<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------------
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) THE SECURITIES EXCHANGE ACT OF
1934 For quarter ended September 30, 2000
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
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
in Company or organization) Identification No.)
108 Main Ave. Warren, Ohio 44482-1311
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
330.841.0123
------------
Registrant's telephone number, including area code
Not applicable
--------------
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 - 10,112,020 shares outstanding as of October
31, 2000.
Page 1 of 15
<PAGE> 2
SECOND BANCORP INCORPORATED AND SUBSIDIARY
<TABLE>
<CAPTION>
INDEX Page
Number
------
<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated balance sheets -
September 30, 2000 and 1999 and December 31, 1999............................. 3
Consolidated statements of income -
Three and nine months ended September 30, 2000 and 1999............. 4
Consolidated statement of shareholders' equity -
Nine months ended September 30, 2000 and 1999........................ 5
Consolidated statements of cash flows -
Nine months ended September 30, 2000 and 1999........................ 6
Notes to consolidated financial statements - September 30, 2000............... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .............. 8-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 12
Item 2. Changes in Securities ...................................... 12
Item 3. Defaults upon Senior Securities............................. 12
Item 4. Submission of Matters to a Vote of Security
Holders..................................................... 12
Item 5. Other Information .......................................... 12
Item 6. Exhibits and Reports on Form 8-K ........................... 12
SIGNATURES........................................................... 13
Statement 11 Re: Computation of Earnings Per Share................... 14
Schedule 27 ......................................................... 15
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Second Bancorp Incorporated and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30 December 31 September 30
-------------------------------------------
(Dollars in thousands) 2000 1999 1999
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
------------------------------------------------
Cash and due from banks $ 34,079 $ 35,238 $ 35,855
Federal funds sold 8,000 0 50,000
Trading account 447 0 0
Securities:
Available-for-sale (at market value) 400,176 367,587 383,847
Loans 1,059,530 1,071,662 1,019,361
Less reserve for loan losses 15,040 11,169 12,049
-------------------------------------------
Net loans 1,044,490 1,060,493 1,007,312
Premises and equipment 17,798 18,575 18,147
Accrued interest receivable 10,630 9,277 9,072
Goodwill and intangible assets 6,193 5,931 6,019
Other assets 39,804 40,177 39,995
-------------------------------------------
Total assets $1,561,617 $1,537,278 $1,550,247
===========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------------------
Deposits:
Demand - non-interest bearing $ 107,391 $ 110,811 $ 105,047
Demand - interest bearing 83,991 90,570 89,850
Savings 262,024 270,544 274,245
Time deposits 630,971 625,664 637,207
-------------------------------------------
Total deposits 1,084,377 1,097,589 1,106,349
Federal funds purchased and securities sold under
agreements to repurchase 116,707 106,532 122,502
Note Payable 0 4,000 0
Other borrowed funds 3,622 5,739 6,322
Federal Home Loan Bank advances 238,872 200,276 187,406
Accrued expenses and other liabilities 6,020 6,795 8,669
-------------------------------------------
Total liabilities 1,449,598 1,420,931 1,431,248
Shareholders' equity:
Common stock, no par value; 30,000,000
shares
authorized; 10,776,870; 10,762,950 and
10,756,950
shares issued, respectively 36,952 36,966 36,931
Treasury stock; 639,920, 304,500 and
231,700 shares, respectively (12,590) (7,140) (5,357)
Net unrealized holding losses on
available-for-sale securities, net of tax (3,849) (7,791) (5,038)
Retained earnings 91,506 94,312 92,463
-------------------------------------------
Total shareholders' equity 112,019 116,347 118,999
-------------------------------------------
Total liabilities and
shareholders' equity $1,561,617 $1,537,278 $1,550,247
===========================================
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 4
Second Bancorp Incorporated and Subsidiary
Consolidated Statements of Income
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
(Dollars in thousands, Ended September 30 Ended September 30
----------------------------- -----------------------
except per share data) 2000 1999 2000 1999
------------------------------------------------------------------------- -----------------------
INTEREST INCOME
--------------------------------------------
<S> <C> <C> <C> <C>
Loans (including fees):
Taxable $23,367 $20,195 $67,790 $59,778
Exempt from federal income taxes 285 148 738 507
Securities:
Taxable 5,419 4,795 15,389 13,712
Exempt from federal income taxes 777 960 2,436 2,849
Federal funds sold 46 316 152 485
Trading account 0 0 3 0
----------------------------- -----------------------
Total interest income 29,894 26,414 86,508 77,331
INTEREST EXPENSE
--------------------------------------------
Deposits 12,216 10,440 34,407 31,102
Federal funds purchased and securities
sold under agreements to repurchase 1,440 1,459 3,980 4,314
Note Payable 0 0 19 0
Other borrowed funds 46 53 147 117
Federal Home Loan Bank advances 4,586 2,114 11,286 4,812
----------------------------- -----------------------
Total interest expense 18,288 14,066 49,839 40,345
----------------------------- -----------------------
Net interest income 11,606 12,348 36,669 36,986
Provision for loan losses 4,843 757 6,226 2,430
----------------------------- -----------------------
Net interest income after
provision for loan losses 6,763 11,591 30,443 34,556
NON-INTEREST INCOME
--------------------------------------------
Service charges on deposit accounts 1,163 1,130 3,296 3,186
Trust fees 833 950 2,886 2,640
(Losses) gains on sale of loans (3,191) 643 (2,491) 1,611
Trading account losses (28) 0 (345) 0
Security (losses) gains (2,802) 55 (2,497) 230
Other operating income 1,167 1,167 3,542 3,629
----------------------------- -----------------------
Total non-interest income (2,858) 3,945 4,391 11,296
NON-INTEREST EXPENSE
--------------------------------------------
Salaries and employee benefits 5,421 4,747 15,926 14,000
Net occupancy 1,062 1,032 3,151 3,053
Equipment 1,044 784 2,990 2,481
Professional services 1,650 535 2,825 1,413
Assessment on deposits and other taxes 423 439 1,261 1,239
Amortization of goodwill and other 216 171 447 513
intangibles
Other operating expenses 3,324 1,910 7,268 5,861
----------------------------- -----------------------
Total non-interest expense 13,140 9,618 33,868 28,560
----------------------------- -----------------------
Income before federal income taxes (9,235) 5,918 966 17,292
Income tax expense (3,690) 1,506 (1,138) 4,427
----------------------------- -----------------------
Net income ($5,545) $ 4,412 $ 2,104 $12,865
============================= =======================
NET INCOME PER COMMON SHARE:
Basic ($0.55) $ 0.41 $ 0.20 $ 1.21
Diluted ($0.55) $ 0.41 $ 0.20 $ 1.20
Weighted average common shares outstanding:
Basic 10,161,386 10,656,697 10,294,922 10,680,710
Diluted 10,161,386 10,739,085 10,318,413 10,767,686
</TABLE>
See notes to financial statements.
-4-
<PAGE> 5
Second Bancorp Incorporated and Subsidiary
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated
Other
Common Treasury Comprehen- Retained Comprehen-
(Dollars in thousands) Stock Stock sive Income Earnings Total sive Income
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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)
Purchase of treasury shares (4,564) (4,564)
Common stock issued - dividend reinvestment
plan 30 30
-----------------------------------------------------
Balance, September 30, 1999 $36,931 $(5,357) $(5,038) $92,463 $118,999
=====================================================
Balance, January 1, 2000 $36,966 $(7,140) $(7,791) $94,312 $116,347
Comprehensive income:
Net income 2,104 2,104 $ 2,104
Other comprehensive income, net of tax
Change in unrealized market value
adjustment on securities
available-for-sale, net of tax 3,942 3,942 3,942
----------
Comprehensive income $ 6,046
==========
Cash dividends declared: common ($.48 per (4,910) (4,910)
share)
Purchase of treasury shares (5,450) (5,450)
Common stock issued - dividend reinvestment
plan (14) (14)
-----------------------------------------------------
Balance, September 30, 2000 $36,952 $(12,590) $(3,849) $91,506 $112,019
=====================================================
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
Consolidated Statements of Cash Flows
Second Bancorp Incorporated and Subsidiary
<TABLE>
<CAPTION>
For the Nine Months Ended
(Dollars in thousands) September 30 September 30
Operating Activities 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 2,104 $ 12,865
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 6,226 2,430
Provision for depreciation 2,639 2,166
Provision for amortization of intangibles 447 513
Net gain/amortization on servicing rights (709) (783)
Amortization (accretion) of investment 173 (171)
discount and premium
Deferred income taxes 138 104
Securities losses (gains) 2,497 (230)
Other losses (gains), net 2,489 (1,658)
Net increase in trading account securities (447) 0
Increase in interest receivable (1,353) (363)
Increase in interest payable 422 1,048
Originations of loans held-for-sale (58,167) (89,701)
Proceeds from sale of loans held-for-sale 55,678 91,359
Net change in other assets & other liabilities (3,078) (1,688)
---------------------------
Net cash provided by operating activities 9,059 15,891
Investing Activities
---------------------------------------------------
Proceeds from maturities of securities - 23,850 99,553
available-for-sale
Proceeds from sales of securities - 105,167 47,140
available-for-sale
Purchases of securities - available-for-sale (158,218) (188,245)
Net decrease (increase) in loans 9,777 (49,628)
Net increase in premises and equipment (1,862) (3,194)
---------------------------
Net cash used by investing activities (21,286) (94,374)
Financing Activities
---------------------------------------------------
Net decrease in demand deposits, interest bearing
demand and savings deposits (18,519) (22,290)
Net increase in time deposits 5,307 26,049
Net increase in federal funds purchased and
securities sold under agreements to
repurchase 10,175 20
Decrease in note payable (4,000) 0
Net (decrease) increase in borrowings (2,117) 5,461
Net advances from Federal Home Loan Bank 38,596 114,624
Cash dividends (4,910) (4,470)
Purchase of treasury stock (5,450) (4,564)
Net issuance of common stock (14) 30
---------------------------
Net cash provided by financing activities 19,068 114,860
---------------------------
Increase in cash and cash equivalents 6,841 36,377
---------------------------
Cash and cash equivalents at beginning of year 35,238 49,478
---------------------------
Cash and cash equivalents at end of period $ 42,079 $ 85,855
===========================
</TABLE>
Supplementary Cash Flow Information:
Cash paid for 1) Federal Income taxes - $2,810,000 and $4,427,000 for the
nine months ended September 30, 2000 and 1999, respectively and 2) Interest
- $50,261,000 and $39,297,000 for the nine months ended September 30, 2000
and 1999, respectively.
See notes to financial statements.
-6-
<PAGE> 7
Notes to Consolidated Financial Statements (unaudited)
Second Bancorp Incorporated and Subsidiary
September 30, 2000
(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- and nine- month periods ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. 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, 1999.
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 - COMPREHENSIVE INCOME
During the first nine months of 2000 and 1999, total comprehensive income
amounted to $6,046 and $4,730, respectively. The components of comprehensive
income, net of tax, for the and nine month periods ended September 30, 2000 and
1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
--------------------------
<S> <C> <C>
Net income $2,104 $12,865
Unrealized losses on available-for-sale securities 3,942 (8,135)
--------------------------
Comprehensive income $6,046 $ 4,730
==========================
</TABLE>
Accumulated other comprehensive loss, net of related tax, at September 30, 2000,
December 31, 1999 and September 30, 1999 totaled $(3,849), $(7,791) and
$(5,038), 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:
<TABLE>
<CAPTION>
January 1 to January 1 to
Sept. 30, 2000 Sept. 30, 1999
------------------------------
<S> <C> <C>
Unrealized holding gains (losses) arising during the period $ 3,942 $(8,135)
Less: reclassification for losses (gains) included in net income 2,497 (230)
---------------------------
Net unrealized gains (losses) on available-for-sale securities $ 6,439 $(8,365)
===========================
</TABLE>
NOTE D - RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative Instruments and Hedging Activities: SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended by
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133", requires derivative
instruments be carried at fair market value 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.
-7-
<PAGE> 8
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.
Financial Condition
At September 30, 2000, the Company had consolidated total assets of $1.56
billion, deposits of $1.08 billion and shareholders' equity of $112 million.
Since September 30, 1999, total assets have increased by $11 million or 0.7%.
Gross loans have grown by 3.9% during the past year to total $1.06 billion.
Consumer lending activities have resulted in strong increases in outstanding
balances, while a large sale of residential real estate loan balances in the
third quarter has reduced from a 42% concentration of total loans to 33% at
quarter end. Consumer loans represented 27% of loans at the end of the third
quarter of 2000 versus 21% for the third quarter of 1999.
Funding growth has primarily been generated through advances from the Federal
Home Loan Bank ("FHLB"). FHLB advances have increased by $51 million over the
past year and are utilized to generate longer duration liabilities and fund
normal loan growth.
Results of Operations
General.
The Company reported a loss of $5,545,000 for the third quarter or a diluted
fifty-five cents ($.55) per share as the Company completed the major
restructuring of its balance sheet originally announced August 14th. Absent the
$9,022,000 in after tax restructuring and other charges taken in the third
quarter, earnings for the period would have been $3,477,000 or thirty-four cents
($.34) per share compared to $4,412,000 or forty-one cents ($.41) per share for
the same period last year. On a year-to-date basis, net income through the end
of the quarter was $2,104,000 ($11,126,000 without restructuring costs) or
twenty cents ($.20) per share compared to $12,865,000 or $1.20 per share for the
first three quarters of 1999.
After tax charges to earnings (losses) during the quarter resulting from the
balance sheet restructuring were $1,825,000 on securities sales; $2,836,000 on
mortgage loan sales; $2,665,000 on additions to the loan loss reserve to reflect
the shift in loan mix; $393,000 on Federal Home Loan Bank advance prepayments;
and $1,303,000 on other non-recurring expenses. The following schedule details
the restructuring and reengineering charges:
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<PAGE> 9
Second Bancorp Incorporated and Subsidiary
Recap of Restructuring and Reengineering Charges
Quarterly Data
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Sept. 2000 Description
------------------------------------------------------------------
<S> <C>
Interest income $ 652 Net deferred costs on sold mortgages
Provision for loan losses 4,100 Additional provision for specific credits
Loss on sale of loans 3,711 Sale of long-term fixed rate mortgages
Loss on sale of securities 2,808 Sale and reinvestment into higher yielding securities
Other expenses 2,609 Various restructuring and reengineering costs incurred in
the third quarter, primarily paid for in the third quarter
with the remainder to be paid in the fourth quarter.
Includes consulting costs, reduction of FHLB
balances and writedown of OREO property.
-------
Pre-tax total $13,880
=======
After-tax total $ 9,022
=======
</TABLE>
One of the effects of the third quarter restructuring and reengineering was to
minimally shrink the Company's balance sheet as $130 million in below market,
fixed rate loan assets were sold and $100 million of the proceeds were used to
reduce exposure on higher cost Federal Home Loan Bank advances. Some of the
positive net effects of these actions will be to significantly improve balance
sheet flexibility and liquidity, reduce the earnings drag caused by a large
mortgage loan portfolio, and ease the overall cost of funds. These actions and
the continuing redeployment of resources into higher yielding assets like
consumer and commercial loans are expected to positively impact the net interest
margin. The restructuring has been completed without material impact on the
capital ratios, which remain above minimum regulatory requirements.
Excluding the restructuring charges, operating return on average assets (ROA)
and return on average total shareholders' equity (ROE) were .84% and 11.92%,
respectively for the third quarter of 2000 compared to 1.17% and 14.89% for last
year's third quarter. A shrinking net interest margin caused by increased
funding rates coupled with increased personnel costs contributed to the earnings
decline for the quarter. For the first nine months of 2000, the Company achieved
operating return on average assets (ROA) and return on average total
shareholders' equity (ROE) were .93% and 12.87%, respectively compared to 1.16%
and 13.99% for the same period last year.
Asset Quality. The reserve for loan losses increased to 1.42% of loans through
an addition of $4,100,000 to the normal provision for loan losses for the
quarter. The additional provision was a result of a detailed review of specific
credits. The reserve was 1.18% of total loans at September 30, 1999. Non-accrual
loans have increased over the past year and total $3,821,000 as of September 30,
2000 versus $1,994,000 as of the same date last year. Net charge-offs were an
annualized .40% of average loans versus .23% for the third quarter of 1999.
-9-
<PAGE> 10
Net Interest Income. Net interest income for the third quarter of 2000 decreased
by $742,000 from the same period last year to $11,606,000. The decrease was
primarily due to the recognition of deferred origination expenses associated
with the bulk mortgage loan sale that was part of the third quarter
restructuring. The operating net interest margin declined to 3.31% for the third
quarter of 2000 versus 3.65% for the same period in 1999. The decline in the net
interest margin primarily resulted from increased funding costs. Net interest
income for the first nine months of 2000 totaled $36,669,000, representing a
0.9% decrease over the same period in 1999. Average interest earning assets
increased by 9.3% while the net interest margin declined from 3.73% for the
first nine months of 1999 to 3.47% for the same period in 2000.
Non-interest Income. Operating non-interest income totaled $3,661,000, or 7.2%
lower than the third quarter of 1999 due primarily to lower trust fee income and
gains on sales of loans. For the third quarter of 2000, fees from trust services
decreased by $117,000, or 12%, over the third quarter of 1999 due primarily to a
reduction in assets under management. Service charges on deposit accounts
increased by $33,000 or 3% from the same period a year ago. For the first nine
months of 2000, non-interest income declined by 3.4% to $10,910,000. was
virtually unchanged from a year prior. The reduction was due to smaller gains
from loan sales and trading account losses of $345,000.
Non-interest Expense. Operating expenses for the third quarter of 2000 were 9.5%
higher than for the same period in 1999. Primary amongst the categories that
increased was salaries and employee benefits, which increased by 14.2% from a
year ago. For the first nine months, operating expenses were up 9.5% from a year
ago, with salaries and benefits up 13.8% from a year prior.
Capital resources. Shareholders' equity has decreased by $7 million from a year
ago due primarily to the balance sheet restructuring completed in the third
quarter of 2000. The company repurchased 335,420 shares of common stock into
Treasury during the first three quarters of 2000 which also contributed to the
decline. The Company completed its previously authorized share repurchase of up
to 600,000 shares of the Company's common stock. The board of directors has
authorized the additional buy-back of up to 2% of the Company's outstanding
shares on an annual basis. Repurchases under this authorization are expected to
be completed through open market transactions at prevailing market prices and
are discretionary, based upon management's periodic assessment of market
conditions and financial benefit to the Company. This continuing repurchase
authorization will remain in effect until amended or withdrawn by subsequent
board action. As of September 30, 2000, the Company had repurchased 639,920 of
the authorized shares of common stock.
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, $20 million in unsecured lines of credit with correspondent banks,
which are renewable annually, and access to the capital markets.
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.
-10-
<PAGE> 11
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 Company's market
risk is composed primarily of interest rate risk. The Company's Asset/Liability
Committee (ALCO) is responsible for reviewing the interest rate sensitivity
position of the Company and establishing policies to monitor and limit the
exposure to interest rate risk. Since nearly the Company'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 Company.
The earnings simulation model forecasts earnings for a one-year horizon frame
under a variety of interest rate scenarios; including interest rate shocks,
stepped rates and yield curve shifts. 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 remain unchanged if interest
rates would immediately rise by 200 basis points. It projects an decrease in net
income of 2.4% if interest rates would immediately fall by 200 basis points.
Management believes this reflects an appropriate level of risk from interest
rate movements. 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. Management expects
interest rates to have an neutral bias for the remainder of 2000.
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 Company also uses off-balance sheet swaps, caps and floors
to manage interest rate risk.
-11-
<PAGE> 12
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 Meeting of Shareholders was held
on May 9, 2000. The results of the votes on the matters presented to
shareholders were included in the Form 10Q for the period ended March 31, 2000.
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 22, 2000 to announce a
restructuring of the Company's balance sheet designed to improve liquidity, net
interest margin, product mix, interest rate sensitivity, and loan loss reserve.
The Company filed a report on Form 8-K on October 20, 2000 to announce the
completion of the previously announced stock repurchase and to announce the
authorization to repurchase up to 2% of outstanding shares on an annual basis.
The Company filed a report on Form 8-K on October 20, 2000 to announce third
quarter earnings and completion of the previously disclosed restructuring.
(27) Financial data schedule
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<PAGE> 13
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 13, 2000 /s/ David L. Kellerman
------------------------------------------------------------
David L. Kellerman, Treasurer
Signing on behalf of the registrant and as principal accounting officer and
principal financial officer.
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<PAGE> 14
Statement 11 Re: Computation of Earnings Per Share
Second Bancorp Incorporated and Subsidiary
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------------------------------------------
September 30 September 30 September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in thousands, except per share data)
BASIC:
Weighted average shares issued 10,776,870 10,756,651 10,773,288 10,747,810
Less: Treasury shares (615,484) (99,954) (478,366) (67,100)
-------------------------------------------------------------
Net Weighted average shares outstanding 10,161,386 10,656,697 10,294,922 10,680,710
=============================================================
Net income ($5,545) $4,412 $2,104 $12,865
=============================================================
Basic Earnings Per Share ($0.55) $0.41 $0.20 $1.21
=============================================================
DILUTED:
Weighted average shares issued 10,776,870 10,756,651 10,773,288 10,747,810
Less: Treasury shares (615,484) (99,954) (478,366) (67,100)
Net effect of dilutive stock options -
based on the treasury stock method
using average market price n/a 82,388 23,491 86,976
-------------------------------------------------------------
10,161,386 10,739,085 10,318,413 10,767,686
=============================================================
Net income ($5,545) $4,412 $2,104 $12,865
=============================================================
Diluted Earnings Per Share ($0.55) $0.41 $0.20 $1.20
=============================================================
</TABLE>
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