The acquisition of Enfin, Inc. enhanced our commercial lending business, while providing the Bank with access to new and attractive markets through the $43.7 million Enterprise Bank.
The merger of The Trumbull Savings and Loan Company into Second National Bank added $462 million in assets and boosted our already dominant market share in Trumbull County to nearly 25 percent. The consolidation made Second National Bank the largest independent bank in the Mahoning Valley and one of the area's largest employers. The acquisition, which added more than 40,000 individuals to our customer base, also gave Second National Bank a presence in Jefferson County.
Both transactions significantly increased the Second Bancorp, Inc. shareholder base, boosting the total number of outstanding shares to more than 10 million. Most importantly, the consolidations assured that locally owned and operated community banking will continue to flourish in the Mahoning Valley.
While growth tops our list of accomplishments, this year's initiatives were targeted and comprehensive--we focused our energies on our people, technology, delivery, and the community.
We continued to capitalize on the outstanding qualities of our people. Training initiatives, brand advertising, and peer-recognition programs all reflected our strong belief in the ability of our employees to make a difference in customer relationships, sales, and service. We continued to offer the compensation, benefits, and professional development opportunities necessary to attract and retain high quality professionals --while challenging our employees to embrace Second National's all-important core values.
At the same time, we advanced our technological capabilities to give our staff better tools for management, sales, and delivery. The year's initiatives --from our internally developed software that significantly reduced the time it takes to open a deposit account to the addition of 24-hour telephone banking to new check imaging technology --were all directed at the continuous improvement of our operations and customer service.
We aggressively addressed the Year 2000 issues being confronted by every segment of the economy. Our approach to the planning and execution of a Year 2000 strategy will result in compliance with all Y2K standards, enabling Second National to maintain its industry leadership position well into the future.
In addition to improving our operational capabilities, we enhanced and expanded existing lines of business, including our mortgage lending business. Second National increased real estate loans by more than 47 percent, contributing to $971 million in total loans outstanding at year-end, up 12 percent over 1997. Non-interest income also produced a double-digit increase in 1998, including a 10 percent gain in trust income.
We are immensely proud of all of our efforts in 1998. We remained steadfastly committed to serving all segments of the community, including the low-to-moderate income consumer. We also played a meaningful role in the economic development of the regions served by Second National and will continue to actively encourage further progress.
We believe all of our accomplishments during the past year created a solid footing for the Company as we move through 1999 and into the new millennium. I am especially grateful for the extraordinary efforts of our employees, who simultaneously executed the consolidation of two financial institutions into Second National Bank, and to both our existing and new customers, who give us the opportunity every day to serve their financial needs.
To our employees, directors, shareholders, and all stakeholders of Second National Bank and Second Bancorp, Inc., I thank you for your contribution to this exceptional year. And I look forward to your future participation.
Alan G. Brant
Chairman and President
1998
Second National Bank continued to enhance its position of leadership in the financial services marketplace during 1998. Each of the year's management initiatives was designed to help Second National become increasingly valued by its stakeholders.
Growth
The growth of Second National's branch network during 1998 represents a major milestone for the Bank and Second Bancorp, Inc. This year's de novo offices and merger and acquisition activity propelled Second National Bank to $1.43 billion in assets and deposits of $1.1 billion. By year-end 1998, the Second National branch network grew to 34 offices in seven Ohio counties.
Acquisitions
Second Bancorp, Inc. announced two separate merger agreements in the spring of 1998. Both transactions are consistent with Second National's stated growth plan to become a leader in regional community banking. On April 1, 1998, Second Bancorp entered into a definitive agreement resulting in the merger of Enfin, Inc. into Second Bancorp. Following the merger on August 21, Enfin's banking subsidiary, the $43.7 million Enterprise Bank in Solon, became a Second National Bank branch. In addition to combining the traditional commercial lending strengths of both companies, the consolidation marked Second National Bank's entry into the Solon market, an area that supports thriving business activities throughout Cuyahoga County.
On May 4, 1998, Second Bancorp, Inc. and Trumbull Financial Corporation jointly announced the signing of a definitive agreement for the acquisition of Trumbull Financial by Second Bancorp. On November 20, 1998, Trumbull Financial's wholly owned subsidiary, the $462 million Trumbull Savings and Loan Company, was merged into Second National Bank. Like the Second National Bank and Western Reserve National Bank merger of 1927, Second National's acquisition of Trumbull Savings was this year's largest financial transaction in the Mahoning Valley. The merger established Second National as the largest independent bank in the Mahoning Valley as well as one of its largest employers.
New Branches
In August, Second National opened a new office in Medina, marking the Bank's entry into yet another Ohio county. From its downtown location, the 1,500 square-foot Medina office will build on an existing customer base and will serve individual, business, and municipal customers in Medina and nearby Summit County. The Medina office is staffed by personal bankers, a branch banking officer, and a commercial lending officer, all providing Second National's brand of highly personalized, decentralized service. A walk-up ATM, night depository, and ample parking are available to Medina customers.
The newly constructed Ravenna office opened in March 1998 with a full month of grand opening activities. The new office, located in a well-traveled portion of downtown, significantly improved the services and conveniences Second National provides in Ravenna by offering two drive-thru lanes, a drive-up ATM, safe deposit boxes, a night depository, and ample parking. With 3,000 square feet of space, a complete range of products and services, and a specialized staff of banking professionals, the new Ravenna office is positioned to be a major competitor in the Portage County market.
Technology
Document Preparation System
Second National developed its own document preparation system for deposit accounts to reduce the paperwork and time associated with opening an account. "Maxsys," the new document preparation system, allows branch personnel to input customer and product information once, then print all necessary cards and forms. The internally produced software, which reduced the time required to open a new deposit account from 35 minutes to 5 minutes, also provided a significant savings to the Bank.
Check Imaging
Second National's conversion to check imaging established the Bank as a leader in the new technology: only 1,600 --or 20 percent of-- U.S. banks currently offer this service to their customers. With check imaging, customers receive a statement featuring digital images of canceled checks, instead of their actual checks. Not only are image statements a better way for customers to review checking activity, the new technology will result in greater efficiencies and cost savings for the Bank.
Branch Teller System
A new branch teller system installed during 1998 makes more features and functions available to branch personnel, while increasing data processing efficiencies and meeting all Y2K compliance requirements. The new system brings a host of advantages to the Bank, including faster processing and better customer service.
Relationship Management System (RMS)
The Relationship Management System (RMS), an enhanced ALLTEL Horizon core application, replaced and represents a significant improvement over the Bank's Central Information File (CIF). Using this fully functional relational database, Second National staff can instantaneously capture a comprehensive picture of any Second National customer --complete with details of their account relationships. In addition to significantly enhancing the Bank's ability to cross-sell, RMS enables management to analyze and evaluate customer account relationships.
Report Imaging
Instead of printing hundreds of daily Horizon reports, all management reports are now accessible through CD-ROM. By migrating from printed reports to report imaging, Second National will recognize significant savings and recoup all project costs within the first eight months of operation.
Wide Area Network
A wide area network installed during 1998 increased efficiencies in the management of the Bank's network communications. By connecting individual branches directly to the AS 400, the network allows transactions to be handled more efficiently while minimizing down time.
Delivery
24-Hour Call Center
With the addition of an interactive voice response (IVR) system in 1998, Second National Bank offers an alternative delivery system for customers who find it more convenient to bank by phone. Through this new delivery channel, Second National customers are able to do virtually anything they can do in a branch-all via a touch-tone telephone. A bill payment option (available March 1999) will allow customers to pay any bill electronically through the IVR.
In tandem with the IVR, the Bank's Customer Information Center was redesigned into a telephone banking center staffed with personal bankers. The Call Center provides high-level, personalized account service and allows customers to open deposit accounts and apply for loans over the telephone.
ATMs
To enhance customer service and convenience, Second National expanded its network of automated teller machines by installing 11 additional ATMs. Coupled with eight machines in newly acquired offices, this initiative brought the total number of ATMs in the network to 34, and made ATM transactions at the Bank's terminals totally free for Second National MAC®ATM cardholders.
People
Second National continued its efforts to keep the Bank's core values foremost in the minds of employees and to inspire its workforce to a high level of performance. Peer-driven recognition programs remained an important means of providing Second National employees with the opportunity to define and recognize excellence in their co-workers. During the "How Far Will Core Values Take You?" contest of 1998, employees identified more than 10,000 examples of outstanding performance by their co-workers, and three top employees were rewarded with trips to Walt Disney World in Orlando, Florida.
Brand
A new marketing communications program, which effectively promoted the Second National value philosophy in the marketplace, put the spotlight on the Bank's employees. The advertising campaign and positioning statement, "The People Making Banking Better," emphasized the quality of Second National employees and the value they bring to customers. As part of the year's cohesive marketing efforts, Second National Bank's corporate identity was also rejuvenated in 1998. The redesigned logo and corporate colors, which now appear on all signage and communication, preserved the equity of the Second National mark while giving the Bank visual prominence in the marketplace.
Leadership
Small Business Lending
Second National Bank was again ranked among the area's top small business lenders by the U.S. Small Business Administration (SBA). During the SBA's fiscal year 1998, Second National was the top community bank lender in the Cleveland district and third among district-wide lenders, ahead of several major financial institutions.
Trust Division
With innovative programs, expert money management, and outstanding customer service, the Trust Division continued to make a solid contribution to the success of Second National Bank.
Once again, Second National ranked among the top money managers in the country, based on investment returns as of the end of 1998. The Trust Division's equity pension and profit sharing fund and fixed income pension and profit sharing fund were both nationally ranked for one- and 10-year returns. 1998 annualized returns were 37.81 percent for the equity fund and 15.34 percent for the fixed income fund. (Rankings were computed by Nelson's Investment Manager Database, which evaluates 4,000 investment products from more than 1,500 investment management firms and regularly publishes its results in the World's Best Money Managers.)
In addition to achieving record levels of trust revenue and asset size, the Trust Division continued to expand its successful Institutional Trust Program, which provides trust services to other financial institutions and great potential for future growth.
Product Development
ELITE Investment Account
Introduced in 1998, the ELITE Investment Account combines high-yield investing with the convenience of ATM and checkbook access. The new product serves as a valuable relationship-builder on the Bank's menu of products and services. With a high yield, checking privileges, and total liquidity, ELITE was designed to help Second National compete with other financial institutions in the marketplace, especially brokerage firms.
Advantage Plus
As part of the Bank's effort to offer customers greater value, it was determined that the target market for the Advantage Plus Program could be expanded by developing a true partnership with baby boomers. The age requirement for this popular package of benefits was reduced from 60 to 50 years old.
Community
Second National continued to put an educational focus on its efforts in the community, underwriting an appearance by activist, author, and media commentator Tavis Smiley at the annual convocation of the Warren City Schools in the summer of 1998. Mr. Smiley, the host of "BET Tonight with Tavis Smiley" on Black Entertainment Television, was invited to Warren to address 700 staff members and members of the community.
The Bank also offered special programs such as "The ABCs of Funding for New and Small Businesses" for Warren-area business owners and aspiring entrepreneurs, and "Fellowship Together for Banking Education," a free program for the public featuring Second National Bank professionals. Other ongoing activities included the Entrepreneurship Program, the INROADS Career Development Program, and the Second National Bank Scholarship Fund.
1999
To sustain its continuous improvement and increased stakeholder value, Second National Bank is committed to improving return on assets and its efficiencyratio, and to increasing deposits and loans during 1999. To accomplish these goals, Second National has recommitted to an organization-wide focus on customer relationships and sales performance and will undertake various projects to enhance profitability, efficiency, and market share.
Sales Performance
To raise the bar on Second National's sales performance, all employees in the Bank's sales divisions and branches have been challenged to increase the sale of profitable products to their existing customers. Throughout the year, sales employees will execute personal business plans designed expressly to expand the Bank's single account relationships.
Profitability Analysis
Providing quality products and services that meet customer needs and wants-at a fair price and profit-will further leverage Second National Bank's value advantage. To increase Second National's profitability analysis capabilities, the Bank will implement three software modules in 1999: Profitvision (FTI), Asset and Liability Management (Sendero), and the Executive Information System (FTI).
Profitvision assists in analyzing the Bank's profitability at multiple levels and from various viewpoints. The application will serve as an integrated solution to customer, relationship, product, and organization profitability management. The Asset and Liability Management module is a modeling system that will serve as an integrated solution to financial and accounting management for profit planning and interest rate risk management. The Executive Information System will provide management with an up-to-the-minute comprehensive overview of the Bank's condition, as well as detailed information, graphical presentation, reports, and analysis.
In addition to the analytical benefits these applications will bring to themanagement of the Bank, data generated from these modules will help direct Second National's sales efforts toward more profitable relationships.
Increased Automated Transactions
During 1999, Second National will take steps to maximize the ratio of automated transactions by encouraging greater use of the ATM, ACH, the IVR/Call Center, and electronic transfer options. Redirecting manual or repetitive transactions to automated environments will offer a two-fold benefit to Second National. A higher ratio of automated transactions will provide branch staff with more time for sales and service. At a lower per-transaction cost to the Bank, increased automated transactions will reduce overall costs and ultimately improve the Bank's efficiency ratio.
Corporate Services
Second National's Corporate Services Division will expand its current menu of products and services to better suit the needs of small-to-medium size businesses --which are expected to increase usage of cash management services by 38 percent over the next five years. This initiative is designed to make this important service more competitive in the marketplace and to increase sales to small businesses.
Growth
During 1999, Second National Bank will establish two de novo offices in addition to opening a newly constructed and expanded Poland office. This activity will bring Second National into its ninth Ohio county while further strengthening the Bank's market position in Summit and Mahoning counties.
Lake Cable
In the Lake Cable area of Jackson Township in Stark County, Second National is renovating 1,200 square feet of space in an existing strip shopping center for a new mini-branch. Lake Cable, a dynamic area with significant mortgage activity and close proximity to North Canton and Canton, is a natural progression for Second National that will build on the success of the Bank's Akron and Green offices in nearby Summit County. In addition to high-level banking professionals, including a branch manager and commercial lending officer, the new office will offer a drive-up ATM and a night depository.
Twinsburg
Second National Bank will solidify its Summit County presence with the opening of an office in Twinsburg, one of the county's fastest growing suburbs. The new office, which will also have close proximity to our Solon office and nearby branches in Portage County, is located in a newly constructed building in front of a retail complex on Route 91. The 3,000 square-foot branch will feature four teller stations, two personal banker service desks, and three offices for financial professionals, including a branch manager and a commercial lender. The full-service Twinsburg branch will also offer safe deposit boxes, a drive-up ATM, three drive-thru lanes, and a night depository.
Poland Relocation
To accommodate its growing customer base and to take advantage of a prime office location, Second National is constructing a new building to house the Bank's Poland branch. The new building, being constructed on the well-traveled Boardman-Poland Road (Rt. 224), just north of the branch's current location, will afford the Poland office greater visibility and a broader range of services.
With 3,000 square feet of office space --nearly triple the size of the current office-- the new Poland branch will offer more space for financial professionals, safe deposit boxes, and four sit-down service desks. The office will also feature two drive-thru lanes, a night depository, and a drive-up ATM.
Year 2000
The Year 2000 Compliance Plan, designed to provide for the continuance of all banking and Trust operations through the century date change, encompasses all current Second National branches and departments while anticipating acquisitions. Second National has demonstrated its commitment to become fully Year 2000 compliant by establishing a Y2K Department overseen by a Steering Committee, allocating resources, and actively involving senior management. The Bank's Y2K Plan was established using Office of the Comptroller of Currency (OCC) guidelines that methodically address Year 2000 issues. The Y2K Steering Committee Chairman provides monthly updates to executive management and reports at least once each quarter to the Board of Directors.
Identifying critical issues began in the third quarter of 1997 and established a level of understanding necessary for a project of this significance. The Y2K Department was established and staffed at the beginning of 1998 to monitor and document progress toward full Year 2000 readiness.
Second National Bank followed OCC guidelines, enabling ease of benchmarking with examining bodies, including five steps: Awareness, Assessment, Renovation, Implementation, and Validation. Because of the complex and evolving nature of Year 2000 information, the Awareness phase was viewed as an ongoing process with a continuing dialogue to maintain confidence in the Bank by all stakeholders. Customer awareness was raised through a statement stuffer, informational brochure, and video. Employees are kept informed through internal memoranda, articles in the Second Thoughts employee newsletter, reports to committees and branch personnel, and the establishment of a "You're 2 Kind" award for extraordinary contributions to the Year 2000 effort.
The Assessment phase included an extensive inventory of the Bank's technology assets, including computer hardware, software, and peripherals. Software licenses were collected for central storage in the Network Support area, and all inventory information was entered into a centralized database for monitoring and future upgrading.
The Renovation phase incorporated testing of the ALLTEL Horizon system and internal mission critical interfaces. The Implementation phase included installation of the fully Y2K compliant ALLTEL Horizon core application software, Southern Data Systems Teller Pro III operating system, and safe deposit box system. Bank-wide Y2K compliance status will be reached by the end of the second quarter of 1999.
The Validation phase commenced at the same time as Renovation with random testing to document that all upgrades installed throughout the Bank were fully functional and compliant.
Second National Bank recognizes the importance of coordination with outside entities to ensure a continuous flow of information on Y2K issues. A formal communication process with vendors, auditors, and regulatory agencies was established in the third quarter of 1997 and is ongoing. Letters requesting documentation of Y2K compliance or progress toward that goal were sent to third party suppliers, including software companies, brokers, utilities, and environmental services.
A Year 2000 Compliance Assessment worksheet and Year 2000 Customer Risk Identification guideline were developed to evaluate commercial loan customers' progress toward Y2K compliant status. The worksheet is a standard part of all commercial loan packages and trust investor portfolios.
Y2K Contingency Planning
Responsible planning for the century date change must also include the possibility of both individual sub-system and core processing computer malfunctions. Hardware upgrades and replacement of non-compliant software, coupled with testing, make system-wide failure unlikely.
Development of contingency plans and worst-case scenarios was deemed prudent to enable Second National to minimize risk factors, ensure the safety and soundness of the financial institution, and lessen or eliminate the disruption of service to both the Bank and its customers. A Contingency Plan was written in conjunction with a testing Plan in order to fulfill both OCC requirements and to complete the Y2K Plan structure. A strategy is in place for periodic review of the Y2K Contingency Plan.
We believe this approach to the planning and execution of the Y2K Plan will result in compliance with all Year 2000 standards and will enable Second National Bank to maintain our industry leadership position into the future.
A Look Ahead
During 1998, Second National uncovered new opportunities to enhance its value advantage in the Bank's people, technology, and delivery systems; through leadership and growth; and within the Bank's community banking philosophy.
The sum total of those efforts afforded Second National customers more convenient and comprehensive products and services. For shareholders, the Bank's pursuit of value translated into greater efficiencies and increased competitiveness. By leveraging an expert workforce and the synergies of its growing branch network, Second National benefitted all of its stakeholders.
In 1999, Second National will aggressively pursue the opportunities created during 1998 --and continue to excel in its financial services niche.
