1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) THE SECURITIES EXCHANGE ACT
OF 1934 For quarter ended September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period ..... to .....
Commission file number: 0-15624
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SECOND BANCORP INCORPORATED
(exact name of registrant as specified in its charter)
OHIO 34-1547453
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(State or other jurisdiction of (I.R.S. Employer
in Company or organization) Identification No.)
108 Main Ave., Warren, Ohio 44482-1311
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(Address of principal executive offices) (Zip Code)
(330) 841-0123
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Registrant's telephone number, including area code
Not applicable
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Former name, former address and former fiscal year, if changed since last
report.
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 [ ]
- ---------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, without par value - 10,516,850 shares outstanding as of October
31, 1999.
Page 1 of 15
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SECOND BANCORP INCORPORATED AND SUBSIDIARY
INDEX Page
Number
------
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated balance sheets -
September 30, 1999 and 1998 and December 31, 1998.........................3
Consolidated statements of income -
Three and nine months ended September 30, 1999 and 1998 .............4
Consolidated statement of shareholders' equity -
Nine months ended September 30, 1999 and 1998........................5
Consolidated statements of cash flows -
Nine months ended September 30, 1999 and 1998........................6
Notes to consolidated financial statements - September 30, 1999...........7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .............8-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................11
Item 2. Changes in Securities ..................................11
Item 3. Defaults upon Senior Securities ........................11
Item 4. Submission of Matters to a Vote of Security
Holders.................................................11
Item 5. Other Information ......................................11
Item 6. Exhibits and Reports on Form 8-K .......................11
SIGNATURES ......................................................12
Statement 11 Re: Computation of Earnings Per Share ..............13
Schedule 27 .....................................................14
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
Second Bancorp Incorporated and Subsidiary
September 30 December 31 September 30
-----------------------------------------
(Dollars in thousands) 1999 1998 1998
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ASSETS
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Cash and due from banks $ 35,855 $ 45,478 $ 32,756
Federal funds sold 50,000 4,000 10,246
Securities:
Available-for-sale (at market value) 383,847 354,415 263,283
Held-to-maturity (market value of $115,052) 0 0 114,193
Loans 1,019,361 970,853 966,522
Less reserve for loan losses 12,049 10,739 9,073
-----------------------------------------
Net loans 1,007,312 960,114 949,501
Premises and equipment 18,147 17,119 18,375
Accrued interest receivable 9,072 8,709 6,592
Goodwill and intangible assets 6,019 5,749 5,729
Other assets 39,995 34,649 20,223
-----------------------------------------
Total assets $1,550,247 $1,430,233 $1,428,846
=========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------
Deposits:
Demand - non-interest bearing $ 105,047 $ 115,624 $99,904
Demand - interest bearing 89,850 101,080 91,427
Savings 274,245 274,728 265,441
Time deposits 637,207 611,158 613,437
-----------------------------------------
Total deposits 1,106,349 1,102,590 1,070,209
Federal funds purchased and securities sold under
agreements to repurchase 122,502 122,482 131,204
Other borrowed funds 6,322 861 4,200
Federal Home Loan Bank advances 187,406 72,782 83,058
Accrued expenses and other liabilities 8,669 8,245 9,809
-----------------------------------------
Total liabilities 1,431,248 1,306,960 1,298,480
Shareholders' equity:
Preferred stock, no par value;
Series A: 1,500,000 shares authorized at September 1998;
718,750 issued and 0 shares outstanding 0
Series B: 1,500,000 shares authorized at September 1998 0
Common stock, no par value; 30,000,000 shares
authorized; 10,756,950; 10,738,850 and 10,738,850
shares issued, respectively 36,931 36,901 37,012
Treasury stock, 231,700; 50,400 and 50,400 shares, respectively (5,357) (793) (793)
Net unrealized holding (loss) gains on
available-for-sale securities, net of tax (5,038) 3,097 4,464
Retained earnings 92,463 84,068 89,683
-----------------------------------------
Total shareholders' equity 118,999 123,273 130,366
-----------------------------------------
Total liabilities and shareholders' $1,550,247 $1,430,233 $1,428,846
equity =========================================
See notes to consolidated financial statements.
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Second Bancorp Incorporated and Subsidiary
Consolidated Statements of Income
For the Three Months For the Nine Months
Ended September 30 Ended September 30
(Dollars in thousands, -------------------------------- ---------------------------
except per share data) 1999 1998 1999 1998
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INTEREST INCOME
- ------------------------------------------------------
Loans (including fees):
Taxable $20,195 $20,101 $59,778 $59,248
Exempt from federal income taxes 148 187 507 549
Securities:
Taxable 4,795 5,486 13,712 18,372
Exempt from federal income taxes 960 853 2,849 2,464
Federal funds sold 316 184 485 457
------------------------------- --------------------------
Total interest income 26,414 26,811 77,331 81,090
INTEREST EXPENSE
- ------------------------------------------------------
Deposits 10,440 10,911 31,102 32,822
Federal funds purchased and securities
sold under agreements to repurchase 1,459 1,671 4,314 5,107
Other borrowed funds 53 43 117 125
Federal Home Loan Bank advances 2,114 1,496 4,812 4,591
------------------------------- --------------------------
Total interest expense 14,066 14,121 40,345 42,645
------------------------------- --------------------------
Net interest income 12,348 12,690 36,986 38,445
Provision for loan losses 757 1,951 2,430 3,691
------------------------------- --------------------------
Net interest income after provision for loan 11,591 10,739 34,556 34,754
losses
NON-INTEREST INCOME
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Service charges on deposit accounts 1,130 1,064 3,186 3,053
Trust fees 950 677 2,640 2,032
Security gains 55 850 230 1,013
Other operating income 1,810 1,615 5,240 3,617
------------------------------- --------------------------
Total non-interest income 3,945 4,206 11,296 9,715
NON-INTEREST EXPENSE
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Salaries and employee benefits 4,747 4,812 14,000 14,319
Merger costs 0 1,436 0 1,741
Net occupancy 1,032 999 3,053 3,001
Equipment 784 713 2,481 2,287
Professional services 535 461 1,413 1,431
Assessment on deposits and other taxes 439 415 1,239 1,249
Amortization of goodwill and other intangibles 171 201 513 604
Other operating expenses 1,910 1,878 5,861 6,107
------------------------------- --------------------------
Total non-interest expense 9,618 10,915 28,560 30,739
------------------------------- --------------------------
Income before federal income taxes 5,918 4,030 17,292 13,730
Income tax expense 1,506 1,195 4,427 3,845
------------------------------- --------------------------
Net income $4,412 $2,835 $12,865 $9,885
=============================== ==========================
NET INCOME PER COMMON SHARE:
Basic $0.41 $0.27 $1.21 $0.93
Diluted $0.41 $0.26 $1.20 $0.92
Dividends declared $0.14 $0.12 $0.42 $0.35
Weighted average common shares outstanding:
Basic 10,656,697 10,684,941 10,680,710 10,657,895
Diluted 10,739,085 10,751,190 10,767,686 10,732,550
See notes to consolidated financial statements.
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Consolidated Statements of Shareholders' Equity
Second Bancorp, Inc. and Subsidiary
Accumulated
Other
Preferred Common Treasury Comprehensive Retained Comprehen-
(Dollars in thousands) Stock Stock Stock Income (Loss) Earnings Total sive Income
- ------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1998 $ - $35,354 $ (793) $ 2,832 $ 83,590 $120,983
Comprehensive income:
Net income 9,885 9,885 $9,885
Other comprehensive income, net of tax
Change in unrealized market value
adjustment on securities
available-for-sale, net of tax 1,632 1,632 1,632
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Comprehensive income $ 11,517
============
Cash dividends declared:
Common stock ($.35 per share) (3,792) (3,792)
Exercise of stock options 286 286
Common stock issued - dividend
reinvestment plan 1,372 1,372
----------------------------------------------------------------
Balance, September 30, 1998 $ - $37,012 $ (793) $ 4,464 $ 89,683 $130,366
================================================================
Balance, January 1, 1999 $36,901 $ (793) $ 3,097 $ 84,068 $123,273
Comprehensive income:
Net income 12,865 12,865 $ 12,865
Other comprehensive income, net of tax
Change in unrealized market value
adjustment on securities
available-for-sale, net of tax (8,135) (8,135) (8,135)
------------
Comprehensive income $ 4,730
============
Cash dividends declared: common
($.42 per share) (4,470) (4,470)
Common stock issued - dividend
reinvestment plan 30 30
Repurchase of common shares
(181,300 shares) (4,564) (4,564)
=======================================================
Balance, September 30, 1999 $36,931 $ (5,357) $ (5,038) $ 92,463 $118,999
=======================================================
See notes to consolidated financial statements.
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Consolidated Statements of Cash Flows
Second Bancorp Incorporated and Subsidiary
For the Nine Months Ended
--------------------------------
(Dollars in thousands) September 30 September 30
Operating Activities 1999 1998
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Net income $12,865 $9,885
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 2,430 3,691
Provision for depreciation 2,166 2,005
Provision for amortization of intangibles 513 604
Net (increase) decrease in servicing rights (783) 659
Amortization of investment discount and premium (171) (1,540)
Deferred income taxes 104 111
Securities gains (230) (1,013)
Other gains, net (1,658) (1,738)
(Increase) decrease in interest receivable (363) 2,190
Increase in interest payable 1,048 543
Originations of loans held-for-sale (89,701) (168,890)
Proceeds from sale of loans held-for-sale 91,359 170,628
(Increase) decrease in other assets (1,064) 898
(Decrease) increase in other liabilities (624) 364
--------------------------------
Net Cash provided by operating activities 15,891 18,397
Investing Activities
- -------------------------------------------------------
Proceeds from maturities of securities -
available-for-sale 99,553 106,041
Proceeds from maturities of securities -
held-to-maturity 0 68,081
Proceeds from sales of securities - available-for-sale 47,140 89,033
Purchases of securities - available-for-sale (188,245) (146,011)
Purchases of securities - held-to-maturity 0 (12,134)
Net increase in revolving credit receivables (1,935) (3,344)
Net increase in loans (47,693) (81,629)
Net increase in premises and equipment (3,194) (5,458)
--------------------------------
Net cash (used by) provided by investing activities (94,374) 14,579
Financing Activities
- -------------------------------------------------------
Net decrease in demand deposits, insured money market
and interest checking accounts and savings deposits (22,290) (12,915)
Net increase (decrease) in time deposits 26,049 (34,571)
Net increase in federal funds purchased
and securities sold under agreements to repurchase 20 9,127
Net increase in borrowings 5,461 643
Net advances from Federal Home Loan Bank 114,624 6,952
Cash dividends (4,470) (3,792)
Repurchase of common stock (4,564) 0
Common stock activity - options and dividend
reinvestment plan 30 1,658
--------------------------------
Net cash provided by (used by) financing activities 114,860 (32,898)
--------------------------------
Increase in cash and cash equivalents 36,377 78
--------------------------------
Cash and cash equivalents at beginning of year 49,478 42,924
--------------------------------
Cash and cash equivalents at end of period $85,855 $43,002
================================
Supplementary Cash Flow Information:
Cash paid for 1) Federal Income taxes - $4,427,000 and $3,845,000 for the nine
months ended September 30, 1999 and 1998, respectively and 2) Interest -
$39,297,000 and $47,521,000 For the nine months ended September 30, 1999 and
1998, respectively.
See notes to consolidated financial statements.
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Notes to Consolidated Financial Statements (unaudited)
Second Bancorp Incorporated and Subsidiary
September 30, 1999
(Dollars in thousands)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month and nine-month periods
ended September 30, 1999 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1999. Certain reclassifications have
been made to amounts previously reported in order to conform to current period
presentations. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
NOTE B - PER SHARE DATA
The per share data is based upon the weighted average number of shares,
including common stock equivalents, outstanding during the period.
NOTE C - ACQUISITIONS
On August 20, 1998, the Company completed the acquisition of Enfin, Inc. and its
subsidiary, Enterprise Bank. The acquisition was accounted on a
pooling-of-interest accounting basis and, therefore, all historical financial
presentations have been restated to reflect the pooling-of-interests accounting
method. On November 19, 1998, the Company completed the acquisition of Trumbull
Financial Corporation and its subsidiary, Trumbull Savings and Loan. The
acquisition was accounted on a pooling-of-interest accounting basis and,
therefore, all historical financial presentations have been restated to reflect
the pooling-of-interests accounting method.
NOTE D - COMPREHENSIVE INCOME
During the first nine months of 1999 and 1998, total comprehensive income
amounted to $1,686 and $6,773, respectively. The components of comprehensive
income, net of tax, for the nine-month periods ended September 30, 1999 and 1998
are as follows:
1999 1998
--------------------------
Net income $12,865 $9,885
Unrealized (losses) on available-for-sale securities (8,135) 1,632
--------------------------
Comprehensive income $4,730 $11,517
==========================
Accumulated other comprehensive income (loss), net of related tax, at September
30, 1999, December 31, 1998 and September 30, 1998 totaled $(5,038), $3,097 and
$4,464, respectively and were comprised entirely of accumulated changes in
unrealized market value adjustments on securities available-for-sale, net of
tax.
Disclosure of reclassification amounts:
January 1 to January 1 to
SEPT. 30, 1999 SEPT. 30, 1998
-------------------------------
Unrealized holding (losses) gains arising during the period $(7,905) $2,645
Less: reclassification for gains included in net income (230) (1,013)
---------------------------
Net unrealized (losses) gains on available-for-sale securities $(8,135) $1,632
===========================
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. Management's Discussion and Analysis of Financial Condition and
Results of Operations Second Bancorp Incorporated and Subsidiary
General
Second Bancorp Incorporated, (the "Company") is a one-bank holding company which
owns The Second National Bank of Warren (the "Bank"), a Warren, Ohio based
commercial bank. Operating through thirty- four branches and one loan production
office, the Bank 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. The Bank focuses its
marketing efforts primarily on local independent and professional firms and
individuals that are the owners and principals of such firms. The Bank has
emphasized commercial lending and market area expansion.
Financial Condition
At September 30, 1999, the Company had consolidated total assets of $1.55
billion, deposits of $1.106 billion and shareholders' equity of $119 million.
Since September 30, 1998, total assets have increased by $121 million or 8.5%.
Gross loans have grown by 5.2% during the past year to total $1.007 billion.
Within the loan totals, third quarter 1999 average real estate loan balances
have increased by 14.1% while average commercial loan balances have increased by
8.3% since the third quarter of last year to $391 million. Average consumer loan
balances have declined by $29 million to $214 million for the third quarter of
1999 and reflects the Bank's reduced focus on indirect automobile lending and
commitment to improved credit quality within that portfolio.
Funding growth has primarily been generated through core deposits (DDA and
savings balances up 2.9% and 8.8%, respectively). Advances from the Federal Home
Loan Bank ("FHLB") have increased by approximately $50 million, or 47%, over the
past year. The additional FHLB advances were utilized to supply funding for
potential Y2K needs and fund acquisition of higher yielding securities. Higher
cost funding via time deposits has declined by $14 million, or 2.2%, over the
same period.
Results of Operations
General. The Company achieved net income of $4,412,000 for the third quarter of
1999, 55.6% greater than the $2,835,000 earned during the same period last year.
All historical financial presentations have been restated to reflect the
pooling-of-interests accounting method used for both the Enfin Inc. and Trumbull
Financial Corporation acquisitions that occurred in 1998. On a per share basis,
diluted earnings for the quarter were $.41, 51.9% greater than the $.27 per
share reported for the third quarter of 1998. Return on average assets (ROA) and
return on average total shareholders' equity (ROE) were 1.17% and 14.89%,
respectively for the third quarter of 1999 compared to .77% and 8.76% for last
year's third quarter. Net interest income decreased by 2.7% to $12,348,000 for
the third quarter of 1999, reflecting a 15 basis point decline in the net
interest margin. Non-interest income, excluding security gains, increased 15.9%
from a year ago with increases in income from trust services, service charges on
deposit accounts, sales of mutual funds, annuities and real estate loans as well
as increased income from bank owned life insurance. Non-interest expenses
declined 11.9% from the same period a year ago. Excluding $1,436,000 in merger
costs, non-interest expenses increased only $139,000 or 1.5% indicating the
Company's continued successful efforts reduce costs and capitalize on synergies
from the acquisitions.
Excluding merger-related expenses, net income for the third quarter of 1998
would have been $3,913,000. ROA and ROE would have been 1.07% and 12.09%,
respectively. Basic and diluted earnings per share would have been $.37 and
$.36, respectively. Net income for the third quarter of 1999 represents a 12.8%
improvement over these adjusted numbers for the third quarter of 1998.
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For the first nine months of 1999, the Company achieved net income of
$12,453,000, 30.1% greater than the $9,885,000 earned during the same period
last year. On a per share basis, diluted earnings were $1.20, up 30.4% from the
$.92 per share reported for the first nine months of 1998. ROA and ROE were
1.16% and 13.99%, respectively for the first nine months of 1999, compared to
.89% and 10.47% for the same period last year. Net interest income decreased by
3.8% to $36,986,000 for the first nine months of 1999, reflecting a 1.0% decline
in average earning assets and an eight basis point decline in the net interest
margin. Non-interest income (excluding non-interest income) increased 27.2% from
a year ago with increases in income from trust services, service charge on
deposits, gains on the sale of real estate loans as well as increased income
from bank owned life insurance. Non-interest expenses were 7.1% lower than the
previous year. Excluding $1,741,000 in merger costs, non-interest expenses
decreased by $438,000 or 1.5%
Excluding merger-related expenses, net income for the first nine months of 1998
would have been $11,192,000. ROA and ROE would have been 1.01% and 11.85%,
respectively. Basic and diluted earnings per share would have been $1.05 and
$1.04, respectively. Net income for the first nine months of 1999 represents a
15% improvement over these adjusted numbers for the same period in 1998.
Asset Quality. The reserve for loan losses was 1.18% of total loans at the end
of the third quarter of 1999 and is substantially higher than a year ago due to
lower net charge-offs in the first nine months of 1999. The reserve was .94% of
total loans at September 30, 1998. Non-accrual loans have declined significantly
over the past year and total $4,994,000 as of September 30, 1999 versus
$6,583,000 as of the same date last year. Net charge-offs also declined
significantly and averaged an annualized .23% of average loans for the third
quarter versus .83% for the third quarter of 1998. Net charge-offs for the first
nine months of 1999 were .15% of average loans compared to .49% for the first
nine months of 1998.
Net Interest Income. Net interest income for the third quarter of 1999 decreased
by 2.7% from the same period last year to $12,348,000. The decrease was derived
from a decrease of 15 basis points in the net interest margin. The decline in
the net interest margin resulted from a lower level of lending activity in the
third quarter of 1999 as interest rates increased and real estate refinancing
activity slowed. Similarly, net interest income for the first nine months of
1999 decreased by 3.8% to $36,986,000, reflecting a 1.0% decline in average
earning assets and an eight basis point decline in the net interest margin.
Non-interest Income. Non-interest income showed significant improvement over the
past year. For the third quarter of 1999, fees from trust services increased by
$273,000, or 40%, over the third quarter of 1998. Other income totaled
$1,810,000 for the third quarter of 1999 versus $1,615,000 for the same period
in 1998. Sales of real estate loans, sales of alternative investment products
and income from the increase in cash surrender value from bank owned life
insurance helped generate the increase in other income. Security sales for the
quarter generated $55,000 in income versus $850,000 in gains for the third
quarter of 1998. Deposit services charges increased by $66,000, or 6.2%,
compared to the third quarter of 1998. For the first nine months of the year,
trust income is up 29.9% and other non-interest income is up 44.9% primarily
from the sources identified earlier for the third quarter of 1999.
Non-interest Expense. Expenses for the third quarter of 1999 were 11.9% lower
than for the same period in 1998. Excluding merger costs of $1,436,000 in 1998,
expenses were up $139,000 or 1.5%. Salaries and employee benefits declined by
1.4% while most other expense categories realized modest increases. For the
first nine months of the year, total expenses (excluding merger costs of
$1,741,000) were down $438,000 led by a $319,000 decline in salaries and
benefits.
Capital resources. Shareholders' equity has decreased by $11.3 million from a
year ago, due to 1) the increase in interest rates which has created an
unrealized holding loss (accumulated other comprehensive loss) of $5,038,000 as
of September 30, 1999 in the available-for-sale security portfolio; 2) the
repurchase of nearly 200,000 shares of common stock into Treasury and 3) the
expenses incurred in the fourth quarter of 1998 associated with the Trumbull
Savings acquisition.
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The impact of the change in unrealized market value adjustment on securities
available-for-sale, net of tax resulted in a net unrealized loss position of
$5,038,000 at September 30, 1999 versus a net unrealized gain position of
$3,097,000 at December 31, 1998 and $4,464,000 at September 30, 1998. The
Company is currently authorized to repurchase up to 500,000 shares of the
Company's common stock. As of September 30, 1999, the Company had repurchased
181,300 shares of common stock at an average price of $25.18. To facilitate the
share repurchase $2 million in advances have been taken on the Company's lines
of credit.
Liquidity. Management of the Company'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 Company. 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 $37 million through correspondent banks.
The parent company has three major sources of funding including dividends from
the Bank, $18 million in remaining unsecured lines of credit with correspondent
banks which are renewable annually, and access to the capital markets. As of
September 30, 1999 the Company had approximately $50 million in cash liquidity
available in preparation of year 2000 liquidity needs. Additionally, the Company
has $50 million available as contingent liquidity via a secured line of credit
with the FHLB.
Forward-looking statements:
The section that follows contains 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 Company
believes that the expectations reflected in such forward-looking statements are
reasonable, actual results may differ materially from the expectations discussed
in these forward-looking statements.
Year 2000:
Due to the approach of the Year 2000, the Company is exposed to risks that
equipment or software applications will not be able to distinguish the year 2000
from the year 1900 and will not function properly. To address the issue, the
Company has initiated the process of preparing its computer systems and
applications for the Year 2000. This process involves modifying or replacing
certain hardware and software used by the Company. The software utilized is
primarily originated and serviced by external providers. The Company has
communicated and continues to communicate with those providers to ensure that
appropriate steps are being taken to remedy any Year 2000 issues. The Company
has in place a steering committee to oversee the Year 2000 readiness effort and
has a formal plan in place addressing the issue. All phases of the year 2000
preparedness for mission critical systems have been completed. These phases
include Awareness, Inventory, Assessment, Analysis, Conversion and
Implementation. The Awareness and Inventory included communications with all
retail and commercial customers and employees. Additional hardware upgrades and
replacements are in progress for non-critical subsystems with the Implementation
phase and will be completed early in the fourth quarter of 1999.
Post-Implementation, or Contingency planning efforts have developed a full
Business Resumption Contingency Plan for use should normal systems not be
available. The total anticipated capital expenditure associated with Year 2000
readiness is expected to be approximately $1.5 million. Of this amount,
approximately $1.2 million has been expended to date. Operating expenses are
estimated to be minimal, including two full time employees dedicated to the
project. Operating expenses incurred for the first nine months of 1999 are
approximately $80,000 ($140,000 life to date) with an additional $50,000
expected through completion of the project.
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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 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 1.1% if
interest rates would immediately rise by 200 basis points. It projects a
decrease in net income of 1.8% if interest rates would immediately fall by 200
basis points. Management believes this reflects a low level of risk from
interest rate movements and within management approved guideline levels of +/-
3% for the one-year time horizon. Similarly, the most recent model projects net
interest income would decrease by 0.7% if interest rates would immediately rise
by 200 basis points. It projects a decrease in net interest income of 0.8% if
interest rates would immediately fall by 200 basis points. Management believes
this reflects a low level of risk from interest rate movements and within
management approved guideline levels of +/- 2% for the one-year time horizon.
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 and
the sale of long-term fixed rate mortgages through the secondary mortgage
market. Although the Corporation has available to it the use of off-balance
sheet swap instruments to manage interest rate risk, these instruments are
historically rarely utilized. Management expects interest rates to be relatively
stable with an upward bias during 1999 and 2000 and believes that the current
modest level of interest rate risk is appropriate.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings -
The Company 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 impact on the financial position or results of
operations of the Company.
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders -
(a) - (d) Second Bancorp, Incorporated's Annual Shareholders Meeting was held on
March 11, 1999. The results of the votes on the matters presented to
shareholders were included in the Form 10Q for the period ended March 31, 1999.
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K:
The following exhibits are included herein:
(11) Statement re: computation of earnings per share
The Company filed a report on Form 8-K on August 31, 1999 pertaining to the
announcement of a stock repurchase program. The Company approved a discretionary
buy-back of up to 500,000 shares of the Company" common stock. The Company also
filed a report on Form 8-K on November 10, 1999 pertaining to the election of
Rick L. Blossom as President and Chief Executive Officer of subsidiary The
Second National Bank of Warren and as President and Chief Operating Officer.
Alan G. Brant, who has served as President and Chief Executive Officer of The
Second National Bank of Warren since 1985, will become Chief Executive Officer
of the Company and will continue as Chairman of the Company.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SECOND BANCORP INCORPORATED
Date: November 12, 1999 /S/ David L. Kellerman
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David L. Kellerman, Treasurer
Signing on behalf of the registrant and as principal accounting officer and
principal financial officer.
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