[Second Bancorp Logo]

FORM 10-K

For the Fiscal Year Ended December 31, 1999

Table of Contents

WASHINGTON, D.C. 20549

FORM 10-K

Commission File Number: 0-15624

SECOND BANCORP INCORPORATED

OHIO

108 Main Avenue SW, Warren, Ohio

44481

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(g) of the Act:

Title of each class

Name of each exchange on which registered

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, no par value

      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 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, 2000 as reported on the NASDAQ National Market System, was approximately $169,664,921. 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, 2000, the registrant had outstanding 10,369,850 shares of Common Stock

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the annual shareholders’ meeting to be held on May 9, 2000 are incorporated by reference into Part III.

Table of Contents

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, 1999, Second Bancorp had consolidated total assets of $1.54 billion, deposits of $1.098 billion and shareholders’ equity of $116 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.

The Second National Network of Banking Centers

      Second National Bank expanded its network of banking centers in 1999 by successfully converting newly acquired bank branches and establishing de novo offices.

      Fully integrating Trumbull Savings & Loan and Enterprise Bank into the Second National Bank system was a major initiative and significant achievement. With the acquisitions completed, both institutions and their respective facilities began operating as Second National Bank. In addition to gaining a 25 percent market share in Trumbull County, the acquisitions  — along with our own sales activities — significantly boosted the Bank’s customer base, deposits, and outstanding loan balances. From mid-1998 through 1999, total checking and savings accounts increased by approximately 100 percent, outstanding home equity loan balances nearly doubled, and the real estate loan portfolio increased by more than 300 percent.

      The acquisition of Trumbull Savings & Loan also helped Second National meet a critical need for office space. The Trumbull Savings headquarters facility in downtown Warren, along with branches in Howland and Newton Falls, enabled us to expand efficiently and conveniently. We capitalized on the additional office space by relocating our very successful Trust Division to the first floor of the High Street Banking Center. The new location showcases the nationally recognized Trust Division while providing greater access and convenience to our customers. In addition to a cohesive work space for trust officers and administrators, the remodeled interior provides a comfortable, professional environment for this growing division.

      To offer more personalized service to customers, the lobby of the High Street Banking Center was also remodeled. Additional space in the building is housing other vital Bank operations, including Trust Operations, the Records and Research Department, and a much expanded Real Estate Division. At the new Howland and Newton Falls Banking Centers in Trumbull County, both of which are among the busiest in the Second National system, we made improvements to handle the increased volume of business and to enhance efficiency and customer accessibility.

      Second National established de novo offices in the Lake Cable area of Jackson Township in Stark County and in the growing suburb of Twinsburg in Summit County. The Bank’s Lake Cable Banking Center, which builds on the success of nearby offices in Akron and Green, offers products and services that are an excellent match for the small- to medium-sized businesses of Jackson Township. With a concentration of Second National offices around our new Twinsburg Banking Center — our sixth in Summit County — we believe we are the most convenient bank in the area.

      Capitalizing on an opportunity to establish a larger presence in the village of Poland, Second National constructed a new banking center directly on Boardman-Poland Road (Route 224). Our new location offers greater visibility, room for expansion, and the convenience of drive-up services. With 3,000 square feet of space — nearly triple the size of the original office — our new banking center not only accommodates the

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Akron

      Second National will strengthen its presence in Summit County in 2000 by expanding the Akron Banking Center. The new center will be three times the size of our current office space, enabling us to increase service to retail and corporate customers. With a total of 3,340 square feet in this prime downtown location, we will be able to add a Mortgage Loan Originator, Investment Representative, and Trust Officer to our Akron staff.

Alternative Delivery

      With the addition of automated bill payment, Second National’s Call Center became a complete alternative delivery system and a true sales venue in 1999.

      Through the Call Center and Interactive Voice Response (IVR), nearly every transaction that can be completed in a Second National retail banking center can be accomplished over the telephone — from transferring funds and verifying account balances to making loan payments. The automated bill payment component allows Second National customers to pay any bill to virtually any merchant from anywhere — all automatically using a touch-tone telephone. This new service not only offers the ultimate in convenience to customers, it is also a major vehicle for shifting routine transactions to a more efficient automated environment.

      The Call Center’s personal bankers — who assist customers in opening new deposit accounts and loans over the telephone — achieved considerable sales success in 1999, booking more than $1 million in consumer loans. In 2000, we plan to build on that volume and make the Call Center its own sales and profit center.

      Operational improvements — such as a new call volume tracking and reporting system, call monitoring, time-in-queue messaging, sales incentives for personal bankers, and the ability of non-customers to open new deposit accounts — will be made to increase sales volume and customer satisfaction in this important delivery channel. By handling more of the Bank’s inquiries and sales calls, the Call Center will not only increase its own revenue stream, it will also provide Second National banking center personnel with more time for face-to-face selling.

Specialized Financial Services

      Building on more than a century of success in traditional banking services, Second National continued to expand its specialized financial services, including Commercial Lending, Corporate Services, Trust, Investments, and Real Estate. Because of our increasing strength in each of these service areas, Second National is able to meet the full range of customer financial needs. We view one-stop shopping not only as the most convenient way for our customers to do business, but also as the key to increased profitability and shareholder return in today’s financial services market.

Commercial Lending

      Second National remained committed to small business and was again a leader in Small Business Administration (SBA) lending. With a total of 65 loans extended during the SBA’s fiscal year 1999, the Bank ranked third in the SBA’s Cleveland district, just behind two major national banks.

      The addition of management expertise to Commercial Lending and Corporate Services strengthened the division’s credit quality and extended the reach of our sales efforts.

      In addition to expanding calling efforts into the Bank’s western territory, Corporate Services will enhance its competitiveness in 2000 by upgrading its automated cash management system to a Windows®-based system, to be more compatible with the technological environments in most businesses today. Corporate Services will also make an important addition to its product mix that will increase the Bank’s fee income and competitiveness. A new equipment lease, offered through CashFlow LEASE™, will be available to creditworthy business customers

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Trust

      Our Trust Division continued to be a standout:  superior investment performance, customer service, and innovative programs have earned Second National Bank an outstanding reputation and significant new trust business. The Trust Division’s growing customer base, together with Institutional Trust Program customers, have boosted trust assets under management to $840 million, an increase of 110 percent over the last five years.

      Second National’s winning investment strategies regularly outrank much larger money managers, while yielding consistently high returns for trust customers. In 1999, the Trust Division’s investment funds continued to be nationally ranked by industry analysts, including Nelson Information Company, Pensions & Investments Report (PIPER), and TIS-PERAscope.

      PIPER ranked all three of Second National’s common trust funds first or second in their respective categories for the one- and five-year periods ending March 31, 1999. The TIS-PERAscope Universe Performance Report ranked the Bank’s employee benefit growth fund second in the nation, based on a return of 20.1 percent from January 1 through September 30, 1999. The same fund ranked fourth with returns of 18 percent and 22.9 percent, respectively, for the three- and five-year periods ending September 30, 1999. The Trust Division’s equity fund and fixed-income funds were also nationally ranked in the report for their returns.

      Nurturing the growth and success of this important division in 2000 will include the addition of a new business officer. To service and further develop trust business in the Bank’s southwestern region, we will place the new trust officer in our Akron Banking Center.

Investments

      Second National Bank’s Investment Center (formerly the Alternative Investment Center) — offering a variety of mutual funds, annuities, stocks, bonds, and insurance* through AAG Securities, Inc. — posted a stellar year, increasing total sales by 89 percent over 1998 and significantly expanding its client base.

      The investment staff, all Registered Representatives of AAG Securities, are deployed throughout Second National’s marketplace. Two members of the Investment Center received the 1999 Summit Club Chairman’s Award by AIM Distributors, Inc., a subsidiary of AIM Management Group, for achieving the highest level of professional excellence and for being among AIM’s top national producers.

      In 2000, the Investment Center will factor prominently in Second National’s relationship building strategy and as a significant contributor to the Bank’s non-interest income. In addition to further penetrating the life and long-term care insurance market, the Center plans to offer comprehensive financial planning to customers. Written plans by Investment Representatives will address client needs for asset allocation, insurance, and estate and retirement planning.

Real Estate Division

      Second National took major steps to bolster the foundation of the Real Estate Division in 1999. With a new organizational structure and an experienced management team, Second National expanded this division and made operational improvements to increase market share and efficiency. As a result of acquired loan balances and sales efforts throughout 1998-99, we experienced more than a 300 percent increase in the real estate portfolio.

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      The division leveraged its Trumbull County mortgage loan leadership position in other Ohio communities by expanding its corps of mortgage originators. Second National recruited and deployed several additional originators throughout Northeast Ohio, moving closer to our 2000 goal of 15 originators.

      To complement our direct loan origination, Second National established a Correspondent Lending Department and began successfully increasing mortgage volume with minimal overhead. Combined with mortgages originated in the banking centers, indirect loans secured through correspondent lending are adding critical mass to the total volume Second National is able to produce and sell in the secondary market.

      To protect the mortgage interest rate risk associated with our increased mortgage activity, Second National hired an experienced professional to establish a full-fledged Secondary Marketing Department. This department monitors the market to maximize Second National’s interest rate spread and competitiveness through optimal pricing.

      The Real Estate Division streamlined the mortgage loan process by implementing the automated underwriting systems Loan Prospector® and Desktop Underwriter®. To improve the processing and tracking of loans, laptop computers were deployed to all originators.

      The pipeline management system will be upgraded to the fully integrated, Windows®-based MortgageFlex module to enhance the flow between processing and servicing, as well as the execution of loan sales. The new system will eliminate manual processes, minimize data entry, and facilitate the tracking of documents. By establishing a new Escrow Department, which will solicit our servicing portfolio for credit life, disability, and accidental insurance, the Real Estate Division will create a new source of non-interest income.

      Second National’s Real Estate Division forges into the 21st century with a broad range of services, strong management, and aggressive sales goals. To increase efficiency and profitability levels in 2000, the division will focus on increased government lending, system enhancements, and further expansion.

Technology

      Second National continued to successfully employ technology to assist in meeting our strategic business goals — from efficient day-to-day operations to sophisticated management analysis to new means of delivering products and services. With the completion of our five-year technology migration plan, we are pleased to report that a nationally recognized financial services consultant positively evaluated Second National’s current technological position.

      Two major accomplishments in 1999 included upgrades to Maxsys (the document preparation system for deposit accounts) and the completion of our imaging project.

      The internally developed software, Maxsys, eliminates the manual writing of information on multiple forms, prepares all account documentation, and reduces the time required to open a new deposit account. Software upgrades to Maxsys further automated the process by offering even more time- and cost-saving features and functions.

      Second National’s imaging project was a significant achievement, and highly successful in terms of cost savings, functionality, and acceptance. All three facets of the project — statement, research, and report imaging — resulted in significant savings in personnel and material costs. New check imaging statements were accepted by more than 99 percent of all customers, making this a technological advancement that immediately contributed to the Bank’s bottom line while adding value to our customers.

      Second National’s new three-year technology migration plan, commencing in the year 2000, creates the appropriate infrastructure to support our sales goals. It is also designed to help Second National realize greater efficiencies, reduce costs, and create new products and services.

      Major initiatives of the technology migration plan include the development of PC-based delivery channels and additional automated processing modules to increase the number of routine transactions performed in automated environments. Our plan also calls for the creation of an additional document preparation system for

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      In 2000, we will take full advantage of our analytical capabilities to build strong customer relationships and to ensure the delivery of our products and services is strategic, focused, and profitable.

      We will implement a new sales tracking system to expand the scope of our sales measurement. By comprehensively measuring all facets of Second National business, the new system will assist in developing individual business plans, employee evaluations, and ultimately, quantifying our 2000 sales achievement.

      ALLTEL’s new Relationship Management System (RMS) will enable Second National staff to take customer financial needs analysis to a higher level. With a more comprehensive picture of customer relationships at their disposal, our personal bankers will be better equipped to identify customer needs and match them with Second National products and services. Using bank-wide information, including the RMS database, our new Profitvision application will continue to assist us in analyzing profitability at multiple levels and from various viewpoints.

Community Development

      With the help of a new Community Development Officer, Second National Bank continued to make a significant impact on the communities it serves through loans, investments, and education. In concert with recently revised Community Reinvestment Act legislation, Second National placed a strong emphasis on lending activity, extending more than $4 million in community development loans throughout the year.

      The Bank orchestrated two community development loans totaling more than $1 million that will help finance the construction of brand new, low-to-moderate income housing in the Mahoning Valley. A $420,000 loan commitment to Sunshine, Inc. of Warren will help fund $4 million to construct 40 new homes in Southwest Warren that will be available for rent and, eventually, for sale. A similar loan in the amount of $620,000 was committed to the Youngstown community development organization CHOICE, Inc., which plans to construct and rent single-family homes in that area.

      Second National also made a $1 million investment with the Ohio Capital Corporation for Housing, which provides capital for the construction of homes in low-to-moderate income areas throughout Ohio. The investment not only helps create more affordable housing, it also provides the Bank with both short-term tax savings and a long-term yield. Second National’s contribution will immediately increase the housing stock in Portage and Summit counties through the $800,000 Portage Housing I project, which intends to build 30 single-family homes in Kent, Ravenna, and Windham.

      Recognizing the importance of education and business ownership, Second National continued offering Youngstown State University’s Entrepreneurship Program, as well as other seminars on financial topics.

2000

      We have determined a singular focus for Second National Bank in the year 2000: providing solutions to our customers’ financial needs and strengthening customer relationships. Building multi-dimensional relationships with a continually expanding customer base will enable us to maximize our return to both customers and Second Bancorp shareholders. At the same time, we will complete a company-wide efficiency analysis, to ensure Second National Bank continues to operate as efficiently and profitably as possible.

      In the coming year, we will continue our dedication to knowing and working with customers, meeting their requests without delay, and offering the best products and services available. We will strive for exceptional customer service, introduce new products, launch a year-long advertising campaign, and deploy specialized financial professionals throughout our marketplace.

      In the area of product development, we will strive to offer more to more people. This year, we will introduce a unique, specialized leasing program for small businesses, as well as a new investment account for Private Banking clients. This new personal “sweep” account will enhance the competitiveness of the Private Banking Program by meeting customer demand for a liquid, high-yield deposit account.

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      With an eye toward continual expansion, we will uncover immediate opportunities throughout our marketplace with the help of an expert sales staff. Additional specialists in Private Banking, Corporate Services, and Trust are assisting our core staff in serving our growing client base throughout our service area and beyond.

      In combination, we believe our relationship building, customer service, and operational initiatives will yield positive results in 2000 and beyond.

      With our vision and commitment to meeting our strategic business goals and building on our past success, we, at Second Bancorp and Second National Bank, will continue our vigilant dedication to establishing more meaningful relationships with our stakeholders and leveraging our value-added advantage to make us truly unique in the banking industry.

      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 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 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, 1999 and 1998 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

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      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 $430 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 will be 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.

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

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      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, 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, 1999, the projected BIF and SAIF assessments for Second National for 2000 will be approximately $240,000.

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 Septem-

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      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, 1999 was approximately 527. 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 25 other branch and loan production office locations are leased under lease and sublease agreements with remaining terms of 1 to 18 years. Second National also has leases for record retention and office space with remaining lease terms of one and seven 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.

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PART II.

      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, 2000, the number of shareholders of record of the Common Stock totaled 2,729. 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.

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 beginning on page 13.

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(1)	Prior period amounts have been restated for stock splits and pooling-of-interests transactions.
(2)	Merger costs for 1998 are discussed in Note 3 to the Consolidated Financial Statements.

      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.

Results of Operations

      Net income for 1999 totaled a record $16,178. Net income in 1998 was $5,633 and was affected by the merger activity completed in 1998. The 1998 acquisition of Trumbull Financial Corporation, headquartered in Warren, Ohio, and Enfin Corporation, headquartered in Solon, Ohio, greatly increased the Corporation’s asset

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      Diluted earnings per share, which takes into effect the dilutive impact of the preferred stock which was present through mid-1996 and other dilutive securities, was $1.51 in 1999, $.52 in 1998 and $1.25 in 1997. The Corporation declared a two-for-one stock split for the common stock effective May 1, 1997. The Corporation’s common stock, trading under the Nasdaq symbol of SECD, has generally followed the path of most bank stocks during 1998 and 1999, peaking at $37.25 per share in the second quarter of 1998 and finishing 1999 at $22.375 per share. The stock price at year-end 1999 represents a price of 201% of book value (up from 193% the prior year-end). Dividends declared in 1999 totaled $.56 per share compared to $.48 per share the prior year.

      Revenue continues to be provided primarily from interest and fees on loans, which totaled $81,464, $79,963 and $74,145 in 1999, 1998 and 1997, respectively. This represents 68%, 67%, and 64% of total revenues for those years. Interest income on securities is also a major source of revenue, contributing 19%, 22% and 26% of revenues in 1999, 1998, and 1997, 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 18% in 1997 to 20% in 1998 to 23% in 1999.

Net Interest Income

      Net interest income declined in 1999, accompanied by a decline in net interest margin. Significantly impacting both net interest income and net interest margin was a lower yield on loans. Loan yields declined by more than 40 basis points in 1999 and created over $4 million in reduced earnings to net interest income (See Rate/ Volume Analysis table). The net interest margin declined to 3.68% from 3.84% in 1998. The net interest margin was 3.78% in 1997. Average earning assets increased by 1.3% in 1999 to $1,405,195 after increasing 2.6% to $1,386,894 in 1998. The Corporation continues to face tightening pressures on the net interest margin due to the existing trend of rising interest rates and a liability sensitive interest rate risk position.

      The relationship between net interest income, FTE net interest income, earning assets and net interest margin for the past three years follows:

      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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SECOND BANCORP, INC. AND SUBSIDIARY

YIELDS ANALYSIS

				Year Ended December 31,
				1999												1998
				Average								Yield/				Average								Yield/
				Balance				Interest				Rate				Balance				Interest				Rate
ASSETS
Interest earning assets:
	Taxable loans(1)(3)			$	992,643			$	80,783				8.14	%		$	924,823			$	79,229				8.57	%
	Tax-exempt loans(2)				13,355				1,048				7.84				13,585				1,112				8.19
	Taxable securities				304,199				18,446				6.06				368,421				22,945				6.23
	Tax-exempt securities				78,783				5,817				7.38				68,994				5,071				7.35
	Federal funds sold				16,215				891				5.49				11,071				742				6.70
		Total interest earning assets			1,405,195				106,985				7.61				1,386,894				109,099				7.87
Non-interest earning assets					93,751												77,909
TOTAL				$	1,498,946											$	1,464,803
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
	Demand deposits			$	92,350				1,395				1.51			$	91,310				1,488				1.63
	Savings deposits				279,305				8,252				2.95				263,855				7,494				2.84
	Time deposits				611,827				32,291				5.28				626,440				34,589				5.52
	Federal funds purchased and securities sold under agreements to repurchase				136,382				5,781				4.24				138,652				6,525				4.71
	Note payable				921				64				6.95
	Other borrowed funds				2,696				155				5.75				3,008				170				5.65
	Federal Home Loan Bank advances				136,484				7,372				5.40				99,462				5,622				5.65
Total interest bearing liabilities					1,259,965				55,310				4.39				1,222,727				55,888				4.57
Non-interest bearing liabilities:
	Demand deposits				108,778												104,469
	Accrued expenses and other liabilities				8,834												10,859
Other liabilities					117,612												115,328
Shareholders’ equity					121,369												126,748
TOTAL				$	1,498,946											$	1,464,803
Net interest earnings (FTE)									51,675												53,211
Taxable equivalent adjustment									2,403												2,102
Net interest income								$	49,272											$	51,109
Net yield on interest earning assets													3.68	%											3.84	%

[Additional columns below]

[Continued from above table, first column(s) repeated]

				Year Ended December 31,
				1997
				Average								Yield/
				Balance				Interest				Rate
ASSETS
Interest earning assets:
	Taxable loans(1)(3)			$	856,186			$	73,509				8.59	%
	Tax-exempt loans(2)				13,147				964				7.33
	Taxable securities				411,075				27,142				6.60
	Tax-exempt securities				56,926				4,324				7.60
	Federal funds sold				13,783				849				6.16
		Total interest earning assets			1,351,117				106,788				7.90
Non-interest earning assets					73,094
TOTAL				$	1,424,211
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
	Demand deposits			$	88,324				1,533				1.74
	Savings deposits				266,500				7,563				2.84
	Time deposits				621,847				34,552				5.56
	Federal funds purchased and securities sold under agreements to repurchase				130,298				6,172				4.74
	Note payable				3,647				276				7.57
	Other borrowed funds				2,851				163				5.72
	Federal Home Loan Bank advances				85,664				5,448				6.36
Total interest bearing liabilities					1,199,131				55,707				4.65
Non-interest bearing liabilities:
	Demand deposits				103,138
	Accrued expenses and other liabilities				9,815
Other liabilities					112,953
Shareholders’ equity					112,127
TOTAL				$	1,424,211
Net interest earnings (FTE)									51,081
Taxable equivalent adjustment									1,798
Net interest income								$	49,283
Net yield on interest earning assets													3.78	%

(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 35%, 34% and 34% marginal Federal tax rates in effect during 1999, 1998 and 1997, respectively.
(3)	Loan fees are included in the interest reported for loans. Those fees amounted to $2,193 in 1999, $2,636 in 1998, and $2,906 in 1997.

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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:

(1)	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 $3,195 in 1999, representing .32% of loans. This represents a significant decline from the prior year’s provision of $10,579 (.92% of average loans). The provision for loan losses was $4,205 in 1997, $5,072 in 1996 and $3,176 in 1995. 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 .40% in 1999 and 1.55% in 1998.

Non-Interest Income

      Non-interest income increased by 16% from the prior year and totaled $14,792 for 1999. Increases were realized in deposit service charges (up 4%), trust income (up 25%) and other income (up 39%). Trust income was strongly influenced by both increased sales and increased returns on investments. Other income was influenced by an additional $15 million investment in bank owned life insurance at the end of 1998. Included in other income is the gain realized on the sale of real estate mortgage and SBA loans. Loan sale gains totaled $2,066 in 1999 compared to $2,150 in 1998. Non-interest income in 1998 increased by 15% over 1997 increases. Service charges on deposit accounts improved by 5% to $4,145 in 1998. 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 $2,820 in 1998, a 10% improvement over the prior year. The revenue increase was partly

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      Included in non-interest income over the past three years were pre-tax gains on the sale of securities. During 1999, the security portfolio realized gains in the amount of $312. Security gains in 1998 totaled $1,007. During 1997, the Corporation established a charitable foundation to carry on the Corporation’s many charitable and civic activities. The gain realized on the appreciated stock donated to the foundation was $352, which represented a significant portion of the total gains realized in 1997 of $595.

Non-Interest Expense

      The Corporation continues to emphasize expense control and to be efficient in its utilization of resources to manage assets. Non- interest expenses as a percentage of average assets were 2.62% in 1999, compared to 2.70% in 1998 (excluding merger costs). The table below details the percentage change in each non-interest expense category over the past three years:

      Equipment expense increased by 11% in 1999 and 13% in 1998 due primarily to the costs associated with automation efforts during the past two years, including year 2000 expenditures. During 1997, the Corporation migrated to an in-house data processing environment, while in 1998, the Corporation continued implementing new technologies and upgraded the acquired companies’ equipment to newer technologies. Otherwise, expense categories either rose by a modest amount or declined versus the prior year, realizing the efficiencies planned during the 1998 acquisitions.

Income Taxes

      The provision for income taxes was $5,361, $1,403 and $3,745 in 1999, 1998 and 1997, respectively. The effective tax rate for the Corporation was 24.9%, 19.9% and 22.1% during the same periods. The reduction in the effective tax rate in 1998 was due to the continuation of the accumulation of tax-exempt securities and the realization of investment tax credits through the Bank’s participation in low-income housing projects as well as reduced net income due to merger activities.

Balance Sheet

      Average assets grew at a 2.4% pace in 1999 after increasing by 2.9% in 1998. The growth rate is impacted 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 1999, up 1% from 1998.

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

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      The securities portfolio totaled $367,587 as of December 31, 1999 and is classified entirely as available-for-sale. That balance represents a 4% increase over the prior year-end. 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 6.4% as of December 31, 1999, down .1% from the prior year-end. During the past year, the Corporation realized $312 in net gains on the sale of securities. In 1998 and 1997, net security gains totaled $1,007 and $515, respectively. As interest rates have increased significantly over the past year, the Corporation now has an unrealized loss position net of tax for the portfolio of $7,791.

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      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 35% for 1999.

      Mortgage-backed securities have various stated maturities through July 2027. The estimated weighted-average maturity of this segment of the portfolio is 6.5 years.

  Loans:

      Listed below is the Corporation’s loan distribution at the end of each of the last 5 years: