Advanced technology continually creates sophisticated products and alternative delivery channels to help meet the financial goals of our customers. Recent groundbreaking legislation allowing banks to further diversify their lines of business will only enhance our ability to serve customers and provide a return to shareholders.
With a comprehensive menu of products and services, multiple delivery channels, and most importantly, exceptionally talented people to build our customer and share-holder relationships, Second National Bank and Second Bancorp are well-positioned for the marketplace of the future. Our bridge to that future is a year of significant achievement in growth and performance in 1999, capping off more than a decade of upward momentum.
Normal growth and two successfully completed acquisitions boosted total assets for the holding company to $1.54 billion and made Second National Bank the largest Trumbull County based bank serving the Mahoning Valley. Our efforts increased the Company's size by more than 50 percent and established Second Bancorp as a formidable financial services competitor in Northeast and East Central Ohio.
In addition to successfully integrating Enfin Corporation and Trumbull Financial into Second Bancorp, we met our objective of a 33 percent cost savings within the first part of the year, accomplishing the major goal of our 1999 business plan. Our ability to execute this and other strategic initiatives contributed to our most successful year at Second National Bank and Second Bancorp.
Earnings for the year of $16.18 million pushed net income 52 percent ahead of 1998 earnings, excluding merger costs. Even on a normalized basis (ignoring one-time gains and expenses during both years), we continue to consistently grow earnings at an annual rate exceeding our targeted 10 percent.
Second Bancorp also actively repurchased its own shares on the open market during 1999 and expects to continue doing so in 2000. This capital management tool allows the Company to take advantage of the recent soft market in financial stocks to strengthen both its diluted earnings per share and return on average equity (ROE) ratio at what we believe to be bargain prices. We expect the strengthening of these two important measures of financial performance to have a positive impact on the price of our stock over the medium- to long-term.
Another significant indicator of the Company's growth and vitality during 1999 was the addition of Second Bancorp common stock to the broad market Russell 3000 and small-cap Russell 2000 Indexes. These indexes reflect general market trends by tracking the performance of the largest publicly traded companies in the United States, as determined by market capitalization (market price per share times total shares outstanding). The Company's market capitalization at year-end was more than $230 million.
Looking ahead to 2000, we will work diligently to continually increase Second National Bank market share and profitability. Building on our core banking business, we plan to introduce products and services to meet the changing needs of our customers. We will pursue the great potential in Trust and specialized financial services, including Investments, Private Banking, and insurance services. By channeling increased resources to our Real Estate Division, we will leverage our emerging leadership position in mortgage lending. Our goal: to make our Real Estate Division a major profit center, echoing the success of our Trust and Commercial Lending Divisions. And finally, we will position Second National Bank for e-commerce delivery and Internet banking.
That said, you should know that the Bank and any Company subsidiaries will maintain a century-old focus on person-to-person service. We believe individual attention and timely responses will expand our customer relationships and continue to distinguish Second Bancorp in this evolving marketplace.
At the Bank level, to build on the successes of the past 120 years and to lead Second National into the 21st century, we ushered in the new year with a new Director, President, and Chief Executive Officer. After 15 years at the helm of the Bank, I passed the torch to Rick L. Blossom at the end of 1999. In addition to providing vision and leadership to Second National Bank, Mr. Blossom is also serving Second Bancorp as Director, President, and Chief Operating Officer.
Mr. Blossom brings a wealth of experience and extraordinary talent to this organization. He joined Second National from First National Bank of Southwestern Ohio, where he served as president, chief executive officer, and a member of its board of directors. The $1 billion bank located in Hamilton, Ohio is the flagship bank of the parent company First Financial Bancorp, a $3.9 billion holding company where Mr. Blossom was the senior vice president and chief lending officer.
I look forward to continuing to serve Second Bancorp in a leadership role and to watch Second National Bank grow under Mr. Blossom's guidance. I consider it a privilege to have been associated with the truly unique and fine people that are Second National Bank. My thanks to every staff member who has made this an institution worthy of continual trust.
To the shareholders of Second Bancorp, I thank you for sharing my confidence in this dynamic Company and its future prospects.
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 growing customer base in the Poland area, it allows Second National to provide a greater range of services. Since opening in 1992, deposits at the Poland Banking Center have grown to $19.5 million; outstanding loan balances are now more than $6 million.
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 with no maximum, and more importantly, no minimum loan amount. The product is unique to Second National's marketplace, especially to small businesses.
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 DIVISON
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.
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 Mortgage Flex 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 consumer and commercial loans and the enhancement of Second National's informational web site into a more interactive environment.
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 Profit vision 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.
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.
