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 the quarterly period ended March 31, 2002
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
incorporation or organization) Identification No.)
108 Main Ave. S. W. Warren, Ohio 44482-1311
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(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 - 9,944,671 shares outstanding as of March 31,
2002.
1
SECOND BANCORP INCORPORATED AND SUBSIDIARIES
INDEX
Page
Number
------
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated balance sheets -
March 31, 2002 and 2001 and December 31, 2001................. 3
Consolidated statements of income -
Three months ended March 31, 2002 and 2001.................... 4
Consolidated statements of comprehensive income -
Three months ended March 31, 2002 and 2001................... 5
Consolidated statements of shareholders' equity -
Three months ended March 31, 2002 and 2001.................... 6
Consolidated statements of cash flows -
Three months ended March 31, 2002 and 2001................... 7
Notes to consolidated financial statements - March 31, 2002............ 8-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................ 10-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk............. 13-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 15
Item 2. Changes in Securities.................................................. 15
Item 3. Defaults upon Senior Securities........................................ 15
Item 4. Submission of Matters to a Vote of Security
Holders................................................................ 15
Item 5. Other Information ..................................................... 15
Item 6. Exhibits and Reports on Form 8-K....................................... 15
SIGNATURES...................................................................... 16
Exhibit 11. Statement Re: Computation of Earnings Per Share
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Second Bancorp Incorporated and Subsidiaries
Consolidated Balance Sheets
March 31 December 31 March 31
-----------------------------------------------------
(Dollars in thousands, except per share data) 2002 2001 2001
--------------------------------------------------------------------------------------------------------------------
ASSETS
---------------------------------------------------------------
Cash and due from banks $ 36,397 $ 40,837 $ 36,937
Federal funds sold and temporary investments 42,631 24,016 25,451
Securities:
Trading 0 0 238
Available-for-sale (at market value) 411,897 417,496 377,323
-----------------------------------------------------
Total securities 411,897 417,496 377,561
Loans 1,114,314 1,121,892 1,076,284
Less reserve for loan losses 16,884 16,695 15,778
-----------------------------------------------------
Net loans 1,097,430 1,105,197 1,060,506
Premises and equipment 16,737 16,416 17,533
Accrued interest receivable 9,596 10,272 10,118
Goodwill and intangible assets 28,187 26,578 6,157
Other assets 41,973 39,544 37,568
-----------------------------------------------------
Total assets $1,684,848 $1,680,356 $1,571,831
=====================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
---------------------------------------------------------------
Deposits:
Demand - non-interest bearing $ 138,107 $ 144,953 $ 105,920
Demand - interest bearing 99,284 105,221 86,124
Savings 335,460 276,628 239,661
Time deposits 558,348 596,329 629,851
-----------------------------------------------------
Total deposits 1,131,199 1,123,131 1,061,556
Federal funds purchased and securities sold under agreements
to repurchase 108,951 107,279 119,684
Note payable 0 0 1,000
Other borrowed funds 724 5,853 46
Federal Home Loan Bank advances 272,005 275,152 256,591
Accrued expenses and other liabilities 12,661 10,200 10,986
Corporation-obligated manditorily redeemable capital
securities of subsidiary trust 30,455 30,442 0
-----------------------------------------------------
Total liabilities 1,555,995 1,552,057 1,449,863
Shareholders' equity:
Common stock, no par value; 30,000,000 shares authorized;
10,856,360,10,832,810 and 10,785,760 shares issued,
respectively 37,722 37,453 36,953
Treasury stock; 911,689, 883,494 and 785,000 shares,
respectively (17,397) (16,798) (14,740)
Other comprehensive income 1,424 3,434 2,950
Retained earnings 107,104 104,210 96,805
-----------------------------------------------------
Total shareholders' equity 128,853 128,299 121,968
-----------------------------------------------------
Total liabilities and shareholders' equity $1,684,848 $1,680,356 $1,571,831
=====================================================
See notes to consolidated financial statements.
3
Second Bancorp Incorporated and Subsidiaries
Consolidated Statements of Income
For the Three Months
(Dollars in thousands, except per share data) Ended March 31
-----------------------------------
2002 2001
--------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
---------------------------------------------------------------------------------
Loans (including fees):
Taxable $20,471 $22,101
Exempt from federal income taxes 243 288
Securities:
Taxable 5,322 5,125
Exempt from federal income taxes 774 773
Federal funds sold and other 213 191
-----------------------------------
Total interest income 27,023 28,478
INTEREST EXPENSE
---------------------------------------------------------------------------------
Deposits 7,674 11,469
Federal funds purchased and securities sold under agreements to repurchase 566 1,187
Note Payable 0 18
Other borrowed funds 16 37
Federal Home Loan Bank advances 3,877 3,851
Corporation-obligated manditorily redeemable capital
securities of subsidiary trust 733 0
-----------------------------------
Total interest expense 12,866 16,562
-----------------------------------
Net interest income 14,157 11,916
Provision for loan losses 933 761
-----------------------------------
Net interest income after provision for loan losses 13,224 11,155
NON-INTEREST INCOME
---------------------------------------------------------------------------------
Service charges on deposit accounts 1,320 1,261
Trust fees 786 756
Gain on sale of loans 1,544 783
Trading account (losses) gains (20) 58
Security (losses) gains (173) 529
Other operating income 1,507 1,172
-----------------------------------
Total non-interest income 4,964 4,559
NON-INTEREST EXPENSE
---------------------------------------------------------------------------------
Salaries and employee benefits 6,309 5,194
Net occupancy 1,137 1,116
Equipment 1,202 1,049
Professional services 485 343
Assessment on deposits and other taxes 329 401
Amortization of goodwill and other intangibles 110 81
Other operating expenses 2,225 1,867
-----------------------------------
Total non-interest expense 11,797 10,051
-----------------------------------
Income before federal income taxes 6,391 5,663
Income tax expense 1,708 1,475
-----------------------------------
Net income before cumulative effect of accounting change $ 4,683 $ 4,188
===================================
Cumulative effect of accounting change - SFAS No. 133 0 (101)
-----------------------------------
Net income $ 4,683 $ 4,087
===================================
NET INCOME PER COMMON SHARE:
Basic - before cumulative effect of accounting change, net of tax n/a $ 0.42
Diluted - before cumulative effect of accounting change, net of tax n/a $ 0.42
Basic $ 0.47 $ 0.41
Diluted $ 0.47 $ 0.41
Weighted average common shares outstanding:
Basic 9,944,671 10,020,097
Diluted 10,054,758 10,046,562
See notes to consolidated financial statements.
4
Second Bancorp Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income
For the Three Months
(Dollars in thousands, except per share data) Ended March 31
------------------------------
2002 2001
---------------------------------------------------------------------------------------------------------------
Net income $ 4,683 $ 4,087
Other comprehensive income, net of tax:
Change in other comprehensive income - SFAS No. 133 - 490
Change in unrealized market value adjustment
on securities available-for-sale (2,010) 2,669
----------------------------
Total other comprehensive income (2,010) 3,159
----------------------------
Comprehensive income $ 2,573 $ 7,246
============================
See notes to consolidated financial statements.
5
Second Bancorp Incorporated and Subsidiaries
Consolidated Statements of Shareholders' Equity
Accumulated
Other
Common Treasury Comprehensive Retained
(Dollars in thousands, except per share data) Stock Stock Income Earnings Total
--------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2001 $36,935 $(13,947) $ 281 $ 93,928 $ 117,197
Net income 4,087 4,087
Change in other comprehensive income -
SFAS No. 133, net of tax of $264 490 490
Change in unrealized market value adjustment
on securities available-for-sale, net 2,669 2,669
of tax of 1,437
Cash dividends declared: common ($.17 per share) (1,700) (1,700)
Purchase of treasury shares (793) (793)
Common stock issued - dividend reinvestment plan 18 18
-------------------------------------------------------------------
Balance, March 31, 2001 $36,953 $(14,740) $ 3,440 $ 96,315 $ 121,968
===================================================================
Balance, January 1, 2002 $37,453 $(16,798) $ 3,434 $104,210 $ 128,299
Net income 4,683 4,683
Change in unrealized market value adjustment
on securities available-for-sale, net of (2,010) (2,010)
tax of $1,082
Cash dividends declared: common ($.18 per share) (1,789) (1,789)
Purchase of treasury shares (599) (599)
Common stock issued -
stock options and dividend reinvestment plan 269 269
-------------------------------------------------------------------
Balance, March 31, 2002 $37,722 $(17,397) $ 1,424 $107,104 $ 128,853
===================================================================
See notes to consolidated financial statements.
6
Second Bancorp Incorporated and Subsidiaries (Dollars in thousands, except per share data)
Consolidated Statements of Cash Flows
For the Three Months Ended
March 31 March 31
Operating Activities 2002 2001
--------------------------------------------------------------------------------------------------------------------
Net income $ 4,683 $ 4,087
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 933 761
Provision for depreciation 1,294 850
Provision for amortization of intangibles 110 81
Amortization of servicing rights 557 (230)
Amortization (accretion) of investment discount and premium 32 (33)
Amotization of underwriting costs - corporation-obligated mandatorily
redeemable capital securities of subsidiary trust 13 0
Increase (decrease) in allowance for servicing rights 100 30
Deferred income taxes (1,098) 0
Security losses (gains) 173 (529)
Other gains, net (1,445) (841)
Net decrease in trading account securities 0 148
Decrease in interest payable 676 1,063
(Decrease) increase in interest payable (185) 52
Originations of loans held-for-sale (171,256) (59,912)
Proceeds from sale of loans held-for-sale 172,701 60,695
Net change in other assets & other liabilities 2,398 2,714
--------- ---------
Net cash provided by operating activities 9,686 8,936
Investing Activities
----------------------------------------
Proceeds from maturities of securities - available-for-sale 55,021 26,503
Proceeds from sales of securities - available-for-sale 83,346 32,862
Purchases of securities - available-for-sale (136,066) (49,922)
Net decrease (increase) in loans 4,458 (6,395)
Net increase in premises and equipment (1,615) (344)
--------- ---------
Net cash provided by investing activities 5,144 2,704
Financing Activities
----------------------------------------
Net increase (decrease) in demand deposits, interest bearing demand
and savings deposits 46,049 (11,664)
Net (decrease) increase in time deposits (37,981) 37,085
Net increase (decrease) increase in federal funds purchased and securities
sold under agreements to repurchase 1,672 (10,211)
Net decrease in borrowings (5,129) (2,117)
Net (repayments) advances from Federal Home Loan Bank (3,147) 4,858
Cash dividends (1,789) (1,700)
Purchase of treasury stock (599) (793)
Net issuance of common stock 269 18
--------- ---------
Net cash (used by) provided by financing activities (655) 15,476
--------- ---------
Increase in cash and cash equivalents 14,175 27,116
--------- ---------
Cash and cash equivalents at beginning of year 64,853 35,272
--------- ---------
Cash and cash equivalents at end of period $ 79,028 $ 62,388
========= =========
Supplementary Cash Flow Information:
Cash paid for 1) Federal income taxes - $1,708 and $0 for the three months
ended March 31, 2002 and 2001, respectively and 2) Interest - $12,323 and
$16,496 for the three months ended March 31, 2002 and 2001, respectively.
See notes to consolidated financial statements.
7
Second Bancorp Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
March 31, 2002
(Dollars in thousands, except per share data)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
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 accounting principles generally accepted
in the United States 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 period ended March 31, 2002 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2002. 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, 2001.
NOTE 2 - COMPREHENSIVE INCOME
During the first three months of 2002 and 2001, total comprehensive income
amounted to $2,573 and $7,246, respectively. The components of comprehensive
income, net of tax, for the three-month periods ended March 31, 2002 and 2001
are as follows:
2002 2001
---------------------------
Net income $ 4,683 $ 4,087
Change in other comprehensive income -
SFAS No. 133 - 490
Unrealized gains on available-for-sale securities (2,010) 2,669
---------------------------
Comprehensive income $ 2,573 $ 7,246
===========================
Accumulated other comprehensive income, net of related tax, at March 31, 2002
and December 31, 2001 totaled $1,424 and $3,434, respectively and was comprised
of accumulated changes in unrealized market value adjustments on securities
available-for-sale, net of tax and deferred supplemental income, net of tax.
Accumulated other comprehensive income, net of related tax, at March 31, 2001
totaled $3,440 and was comprised of accumulated changes in unrealized market
value adjustments on securities available-for-sale, net of tax, accumulated
changes in other comprehensive income arising from SFAS No. 133 activities.
Disclosure of reclassification amounts:
Three Months Ended
---------------------------------
March 31, 2002 March 31, 2001
---------------------------------
Unrealized holding (losses) gains arising during the period $(2,183) $ 3,198
Less: reclassification of losses (gains) included in
net income, net of tax 173 (529)
---------------------------------
Net unrealized (losses) gains on available-for-sale securities $(2,010) $ 2,669
=================================
8
(Dollars in thousands, except per share data)
NOTE 3 - INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and indefinite lived intangible
assets will no longer be amortized but will be subject to annual impairment
tests in accordance with the statements. Other intangible assets, such as core
deposit intangibles, will continue to be amortized over their useful lives. The
Company had approximately $14.6 million of goodwill on its balance sheet at
December 31, 2001. This goodwill will be evaluated for impairment during the
second quarter of 2002 and a determination will be made regarding possible
impairment at that time. No amortization expense is being recorded on the
goodwill in 2002 compared to amortization expense of $47 for the first quarter
of 2001 and $187 for the year 2001. Application of the non-amortization
provisions of the statement increased net income by $32 or $.00 per share in the
first quarter of 2002 and is expected to increase net income by $126 or $.01 per
share for the entire year.
Reported net income for the first quarter of 2001 was $4,087. Adjusting for the
amortization provisions of SFAS No. 142, net income for the first quarter of
2001 would have been $4,119. Both basic and diluted earnings per share would not
have been affected by the adjustment.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is that amount believed adequate to absorb credit
losses in the loan portfolio based on management's evaluation of various factors
including overall growth in the loan portfolio, an analysis of individual loans,
prior and current loss experience, and current economic conditions. A provision
for loan losses is charged to operations based on management's periodic
evaluation of these and other pertinent factors.
Allowance for loan losses
2002 2001
-----------------------------
Beginning balance, January 1 $16,695 $15,217
Provision 933 761
Charge-offs 1,285 862
Recoveries 541 662
-----------------------------
Net charge-offs 744 200
-----------------------------
Ending balance, March 31 $16,884 $15,778
=============================
As a percentage of loans 1.52% 1.47%
9
(Dollars in thousands, except per share data)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
Second Bancorp Incorporated (the "Company") is a financial holding company
headquartered in Warren, Ohio. The primary subsidiary, The Second National Bank
of Warren, (the "Bank") was originally established in 1880. Operating through 37
retail banking centers, we offer 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 and east-central Ohio. Among
other things, our consumer banking business includes a large and growing
mortgage banking function. The Company also maintains another subsidiary, Second
Bancorp Capital Trust I, which was established in 2001 to facilitate raising
Tier I eligible capital in the form of corporation-obligated manditorily
redeemable capital securities of subsidiary trust for the primary purpose of
funding our acquisition of Commerce Exchange Bank.
Forward-looking statements
The sections that follow contain certain forward-looking statements (as defined
in the Private Securities Litigation Reform Act of 1995). These forward-looking
statements may involve significant risks and uncertainties. Although the 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.
Financial Condition
At March 31, 2002, the Company had consolidated total assets of $1.68 billion,
deposits of $1.13 billion and shareholders' equity of $129 million. Since March
31, 2001, total assets have increased by $113 million or 7%, primarily as a
result of the acquisition of Commerce Exchange Corporation ("Commerce") and its
subsidiary, Commerce Exchange Bank. Total assets of Commerce were $111 million.
Gross loans have increased by $38 million the past year, $93 million from
Commerce. Excluding the impact of the Commerce acquisition, the net reduction in
loans otherwise was primarily the result of reduced balances in real estate
loans. Real estate loans declined by $33 million since March 31, 2001 due to the
increase in refinancing and secondary market sales activities during the past
year. The increased activity levels were brought about by lower long-term
interest rates. A steady increase in direct consumer lending volume has offset
the decline in indirect loan volumes. Indirect loans have been de-emphasized due
to the lower profit margins associated with the credits. Commercial loans are
also undergoing an internal shift away from fixed rate, real estate based
lending to a more variable rate, cash flow based lending structure. The loan mix
has moved from a 40%, 29% and 31% mix of commercial, consumer and residential
real estate loans, respectively, as of March 31, 2001 to a 45%, 29%, 26% mix at
the end of the most recent quarter.
Deposits increased by $70 million since March 31, 2001 primarily as a result of
the acquisition of $95 million in deposits from Commerce. The Bank is also in
the process of de-emphasizing higher cost time deposits as a funding source.
Time deposits have declined by $72 million from a year ago. Savings accounts
have increased by a substantial amount. The $96 million increase in savings
accounts is primarily the result of the introduction of the Your Best Interest
account which is an MMDA account with attractive premium pricing. Demand deposit
accounts have increased by $42 million over the same time period. Approximately
50% of the increase is associated with the Commerce acquisition, while the
remaining 50% is from internal growth. The corporation-obligated manditorily
redeemable capital securities of subsidiary trust (the "Trust Preferred
Securities") used to finance the Commerce acquisition totaled $30.5 million as
of March 31, 2002.
10
(Dollars in thousands, except per share data)
Since December 31, 2001, total assets have increased by $4.5 million. Moderate
loan demand, strong secondary mortgage activities and the internal shift away
from both indirect lending and long-term fixed rate commercial real estate
lending has kept internal balance sheet growth at below normal and historically
sustainable levels. Due to the same reasons as noted above in the
quarter-to-quarter analysis, deposits have increased by $8 million during the
most recent quarter, with savings accounts increasing by $59 million and time
deposits decreasing by $38 million.
Results of Operations
Quarterly Comparison
The Company reported net operating income of $4,683 for the first quarter of
2002. Net income for the first quarter represented forty-seven cents ($.47) per
share on a diluted basis. Operating return on average assets (ROA) and return on
average total shareholders' equity (ROE) were 1.11% and 14.39%, respectively,
for the first quarter of 2002 compared to 1.08% and 14.09% for last year's first
quarter. Net interest income increased from $11,916 for the first quarter of
2001 to $14,157 for this year's first quarter. The 18.8% improvement was
primarily the result of an improved net interest margin, which increased to
3.72% for the first quarter 2002 from 3.43% from the first quarter of 2001. The
improvement also partially stemmed from an 8.8% increase in average earning
assets, primarily generated through the Commerce acquisition. The efficiency
ratio was slightly improved, decreasing from 60.94% for the first quarter of
2001 to 59.46% for this year's first quarter.
Commercial Lending. Commercial lending activities focus primarily on providing
local independent commercial and professional firms with commercial business
loans and loans secured by owner-occupied real estate. We primarily make secured
and unsecured commercial loans for general business purposes, including working
capital, accounts receivable financing, machinery and equipment acquisition, and
commercial real estate financing. These loans have both fixed and floating
interest rates and typically have maturities of three to seven years. To a
lesser extent, we also make construction loans and finance commercial equipment
leases. Commercial loans comprised approximately 45% of our total loan portfolio
at March 31, 2002. Loan volume generated for the first quarter of 2002 totaled
$43.5 million versus $37.4 million for the same period in 2001. Loan balances
have actually declined by $8 million since December 31, 2001 due to the
de-emphasis of long-term fixed rate commercial real estate lending. The
portfolio mix continues to shift towards more rate-sensitive and higher margin,
variable rate commercial loans.
Retail Lending. The Company offers a full range of retail loans to individuals,
including the owners and principals of our commercial customers and a wide range
of retail customers in our market area. We offer consumer loans for a variety of
personal financial needs, including home equity, new and used automobiles, boat
loans, credit cards and overdraft protection for checking account customers. At
March 31, 2002, approximately 29% of loans were consumer loans. Of these
balances, 40.3% were related to indirect automobile, boat and recreational
vehicle lending compared to 49.0% as of March 31, 2001. Our indirect loans are
originated through dealers in the local area. Indirect auto originations have
decreased significantly from $22 million during the first quarter of 2001 to
$9.8 million during the first quarter of 2002. Conversely, direct consumer
lending has increased by 25% from $14.8 million for the first quarter of 2001 to
$18.5 million for this year's first quarter.
11
(Dollars in thousands, except per share data)
Mortgage Banking. Our mortgage department underwrites and originates a wide
range of retail mortgage loan products and sells a significant volume of them
primarily on a servicing retained basis. Generally, the loans sold into the
secondary mortgage market make funds available for reuse in mortgage or other
lending activities. The sales generate a net gain (including origination fee
income and deferred origination costs), limit the interest rate risk caused by
holding long-term, fixed-rate loans, and build a portfolio of serviced loans
which generate a recurring stream of fee income. We originated $180 million in
residential real estate loans and sold approximately $171 million of loans
during the first quarter of 2002, generating a net gain of $1,354.
Comparatively, we originated $59 million and sold $60 million during the first
quarter of 2001, generating net gains of $709. We service $937 million in
mortgage loans for others at March 31, 2002 versus $487 million as of March 31,
2001.
Trust. The trust department is a traditional provider of fiduciary services with
a focus on administration of estates, trusts and qualified employee benefit
plans. During the first quarter of 2002, personal trust accounts and employee
benefit accounts produced approximately 73% and 27% of the total revenues of the
department, respectively. The department began offering a daily valuation
service for 401(k) plans during the third quarter of 2001, which is expected to
position the Company well for future growth in employee benefit assets and
revenues. Fee income is up 4% from the first quarter of 2001 due a modest
increase in assets under management. Our trust department had approximately $624
million in assets under management at March 31, 2002 as compared to $624 million
at December 31, 2001.
Asset Quality. The reserve for loan losses represented 1.52% of loans as of
March 31, 2002. The determination of the reserve for loan losses is based on
management's evaluation of the potential losses in the loan portfolio at March
31, 2002 considering, among other relevant factors, repayment status, borrowers'
ability to repay, collateral and current economic conditions. The methodology
for the provision for loan losses includes analysis of various economic factors
including loan losses and portfolio growth. The provision for loan losses
increased to $933 for the first quarter of 2002 from $761 during the same period
in 2000. Total net charge-offs were $744 for the first quarter of 2002 versus
$200 for the first quarter of 2001. Loan losses are expected to remain slightly
above their historical level of .30% of gross loans for the remainder of the
year, primarily due to continued soft economic conditions and their impact on
our commercial and consumer borrowers. The reserve was 1.47% of total loans at
March 31, 2001. Non-accrual loans have increased slightly over the past year and
total $5,313 as of March 31, 2002 versus $5,163 as of the same date last year.
Loans past due over 90 days and still accruing totaled $6,257 as of March 31,
2002, up 62.6% from March 31, 2001, reflecting the general economic slowdown in
both the national and local economies. Approximately 50% of the loans past due
over 90 days and still accruing are residential real estate loans with minimal
loss expectations.
Non-interest Income. Non-interest income (excluding security gains and losses
and trading activity) totaled $5,157 for the first quarter of 2002 versus $3,972
for the same period last year. The improvement came from a variety of sources
including an increase in 4.7% in service charges on deposit accounts
attributable to an increase in the number of accounts and an increase in the
gain on sale of loans from $783 to $1,544 primarily due to lower mortgage rates
and the resulting increase in refinancing activity.
Non-interest Expense. Expenses for the first quarter of 2002 were $11,797, up
17.4% from the same period last year due to the additional banking centers
acquired from Commerce and an increase in staff to manage the increased mortgage
banking activities along with a $141 write-down in other real estate owned
property.
12
(Dollars in thousands, except per share data)
Capital resources. Shareholders' equity has increased by $554 since December 31,
2001 due to the retained earnings of $2,894 offset by a decrease in accumulated
other comprehensive income ("OCI") of $2,010 and the addition of $599 in
treasury stock. The Company repurchased more than 28,000 shares during the first
quarter of 2002. The Company has more than 100,000 shares remaining to
repurchase under the current authorization. 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.
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 $28 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. There were no
outstanding balances against the unsecured lines of credit as of March 31, 2002.
Item 3. Qualitative and Quantitative Disclosure About Market Risk
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.
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.
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(Dollars in thousands, except per share data)
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 increase by 4.6% if interest
rates would immediately rise by 200 basis points. It projects a decrease in net
income of 7.4% if interest rates would immediately fall by 200 basis points.
Management believes this reflects an acceptable level of risk from interest rate
movements based on the current level of interest rates. 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 a neutral to
upward bias for the remainder of 2002. Management is in the process of shifting
the processing of the simulation modeling from in-house to a third party
provider.
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. The Company also may use interest rate swaps, caps and floors to manage
interest rate risk.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings -
The Company is subject to various pending and threatened lawsuits in the
ordinary course of business in which claims for monetary damages are asserted.
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 - None
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 April 18, 2002. The results of the votes on the matters presented to
shareholders are as follows: Of the 9,855,453 issued and outstanding shares
eligible to vote, 8,849,985 were represented at the meeting. The shareholders
approved Proposal 1 to set the number of directors at eleven with 8,683,968
votes "FOR", 116,494 votes "AGAINST" and 49,514 "ABSTAINED". Elected to serve as
directors of the Company in Class II until the 2004 Annual Meeting of
Shareholders under Proposal 2 were:
Share voted "FOR" John A. Anderson 8,570,056
Share voted "FOR" Lynnette M. Cavalier 8,469,821
Share voted "FOR" James R. Izant 8,413,843
The shareholders approved Proposal 3 to approve the option plan re-load with
votes "FOR" of 7,569,727, votes "AGAINST" of 1,135,291 and votes "ABSTAINED" of
144,955.
The shareholders approved Proposal 4 to ratify the appointment of Ernst & Young
LLP as the independent Certified Public Accountants of the Company with votes
"FOR" of 8,725,462, votes "AGAINST" of 43,171 and votes "ABSTAINED" of 81,347.
Item 5. Other Information - Not applicable
Item 6. Exhibits and Reports on Form 8-K:
The following exhibits are included herein:
Exhibit 11. Statement re: computation of earnings per share
The Company filed no reports on Form 8-K since December 31, 2001 except to
announce quarterly earnings. The Company filed a report on Form 8-K on January
25, 2002 to announce earnings for the fourth quarter and full year 2001. The
Company filed a report on Form 8-K on April 22, 2002 to announce earnings for
the first quarter 2002.
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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: May 14, 2002 /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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