed
to be undercapitalized if the depository institution has a total risk-based
capital ratio that is less than 8%, a Tier I risk- based capital that is less
than 4% or a Tier I leverage ratio of less than 4% (or in some cases 3%). A
depository institution will be deemed to be significantly undercapitalized if
the depository institution has a total risk-based capital ratio that is less
than 6%, a Tier I risk-based capital ratio that is less than 3%, or a leverage
ratio that is less than 3% and will be deemed to be critically undercapitalized
if it has a ratio of tangible equity to total assets that is equal to or less
than 2%.
FDICIA generally prohibits a depository institution from making a
capital distribution (including payment of dividends) or paying management fees
to any entity that controls the institution if it thereafter would be
undercapitalized. If a depository institution becomes undercapitalized, it will
be generally restricted from borrowing from the Federal Reserve, increasing its
average total assets, making any acquisitions, establishing any branches or
engaging in any new line of business. An undercapitalized institution must
submit an acceptable capital restoration plan to the appropriate federal banking
agency, which plan must, in the opinion of such agency, be based on realistic
assumptions and be "likely to succeed" in restoring the depository institution's
capital. In connection with the approval of such a plan,
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the holding company of the depository institution must guarantee that the
institution will comply with the plan, subject to a limitation of liability
equal to a portion of the depository institution's assets. If an
undercapitalized depository institution fails to submit an acceptable plan or
fails to implement such a plan, it will be treated as if it is significantly
undercapitalized.
Under FDICIA, bank regulators are directed to require "significantly
undercapitalized" depository institutions, among other things, to restrict
business activities, raise capital through a sale of stock, merge with another
depository institution and/or take any other action which the agency determines
would better carry out the purposes of FDICIA.
Within 90 days after a depository institution is determined to be
"critically undercapitalized", the appropriate federal banking agency must, in
most cases, appoint a receiver or conservator for the institution or take such
other action as the agency determines would better achieve the purposes of
FDICIA. In general, "critically undercapitalized" depository institutions will
be prohibited from paying principal or interest on their subordinated debt and
will be subject to other substantial restrictions.
FDICIA also contains a variety of other provisions that could affect
the operations of Second Bancorp, including new reporting requirements,
regulatory standards for real estate lending, "truth in savings" provisions, the
requirement that a depository institution give 90 days' prior notice to
customers and regulatory authorities before closing any branch, limitations on
credit exposure between banks, restrictions on loans to a bank's insiders and
guidelines governing regulatory examinations.
DEPOSIT INSURANCE ASSESSMENTS
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance for members of the BIF and the SAIF. The FDIC may increase
assessment rates for either fund if necessary to restore the fund's ratio of
reserves to insured deposits to its target level within a reasonable time and
may decrease such rates if such target level has been met. The FDIC has
established a risk-based assessment system for both BIF and SAIF members. Under
this system, assessments vary based on the risk the institution poses to its
deposit insurance fund. The risk level is determined based on the institution's
capital level and the FDIC's level of supervisory concern about the depository
institution.
Based upon its respective level of deposits at December 31, 2000, the
projected BIF and SAIF assessments for Second National for 2001 will be
approximately $230,000.
INTERSTATE BANKING AND BRANCHING LEGISLATION
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "IBBEA") authorized interstate acquisitions of banks and bank holding
companies without geographic constraint beginning September 29, 1995. Beginning
June 1, 1997, the IBBEA also authorizes banks to merge with banks located in
another state provided that neither state has "opted out" of interstate
branching between September 29, 1994 and May 31, 1997. After acquiring
interstate branches through a merger, a bank may establish additional branches
in that state at the same locations as any bank involved in the merger could
have established branches under state and federal law. In addition, a bank may
establish a de novo branch in another state that expressly permits the
establishment of such branches. A bank that establishes a de novo interstate
branch may thereafter establish additional branches on the same basis as a bank
that has established interstate branches through a merger transaction.
10
12
If a state "opts out" of interstate branching, no bank from another
state may establish a branch in that state, whether through a merger or by a de
novo establishment. Pennsylvania, the state in closest proximity to Second
National, has opted to permit interstate branching, creating the possibility of
branching into that state. To date, Second National has taken no action to
branch into Pennsylvania or any other state, however Second National may do so
in the future.
EMPLOYEES
The number of full time equivalent employees of Second Bancorp as of
December 31, 2000 was approximately 499. Second Bancorp considers its employee
relations to be good. None of the employees are covered by a collective
bargaining agreement.
ITEM 2. PROPERTIES
Second Bancorp's executive offices are located at Second National's
main office building in Warren, Ohio, which is leased by Second National under a
long-term triple net lease agreement with a term, including optional renewals,
expiring on October 31, 2029. Second National has the option to purchase the
main office facility before two optional renewal periods at the fair market
value in existence at that time. Second National owns 11 of its branch
locations, while Second National's 23 other branch locations are leased under
lease and sublease agreements with remaining terms of 1 to 14 years. Second
National also has leases for record retention and office space with remaining
lease terms of one and six years, respectively.
ITEM 3. LEGAL PROCEEDINGS
Second Bancorp is subject to various pending and threatened lawsuits in
which claims for monetary damages are asserted in the ordinary course of
business. While any litigation involves an element of uncertainty, in the
opinion of management, liabilities, if any, arising from such litigation or
threat thereof will not have a material effect on the financial position or
results of operations of Second Bancorp.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no special meetings for shareholders since last year's
annual meeting.
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ITEM 4a. IDENTIFICATION OF EXECUTIVE OFFICERS
The following table sets forth the names and ages and business
experience for the last five years of each of the executive officers of the
Corporation. Each executive officer of the Corporation is appointed by the Board
of Directors on an annual basis, and serves at the pleasure of the Board.
Year
Name Age Position and Experience Appointed
- -------------------------------------------------------------------------------------------------
R. L. (Rick) Blossom 53 President, Chief Executive Officer and Director 1999
of Second Bancorp and President, Chief Executive
Officer and Director of Second National.
Former Chief Executive Officer and Director
of First National Bank of Southwestern Ohio
and Senior Vice President and Chief Lending
Officer of First Financial Bancorp.
David L. Kellerman 43 Treasurer of Second Bancorp and Executive Vice 1987
President and Chief Financial Officer of Second National.
Christopher Stanitz 52 Executive Vice President and Secretary of Second 1992
Bancorp and Vice President of Second National.
Thomas W. Allen 56 Executive Office of Second Bancorp and Senior 2000
Vice President of Second National Bank
Diane C. Bastic 57 Executive Officer of Second Bancorp and Senior 1985
Vice President of Second National.
John L. Falatok 43 Executive Officer of Second Bancorp and Senior 2000
Vice President of Second National.
Mike Filarski 52 Executive Officer of Second Bancorp and Senior 1999
Vice President of Second National. Former President
for Signal Mortgage (1998-99), previously President
for National Auto Credit (1996-1997), previously
Executive Vice President for The Leader Mortgage
Company (1992-1996).
Darryl E. Mast 50 Executive Officer of Second Bancorp and Senior 1986
Vice President of Second National.
Terry L. Myers 51 Executive Officer of Second Bancorp and Senior 1986
Vice President of Second National.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Second Bancorp's Common Stock trades on The Nasdaq National Market tier
of The Nasdaq Stock Market under the trading symbol SECD. As of March 15, 2001,
the number of shareholders of record of the Common Stock totaled 2,339. The
detail of stock prices and dividend payments are incorporated herein by
reference from Item 7; Management's Discussion and Analysis of Financial
Condition and Results of Operations. Dividend restrictions are detailed in
footnote 13 of Item 8; Second Bancorp's Financial Statements and Supplementary
Data are incorporated herein by reference.
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ITEM 6. SELECTED FINANCIAL DATA
This management's discussion and analysis of financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and accompanying footnotes.
SELECTED FINANCIAL DATA
Year ended December 31 2000 1999 1998 1997 1996
------------ ------------- ------------- ------------ ------------
Results of Operations:
Interest Income $ 116,298 $ 104,582 $ 106,997 $ 104,990 $ 101,158
Interest expense 66,921 55,310 55,888 55,707 54,153
------------ ------------- ------------- ------------ ------------
Net interest income 49,377 49,272 51,109 49,283 47,005
Provision for loan losses 7,129 3,195 10,579 4,205 5,072
Other income 8,275 14,792 12,754 11,101 10,008
Other expense 44,213 39,330 46,248 39,198 39,279
------------ ------------- ------------- ------------ ------------
Income before federal income taxes 6,310 21,539 7,036 16,981 12,662
Federal tax expense 176 5,361 1,403 3,745 2,993
------------ ------------- ------------- ------------ ------------
Net income $ 6,135 $ 16,178 $ 5,633 $ 13,236 $ 9,699
------------ ------------- ------------- ------------ ------------
Per Common Share Data: (1)
Basic earnings $ 0.60 $ 1.52 $ 0.53 $ 1.25 $ 0.93
Diluted earnings 0.60 1.51 0.52 1.25 0.92
Cash dividends 0.64 0.56 0.48 0.40 0.34
Book value, December 31 11.65 11.12 11.53 11.34 10.40
Market value, December 31 14.50 22.38 22.25 25.38 15.69
Weighted-average shares outstanding (1)
Basic 10,247,025 10,635,852 10,655,597 10,555,921 9,876,174
Diluted 10,271,548 10,698,717 10,742,622 10,616,752 10,555,060
Shares outstanding at year-end (1) 10,057,110 10,458,450 10,688,450 10,606,749 10,503,660
Per Preferred Share Data:
Cash dividends n/a n/a n/a n/a $ 0.75
Market value, December 31 n/a n/a n/a n/a n/a
Balance Sheet Data:
As of December 31:
Total assets $ 1,546,290 $ 1,537,278 $ 1,430,233 $ 1,438,193 $ 1,397,194
Loans, net 1,054,872 1,060,493 960,114 858,321 808,396
Deposits 1,036,135 1,097,589 1,102,590 1,115,044 1,076,947
Shareholder's equity 117,197 116,347 123,273 120,318 106,415
Averages:
Total assets 1,584,016 1,498,946 1,464,803 1,424,211 1,384,343
Earning assets 1,488,334 1,405,195 1,386,894 1,351,117 1,301,032
Loans 1,107,948 1,005,998 938,408 869,333 797,174
Deposits 1,091,441 1,092,260 1,086,074 1,079,809 1,072,583
Shareholders' equity 114,652 121,369 126,748 112,127 103,725
Ratios:
Return on average assets 0.39% 1.08% 0.38% 0.93% 0.70%
Return on average common
shareholder's equity 5.35 13.33 4.44 11.80 9.32
Net interest margin 3.46 3.68 3.84 3.78 3.73
Efficiency ratio 70.67 59.45 70.11 63.04 67.11
Dividend pay-out 106.26 36.68 91.53 32.29 35.77
Average loans to average deposits 101.51 92.10 86.40 80.51 74.24
Allowance for loan losses as a percent of loans 1.42 1.04 1.11 1.02 1.13
Net charge-offs as a percent of average loans 0.28 0.27 0.92 0.53 0.57
Non-performing loans to total loans .75 0.55 0.71 0.80 1.17
Allowance for loans losses to
non-performing loans 191 188 155 128 96
Tier I leverage ratio 7.47 8.15 8.65 7.87 7.49
(1) Prior period amounts have been restated for stock splits and
pooling-of-interests transactions.
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The table below details operating results excluding the impact of the
2000 restructuring activity and the 1998 merger activity:
SELECTED FINANCIAL DATA - OPERATING RESULTS EXCLUDING RESTRUCTURING CHARGES AND
MERGER COSTS
Year ended December 31 2000 1999 1998 1997 1996
------------ ------------- ------------- ------------ ------------
Results of Operations:
Interest Income $ 116,950 $ 104,582 $ 106,997 $ 104,990 $ 101,158
Interest expense 66,921 55,310 55,888 55,707 54,153
------------ ------------- ------------- ------------ ------------
Net interest income 50,029 49,272 51,109 49,283 47,005
Provision for loan losses 3,029 3,195 10,579 4,205 3,176
Other income 14,794 14,792 12,754 11,101 10,008
Other expense 41,604 39,330 39,591 39,198 39,279
------------ ------------- ------------- ------------ ------------
Income before federal income taxes 20,190 21,539 13,693 16,981 12,662
Federal tax expense 5,034 5,361 3,063 3,745 2,993
------------ ------------- ------------- ------------ ------------
Net income $ 15,156 $ 16,178 $ 10,630 $ 13,236 $ 9,699
------------ ------------- ------------- ------------ ------------
Per Common Share Data: (1)
Basic earnings $ 1.48 $ 1.52 $ 1.00 $ 1.25 $ 0.93
Diluted earnings 1.48 1.51 0.99 1.25 0.92
Ratios:
Return on average assets 0.96% 1.08% 0.73% 0.93% 0.70%
Return on average common
shareholder's equity 13.22 13.33 8.39 11.80 9.32
Net interest margin 3.51 3.68 3.84 3.78 3.73
Efficiency ratio 62.17 59.45 60.95 63.04 67.11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain sections of this report contain certain forward-looking
statements (as defined in the Private Securities Litigation Reform Act of 1995).
These forward-looking statements may involve significant risks and
uncertainties. Although the Corporation believes that the expectations reflected
in such forward-looking statements are reasonable, actual results may differ
materially from these results discussed in these forward-looking statements.
Risks and uncertainties that could cause or contribute to such material
differences include, but are not limited to, general economic conditions,
interest rate environment, competitive conditions in the financial services
industry, changes in law, governmental policies and regulations, and rapidly
changing technology affecting financial services.
RESULTS OF OPERATIONS
Net income for 2000 totaled $6,134 and was significantly impacted by a
major balance sheet restructuring during the third quarter. The restructuring
was designed to improved balance sheet flexibility and liquidity, reduce the
earnings drag caused by the large mortgage loan portfolio, and improve net
interest margin. The after-tax impact of the restructuring totaled $9,022. An
additional $4.1 million in provision for loan losses which helped increase the
reserve for loan losses to 1.42% of loans at year-end. The additional provisions
resulted from a specific analysis of commercial credits and reflect current
management's philosophy of loan analysis. Additionally, $2,808 in security
losses were realized as the Corporation repositioned it's security portfolio and
improved overall earning performance. An additional $4.363 in losses were
realized on the disposition of $130 million in low yielding, fixed rate mortgage
loans. The effect of the sale was to minimally shrink the Corporation's balance
sheet and reduce exposure to higher cost Federal Home Loan advances. Excluding
the restructuring charges, net income would have been $15,156. Net income in
1999 was $16,178, while net income in 1998 was $5,633 and was affected by the
costs associated with merger activity completed in 1998. The 1998 acquisition of
Trumbull Financial
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17
Corporation, headquartered in Warren, Ohio and Enfin Corporation, headquartered
in Solon, Ohio, greatly increased the Corporation's asset size. Cost reduction
targets associated with the acquisitions were achieved in 1999. Additional
revenue enhancements from the acquisitions are possible as cross-sale efforts
continue. During 1998, however merger related costs of $6,657 were taken to
accomplish the strategic growth. The acquisition of Enfin gives the Corporation
access to the commercial lending market in and around Solon, a suburb of
Cleveland, while the acquisition of Trumbull strengthens the Corporation's
dominance of the Trumbull County market. Also impacting earnings during 1998 was
the need to provide additional provision for loan losses. Net losses incurred
during 1998; primarily commercial loan losses, exceeded $8.6 million for the
year, necessitating the increase in provision. Absent the merger costs and
related tax impact, net income for 1998 would have been $10,630. The
Corporation's return on average assets ("ROA") was .39%, 1.08% and .38% for
2000, 1999 and 1998, respectively. Excluding restructuring charges and merger
costs, ROA would have been .96%, 1.08% and .73% in 2000, 1999 and 1998,
respectively. The total shareholders' return on average equity ("ROE") was
5.35%, 13.33% and 4.44% (13.22%, 13.33% and 8.39% excluding restructuring
charges and merger costs) in 2000, 1999 and 1998, respectively.
Diluted earnings per share was $.60 in 2000, $1.51 in 1999 and $.52 in
1998. Absent the restructuring charges and merger costs, diluted earnings per
share were $1.48, $1.51 and $.99 for those same periods. The Corporation's
common stock, trading under the NASDAQ symbol of SECD, has generally followed
the path of most bank stocks during 1999 and 2000, peaking at $30.75 per share
in the third quarter of 1999 and finishing 2000 at $14.50 per share. The stock
price at year-end 2000 represents a price of 124% of book value, down
significantly from 201% the prior year-end. The stock price was effected by
higher interest rates and market concerns for a slowing economy and potential
increased loan losses in the banking industry. Dividends declared in 2000
totaled $.64 per share compared to $.56 per share the prior year.
Revenue continues to be provided primarily from interest and fees on
loans, which totaled $91,830, $81,464 and $79,963 in 2000, 1999 and 1998,
respectively. Excluding the impact of restructuring, this represents 70%, 68%
and 67% of total revenues for those years. Interest income on securities is also
a major source of revenue, contributing 18%, 19% and 22% of revenues in 2000,
1999 and 1998, respectively. The Corporation is making steady improvement in
diversifying its revenue source away from net interest income. Non-interest
income has increased as a percent of net revenues (net interest income plus
non-interest income) from 20% in 1998 to 23% in both 1999 and 2000.
NET INTEREST INCOME
Net interest income declined slightly in 2000 due to a decline in net
interest margin. Significantly impacting both net interest income and net
interest margin were steadily increasing interest rates resulting from the
Federal Reserve Bank monetary tightening and an inverted yield curve
environment. The yield on earning assets improved by 35 basis points to 7.96% in
2000, however, the cost of funds increased by 57 basis points to 4.96%. The net
interest margin declined to 3.46% from 3.68% in 1999. Average earning assets
increased by 5.9% in 2000 to $1,488,334 after increasing 1.3% to $1,405,195 in
1999.
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The relationship between net interest income, FTE net interest income,
earning assets and net interest margin for the past three years follows:
2000 1999 1998
------------------- ------------------ -------------------
Net interest income - per financial statements $ 49,377 $ 49,272 $ 51.109
Tax equivalent adjustment 2,175 2,403 2,102
------------------- ------------------ -------------------
Net interest income - FTE $ 51,552 $ 51,675 $ 53,211
------------------- ------------------ -------------------
Average earning assets $ 1,488,334 $ 1,405,195 $ 1,386,894
Net interest margin 3.46% 3.68% 3.84%
Net interest income can be analyzed through the use of the Yields
Analysis table. The table shows a three-year comparison of the average balance
of interest earning assets and interest bearing liabilities along with interest
and yields associated with them.
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19
YIELDS ANALYSIS
Year Ended December 31 2000 1999
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------------------------------------------------------------
ASSETS
- ------
Interest earning assets:
Taxable loans (1)(3) $ 1,089,484 $90,819 8.34% $ 992,643 $80,783 8.14%
Tax-exempt loans (2) 18,464 1,536 8.32 13,355 1,048 7.84
Taxable securities 308,084 20,970 6.81 304,199 18,446 6.06
Tax-exempt securities 66,866 4,862 7.27 78,783 5,817 7.38
Federal funds sold 5,436 286 5.26 16,215 891 5.49
------------------------------------------------------------------
Total interest earning 1,488,344 118,473 7.96 1,405,195 106,985 7.61
assets
Non-interest earning assets 95,682 93,751
------------------------------------------------------------------
TOTAL $ 1,584,016 $ 1,498,946
==================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits $ 86,818 1,290 1.49 $ 92,350 1,395 1.51
Savings deposits 266,863 8,561 3.21 279,305 8,252 2.95
Time deposits 625,575 36,385 5.82 611,827 32,291 5.28
Federal funds purchased
and securities sold
under agreements
to repurchase 118,070 5,540 4.69 136,382 5,781 4.24
Note payable 292 25 8.56 921 64 6.95
Other borrowed funds 2,532 172 6.79 2,696 155 5.75
Federal Home Loan Bank
Advances 248,648 14,948 6.01 136,484 7,372 5.40
------------------------------------------------------------------
Total interest bearing liabilities 1,348,798 66,921 4.96 1,259,965 55,310 4.39
Non-interest bearing liabilities: 112,185 108,778
Demand deposits
Accrued expenses and
other liabilities 8,381 8,834
------------------------------------------------------------------
Other liabilities 120,566 117,612
Shareholders' equity 114,652 121,369
------------------------------------------------------------------
TOTAL $ 1,584,016 $ 1,498,946
==================================================================
Net interest earnings (FTE) 51,552 51,675
Taxable equivalent adjustment 2,175 2,403
------------------------------------------------------------------
Net interest income $49,377 $49,272
==================================================================
Net yield on interest earning 3.46% 3.68%
assets ==================================================================
YIELDS ANALYSIS
Year Ended December 31 1998
AVERAGE YIELD/
BALANCE INTEREST RATE
--------------------------------
ASSETS
- ------
Interest earning assets:
Taxable loans (1)(3) $ 924,823 $79,229 8.57%
Tax-exempt loans (2) 13,585 1,112 8.19
Taxable securities 368.421 22,945 6.23
Tax-exempt securities 68,994 5,071 7.35
Federal funds sold 11,071 742 6.70
--------------------------------
Total interest earning 1,386,894 109,099 7.87
assets
Non-interest earning assets 77,909
--------------------------------
TOTAL $ 1,464,803
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits $ 91,310 1,488 1.63
Savings deposits 263,855 7,494 2.84
Time deposits 626,440 34,589 5.52
Federal funds purchased
and securities sold
under agreements
to repurchase 138,652 6,525 4.71
Note payable
Other borrowed funds 3,008 170 5.65
Federal Home Loan Bank
Advances 99,462 5,622 5.65
--------------------------------
Total interest bearing liabilities 1,222,727 55,888 4.57
Non-interest bearing liabilities: 104,469
Demand deposits
Accrued expenses and
other liabilities 10,859
--------------------------------
Other liabilities 115,328
Shareholders' equity 126,748
--------------------------------
TOTAL $ 1,464,803
================================
Net interest earnings (FTE) 53,211
Taxable equivalent adjustment 2,102
--------------------------------
Net interest income $51,109
================================
Net yield on interest earning 3.84%
assets ================================
(1) For purposes of these computations, non-accruing loans are included in the
daily average loan amounts outstanding.
(2) The tax-exempt income and yields are shown on a tax equivalent basis using
the 34%, 35% and 34% marginal Federal tax rates in effect during 2000, 1999
and 1998, respectively.
(3) Loan fees are included in the interest reported for loans. Those fees
amounted to $2,326 in 2000, $2,193 in 1999, and $2,636 in 1998.
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You can further analyze the change in net interest income by separating the
volume and rate impact of the change.
The following table details the breakdown of the major categories affecting
the change:
2000 compared to 1999 1999 COMPARED TO 1998
RATE / VOLUME ANALYSIS DUE TO CHANGE IN DUE TO CHANGE IN
VOLUME RATE NET VOLUME RATE NET
------------------------------------------------------------------------
Increase (decrease) in FTE interest income:
Taxable loans $ 7,881 $ 2,155 $ 10,036 $ 5,810 $ (4,256) $ 1,554
Tax-exempt loans 400 88 488 (19) (45) (64)
Taxable securities 236 2,288 2,524 (4,000) (499) (4,499)
Tax-exempt securities (880) (75) (955) 720 26 746
Federal funds sold (592) (13) (605) 345 (196) 149
------------------------------------------------------------------------
Total interest bearing assets 7,045 4,443 11,488 2,856 (4,970) (2,114)
Interest bearing liabilities:
Demand deposits - interest bearing (84) (21) (105) 17 (110) (93)
Savings deposits (368) 677 309 439 319 758
Time deposits 726 3,368 4,094 (807) (1,491) (2,298)
Federal funds purchased and
securities sold under
agreements to repurchase (776) 535 (241) (107) (637) (744)
Note payable (44) 5 (39) 64 0 64
Other borrowed funds (9) 26 17 (18) 3 (15)
Federal Home Loan Bank Advances 6,058 1,518 7,576 2,093 (343) 1,750
-------------------------------------------------------------------------
Total interest bearing liabilities 5,503 6,108 11,611 1,681 (2,259) (578)
-------------------------------------------------------------------------
Total effect on net interest income $ 1,542 $(1,665) $ (123) $ 1,175 $ (2,711) $(1,536)
-------------------------------------------------------------------------
The change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
PROVISION FOR LOAN LOSSES
The provision for loan losses totaled $7,129 in 2000 representing .64%
of average loans. Included in the third quarter was an additional $4.1 million
in provision for loan losses which helped increase the reserve for loan losses
to 1.42% of loans at year-end. The additional provision resulted from a specific
analysis of commercial credits and reflect current management's philosophy of
loan analysis. Excluding the third quarter additional provision, the provision
would have been a more normalized .27% of loans. The provision for loan losses
totaled $3,195 in 1999, representing .32% of average loans. This represents a
significant decline from the provision for 1998 of $10,579 (.92% of average
loans). The provision for loan losses was $4,205 in 1997 and $5,072 in 1996. The
increase in 1998 can be attributed to higher than historically normal levels of
net charge-offs for the commercial loan portfolio. Net charge-offs as a percent
of average commercial loans were 1.55% in 1998 and .40% in 1999.
NON-INTEREST INCOME
Total non-interest income was significantly impacted by the loan and
security losses realized during the third quarter restructuring of $3,711 and
$2,808, respectively. Absent the restructuring activity, non-interest income
would have totaled $14,794, virtually unchanged from the prior year total of
$14,792. Increases were realized in deposit service charges (up 2.2%), trust
income (up 10.3%) and other income (up 3.0%). Reducing non-interest income was a
loss on trading activity of $335 during the year. Non-
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interest income in 1999 increased by 16% increase over 1998. Other income was
influenced by an additional $15 million investment in bank owned life insurance
at the end of 1998. Loan sale gains totaled $2,066 in 1999 compared to $2,150 in
1998. Service charges on deposit accounts improved by 4% from 1998 to $4,309 in
1999. The increase is attributable to the increase in revenue from ATM services
provided and improvements on the collection of return check and overdraft fees.
Trust fee income totaled $3,534 in 1999, a 25% improvement over the prior year.
Trust income was strongly influenced by both increased sales and increased
returns on investments.
Included in non-interest income over the past three years were pre-tax
losses and gains on the sale of securities. During 2000, the security portfolio
realized losses in the amount of $2,399. Absent the restructuring activity,
gains of $409 would have been realized. Security gains in 1999 and 1998 totaled
$312 and $1,007, respectively.
NON-INTEREST EXPENSE
The Corporation continues to emphasize control and to be efficient in
its utilization of resources to manage assets. Non-interest expenses as a
percentage of average assets were 2.79% in 2000, compared to 2.62% in 1999.
Included in the 2000 expenses were professional services costs incurred to
facilitate restructuring and reengineering activities. The table below details
the percentage change in each non-interest expense category over the past three
years:
PERCENTAGE CHANGE
2000 OVER 1999 1999 OVER 1998
---------------------- ---------------------
Salaries and benefits 9% 0%
Net occupancy 1 4
Equipment 17 11
Professional services 59 3
Assessment on deposits and other taxes 0 2
Amortization of goodwill & other intangibles (19) (14)
Other expenses 17 (8)
INCOME TAXES
The provision for income taxes was $176, $5,361 and $1,403 in 2000,
1999 and 1998, respectively. The effective tax rate for the Corporation was
2.8%, 24.9% and 19.9% during the same periods. The reduction in the effective
tax rate in 2000 was due to the reduced net income due to restructuring
activities.
BALANCE SHEET
Average assets grew at a 5.7% pace in 2000 after increasing by 2.4% in
1999. The growth rate was influenced by strong growth in consumer lending. Both
2000 and 1999 have been influenced by low deposit growth rates. As an industry,
financial institutions are experiencing slower deposit growth rates due to
increased competition from non-traditional alternatives, especially mutual
funds. Deposit balances averaged $1.09 billion in 2000, virtually unchanged from
1999.
EARNING ASSETS
SECURITIES:
The securities portfolio of the Corporation is used to provide an
adequate rate of return to the Corporation along with appropriate levels of
liquidity, and as a tool for efficient tax management and interest rate risk
management. The accounting treatment for the securities portfolio is determined
by the Corporation's intent regarding particular security holdings. Securities
held-to-maturity are purchased with the intent and ability to hold them to
maturity and are, therefore, carried at amortized cost. Additionally, the
acquired companies had previously classified securities as held-to-maturity. The
Corporation
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reclassified all securities as available-for-sale upon acquisition in 1998.
Securities are purchased to satisfy yield enhancement, liquidity, interest rate
risk management, and pledging needs. Purchases in longer maturity ranges that
provided yield enhancement included purchases of tax-exempt securities which
provide the additional benefit of tax reduction.
The securities portfolio totaled $382,098 as of December 31, 2000 and
is classified entirely as available-for-sale. That balance represents a 4%
increase over the prior year-end. For 2000, the growth in securities was
concentrated in corporate issues that helped improve the earnings performance
characteristics of the portfolio. In 1999, security balance growth was limited
to leveraging activities that coupled like-term FHLB advances with securities
purchases designed to enhance net income, earnings per share and return on
equity. Growth in securities had previously been concentrated in tax-exempt
issues.
The average yield on the portfolio is 6.9% as of December 31, 2000, up
.5% from the prior year-end. During the past year, the Corporation realized
$2,399 in net losses on the sale of securities. In 1999 and 1998, net security
gains totaled $312 and $1,007, respectively. As interest rates have reversed
their previous upward trend, the Corporation now has an unrealized gain position
for the portfolio of $433.
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23
Summary yield and maturity information regarding the securities
portfolios on December 31 follows. Yields are calculated on a fully taxable
equivalent basis using the marginal Federal income tax rate of 34% for 2000.
BOOK VALUE
-------------------------------------------------------------------
2000 1999 1998
AVAILABLE- 2000 AVAILABLE- AVAILABLE-
FOR-SALE YIELD FOR-SALE FOR-SALE
-------------------------------------------------------------------
U. S. Treasury and other U. S. Government
agencies and corporations:
Under 1 year $ 7,322 5.8% $ 3,180 $ 24,363
1 to 5 years 28,128 5.9 60,349 56,520
5 to 10 years 16,292 6.9 17,802 8,769
Over 10 years 0 0.0 0 0
-------------------------------------------------------------------
Total 51,742 6.2 81,331 89,652
Obligations of states and political subdivisions:
Under 1 year 1,076 7.8 259 2,758
1 to 5 years 13,458 7.3 11,065 18,154
5 to 10 years 38,896 7.1 41,497 34,360
Over 10 years 13,406 6.9 24,334 21,705
-------------------------------------------------------------------
Total 66,836 7.1 77,155 76,977
Corporate:
Under 1 year 3,790 8.8 0 0
1 to 5 years 20,558 7.4 3,163 10,446
5 to 10 years 7,947 7.6 0 0
Over 10 years 38,123 8.7 18,781 0
-------------------------------------------------------------------
Total 70,418 8.2 21,944 10,446
Mortgage-backed securities 175,294 6.5 173,750 164,262
Equity securities 17,808 7.4 13,407 13,078
-------------------------------------------------------------------
$ 382,098 6.9% $ 367,587 $ 354,415
===================================================================
Mortgage-backed securities have various stated maturities through
August 2030. The estimated weighted-average maturity of this segment of the
portfolio is 6.1 years.
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24
LOANS:
Listed below is the Corporation's loan distribution at the end of each
of the last 5 years:
2000 1999 1998 1997 1996
--------------------------------------------------------------------------------
Commercial $ 421,229 $ 413,097 $ 373,244 $ 347,173 $ 332,127
Consumer 302,881 216,173 230,561 238,245 261,487
Real estate mortgage 345,979 442,392 367,048 281,729 224,017
--------------------------------------------------------------------------------
Balance December 31 $1,070,089 $ 1,071,662 $ 970,853 $ 867,147 $ 817,631
--------------------------------------------------------------------------------
An analysis of maturity and interest rate sensitivity of commercial
loans as of December 31, 2000 follows:
ONE YEAR ONE TO OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
---------------------------------------------------------------
Fixed rate $ 2,590 $ 93,501 $ 84,594 $ 180,685
Variable rate 57,872 50,368 132,304 240,544
---------------------------------------------------------------
Total commercial loans $ 60,462 $ 143,869 $ 216,898 $ 421,229
---------------------------------------------------------------
The Corporation emphasizes growth in real estate loans and commercial
balances. The Corporation emphasizes real estate lending through its branch
network, reaching a broad range of customers. The Corporation has benefited from
this approach along with the use of mortgage loan originators and correspondent
lender relationships. Generally, the loans sold into the secondary mortgage
market make funds available for reuse in mortgage or other lending activities.
The sales generate a net gain (including origination fee income and deferred
origination costs), limit the interest rate risk caused by holding long-term,
fixed-rate loans, and build a portfolio of serviced loans which generate fee
income for the Corporation. The serviced portfolio of mortgages totaled $472 and
$344 million as of December 31, 2000 and 1999, respectively.
Commercial loans are generated through a calling program targeting
medium size companies. The Corporation is also generating an increasing volume
of Small Business Administration ("SBA") loans. The Corporation sells the
guaranteed portion of the SBA loans originated. The sales generated $508 and
$423 in net revenues, including $191 and $150 in revenues from the value of the
servicing retained in 2000 and 1999, respectively. The amount of SBA loans being
serviced by the Corporation totaled approximately $13.3 and $11.5 million at
December 31, 2000 and 1999, respectively.
The Corporation's loans are granted to customers within the immediate
trade area of the Corporation. The mix is diverse, covering a wide range of
borrowers. The Corporation monitors and controls concentrations within a
particular industry or segment. As of December 31, 2000, the Corporation had a
concentration in commercial real estate loans totaling approximately $284
million, approximately 62.3% of which were owner-occupied businesses, including
medical office buildings and retail and fast-food restaurants within the
Corporation's market area.
23
25
ASSET QUALITY
The reserve for loan losses is analyzed in the table below:
Year Ended December 31 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------
Balance at January 1 $ 11,169 $ 10,739 $ 8,837 $ 9,235 $ 8,715
Charge-offs:
Commercial 1,702 2,430 6,734 2,435 2,051
Real estate 164 86 820 12 56
Consumer 2,194 1,961 3,055 2,992 3,497
-------------------------------------------------------------------------------
4,060 4,477 10,609 5,439 5,604
Recoveries:
Commercial 533 901 1,213 108 155
Real estate 8 4 50 0 46
Consumer 438 807 669 717 851
-------------------------------------------------------------------------------
979 1,712 1,932 825 1,052
Net charge-offs 3,081 2,765 8,677 4,614 4,552
Additions:
Charged to operations 7,129 3,195 10,579 4,205 5,072
-------------------------------------------------------------------------------
Balance at December 31 $ 15,217 $ 11,169 $ 10,739 $ 8,826 $ 9,235
===============================================================================
Reserve for loan losses as a percentage
of year-end loans 1.42% 1.04% 1.11% 1.02% 1.13%
Reserve for loan losses as a percentage
of non-performing assets 191% 188% 155% 128% 96%
Year Ended December 31: 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------
Commercial 0.29% 0.40% 1.55% 0.68% 0.61%
Real estate 0.04 0.02 0.23 0.00 0.00
Consumer 0.68 0.53 0.98 0.85 1.08
Total net charge-offs to average loans 0.28 0.27 0.92 0.53 0.57
The balance of the reserve for loan losses has increased steadily from
1996 to 2000 and finished at $15,217 as of December 31. The reserve also covers
191% of non-performing loans (loans past due 90 days or more, on non-accrual or
restructure status), up from 96% in 1996. Net charge-offs continued the 1999
performance at .28% of loans, well below the average net charge-off rates for
1996 to 1998.
The following presents a breakdown of the allocation of the loan loss
allowance by loan category for each of the last five years:
DECEMBER 31
Loan Category 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------
Commercial $ 9,927 65% $ 7,449 67% $ 7,351 69% $ 4,817 54% $ 5,296 57%
Consumer 5,161 34 2,587 23 1,952 18 3,311 38 3,327 36
Real Estate 129 1 1,133 10 1,436 13 698 8 612 7
---------------------------------------------------------------------------------------------------
$15,217 100% $11,169 100% $10,739 100% $ 8,826 100% $ 9,235 100%
---------------------------------------------------------------------------------------------------
24
26
The determination of the reserve for loan losses is based on
Management's evaluation of the potential losses in the loan portfolio
considering, among other relevant factors, repayment status, borrowers' ability
to repay, collateral, and current economic conditions. The Bank utilizes its
internal loan gradings for commercial loans in conjunction with historical loss
experience for loans of each grade level and current economic trends as parts of
its analysis in determining the adequacy of its reserve for loan losses.
Below is a table listing the non-accrual, past due and restructured
loans at the end of the last five years:
2000 1999 1998 1997 1996
--------------------------------------------------------------------
Non-accrual loans $ 4,699 $ 2,743 $ 4,130 $ 5,819 $ 7,271
Past due loans 3,239 3,132 2,725 1,075 2,158
Restructured loans 43 52 61 13 171
--------------------------------------------------------------------
Total $ 7,981 $ 5,927 $ 6,916 $ 6,907 $ 9,600
--------------------------------------------------------------------
Percent of loans at year end 0.75% 0.55% 0.71% 0.80% 1.17%
Other real estate owned $ 902 $ 281 $ 79 $ 0 $ 0
Loans 30 to 89 days past due, excluding non-accrual and restructured
loans included in the table above, amounted to $7,356, or .69% of outstanding
loans, as of December 31, 2000, as compared to $6,215, or .58% of loans on
December 31, 1999. Loans then current where some concerns existed as to ability
of the borrower to comply with loan repayment terms approximated $28,536 at
December 31, 2000 and $16,843 on December 31, 1999. Such loans have been and are
being closely monitored by Management.
Further discussion on loan quality and credit risk are presented in
Note 1h, 7 and 21 of Item 8; Second Bancorp's Financial Statements and
Supplementary Data are incorporated herein by reference.
FUNDING SOURCES
DEPOSITS:
The average amounts of deposits are summarized below:
2000 1999 1998
--------------------------------------------
Demand deposits - non-interest bearing $ 112,185 $ 108,778 $ 104,469
Demand deposits - interest bearing 86,818 92,350 91,310
Savings deposits 266,863 279,305 263,855
Time deposits 625,575 611,827 626,440
--------------------------------------------
$1,091,441 $1,092.260 $ 1,086,074
--------------------------------------------
Average deposits remained virtually unchanged in 2000 with slight
increases in average demand deposits and time deposits. Average interest bearing
demand deposits and savings deposits declined during 2000 as the Corporation
utilized FHLB advances to supplement funding at rates and maturity structures
more favorable than what was available in the retail market. During 1999,
average demand deposit and savings balances increased modestly, while time
deposit balances decreased modestly.
25
27
On December 31, 2000 time deposits over $100 totaled $96,588. The Bank
continues to maintain strong relationships with the various public entities
centered in the primary markets of the Bank which contributes to the balance of
time deposits over $100. The maturity schedule for time deposits over $100 as of
December 31 is given in the table below:
Maturing in: 2000 1999
----------------------------
3 months or less $ 42,168 $ 39,081
3 to 6 months 16,395 14,609
6 to 12 months 27,065 18,150
Over 12 months 10,960 7,771
----------------------------
$ 96,588 $ 79,611
----------------------------
OTHER SOURCES OF FUNDS:
The repurchase agreement program provides a sweep feature on the
customer's primary business account along with competitive market rates of
interest for their excess funds. The success of this product reflects the strong
emphasis the Bank places on offering competitive products coupled with
personalized service to the small-to mid-size businesses operating in the Bank's
various markets. Federal funds purchased and securities sold under agreements to
repurchase averaged $106 million in 2000 with the majority of the average
balances representing the retail sweep product.
The Corporation also has available to it unsecured lines of credit with
correspondent banks totaling $20 million. The lines of credit are renewable
annually and bear interest at a floating rate based on several indices. As of
December 31, 2000, the Corporation had utilized $1 million in borrowings under
these lines. There was $4 million in outstanding borrowing under these lines as
of December 31, 1999.
The Corporation also has access to federal tax deposits on a daily
basis. After being deposited by customers, the tax deposits are held at the
Corporation up to a self-imposed limit of $6 million until they are drawn upon
by the Federal government. The balance of these funds was $2,163 and $5,739 as
of December 31, 2000 and 1999, respectively. The Corporation occasionally uses
federal funds purchased from other financial institutions as a source of
short-term funding. The Corporation had $29 million in federal funds purchased
as of December 31, 2000 and none as of December 31, 1999.
The Bank also is a member of the Federal Home Loan Bank ("FHLB") system
and utilizes the various advance programs offered by the FHLB. The funds are
drawn from the FHLB for various terms through 2007 and are utilized to provide
long-term funding to offset the interest rate risk inherent with holding
long-term, fixed-rate mortgages. The balances of these advances were $251,733
and $200,276 as of December 31, 2000 and 1999, respectively.
CAPITAL
The shareholders' equity increased to $117,197 at December 31, 2000
from $116,347 a year earlier. The increase was attributable to the increase in
market values for the available-for-sale securities. The increase offset the
treasury share repurchase activities. The impact of the change in unrealized
market value adjustment on securities available-for-sale, net of tax (SFAS No.
115 adjustment of $8,072 in 2000) resulted in a net unrealized gain position of
$281 at December 31, 2000 versus a net unrealized loss position of $7,791 at
December 31, 1999. Dividends exceeded earnings in 2000 due to the restructuring
activities. Earnings retained in 1999 amounted to $10,244.
26
28
On February 27, 1998, the Board of Directors rescinded the
authorization to repurchase any shares of common stock. As of December 31, 1998,
the Corporation had 50,400 shares held in treasury at a cost of $793. On August
10, 1999, the Board of Directors authorized the discretionary buy-back of up to
500,000 shares of common stock. As of December 31, 1999, 254,100 shares had been
repurchased bring the total shares in treasury to 304,500. The number of shares
authorized for repurchase was increased to 600,000 on April 20, 2000. The
600,000 share repurchase was completed on October 11, 2000. On October 12, 2000
the Board of Directors authorized the repurchase of up to 2% of outstanding
shares on an annual basis.
The Corporation has consistently had qualifying capital under the
risk-based capital requirements in excess of those required to meet the
"well-capitalized" standards. For further details on capital ratios, see Note
13.
The Corporation trades under the symbol SECD on the NASDAQ National
Market System. The total market capitalization of the Corporation was
approximately $146 million at December 31, 2000. The table below lists the high
and low trading prices for the common stock by quarter for the last three years.
Quarter FIRST SECOND THIRD FOURTH YEAR
-----------------------------------------------------------------
2000
High $ 22.31 $ 18.13 $ 16.31 $ 16.94 $ 22.31
Low 17.06 12.25 13.75 12.13 12.13
Dividends Declared .16 .16 .16 .16 .64
1999
High $ 24.00 $ 29.50 $ 30.75 $ 27.00 $ 30.75
Low 19.06 21.00 24.00 22.38 19.06
Dividends Declared .14 .14 .14 .14 .56
1998
High $ 34.75 $ 37.25 $ 31.50 $ 26.00 $ 37.25
Low 24.88 27.00 25.75 19.75 19.75
Dividends Declared .11 .12 .12 .13 .48
The Corporation's price for its common stock decreased to a trading
range of $12.13 to $16.94 per share in the fourth quarter of 2000 and closed the
year at $14.50. The Corporation's stock has generally followed the market trend
for traded bank stocks. Bank stock prices in general were subject to downward
pressure with the increase in market rates associated with Federal Open Market
Committee activities. The common stock closed at $22.375 at December 31, 1999.
Book value per common share was $11.65 and $11.12 at December 31, 2000 and 1999,
respectively.
The Corporation has historically paid cash dividends on a quarterly
basis and has periodically paid stock dividends at the discretion of the Board
of Directors. The payment and amount of future dividends on the common stock
will be determined by the Board of Directors. The payment will depend on, among
other things, earnings, financial condition and cash requirements of the
Corporation at the time that such payment is considered, and on the ability of
the Corporation to receive dividends from the Bank, the amount of which is
subject to regulatory limitations. For 2000, 1999 and 1998, the dividend-payout
ratio for the Corporation was 106.3%, 36.7 and 91.5%, respectively. The
abnormally high dividend payout ratios for 2000 and 1998 were attributable to
the impact of restructuring and merger related costs, respectively.
27
29
LIQUIDITY
Management of the Corporation's liquidity position is necessary to
ensure that funds are available to meet the cash flow needs of depositors and
borrowers as well as the operating cash needs of the Corporation. Funds are
available from a number of sources including maturing securities, payments made
on loans, the acquisition of new deposits, the sale of packaged loans, borrowing
from the FHLB and overnight lines of credit of over $41 million through
correspondent banks. The parent company has three major sources of funding
including dividends from the Bank, $20 million in unsecured lines of credit with
correspondent banks which are renewable annually, and access to the capital
markets. The net cash provided by operating activities for 2000, 1999 and 1998
were approximately $16, $20 and $4 million, respectively. As discussed in Note
13, the Bank is subject to regulation and may be limited in its ability to pay
dividends to the parent company. Accordingly, consolidated cash flows may not
represent cash available to common stockholders.
MARKET RISK MANAGEMENT
Market risk is the risk of economic loss from adverse changes in the
fair value of financial instruments due to changes in (a) interest rates, (b)
foreign exchange rates, or (c) other factors that relate to market volatility of
the rate, index, or price underlying the financial instrument. The Corporation's
market risk is composed primarily of interest rate risk. The Corporation's
Asset/Liability Committee (ALCO) is responsible for reviewing the interest rate
sensitivity position of the Corporation and establishing policies to monitor and
limit the exposure to interest rate risk. Since nearly the Corporation's entire
interest rate risk exposure relates to the financial instrument activity of the
Bank, the Bank's Board of Directors review the policies and guidelines
established by ALCO.
The primary objective of asset/liability management is to provide an
optimum and stable net interest margin, after-tax return on assets and return on
equity capital, as well as adequate liquidity and capital. Interest rate risk is
monitored through the use of two complementary measures: dynamic gap analysis
and earnings simulation models. While each of the measurement techniques has
limitations, taken together they represent a reasonably comprehensive tool for
measuring the magnitude of interest rate risk inherent in the Corporation.
The dynamic gap analysis measures the amount of repricing risk
associated with the balance sheet at a specific point in time. Expected cash
flows from fixed rate instruments are defined utilizing contractual maturities
and anticipated cash flows through early repayment of loans, early calls and
paydowns of securities and early withdrawals of deposits. Variable rate
instrument's repricing frequencies are categorized according to their earliest
repricing opportunity. Core deposits with noncontractual maturities are included
in the gap repricing distributions based on historical patterns of pricing
behavior.
The earnings simulation model forecasts earnings for a one-year horizon
frame under a variety of interest rate scenarios. Management evaluates the
impact of the various rate simulations against earnings in a stable interest
rate environment. The most recent model projects net income would decrease by
3.5% if interest rates would immediately fall by 200 basis points and increase
by 2.1% if interest rates would immediately rise by 200 basis points. This
represents a shift from the prior year and substantial improvement in the
Corporation's interest sensitivity position. At December 31, 1999 the model
projected
28
30
net income would increase by 7.5% if interest rates would immediately fall by
200 basis points and would decrease by 9.3% if interest rates would immediately
rise by 200 basis points. Management believes this liability sensitive position
for the one-year time horizon is well within approved levels of 5% variance in
net income. The earnings simulation model includes assumptions about how the
various components of the balance sheet and rate structure are likely to react
through time in different interest rate environments. These assumptions are
derived from historical analysis and management's outlook.
Interest rate sensitivity is managed through the use of security
portfolio management techniques, the use of fixed rate long-term borrowings from
the FHLB, the establishment of rate and term structures for time deposits and
loans, the sale of long-term fixed rate mortgages through the secondary mortgage
market and off-balance sheet swaps, caps and floors.
Additional discussion regarding Second Bancorp's liquidity and capital
resources are set forth in Notes 10, 11, 12 and 13 of Item 8; Second Bancorp's
Financial Statements and Supplementary Data are incorporated herein by
reference.
29
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ASSETS DECEMBER 31
2000 1999
------------------- --------------------
Cash and due from banks $ 35,272 $ 35,238
Trading account 328 0
Securities: Available-for sale (at market value) 382,098 367,587
Loans 1,070,089 1,071,662
Less reserve for loan losses 15,217 11,169
------------------- --------------------
Net loans 1,054,872 1,060,493
Premises and equipment 18,039 18,575
Accrued interest receivable 11,181 9,277
Goodwill and intangible assets 6,038 5,931
Other assets 38,462 40,177
------------------- --------------------
Total assets $ 1,546,290 $ 1,537,278
------------------- --------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand - non-interest bearing $ 110,045 $ 110,811
Demand - interest bearing 87,268 90,570
Savings 246,056 270,544
Time deposits 592,766 625,644
------------------- --------------------
Total deposits 1,036,135 1,097,589
Federal funds purchased and securities sold
under agreements to repurchase 129,895 106,532
Note payable 1,000 4,000
Other borrowed funds 2,163 5,739
Federal Home Loan Bank advances 251,733 200,276
Accrued expenses and other liabilities 8,167 6,795
------------------- --------------------
Total liabilities 1,429,093 1,420,931
Shareholders' equity:
Common Stock, no par value; 30,000,000 shares authorized;
10,787,310 and 10,762,950 shares issued in
2000 and 1999, respectively 36,935 36,966
Treasury stock; 730,200 and 304,500 shares, respectively (13,947) (7,140)
Net unrealized holding gains (losses) on
available-for-sale securities, net of tax 281 (7,791)
Retained earnings 93,928 94,312
------------------- --------------------
Total shareholders' equity 117,197 116,347
------------------- --------------------
Total liabilities and shareholders' equity $ 1,546,290 $ 1,537,278
------------------- --------------------
30
32
FOR THE CALENDAR YEAR
INTEREST INCOME 2000 1999 1998
---------------- ---------------- ----------------
Loans (including fees):
Taxable $ 90,819 $ 80,783 $ 79,229
Exempt from federal income taxes 1,014 681 734
Securities:
Taxable 20,970 18,446 22,945
Exempt from federal income taxes 3,209 3,781 3,347
Federal funds sold and other 286 891 742
---------------- ---------------- ----------------
Total interest income 116,298 104,582 106,997
INTEREST EXPENSE
Deposits 46,236 41,938 43,571
Federal funds purchased and securities
sold under agreements to repurchase 5,540 5,781 6,525
Note payable 25 64 0
Other borrowed funds 172 155 170
Federal Home Loan Bank advances 14,948 7,372 5,622
---------------- ---------------- ----------------
Total interest expense 66,921 55,310 55,888
---------------- ---------------- ----------------
Net interest income 49,377 49,272 51,109
Provision for loan losses 7,129 3,195 10,579
---------------- ---------------- ----------------
Net interest income after provision for loan losses 42,248 46,077 40,530
NON-INTEREST INCOME
Service charges on deposit accounts 4,406 4,309 4,145
Trust fees 3,898 3,534 2,820
Security (losses) gains (2,399) 312 1,007
(Loss) gain on sale of loans (2,001) 2,066 2,150
Trading losses (335) 0 0
Other operating income 4,706 4,571 2,632
---------------- ---------------- ----------------
Total non-interest income 8,275 14,792 12,754
NON-INTEREST EXPENSE
Salaries and employee benefits 20,817 19,054 19,080
Merger costs 0 0 6,657
Net occupancy 4,191 4,134 3,966
Equipment 3,985 3,418 3,073
Professional services 3,476 2,192 2,137
Assessment on deposits and other taxes 1,684 1,689 1,660
Amortization of goodwill and other intangibles 555 685 799
Other operating expenses 9,505 8,158 8,876
---------------- ---------------- ----------------
Total non-interest expense 44,213 39,330 46,248
---------------- ---------------- ----------------
Income before federal income taxes 6,310 21,539 7,036
Income tax expense (benefit):
Current 1,415 4,516 1,864
Deferred (1,239) 845 (461)
---------------- ---------------- ----------------
Total federal income tax expense 176 5,361 1,403
---------------- ---------------- ----------------
Net income $ 6,134 $ 16,178 $ 5,633
---------------- ---------------- ----------------
Earnings per common share:
Basic $ 0.60 $ 1.52 $ 0.53
Diluted $ 0.60 $ 1.51 $ 0.52
Average Common Shares Outstanding:
Basic 10,247,025 10,635,852 10,665,597
Diluted 10,271,548 10,698,717 10,742,622
31
33
UNREALIZED
COMMON TREASURY HOLDING RETAINED COMPREHENSIVE
STOCK STOCK GAIN (LOSS) EARNINGS TOTAL INCOME
----------- ------------ ---------------- ------------- ------------ ---------------------
Balance, January 1, 1998 $35,354 $ (793) $ 2,813 $ 82,944 $ 120,318
Adjustment to conform pooled company's
fiscal year end 19 646 665 $ 934
=====================
Comprehensive income:
Net income 5,633 5,633 $ 5,633
Unrealized gain on securities of
$930, net of reclassification
adjustment for gains included
in net income of $665 265 265 265
---------------------
Comprehensive income $ 5,898
---------------------
Cash dividends declared:
Common stock ($.48 per share) (5,155) (5,155)
Common stock issued -
dividend reinvestment
and stock option plans 1,547 1,547
----------- ------------ ---------------- ------------- ------------
Balance, December 31, 1998 36,901 (793) 3,097 84,068 123,273
Comprehensive income:
Net income 16,178 16,178 $ 16,178
Unrealized loss on securities of
$10,634, net of reclassification
adjustment for gains included in
net income of $254 (10,888) (10,888) (10,888)
---------------------
Comprehensive income $ 5,290
---------------------
Cash dividends declared:
Common stock ($.56 per share) (5,934) (5,934)
Purchase of treasury stock (6,347) (6,347)
Common stock issued -
dividend reinvestment
and stock option plans 65 65
----------- ------------ ---------------- ------------- ------------
Balance, December 31, 1999 36,966 (7,140) (7,791) 94,312 116,347
Comprehensive income:
Net income 6,134 6,134 $ 6 ,134
Unrealized gain on securities of
$5,673, net of reclassification
adjustment for losses included
in net income of $2,399 8,072 8,072 8,072
---------------------
Comprehensive income $ 14,206
---------------------
Cash dividends declared:
Common stock ($.64 per share) (6,518) (6,518)
Purchase of treasury stock (6,807) (6,807)
Net common stock issued -
dividend reinvestment
and stock option plans (31) (31)
----------- ------------ ---------------- ------------- ------------
Balance, December 31, 2000 $36,935 $ (13,947) $ 281 $ 93,928 $ 117,197
----------- ------------ ---------------- ------------- ------------
32
34
FOR THE CALENDAR YEAR
OPERATING ACTIVITIES 2000 1999 1998
----------------- --------------- -----------------
Net Income $ 6,134 $ 16,178 $ 5,633
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 7,129 3,195 10,579
Provision for depreciation 3,444 2,985 2,614
Provision for amortization of intangibles 556 685 799
Amortization (accretion) of investment
discount and premium 185 (293) (1,811)
Provision for loss on servicing rights 0 (451) 380
Deferred income taxes (1,239) 845 (461)
Securities losses (gains) 2,399 (312) (1,007)
Other losses (gains), net 2,046 (2,112) (2,104)
Net increase in trading account securities (328) 0 0
(Increase) decrease in interest receivable (1,904) (568) 73
Increase (decrease) in interest payable 476 609 (220)
Originations of loans held-for-sale (83,888) (119,047) (118,838)
Proceeds from sale of loans held-for-sale 81,890 121,159 120,948
Net change in other assets & other liabilities (1,159) (3,037) (12,653)
----------------- --------------- -----------------
Net cash provided by operating activities 15,741 19,836 3,932
INVESTING ACTIVITIES
Proceeds from maturities of securities - held-to-maturity 0 0 87,945
Proceeds from maturities of securities - available-for-sale 31,765 163,240 166,019
Proceeds from sales of securities - available-for-sale 138,831 52,415 86,245
Donation of securities to establish charitable foundation 0 0 202
Purchases of securities - held-to-maturity 0 0 (12,384)
Purchases of securities - available-for-sale (175,273) (244,921) (201,734)
Net increase in loans (1,508) (103,574) (94,526)
Net increase in premises and equipment (2,956) (4,441) (4,817)
----------------- ---------------- ----------------
Net cash (used by) provided by investing activities (9,141) (137,281) 26,950
FINANCING ACTIVITIES
Net (decrease) increase in demand deposits, interest bearing (28,556) (19,507) 21,745
demand and savings deposits
Net (decrease) increase in time deposits (32,898) 14,506 (36,850)
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase 23,363 (15,950) 405
(Decrease) increase in note payable (3,000) 4,000 0
Net (decrease) increase in borrowings (3,576) 4,878 (2,696)
Net advances (repayments) from Federal Home Loan Bank 51,457 127,494 (3,324)
Cash dividends (6,518) (5,934) (5,155)
Purchase of treasury stock (6,807) (6,347) 0
Net issuance of common stock (31) 65 1,547
----------------- ---------------- ----------------
Net cash (used by) provided by financing activities (6,566) 103,205 (24,328)
----------------- ---------------- ----------------
Increase (decrease) in cash and cash equivalents 34 (14,240) 6,554
Cash and cash equivalents at beginning of year 35,238 49,478 42,924
----------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 35,272 $ 35,238 $ 49,478
----------------- ---------------- ----------------
Supplementary Cash Flow Information:
Cash paid for 1) Federal income taxes - $2,810, $3,924, and $2,885 for
the 12 months ended December 31, 2000, 1999 and 1998, respectively and 2)
Interest - $66,867, $55,310, and $56,108 for the 12 months ended December 31,
2000, 1999, and 1998, respectively.
33
35
1. STATEMENT OF ACCOUNTING POLICIES
Nature of Operations: Second Bancorp Incorporated (the Corporation) is
a one bank financial holding company with its sole subsidiary being The Second
National Bank of Warren (the Bank), headquartered in Warren, Ohio, with 34
banking centers operating in northeast Ohio. In addition to general commercial
banking, the Bank engages in trust and mortgage banking activities and other
financially related businesses.
The accounting policies followed by the Corporation conform to
generally accepted accounting principles and to general practices within the
banking industry. The following is a description of the more significant
accounting policies:
a. Principles of Consolidation: Significant inter-company balances and
transactions between the Corporation and the Bank have been eliminated. The
consolidated financial statements have been prepared to give retroactive
effect to the August 20, 1998 acquisition of Enfin, Inc. (Enfin) and to the
November 19, 1998 acquisition of Trumbull Financial Corporation (Trumbull).
In accordance with the rules of the Securities and Exchange Commission,
Trumbull's financial statements and selected financial data for the years
ended September 30, 1995 through 1997 have been combined with the
Corporation's financial statements and selected financial data for the years
ended December 31, 1995 through 1997, respectively. Certain prior year
amounts have been reclassified to conform with the current year
presentation.
b. Use of Estimates: The preparation of the financial statements in conformity
with generally accepted accounting principles requires Management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
c. Business Combinations: Business combinations which have been accounted for
under the pooling-of-interests method of accounting which requires the
assets, liabilities and shareholders' equity of the merged entity to be
retroactively combined with the Corporation's respective accounts at
recorded value. Prior period financial statements have been restated to give
effect to business combinations accounted for under this method.
d. Cash Equivalents: Cash equivalents include amounts due from banks and
federal funds sold. Generally, federal funds are purchased and sold for
periods of less than thirty days.
e. Securities: Debt and equity securities are classified as held-to-maturity,
available-for-sale, or trading. Securities classified as held-to-maturity
are measured at amortized or historical cost, securities available-for-sale
and trading at fair value. Adjustments to fair value of the securities
available-for-sale, in the form of unrealized holding gains and losses, are
excluded from earnings and reported net of tax as a separate component of
shareholders' equity. Adjustments to fair value of securities classified as
trading are included in earnings. Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates
such designation as of each balance sheet date. Debt securities are
classified as held-to-maturity when the Corporation has the positive intent
and ability to hold the securities to maturity. Classifying securities as
available-for-sale allows the Corporation to sell securities to fund
liquidity and manage the Corporation's interest rate risk. The Corporation
does not maintain a trading account. Securities previously classified as
held-to-maturity by Trumbull were reclassified to available-for-sale at the
consummation of the transaction.
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The amortized cost of the debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity or, in the case of mortgage-backed securities, over
the estimated life of the security. Such amortization is included in
interest income from investments. Interest and dividends are included in
interest income from investments. Realized gains and losses, and declines in
value judged to be other than temporary are included in net securities gains
(losses). The cost of securities sold is based on the specific
identification method.
f. Revenue Recognition: Interest on loans is accrued and credited to operations
based upon the principal amount outstanding. Premiums on acquired loans have
been deducted from the related interest income and are amortized over the
remaining useful life of the loans acquired. Discounts and premiums on
acquired deposits have been deducted or added respectively from the related
interest expense and are being accreted or amortized over the remaining
useful life of the deposits. The accrual of interest income generally is
discontinued when a loan becomes, in Management's opinion, doubtful of being
collectible. When interest accruals are discontinued, interest credited to
income for the current years is reversed, and interest accrued in prior
years is charged to the reserve for loan losses.
The Corporation accounts for loan origination and commitment fees and
certain direct loan origination costs by deferring the net fees, or net
costs, and amortizing them as an adjustment of the related loan's yield. The
Corporation is amortizing these amounts over the contractual life of the
related loans. Net unamortized deferred costs, primarily representing costs
of acquiring indirect automobile loans, were $4,636 and $3,558 at December
31, 2000 and 1999, respectively.
g. Loans Available-for-sale: From time to time, the Corporation will sell loans
it originated, mostly mortgages. The loans are reclassified as
available-for-sale and are recorded at the aggregate cost or market value by
loan.
h. Reserve for Loan Losses: The reserve for loan losses is maintained at a
level believed adequate by Management to absorb potential losses in the loan
portfolio. Management's determination of the adequacy of the reserve is
based upon an evaluation of the collectibility of the loans. These
evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, current economic conditions that may
affect the borrower's ability to pay, overall quality, and a review of
specific problem loans. Certain loans are accounted for under Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors
for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures."
These standards address the accounting for certain loans when it is probable
that amounts due pursuant to the contractual terms of the loan will not be
collected. This evaluation is inherently subjective and requires Management
to make estimates regarding the amounts and timing of future cash flows
expected to be received on impaired loans, that could be susceptible to
change. To determine the amount of impaired loans, the Corporation analyzes
the expected cash flows of non-accrual loans. To the extent that the net
present value of expected cash flows is less than the carrying amount of an
individual loan, the loan balance is included as impaired loans, and an
allowance is maintained.
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i. Premises and Equipment: Premises and equipment are stated at cost, less
accumulated depreciation and amortization. The provision for depreciation
and amortization for premises and equipment, including costs related to
developing or obtaining software for internal use, is computed generally by
the straight-line method over their useful lives. Leasehold improvements are
amortized over the shorter of the terms of the respective leases or the
estimated useful lives.
j. Intangible Assets: Intangible assets resulting from the excess of the
purchase price over net identifiable tangible assets acquired through
acquisitions are specifically identified when determinable. The excess
goodwill is amortized based on the estimated useful life of the long-term
assets acquired and on an accelerated basis. The core deposit intangible is
amortized both on an accelerated basis and on a straight-line basis over the
estimated useful life. Original estimated useful lives for the core deposit
intangible and goodwill range from 10 to 14 years and 8 to 22 years,
respectively. Accumulated amortization as of December 31, 2000 and 1999 were
$9,957 and $9,401, respectively.
k. Mortgage Servicing Rights: The Corporation recognizes as separate assets the
value of mortgage servicing rights, whether those rights are acquired
through loan origination activities or through purchase activities.
Management stratifies servicing rights based on term or method of
acquisition. Capitalized mortgage servicing rights are amortized on an
accelerated basis over the estimated life of the loans sold. Management
evaluates the recoverability of the mortgage servicing rights in relation to
the impact of actual and anticipated loan portfolio prepayments,
foreclosures, and delinquency experience.
l. Interest Rate Risk Management: As part of managing the Corporation's
interest rate risk, a variety of financial instruments may, from time to
time, be used to hedge market values and to alter the cash flow
characteristics of certain on-balance sheet instruments. The derivative
financial instruments used primarily consist of interest rate caps and
swaps. The derivative instruments used to manage interest rate risk are
linked with a specific asset or liability or a group of related assets or
liabilities at the inception of the derivative contract and have a high
degree of correlation with the associated balance sheet item during the
hedge period. Net interest income or expense on derivative contracts used
for interest rate risk management is accrued. Deferred amounts are amortized
into interest income or expense over either the remaining original life of
the derivative instrument or the expected life of the associated asset or
liability. Unrealized gains or losses are not recognized on the balance
sheet.
m. Federal Income Taxes: Deferred federal income taxes are provided for
differences between tax and financial statement bases of assets and
liabilities at year-end. Deferred taxes are recognized using the liability
method, whereby tax rates are applied to cumulative temporary differences
based on when and how they are expected to affect the tax return. Deferred
tax assets and liabilities are adjusted for tax rate changes.
n. Treasury Stock: Acquisitions of treasury stock are recorded on the cost
method with the full amount of the cash paid deducted from shareholders'
equity.
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2. RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative Instruments and Hedging Activities: SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended,
requires all derivative instruments to be carried at fair value on the balance
sheet. This requirement is in contrast to previous accounting guidance, which
does not require unrealized gains and losses on derivatives used for hedging
purposes to be recorded in the financial statements. The new statement does
allow hedge accounting treatment for derivatives used to hedge various risks and
sets forth specific criteria to be used to determine when hedge accounting can
be applied. Hedge accounting treatment provides for changes in fair value or
cash flows of both the derivative and the hedged item to be recognized in
earnings in the same period. SFAS No. 133 does not change the accounting for
those derivative instruments not designated in a hedge accounting relationship,
considered trading derivatives, for which fair value changes are recorded
through earnings as they occur.
Derivative instruments used to hedge the exposure to changes in the
fair value of an asset, liability or firm commitment attributable to a
particular risk, such as interest rate risk, are considered fair value hedges
under SFAS No. 133, while derivative instruments used to hedge the exposure to
variability in expected future cash flows, or other types of forecasted
transactions, are considered cash flow hedges. Fair value hedges are accounted
for by recording the fair value related to the risk being hedged of both the
derivative instrument and the hedged asset or liability on the balance sheet
with a corresponding offset recorded in the income statement. Cash flow hedges
are accounted for by recording only the value of the derivative instrument on
the balance sheet as either an asset or liability with a corresponding offset
recorded in other comprehensive income within stockholders' equity, net of tax.
Amounts are reclassified from other comprehensive income to the income statement
in the period the hedged cash flow occurs. Under both scenarios, derivative
gains and losses not considered effective in hedging the change in fair value or
expected cash flows of the hedged item are recognized immediately in the income
statement.
The Corporation uses derivative instruments to protect against the risk
of adverse price or interest rate movements on the value of certain assets and
liabilities or on future cash flows. The fair value of these derivative
instruments is currently not on the balance sheet. The Corporation plans to
adopt the provisions of this statement, as amended, for its quarterly and annual
reporting beginning January 1, 2001, the statement's effective date. The impact
of adopting the provisions of this statement on the Corporation's financial
position, results of operations and cash flow subsequent to the effective date
is not expected to be material.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities: SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, was issued in
September 2000 and replaces SFAS No. 125. The guidance in SFAS No. 140, while
not changing most of the guidance originally issued in SFAS No. 125, revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain additional disclosures related to
transferred assets.
Certain provisions of the statement related to the recognition,
reclassification and disclosure of collateral, as well as the disclosure of
securitization transactions, became effective for the Corporation for 2000
year-end reporting. Other provisions related to the transfer and servicing of
financial assets and extinguishments of liabilities are effective for
transactions occurring after March 31, 2001.
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Based on current circumstances, management believes the application of
the new rules will not have a material impact on the Corporation's results of
operations, financial position or liquidity.
3. MERGERS AND ACQUISITIONS
On August 20, 1998, Second Bancorp acquired Enfin, Inc. (Enfin), a $44
million asset bank holding company headquartered in Solon, Ohio, in a
transaction accounted for as a pooling of interests. Second Bancorp issued .5
million shares of common stock to the shareholders of Enfin based upon an
exchange ratio of .95 shares of Second Bancorp common stock for each outstanding
share of Enfin common stock. The historical consolidated financial statements
have been restated to reflect this transaction.
On November 19, 1998, Second Bancorp acquired Trumbull Financial
Corporation (Trumbull), a $462 million asset unitary thrift holding company
headquartered in Warren, Ohio, in a transaction accounted for as a pooling of
interests. Second Bancorp issued 3.3 million shares of common stock to the
shareholders of Trumbull based upon an exchange ratio of 3.78 shares of Second
Bancorp common stock for each outstanding share of Trumbull common stock. The
historical consolidated financial statements have been restated to reflect this
transaction.
Prior to the merger, Trumbull used a fiscal year end of September 30.
The 1998 financial statements combine each company's year ended December 31. The
restated financial statements for the years ended December 31, 1997 combine
Second Bancorp's and Enfin's financial statements for the years ended December
31, 1997 with Trumbull's financial statements for the years ended September 30,
1997. Due to the different fiscal year ends, Trumbull's results for the three
months ended December 31, 1997 are reflected as an adjustment in the
accompanying statement of shareholders' equity. Net income for Trumbull for the
period totaled $915, with dividends declared of $269 and a net change in
unrealized gains on securities available-for-sale of $19.
The net interest income, net income and diluted net income per common
share for the period October 1, 1997 through December 31, 1997 that were
excluded from the results of operations were $3,177, $915, and $.09,
respectively. Trumbull's net interest income, net income and diluted income per
share for the period January 1, 1998 through September 30, 1998 was $10,204,
$2,861, and $.27, respectively.
Merger expenses incurred in 1998 as a result of the Enfin and Trumbull
acquisitions totaled $6,657 and consisted of: personnel-related costs of 2,931;
professional fees of $1,917; system conversion expenses of $810; and
miscellaneous expenses of $999.
4. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The average amount of those reserve balances for the year ended
December 31, 2000 was approximately $1,964, which represents compensating
balances for services provided by the Federal Reserve Bank during 2000.
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5. SECURITIES
The following is a summary of securities:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
December 31, 2000 COST GAINS LOSSES VALUE
------------------ ----------------- ---------------- ------------------
Available for Sale:
U. S. Treasury securities and obligations of other
U. S. government agencies and corporations $ 51,123 $ 657 $ (38) $ 51,742
Obligations of states and political subdivisions 65,780 1,236 (180) 66,836
Corporate securities 72,756 733 (3,071) 70,418
Mortgage-backed securities 174,206 1,707 (619) 175,294
------------------ ---------------- ----------------- ------------------
Total debt securities 363,865 4,333 (3,908) 364,290
Equity securities 17,800 183 (175) 17,808
------------------ ---------------- ----------------- ------------------
Total securities $ 381,665 $ 4,516 $ (4,083) $ 382,098
================== ================ ================= ==================
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
December 31, 1999 COST GAINS LOSSES VALUE
------------------ ---------------- ----------------- ------------------
Available for Sale:
U. S. Treasury securities and obligations of other
U. S. government agencies and corporations $ 84,021 $ 1 $ (2,691) $ 81,331
Obligations of states and political subdivisions 78,691 392 (1,928) 77,155
Corporate securities 23,135 0 (1,191) 21,944
Mortgage-backed securities 180,312 99 (6,661) 173,750
------------------ ---------------- ----------------- ------------------
Total debt securities 366,159 492 (12,471) 354,180
Equity securities 13,414 144 (151) 13,407
------------------ ---------------- ----------------- ------------------
Total securities $ 379,573 $ 636 $ (12,622) $ 367,587
================== ================ ================= ==================
The amortized cost and estimated market value of securities at December 31, 2000
by contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------------- ------------------
Under 1 year $ 12,335 $ 12,188
1 to 5 years 61,359 62,144
5 to 10 years 61,605 63,135
Over 10 years 54,360 51,529
----------------- ------------------
189,659 188,996
Mortgage-backed securities 174,206 175,294
Equity securities 17,800 17,808
----------------- ------------------
$ 381,665 $ 382,098
----------------- ------------------
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Information relating to sales of securities for the three years ended
December 31, 2000 are as follows:
2000 1999 1998
--------------- ----------------- ------------------
Proceeds from sales of securities $ 131,467 $ 52,415 $ 96,971
--------------- ----------------- ------------------
Gross realized gains $ 961 $ 351 $ 1,024
Gross realized losses 3,360 39 17
Income tax associated with net (losses) gains (816) 109 342
--------------- ----------------- ------------------
After tax (losses) gains $ (1,583) $ 203 $ 665
--------------- ----------------- ------------------
Impact on earnings per share $ (0.15) $ 0.02 $ 0.06
--------------- ----------------- ------------------
At December 31, 2000 and 1999, securities with a carrying value of
$211,840 and $254,941, respectively, were pledged to secure repurchase
agreements, deposits of public funds and for other purposes.
6. LOANS
Loans consist of the following:
DECEMBER 31
2000 1999
-------------------- --------------------
Commercial $ 421,229 $ 413,097
Consumer 302,881 216,173
Real Estate 300,526 402,468
Real Estate - Construction 45,453 39,924
-------------------- --------------------
$ 1,070,089 $ 1,071,662
-------------------- --------------------
At December 31, 2000 and 1999, the Corporation serviced mortgage loans
for others totaling $472,120 and $343,756, respectively. Following is an
analysis of the activity for capitalized mortgage loan servicing rights acquired
during the years ending December 31:
2000 1999
-------------------- --------------------
Balance at January 1 $ 3,490 $ 2,683
Additions 1,340 1,302
Amortizations (765) (946)
Change in valuation allowance 0 451
-------------------- --------------------
Balance at December 31 $ 4,065 $ 3,490
-------------------- --------------------
Following is an analysis of the aggregate changes in the valuation
allowances for mortgage servicing rights for the years ended December 31:
2000 1999
-------------------- --------------------
Balance at January 1 $ 0 $ 451
Additions 0 0
Reductions 0 (451)
-------------------- --------------------
Balance at December 31 $ 0 $ 0
-------------------- --------------------
The Corporation also services Small Business Administration (SBA) loans
for others totaling $13,448 and $11,484 as of December 31, 2000 and 1999,
respectively. Amounts capitalized as originated servicing rights were $191 and
$143 in 2000 and 1999, respectively. Capitalized servicing rights amortized were
$103 and $83 in 2000 and 1999, respectively.
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The Bank has granted loans to the officers and directors of both the
Corporation and the Bank and their associates. Related-party loans are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons. The
aggregate dollar amounts of these loans were $13,454 and $16,407 at December 31,
2000 and 1999, respectively. New loans and advances totaled $4,257 and payments
were $4,820 in 2000. Loans to officers and directors who left the Corporation in
2000 totaled $2,671, while loans to officers and directors who joined the
Corporation in 2000 totaled $282.
7. ASSET QUALITY
Reserve for loan losses:
Changes in the reserve for loan losses for each of the last three years
ended December 31 were as follows:
2000 1999 1998
---------------- ---------------- ----------------
Balance at beginning of year $ 11,169 $ 10,739 $ 8,837
Charge-offs (4,059) (4,477) (10,609)
Recoveries 978 1,712 1,932
---------------- ---------------- ----------------
Net charge-offs (3,081) (2,765) (8,677)
Provision for loan losses 7,129 3,195 10,579
---------------- ---------------- ----------------
Balance at end of year $ 15,217 $ 11,169 $ 10,739
---------------- ---------------- ----------------
Reserve for loan losses as a percent of total loans 1.42% 1.04% 1.11%
Non-accural, past-due and restructured loans (non-performing loans):
Non-accrual loans are loans that are no longer accruing interest at the
discretion of Management. This occurs when Management determines that the
borrower can no longer service the debt, but the loan is adequately secured with
collateral or the borrower is able to repay the principal of the loan in the
future. Past-due loans are loans with principal payments more than 90 days past
due. Both interest and principal are expected to be repaid. Restructured loans
include loans whose original terms were redesigned to allow the customer to
remain current and repay the loan. Also listed is other real estate owned which
represents real estate acquired through the default of loans. The Bank's
practice is to carry other real estate owned at the lower of cost or fair market
value, less estimated costs to sell.
DECEMBER 31
2000 1999
---------------- ----------------
Non-accural loans $ 4,699 $ 2,743
Past-due loans 3,238 3,132
Restructured loans 43 52
---------------- ----------------
Total $ 7,980 $ 5,927
---------------- ----------------
Percent of total loans at year end 0.75% 0.55%
Other real estate owned (net of reserve) $ 902 $ 281
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For the year ended December 31, 2000, interest income that would have
been earned under the original terms of the loans classified in non-accrual and
restructured loans in the above schedule amounted to $382. No interest income
was realized on these loans for 2000. Loans that were considered to be impaired
under SFAS No. 114 totaled $1,397 and $542 as of December 2000 and 1999,
respectively, all of which were included in non-performing assets as of those
dates. The related allowance allocated to impaired loans for 2000 and 1999 was
$562 and $280, respectively.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires that the Corporation disclose estimated fair values for its financial
instruments. The market value of securities, as presented in Note 5, is based
primarily upon quoted market prices. For substantially all other financial
instruments, the fair values are Management's estimates of the values at which
the instruments could be exchanged in a transaction between willing parties. In
accordance with SFAS No. 107, fair values are based on estimates using present
value and other valuation techniques in instances where quoted prices are not
available. These techniques are significantly affected by the assumptions used,
including discount rates and estimates of future cash flows. As such, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, further, may not be realizable in an immediate
settlement of the instruments. SFAS No. 107 also excludes certain items from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent, and should not be construed to represent, the underlying value
of the Corporation.
The following table presents the estimates of fair value of financial
instruments:
DECEMBER 31, 2000 DECEMBER 31, 1999
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------------- ----------------- ----------------- ------------------
Assets:
Cash and cash equivalents $ 35,272 $ 35,272 $ 35,238 $ 35,238
Trading account 328 328 0 0
Securities 382,098 382,098 367,587 367,587
Loans 1,070,089 1,064,820 1,071,662 1,051,975
Allowance for loan losses (15,217) (11,169)
Cost of mortgage servicing rights 4,065 5,385 3,490 4,152
Liabilities:
Demand deposits - non-interest bearing 110,045 110,045 110,811 110,811
Demand deposits - interest bearing 87,268 87,268 90,570 90,570
Savings deposits 246,056 246,056 270,544 270,544
Time deposits 592,766 595,299 625,664 623,534
Federal funds purchased and securities
sold under agreements to repurchase 129,895 129,895 106,532 106,532
Note payable 1,000 1,000 4,000 4,000
Other borrowed 2,163 2,163 5,739 5,739
FHLB advances 251,733 255,987 200,276 199,282
Off-balance sheet:
Interest rate caps, floors and swaps 29 262
Fair value estimates, methods, and assumptions are set forth below for
the Corporation's financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair value.
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Securities: Fair values for securities are based on quoted market
prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments.
Loans: Variable-rate loans that reprice frequently are assumed to have
a short-duration period, yielding a fair value that approximates the carrying
value. The fair values for other loans are estimated using a discounted cash
flow calculation.
Cost of mortgage servicing rights: The fair value for the cost of
mortgage servicing rights as of December 31, 2000 were determined via a
independent quote from a third party. Included in the valuation of fair value
were assumptions regarding prepayment speeds, discount rates, servicing costs,
delinquency, ancillary income and foreclosure costs arrived at from third party
sources and internal historical records.
Deposit liabilities: The fair values disclosed for demand deposits,
insured money market and interest checking accounts, and savings accounts are,
by definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). The carrying amounts for time deposits are
estimated using a discounted cash flow calculation. Variable-rate time deposits
that reprice frequently are assumed to have a short-duration period, yielding a
fair value that approximates the carrying value.
Federal funds purchased, securities sold under agreements to
repurchase, and other short-term borrowings: The carrying amounts of federal
funds purchased, securities sold under agreements to repurchase, and other
short-term borrowings approximate their fair values.
9. PREMISES AND EQUIPMENT
The following is a summary of bank premises and equipment accounts as
of December 31:
2000 1999
---------------- ----------------
Land and buildings $ 6,438 $ 6,456
Leasehold improvements 9,683 8,932
Furniture and equipment 24,974 23,103
---------------- ----------------
41,095 38,491
Less:
Accumulated depreciation and amortization 23,056 19,916
---------------- ----------------
$ 18,039 $ 18,575
---------------- ----------------
10. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE
The Corporation has the availability to borrow $41 million from
correspondent banks as overnight federal funds purchased. There were $29 million
in federal funds purchased at December 31, 2000, with none purchased at December
31, 1999 and 1998. The Corporation has repurchase agreements with corporate
customers and local municipalities. These borrowings have an overnight maturity
and are collateralized with U. S. Treasury and government agency securities,
including agency-issued mortgage-backed securities with a market value of
$100,609 and $84,882 as of December 31, 2000 and 1999, respectively. The
securities are held in the Corporation's safekeeping account at the Federal
Reserve Bank. Although there were no repurchase agreements with approved brokers
outstanding at December 31, 2000, the Corporation previously maintained such
balances,
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which were collateralized by U. S. Treasury and government agency securities
held by the broker. The following table summarizes certain information relative
to these borrowings:
2000 1999 1998
---------------- ---------------- ----------------
Outstanding at December 31 $ 100,609 $ 106,532 $ 122,482
Weighted-average interest rate at December 31 4.49% 4.46% 4.23%
Maximum amount outstanding as of any month end $ 120,026 $ 133,951 $ 166,043
Average amount outstanding $ 105,850 $ 136,382 $ 135,259
Approximate weighted-average interest rate during the year 4.50% 4.24% 4.61%
11. NOTES PAYABLE
As of December 31, 2000, the Corporation had $1 million in notes payable to a
correspondent bank. The Corporation has an additional $19 million in unsecured
lines of credit with two correspondent banks. The lines are renewable annually
and bear interest at a floating rate based on several indices including LIBOR,
Federal funds or prime rate.
12. OTHER BORROWED FUNDS AND FEDERAL HOME LOAN BANK ADVANCES
The Corporation has a Treasury Note Option Agreement with the Federal Government
which allows the Corporation to hold funds deposited by customers for treasury
and tax payments to the Government up to a self-imposed limit of $6,000,000.
Federal Home Loan Bank (FHLB) advances are collateralized by all shares of FHLB
stock and a portion of the Corporation's qualified mortgage loan portfolio, and
are used to fund mortgage loan originations of the Corporation and as a regular
funding source. The detail of these borrowings on December 31, 2000 and 1999 is
as follows:
CURRENT INTEREST BALANCE
DESCRIPTION RATES 2000 1999
------------------------ ---------------- ----------------
Treasury note option account 6.29% $ 2,163 $ 5,739
Fixed rate FHLB advances with monthly interest payments
Advances due in 2001 4.85% to 6.68% $ 64,000 $ 78,000
Fixed rate FHLB advances with monthly principal and
interest payments
Advance due 2002 to 2007 4.90% to 6.95% $ 187,733 $ 122,276
13. SHAREHOLDERS' EQUITY
On February 27, 1998, the Board of Directors rescinded the
authorization to repurchase any shares of common stock. As of December 31, 1998,
the Corporation had 50,400 shares held in treasury. On August 10, 1999, the
Board of Directors authorized the discretionary buy-back of up to 500,000 shares
of common stock. As of December 31, 1999, 254,100 shares had been repurchased
bringing the total shares in treasury to 304,500. During 2000, the Board of
Directors authorized an increase to 600,000 the number of authorized shares to
be repurchased. The repurchase of the 600,000 shares authorized was completed on
October 11, 2000. The Board of Directors subsequently authorized the repurchase
of up to 2% of shares outstanding annually. As of December 31, 2000, 79,800
shares had been repurchased bringing the total shares in treasury to 730,200.
Dividends are paid by the Corporation from its assets, which are mainly
provided by dividends from the Bank. However, certain restrictions exist
regarding the ability of the Bank to transfer funds to the Corporation in the
form of cash dividends, loans, or advances. The approval of
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the Comptroller of the Currency is required to pay dividends in excess of the
Bank's earnings retained in the current year plus retained net profits from the
preceding two years. As of December 31, 2000, the Bank had retained earnings of
$93,928, of which $12,430 was available for distribution to the Corporation as
dividends without prior regulatory approval.
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and the Bank must meet specific
capital guidelines that involve quantitative measures of the bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Corporation's and the Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation and the Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined by
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2000, that the Corporation and the Bank meet all capital adequacy requirements
to which it is subject.
As of December 31, 2000, the most recent notification from the Office
of the Comptroller of the Currency categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized the Bank must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that Management believes have
changed the Bank's category.
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47
The consolidated Corporation's and the subsidiary Bank's actual capital
amounts and ratios are also presented in the table.
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
AMOUNT RATIO AMOUNT RATIO
-------- ----- -------------------------------------------
As of December 31, 2000;
Total capital (to risk-weighted assets):
Second Bancorp $ 129,366 11.5% Greater than or equal to $89,926 Greater than or equal to 8.0%
Second National Bank 127,001 11.3 Greater than or equal to 89,725 Greater than or equal to 8.0
Tier I capital (to risk-weighted assets):
Second Bancorp 115,315 10.3 Greater than or equal to 41,479 Greater than or equal to 4.0
Second National Bank 112,982 10.1 Greater than or equal to 44,862 Greater than or equal to 4.0
Tier I leverage:
Second Bancorp 115,315 7.5 Greater than or equal to 61,788 Greater than or equal to 4.0
Second National Bank 112,982 7.2 Greater than or equal to 63,163 Greater than or equal to 4.0
As of December 31, 1999:
Total capital (to risk-weighted assets):
Second Bancorp 133,150 12.8 Greater than or equal to 82,958 Greater than or equal to 8.0
Second National Bank 130,460 12.6 Greater than or equal to 82,819 Greater than or equal to 8.0
Tier I capital (to risk-weighted assets):
Second Bancorp 121,981 11.8 Greater than or equal to 41,479 Greater than or equal to 4.0
Second National Bank 113,211 10.9 Greater than or equal to 41,409 Greater than or equal to 4.0
Tier I leverage:
Second Bancorp 121,981 8.2 Greater than or equal to 59,872 Greater than or equal to 4.0
Second National Bank 113,211 7.6 Greater than or equal to 59,760 Greater than or equal to 4.0
TO BE WELL-
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
AMOUNT RATIO
---------------------------------------------------------
As of December 31, 2000;
Total capital (to risk-weighted assets):
Second Bancorp N/A
Second National Bank Greater than or equal to $112,156 Greater than or equal to 10.0%
Tier I capital (to risk-weighted assets):
Second Bancorp N/A
Second National Bank Greater than or equal to 67.294 Greater than or equal to 6.0
Tier I leverage:
Second Bancorp N/A
Second National Bank Greater than or equal to 78,954 Greater than or equal to 5.0
As of December 31, 1999:
Total capital (to risk-weighted assets):
Second Bancorp N/A
Second National Bank Greater than or equal to 103,523 Greater than or equal to 10.0
Tier I capital (to risk-weighted assets):
Second Bancorp N/A
Second National Bank Greater than or equal to 62,114 Greater than or equal to 6.0
Tier I leverage:
Second Bancorp N/A
Second National Bank Greater than or equal to 74,700 Greater than or equal to 5.0
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
2000 1999 1998
------------------ ------------------ ------------------
Numerator for basic and diluted earnings per share:
Net income $ 6,134 $ 16,178 $ 5,633
================== ================== ==================
Denominator:
Denominator for basic earnings per share
- weighted-average shares 10,247,025 10,635,852 10,665,597
Effect of dilutive securities:
Employee stock options 24,523 62,865 77,025
------------------ ------------------ ------------------
Demoninator for diluted earnings per share
- adjusted weighted-average shares 10,271,548 10,698,717 10,742,622
================== ================== ==================
Basic earnings per share $ 0.60 $ 1.52 $ 0.53
================== ================== ==================
Diluted earnings per share $ 0.60 $ 1.51 $ 0.52
================== ================== ==================
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15. FEDERAL INCOME TAXES
The Corporation's federal income tax provision in the accompanying
statements of income differs from the statutory rate as follows:
2000 1999 1998
------------------- ------------------ -------------------
Statutory rate 34% 35% 34%
Income before federal income taxes $ 6,311 $ 21,539 $ 7,036
Tax at statutory rate $ 2,146 $ 7,539 $ 2,392
Tax effect of non-taxable interest (1,188) (1,558) (1,388)
Merger costs 0 0 603
Other items, net (782) (620) (204)
------------------- ------------------ -------------------
$ 176 $ 5,361 $ 1,403
------------------- ------------------ -------------------
Significant components of the Corporation's deferred tax liabilities
and assets as of December 31 are as follows:
2000 1999
------------------ -------------------
Deferred tax liabilities:
SFAS No. 115 adjustment $ 151 $ n/a
FHLB dividends 1,912 1,540
Other 1,455 1,420
------------------ -------------------
Total deferred tax liabilities 3,518 2,960
Deferred tax assets:
SFAS No. 115 adjustment n/a 4,195
Provision for loan losses 5,105 3,578
Goodwill and intangible amortization 722 745
Non-accrual interest 132 82
Other 1,377 1,285
------------------ -------------------
Total deferred tax assets 7,336 9,885
------------------ -------------------
Net deferred tax assets $ 3,818 $ 6,925
------------------ -------------------
16. EMPLOYEE BENEFIT PLANS
The Corporation has a non-contributory, defined-benefit pension plan
covering substantially all of its employees. The benefits are based on a
percentage of the employee's average annual earnings multiplied by completed
years of continuous service. The Corporation's funding policy is to contribute
annually an amount between the minimum required and the maximum amount that can
be deducted for federal income tax purposes. Contributions are intended to
provide not only for benefits attributed to service to date but also for those
expected to be earned in the future. The plan assets at December 31, 2000 are
invested primarily in common stock, preferred stock, and corporate bonds. The
Bank also has a supplemental retirement deferred benefit plan for certain
employees, which provides benefits in excess of the defined benefit plan.
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The following table sets forth the plan's pension benefits as of
December 31:
2000 1999
----------------------- ------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 7,473 $ 7,672
Service cost 617 798
Interest cost 594 541
Actuarial loss (gain) 438 (1,197)
Disbursements (320) (341)
----------------------- ------------------
Benefit obligation at end of year $ 8,802 $ 7,473
----------------------- ------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 10,361 $ 8,707
Actual return on plan assets (350) 1,931
Employer contribution 1,265 64
Disbursements (320) (341)
----------------------- ------------------
Fair value of plan assets at end of year $ 10,956 $ 10,361
----------------------- ------------------
Funded status $ 2,154 $ 2,888
Unrecognized net actuarial gain (2,739) (4,541)
Unrecognized prior service cost 6 12
Unrecognized initial net obligation (49) (70)
----------------------- ------------------
Net amount recognized $ (628) $ (1,711)
----------------------- ------------------
Accrued benefit liability recognized $ (628) $ (1,711)
----------------------- ------------------
Weighted average assumptions as of December 31:
Discount rate 7.75% 8.00%
Expected return on plan assets 9.75% 9.75%
Rate of compensation increase Age-graded Age-graded
2000 1999 1998
-------------------- ----------------------- ------------------
Service cost $ 617 $ 798 $ 571
Interest cost 594 541 447
Expected return on plan assets (832) (685) (594)
Amortization of prior service cost 6 6 6
Amortization of initial net asset (21) (22) (22)
Recognized net actuarial loss (gain) (181) 6 (4)
-------------------- ----------------------- ------------------
Net periodic pension expense $ 183 $ 644 $ 404
-------------------- ----------------------- ------------------
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for the nonqualified pension plan with accumulated
benefit obligations in excess of plan assets were $781, $781, and $0,
respectively, as of December 31, 2000, and $785, $785, and $0, respectively as
of December 31, 1999.
Prior to its acquisition, Trumbull had a noncontributory defined
benefit retirement plan covering substantially all of its employees. The plan
was a multi-employer plan and separate actuarial valuations were not made with
respect to each employer, nor were plan assets so segregated. The multi-employer
plan still covers the benefit obligation for the former Trumbull employees who
are now employed by the Company. There have been no contributions since 1997.
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50
The Bank had a stock appreciation rights plan that was used to grant
certain officers stock appreciation rights upon their employ. The Corporation
has not issued any rights since 1987 and all rights were fully exercised by the
end of 1999. As of December 31, 1998, the accumulated obligation for these
rights recorded in the financial statements was $168. The plan expense for 1999
and 1998 was $7 and $56, respectively.
The Bank also sponsors a defined contribution benefit plan covering
substantially all eligible employees of the Bank. The Bank voluntarily
contributes 75% of the participants' contribution to a maximum of 4.5% of the
participant's compensation. Participants, at their discretion, may invest in
several investment funds or a stock fund consisting solely of the Corporation's
common stock. The Bank's contribution is limited solely to the stock fund.
Contributions in 2000, 1999, and 1998 were $442, $416, and $410, respectively.
The Board of Directors of the Corporation has authorized the issuance of 99,000
shares of the Corporation's common stock for use in the Bank's defined
contribution benefit plan. As of December 31, 2000, none of the shares
authorized have been issued.
17. STOCK OPTIONS
The Corporation maintains incentive and non-qualified stock option
plans that allow for stock based awards to eligible employees and directors.
Through February 1998, the Corporation issued incentive stock options that were
exercisable in one year after issuance and expire after ten years. The maximum
annual grant was 7,500 shares per employee. The plan was terminated in May 1998
when the non-qualified stock option plan was approved. The non-qualified plan
authorizes 650,000 shares of common stock to be reserved and subject to
issuance. The maximum annual grant is 10,000 shares per employee and 1,000
shares per director. The options are also exercisable one year after issuance
and expire after ten years.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, "Accounting for Stock-Based Compensation" and has been
determined as if the Corporation had accounted for its employee stock options
under the fair value method of that Statement. Under the fair-value based
method, compensation cost is measured at the grant date based upon the value of
the award and recognized over the service period. The Corporation has elected,
as the standard allows, to continue to measure compensation costs for its plans
as prescribed in Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees" because the alternative fair value accounting
provided under SFAS No. 123 requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB No. 25,
because the exercise price of the Corporation's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized. Pro forma disclosure of net income and earnings per share
is made in the accompanying footnotes as if the fair-value method of accounting,
as defined by SFAS No. 123, had been adopted.
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51
The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions:
2000 1999 1998
----------------- ----------------- ------------------
Risk-free interest rate 5.5% 6.5% 4.6%
Dividend yield 4.0% 3.0% 3.0%
Volatility factor of expected market
price of Corporation's common stock .301 .274 .214
Weighted-average expected life 6 years 6 years 6 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Corporation's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in Management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of the pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Corporation's pro forma information follows:
2000 1999 1998
----------------- ----------------- ------------------
Pro forma net income $ 5,797 $ 15,583 $ 5,447
Pro forma earnings per share:
BASIC $ .57 $ 1.47 $ .51
Diluted $ .56 $ 1.46 $ .51
Due to the inclusion of only the 1996 and subsequent option grants, the
effects of applying FSAS No. 123 to the years presented above may not be
representative of the pro forma impact in future years.
A summary of stock option activity is as follows:
NUMBER OF SHARES OPTION PRICE PER
SHARE TOTAL
-------------------- ------------------- -----------------
Outstanding at December 31, 1997 193,400 $7.33 - $24.19 $ 2,905
GRANTED 114,200 23.88 - 25.44 2,860
Exercised (31,150) 10.56 - 13.44 (377)
-------------------- ------------------- -----------------
Outstanding at December 31, 1998 276,450 7.33 - 25.44 5,388
GRANTED 108,400 22.72 - 24.22 2,478
Exercised (24,100) 9.21 - 22.13 (273)
-------------------- ------------------- -----------------
Outstanding at December 31, 1999 360,750 7.33 - 25.44 7,593
Granted 92,000 13.66 - 22.34 1,412
Forfeited (54,050) 13.44 - 25.44 (1,281)
Exercised (2,500) 13.44 (34)
-------------------- ------------------- -----------------
Outstanding at December 31, 2000 396,200 $7.33 - $25.44 $ 7,690
-------------------- ------------------- -----------------
Exercisable at December 31, 2000 309,200 $7.33 - $25.44 $ 6,391
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The weighted-average fair value of the options granted during 2000,
1999 and 1998 were $3.68, $7.03 and $5.41, respectively. The weighted-average
remaining contractual life of the outstanding options is 7.5 years.
18. PARENT COMPANY
Condensed financial information of Second Bancorp Incorporated (Parent
Company only) is as follows:
CONDENSED BALANCE SHEETS
DECEMBER 31
2000 1999
------------------- -----------------
Assets:
Cash $ 117 $ 134
Trading account 328 0
Available-for-sale securities 1,355 1,229
Loans 612 638
Investment in and advances to subsidiary, at equity
in underlying value of their net assets 115,226 118,585
Fixed assets 6 17
Other assets 1,999 1,597
------------------- -----------------
Total assets $ 119,643 $ 122,200
=================== =================
Liabilities and Shareholders' Equity:
Accrued and other liabilities $ 1,446 $ 1,853
Note payable 1,000 4,000
Shareholders' Equity:
Common stock, no par value; 30,000,000 shares
authorized; 10,787,310 and 10,762,950 shares
issued, respectively 36,935 36,966
Treasury stock, 730,200 and 304,500 shares, respectively (13,947) (7,140)
Net unrealized holding gains (losses) on
available-for-sale securities 281 (7,791)
Retained earnings 93,928 94,312
------------------- -----------------
Total Liabilities and Shareholders' Equity $ 119,643 $ 122,200
=================== =================
CONDENSED STATEMENTS OF INCOME
Years ended December 31
2000 1999 1998
------------------- ------------------ -------------------
Income:
Cash dividends from subsidiary $ 7,952 $ 6,345 $ 8,767
Interest income 259 939 1,000
Trading account losses (309) 0 0
(Losses) gains on sale of securities (10) 101 41
Other income 9 0 32
------------------- ------------------ -------------------
Total income 7,901 7,385 9,840
Expenses:
Interest expense 25 64 0
Merger costs 0 0 6,657
Other expenses 2,108 1,468 1,162
------------------- ------------------ -------------------
Total expenses 2,133 1,532 7,819
------------------- ------------------ -------------------
Income before income taxes and equity in
undistributed earnings of subsidiary 5,768 5,853 2,021
Income tax benefit 780 252 1,777
------------------- ------------------ -------------------
Income before and equity in undistributed earnings
of subsidiary 6,548 6,105 3,798
Equity in undistributed earnings of subsidiary (414) 10,073 1,835
------------------- ------------------ -------------------
Net income $ 6,134 $ 16,178 $ 5,633
------------------- ------------------ -------------------
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CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31
2000 1999 1998
------------------- ------------------ -------------------
Operating Activities:
Net income $ 6,134 $ 16,178 $ 5,633
Less: Equity in undistributed net income of subsidiary 414 (10,073) (1,835)
Provision for depreciation 13 30 31
Net increase in trading account securities (328) 0 0
Loss (gain) on sale of securities 10 (101) (41)
(Gain) loss on disposal of fixed assets (9) 2 0
Other (net) (818) (1,627) 1,444
------------------- ------------------ -------------------
Cash provided by operations 5,416 4,409 5,232
Investing Activities:
Repayment of loan to subsidiary 11,000 0 0
Net decrease in loans 26 22 22
Sale of securities 17 251 0
Purchase of securities (126) (43) (191)
Donation of securities to charitable foundation 0 0 202
Sale of premises and equipment 11 25 0
Purchase of premises and equipment (5) 0 (63)
------------------- ------------------ -------------------
Cash provided by (used by) investing activities 10,923 256 (30)
Financing Activities:
Issuance of note payable 1,000 4,000 0
Repayment of note payable (4,000) 0 (65)
Net issuance of common stock (31) 65 1,547
Purchase of treasury stock (6,807) (6,347) 0
Payment of dividend (6,518) (5,934) (5,155)
------------------- ------------------ -------------------
Cash used by financing activities (16,356) (8,216) (3,673)
------------------- ------------------ -------------------
(Decrease) increase in cash (17) (3,551) 1,529
Cash at beginning of year 134 3,685 2,156
------------------- ------------------ -------------------
Cash at end of year $ 117 $ 134 $ 3,685
------------------- ------------------ -------------------
19. OFF-BALANCE SHEET INSTRUMENTS
The Corporation utilizes off-balance sheet financial instruments,
frequently called interest rate derivatives, to efficiently manage its exposure
to interest rate risk. As with any financial instrument, derivatives have
inherent risks. Market risk includes the risk of gains and losses that result
from changes in interest rates. These gains and losses may be offset by other
on- or off-balance sheet transactions. Credit risks is the risk that the
counter-party fails to perform according to the terms of the contract. Credit
risk can be measured as the cost of acquiring a new derivative contract with
identical cash flows as those of the defaulted agreement.
The Corporation uses interest rate cap contracts to help protect its
net interest margin in periods of extremely high interest rates. As of December
31, 2000, the Corporation's interest rate cap contracts utilized for interest
rate risk management purposes had a notional amount of $80,900, unrealized loss
of $71, an average strike rate of 6.00% and an average life of 1.6 years. The
Corporations' interest rate floors had an notional amount of $50,000 and an
unrealized gain of $270, while an interest rate swap agreement had a notional
value of $5,000, with an unrealized loss of $168. As of December 31, 1999, the
Corporation's interest rate cap contracts had a notional value of $30,900,
unrealized gain of $262, an average strike rate of 6.00% and an average life of
2.3 years.
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20. COMMITMENTS AND CONTINGENT LIABILITIES
LOAN COMMITMENTS:
Loan commitments are made to accommodate the financial needs of the
Bank's customers; however, there are no long-term, fixed-rate loan commitments
that result in market risk. Standby letters of credit commit the Bank to make
payments on behalf of customers when certain specified future events occur. They
primarily are issued to facilitate customers' trade transactions.
Both arrangements have credit risk essentially the same as that
involved in extending loans to customers and are subject to the Bank's normal
credit policies. Collateral (e.g., securities, receivables, inventory, and
equipment) is obtained based on Management's credit assessment of the customer.
The Bank's maximum obligation to extend credit for loan commitments
(unfunded loans and unused lines of credit) and standby letters of credit
outstanding on December 31 was as follows:
2000 1999
--------------------- ---------------------
Commercial $ 101,450 $ 89,808
Real Estate 29,818 26,292
Consumer 44,741 35,562
Standby Letters of Credit 3,546 4,504
--------------------- ---------------------
$ 179,555 $ 156,166
--------------------- ---------------------
Lease Agreements: The Bank has entered into lease agreements covering
its main office, several branch locations, and equipment for various periods
through 2014, with options to renew. Also, the Bank has the option to purchase
the main office facility before two optional renewal periods at the fair market
value in existence at that time.
Future minimum commitments under non-cancelable operating leases and
future estimated commitments are as follows:
2001 2,053
2002 1,996
2003 1,866
2004 1,630
2005 1,710
Thereafter 7,843
Rentals under operating leases and data processing costs amounted to
$3,020, $2,893, and $3,501 in 2000, 1999, and 1998, respectively.
Low Income Housing Project: In 1993, the Bank began investing in
low-income housing tax credit projects designed to provide affordable housing
for Ohio communities. The Bank has invested $1,442 to date and has begun to
realize tax credits and tax savings from the investments. The Bank is committed
to invest another $2,558 to the fund over the next several years.
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21. SIGNIFICANT CONCENTRATION OF CREDIT RISK
Most of the Bank's business activity is with customers located within
the state of Ohio. As of December 31, 2000, the Bank had a concentration in
commercial real estate loans totaling approximately $277,503, approximately
61.4% of which were owner-occupied businesses, including medical office
buildings and retail and fast-food restaurants within the Bank's market area. Of
the $277,503 of commercial real estate loans, $2,622 or 0.94% were on
non-accrual status as of December 31, 2000.
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REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF SECOND BANCORP INCORPORATED:
We have audited the accompanying consolidated balance sheets of Second Bancorp
Incorporated and subsidiary as of December 31, 2000 and 1999, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Corporation's Management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by Management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Second Bancorp
Incorporated and subsidiary at December 31, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted within the United States.
/s/ Ernst & Young LLP
Cleveland, Ohio
January 23, 2001
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57
The following is a summary of the quarterly results of operations for the years
ended December 31, 2000 and 1999.
THREE MONTHS ENDED
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------------- ------------ ------------- ------------
2000
Interest Income $ 27,435 $ 29,179 $ 29,894 $ 29,790
Interest expense 15,017 16,534 18,288 17,082
Net interest income 12,418 12,645 11,606 12,708
Provision for loan losses 687 696 4,843 903
Other income 3,704 3,240 (56) 3,786
Security gains (losses) 99 206 (2,802) 98
Other expenses 10,297 10,431 13,140 10,345
Income (loss) before federal income taxes 5,237 4,964 (9,235) 5,344
Federal income taxes (benefit) 1,301 1,251 (3,690) 1,314
Net income (loss) 3,936 3,713 (5,545) 4,030
Earnings (loss) per common share:
Basic $ 0.38 $ 0.36 $ (0.54) $ 0.40
Diluted $ 0.38 $ 0.36 $ (0.54) $ 0.40
1999
Interest income $ 25,512 $ 25,405 $ 26,414 $ 27,251
Interest expense 12,997 13,282 14,066 14,965
Net interest income 12,515 12,123 12,348 12,286
Provision for loan losses 829 844 757 765
Other income 3,214 3,962 3,890 3,414
Security gains 111 64 55 82
Other expenses 9,516 9,426 9,618 10,770
Income before federal income taxes 5,495 5,879 5,918 4,247
Federal income taxes 1,380 1,541 1,506 934
Net income 4,115 4,338 4,412 3,313
Earnings per common share:
Basic $ 0.38 $ 0.41 $ 0.41 $ 0.32
Diluted $ 0.38 $ 0.40 $ 0.41 $ 0.32
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not Applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In accordance with General Instruction G(3), the information called for
in this Item 10 is incorporated herein by reference to Second Bancorp's
definitive proxy statement for the annual meeting of shareholders to be held May
8, 2001 (the "Proxy Statement"). Such Proxy Statement will be filed with the
Securities and Exchange Commission within 120 days of December 31, 2000.
Information regarding executive officers is included under item 4a hereof.
ITEM 11. EXECUTIVE COMPENSATION
In accordance with General Instruction G(3), the information called for
in this Item 11 is incorporated herein by reference to Second Bancorp's
definitive proxy statement for the annual meeting of shareholders to be held May
8, 2001 (the "Proxy Statement"). Such Proxy Statement will be filed with the
Securities and Exchange Commission within 120 days of December 31, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In accordance with General Instruction G(3), the information called for
in this Item 12 is incorporated herein by reference to Second Bancorp's
definitive proxy statement for the annual meeting of shareholders to be held May
8, 2001 (the "Proxy Statement"). Such Proxy Statement will be filed with the
Securities and Exchange Commission within 120 days of December 31, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with General Instruction G(3), the information called for
in this Item 13 is incorporated herein by reference to Second Bancorp's
definitive proxy statement for the annual meeting of shareholders to be held May
8, 2001 (the "Proxy Statement"). Such Proxy Statement will be filed with the
Securities and Exchange Commission within 120 days of December 31, 2000.
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PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements of Second Bancorp,
Incorporated and its subsidiary are incorporated herein by reference from Item
8:
Consolidated Balance Sheets - December 31, 2000 and 1999.
Consolidated Statements of Income - years ended December 31, 2000, 1999 and
1998.
Consolidated Statements of Shareholders' Equity - years ended December 31, 2000,
1999 and 1998.
Consolidated Statement of Cash Flows - years ended December 31, 2000, 1999 and
1998.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
(2) Schedules to the consolidated financial statements required by Article 9 of
Regulation S-X are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(3) Listing of Exhibits. The exhibits listed on the accompanying Index to
Exhibits immediately following the financial statement schedules are filed as
part of, or incorporated by reference into, this report.
3.1(1) Amended and Restated Articles of Incorporation of the
Registrant. (As updated to include Amendments dated March 17,
1987; January 7, 1991; June 20, 1997; September 18, 1998; and
November 10, 1998)
3.3(2) Code of Regulations of the Registrant.
10.1(3) 1998 Non-qualified Stock Option Plan
10.1(2) Amended Stock Option Incentive Plan.
10.2(2) Form of Incentive Stock Option Agreement.
10.3(2) Stock Appreciation Rights Agreement by and between Second
Bancorp and Alan G. Brant, dated April 1, 1987, as amended.
10.4(4) Form of Amendment to April 1, 1987 Stock Appreciation Rights
Agreement by and between Second Bancorp and Alan G. Brant,
effective December 18, 1996.
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10.5(2) Employment Agreement by and between Second Bancorp and Alan G.
Brant, dated April 1, 1985.
10.6(5) Amendments to Employment Agreement by and between Second Bancorp
and Alan G. Brant, dated April 1, 1985.
10.7(2) Consulting Agreement by and between Second Bancorp and Alan G.
Brant, dated April 1, 1985.
10.8(5) Amendment to Consulting Agreement by and between Second Bancorp
and Alan G. Brant, dated April 1, 1985.
10.9(5) Deferred Compensation Agreement between Second Bancorp and Alan
G. Brant, dated November 9,1995.
10.10(2) Lease Agreement between Arden Associates Limited Partnership and
Second National, dated October 1, 1979.
10.11(5) Amendment to Lease Agreement between Arden Associates Limited
Partnership and Second National.
10.12(5) Form of Amended Management Severance Agreement with executive
officers.
10.13(6) Revolving Credit Agreement (excluding exhibits), dated September
15, 19998, between Second Bancorp and The Northern Trust
Company.
10.14(6) First Amendment to Revolving Credit Agreement (excluding
exhibits), dated March 11, 1997, between Second Bancorp and The
Northern Trust Company.
10.15(1) Form of Non-qualified Stock Option Agreement.
10.16(7) Employment Agreement by and between Second Bancorp and Rick L.
Blossom, dated December 6, 1999.
10.17(7) Deferred Compensation Agreement by and between Second Bancorp
and Rick L. Blossom, dated December 6, 1999.
10.18(7) Management Severance Agreement by and between Second Bancorp and
Rick L. Blossom, dated December 6, 1999.
11(8) Statement Re: Computation of Per Share Earnings
21 Subsidiaries of the registrant.
23.1 Consent of Ernst & Young.
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(1) Incorporated by reference to the exhibit filed with Second
Bancorp's annual report on Form 10-K for the year ended December
31, 1998.
(2) Incorporated by reference to the exhibit filed with Second
Bancorp's annual report on Form 10-K for the year ended December
31, 1994.
(3) Incorporated by reference to Exhibit A of the Registrant's proxy
statement dated April 1, 1998, as filed with the Securities and
Exchange Commission in April, 1998.
(4) Incorporated by reference to the exhibit filed with Second
Bancorp's annual report on Form 10-K for the year ended December
31, 1997.
(5) Incorporated by reference to the exhibit filed with Second
Bancorp's annual report on Form 10-K for the year ended December
31, 1995.
(6) Incorporated by reference to the Exhibit filed with the
Registrant's registration statement on Form S-4 (registration No.
333-62365) as filed on September 21, 1998 with the Securities and
Exchange Commission.
(7) Incorporate dby reference to the exhibit filed with Second
Bancorp's annual report on form 10-K for the year ends December
31, 1999.
(8) Page 46 (Included in Note 14 of the Notes to the Consolidated
Financial Statements of Registrant in the financial statements
portion of this annual report on Form 10-K).
(b) The Corporation filed two reports on Form 8-K during the three months ended
December 31, 2000. A Form 8-K was filed on October 20, 2000 is disclose the
earnings for the third quarter of 2000. A Form 8-K was filed on October 20, 2000
to disclose that the Corporation's previously announce repurchase authorization
of 600,000 shares had been completed and that the board of directors had
authorized the additional buy-back of up to 2% of the Corporation's outstanding
shares on an annual basis.
(c) Exhibits - The response to this portion of Item 14 is included at Item
14(a)(3) of this report.
(d) Financial Statement Schedules - None.
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SIGNATURES
Pursuant to the requirements of section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SECOND BANCORP, INCORPORATED
/s/DAVID L. KELLERMAN March 21, 2001
-------------------------------------------
David L. Kellerman, Treasurer (date)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
By: /s/ RICK L. BLOSSOM March 23, 2001
-------------------------------------------------
Rick L. Blossom, President & CEO
By: /s/ ALAN G. BRANT March 21, 2001
--------------------------------------------------
A. G. Brant, Chairman (date)
By: /s/ DAVID L. KELLERMAN March 21, 2001
---------------------------------------------------
D. L. Kellerman, Principal Financial (date)
Officer and Principal Accounting Officer
By: /s/ DAVID A. ALLEN March 23, 2001
--------------------------------------------------
David A. Allen, Director (date)
By: /s/ JOHN A. ANDERSON March 23, 2001
--------------------------------------------------
John A. Anderson, Director (date)
By: /s/ NORMAN C. HARBERT March 22, 2001
---------------------------------------------------
Norman C. Harbert, Director (date)
By: /s/ JOHN L. POGUE March 23, 2001
--------------------------------------------------
John L. Pogue, Director (date)
61