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SECURITIES AND EXCHANGE COMMISSIONS
WASHINGTON, D.C. 20549
_________________
FORM 10-K
_________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998 Commission File No. 000-24853
FRONTIER NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Alabama 72-1355228
- -------------------------- ---------------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
43 North Broadway
Sylacauga, Alabama 35150
-------------------------
(Address of principal executive offices)
(334) 644-5419
---------------
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- ----------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 Par Value
-----------------------------
(Title of Class)
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 period 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 26, 1999 the aggregate market value of voting stock held by non-
affiliates was $53,628,709.
Indicate the number of shares outstanding of the registrant's class of common
stock, as of the latest practicable date.
Class Outstanding at March 15, 1999
- ------------------------------ -----------------------------
Common Stock, $.001 Par Value 2,315,683
Documents Incorporated by Reference Part of 10-K in which incorporated
- ------------------------------------ ----------------------------------
Proxy Statement for 1999 annual meeting Part III
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PART I
ITEM 1 - BUSINESS
Frontier National Corporation ("Frontier" or the "Company"), incorporated
in Alabama, is a bank holding company that commenced operations in 1997 as
Valley National Corporation. The Company is headquartered in Sylacauga, Alabama
and engages in a variety of banking services. Its principal assets are the
capital stock of Valley National Bank in Lanett, Alabama and First National-
America's Bank in Sylacauga, Alabama (the "Subsidiary Banks"), both are wholly-
owned subsidiaries of the Company and are national banking associations. At
December 31, 1998, Frontier had total assets of $216 million and stockholders'
equity of 22.4 million.
EMPLOYEES
As of March 31, 1998, Frontier and its subsidiaries had approximately 128
full-time employees. The employees are not represented by a collective
bargaining unit. Frontier believes its relationship with its employees to be
good.
BANKING SERVICES
Commercial banking is Frontier's predominant business, with special
emphasis in retail banking, including the acceptance of checking and savings
deposits, and the making of commercial, real estate, personal, home improvement,
automobile and other installment and term loans. It also offers collections,
notary public services, and other customary bank services to its customers.
Frontier provides ancillary financial services through two wholly owned
subsidiaries of First National-America's Bank. Frontier Financial Services,
Inc., an Alabama corporation ("Frontier Financial"), formed in 1993, is a
consumer finance company located in seven Alabama cities. The Frontier Agency,
Inc. is an insurance agency that was recently formed and operates out of
Sylacauga, Alabama.
BUSINESS COMBINATIONS
On August 24, 1998, the Company merged with First National Sylacauga
Corporation ("FNSC"). FNSC was a bank holding company which owned 100% of First
National-America's Bank, a national bank with approximately $136 million in
assets. The merger was effected as a reverse purchase acquisition of the
Company by FNSC, whereby, the financial statements reflect the ongoing
operations of FNSC combined with the accounts of the Company as of the merger
date and thereafter. Operating results and balance sheet information prior to
the merger reflect only the balances of FNSC. The merger increased FNSC's
total assets by approximately $76 million and increased its liabilities and
equity by approximately $67.4 million and $8.6 million, respectively.
On November 23, 1998, the Frontier Agency Inc., a subsidiary of First
National-America's Bank, purchased two insurance agencies. Brown Insurance
Agency located in Sylacauga, Alabama was purchased with cash and accounted for
by the purchase method of accounting. Wright-Sprayberry, Inc. also located in
Sylacauga, Alabama was purchased with 49,337 shares of the Company's stock and
accounted for by the pooling of interest method of accounting. The associated
real estate was purchased with cash at fair market values.
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COMPETITION
All phases of Frontier's banking activities are highly competitive.
Frontier competes actively with regional and community banks, as well as finance
companies, credit unions and other financial institutions located in its service
areas.
FORWARD-LOOKING STATEMENTS
In this report and in documents incorporated herein by reference, the
Company may make statements related to the future results of the Company that
may be considered "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company's actual results may
differ materially from those included in the forward-looking statements.
Forward-looking statements are typically identified by the words "believe,
expect, anticipate, intend, estimate" and similar expressions. These statements
may relate to, among other things, Year 2000 readiness and unforeseen or
unanticipated costs associated with Year 2000 compliance, loan loss reserve
adequacy, simulation of changes in interest rates and litigation results.
Actual results may differ materially from those expressed or implied by such
forward-looking statements as a result of certain risks and uncertainties,
including, but not limited to, changes in political and economic conditions,
interest rate fluctuations, competitive product and pricing pressures within the
Company's markets, equity and fixed income market fluctuations, personal and
corporate customer's bankruptcies, inflation, acquisitions and integrations of
acquired businesses, technological change, changes in law, changes in fiscal,
monetary, regulatory and tax policies, monetary fluctuations, success in gaining
regulatory approvals when required as well as other risks and uncertainties,
many of which are beyond the Company's control.
SUPERVISION AND REGULATION
The following summary of the Bank Holding Company Act ("BHC Act") and of
the other acts described herein is qualified in its entirety by express
reference to each of the particular acts.
Bank Holding Company Act of 1956. Frontier is a bank holding company
within the meaning of the federal BHC Act, and is registered with the Board of
Governors of the Federal Reserve System (the "Board"). Frontier is required to
file with the Board annual reports and such additional information as the Board
may require pursuant to the BHC Act. The Board may also make examinations of
Frontier and its subsidiaries.
The BHC Act requires every bank holding company to obtain the prior
approval of the Board before acquiring direct or indirect ownership or control
of more than 5% of the voting shares of any bank which is not majority owned by
Frontier. The BHC Act prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the outstanding voting shares of any company which is not a bank and from
engaging in any business other than banking or furnishing services to or
performing services for its subsidiaries. The 5% limitation is not applicable
to ownership of shares in any company the activities of which the Board has
determined to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.
In addition, and subject to certain exceptions, the BHC Act and the Change
in Bank Control Act, together with regulations thereunder, require Board
approval (or, depending on the circumstances, no notice of disapproval) prior to
any person or company acquiring "control" of a bank holding company, such as
Frontier. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the bank holding
company. Control is rebuttably presumed to exist if a person acquires 10% or
more but less than 25% of any class of voting securities and either the bank
holding company has registered securities under Section 12 of the Exchange Act
or no other person
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will own a greater percentage of that class of voting securities immediately
after the transaction. The regulations provide a procedure for challenge of the
rebuttable control presumption.
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Interstate Banking and Branching Act"), bank holding companies may
acquire banks in states other than their home states without regard to the
permissibility of such acquisitions under state law, but subject to any state
requirement that the bank has been organized and operating for a minimum period
of time, not to exceed five years, and the requirement that the bank holding
company, prior to or following the proposed acquisition, controls no more than
10% of the total amount of deposits of insured depository institutions in the
United States and less than 30% of such deposits in that state (or such lesser
or greater amount set by state law). The Interstate Banking and Branching Act
also authorizes banks to merge across state lines, thereby creating interstate
branches. This provision, which became effective June 1, 1997, allowed each
state, prior to the effective date, the opportunity to "opt out" of this
provision, thereby prohibiting interstate branching within that state. Alabama
did not adopt legislation to "opt out" of the interstate branching provisions.
Valley National Bank and First National-America's Bank are "affiliates" of
Frontier within the meaning of the Federal Reserve Act. This act places
restrictions on a bank's loans or extensions of credit to, purchases of or
investments in the securities of, and purchases of assets from an affiliate, a
bank's loans or extensions of credit to third parties collateralized by the
securities or obligations of an affiliate, the issuance of guarantees,
acceptances, and letters of credit on behalf of an affiliate, and certain bank
transactions with an affiliate, or with respect to which an affiliate acts as
agent, participates, or has a financial interest. Furthermore, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.
Under Federal Reserve Board policy, Frontier is expected to act as a source
of financial strength to its Subsidiary Banks and to commit resources to support
its subsidiaries. This support may be required at times when, absent such
Federal Reserve Board policy, Frontier may not be inclined to provide it. Under
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), a depository institution insured by the FDIC can be held liable for
any loss incurred by, or reasonably expected to be incurred by, the FDIC after
August 9, 1989 in connection with (a) the default of a commonly controlled FDIC-
insured depository institution or (b) any assistance provided by the FDIC to any
commonly controlled FDIC-insured depository institution "in danger of default."
"Default" is defined generally as the appointment of a conservator or receiver
and "in danger of default" is defined generally as the existence of certain
conditions indicating that a default is likely to occur in the absence of
regulatory assistance. Under FDICIA (see discussion below) a bank holding
company may be required to guarantee the capital plan of an undercapitalized
depository institution. Any capital loans by a bank holding company to any of
its subsidiary banks are subordinate in right of payment to deposits and to
certain other indebtedness of such subsidiary bank. In the event of a bank
holding company's bankruptcy, any commitment by the bank holding company to a
federal bank regulatory agency to maintain the capital of a subsidiary bank will
be assumed by the bankruptcy trustee and entitled to a priority of payment.
National Banking Act; Federal Deposit Insurance Act. Both subsidiary banks
are incorporated under the National Banking Act, as amended, and are subject to
the applicable provisions of that law. As national banking associations, both
are subject to the supervision of the Office of the Comptroller of the Currency
("OCC") and to regular examination by that agency. In addition, both are
members of the FDIC and its deposits are insured by the FDIC. Therefore, both
are subject to examination and regulation by the FDIC.
A number of federal statutes as regulations limit the amount of dividends
that can be paid by both subsidiary banks and Frontier. The amount of dividends
that a subsidiary national bank may declare in
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one year, without approval of the OCC, is the sum of the bank's net profits for
that year and its retained net profits for the preceding two years. Under the
rules of the OCC, the calculation of net profits is more restrictive under
certain circumstances. In addition, the declaration and payments of dividends by
the subsidiary bank's Boards are subject to the rules and regulations of the FRB
governing the amount of dividends which may be paid to shareholders, the manner
in which dividends are paid, and the methods, if any, by which capital stock and
surplus may be retired and reduced.
The Subsidiary Banks also are subject to regulation respecting the
maintenance of certain minimum capital levels (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Capital Resources"
and "Liquidity"), and will be required to file annual reports and such
additional information as the National Banking Act and FDIC regulations require.
They are also subject to certain restrictions on loan amounts, interest rates,
"insider" loans to officers, directors and principal shareholders, tie-in
arrangements, and transactions with affiliates, as well as many other matters.
Strict compliance at all times with state and federal banking laws is required.
In December 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") was enacted, which substantially revised the bank regulatory
and funding provisions of the Federal Deposit Insurance Act and makes revisions
to several other federal banking statutes. Among other things, FDICIA requires
the federal banking regulators to take "prompt corrective action" in respect of
depository institutions that do not meet minimum capital requirements. In
addition, an institution that is not well capitalized is generally prohibited
from accepting brokered deposits and offering interest rates on deposits higher
than the prevailing rate in its market and also may not be able to "pass
through" insurance coverage for certain employee benefit accounts. FDICIA also
requires the holding company of any undercapitalized depository institution to
guarantee, in part, certain aspects of such depository institution's capital
plan for such plan to be acceptable. FDICIA contains numerous other provisions,
including new accounting, audit and reporting requirements, termination of the
"too big to fail" doctrine except in special cases, limitations on the FDIC's
payment of deposits at foreign branches, new regulatory standards in such areas
as asset quality, earnings and compensation and revised regulatory standards
for, among other things, powers of state banks, real estate lending and capital
adequacy. FDICIA also requires that a depository institution provide 90 days
prior notice of the closing of any branches.
Under the Community Reinvestment Act ("CRA"), as implemented by Federal
Reserve Board and OCC regulations, holding companies and national banks have a
continuing and affirmative obligation consistent with their safe and sound
operation to help meet the credit needs of their entire community, including
low- and moderate-income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community. The CRA requires the
Federal Reserve Board and the OCC, in connection with their examination of
holding companies or banks, to assess the companies' record of meeting the
credit needs of their communities and to take such record into account in its
evaluation of certain applications by such institution. The FIRREA amended the
CRA to require public disclosure of an institution's CRA rating and to require
that the Federal Reserve Board and the OCC provide a written evaluation of an
institution's CRA performance utilizing a four-tiered descriptive rating system
in lieu of the then existing five-tiered numerical rating system. Frontier and
its subsidiaries are subject to these regulations.
Alabama law contains limitations on the interest rates that may be charged
on various types of loans. The operations of banks are also affected by various
consumer laws and regulations, including those relating to equal credit
opportunity and regulation of consumer lending practices. All national banks
must become and remain insured banks under the FDIA. (See 12 U.S.C. (S) 1811,
et seq.).
The U.S. federal and state banking agencies have broad enforcement powers
over bank holding companies and their subsidiaries, including, in the case of
the federal agencies, the power to terminate
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deposit insurance, impose substantial fines and other civil penalties and, in
the most severe cases, to appoint a conservator or receiver for a depository
institution. Failure to maintain adequate capital or to comply with applicable
laws, regulations and supervisory agreements could subject Frontier or its
subsidiaries to these enforcement provisions.
EFFECT OF GOVERNMENTAL POLICIES
Frontier and its subsidiaries are affected by the policies of regulatory
authorities, including the Federal Reserve System. An important function of the
Federal Reserve System is to regulate the national money supply. Among the
instruments of monetary policy used by the Federal Reserve are: purchases and
sales of U.S. Government securities in the marketplace; changes in the discount
rate, which is the rate any depository institution must pay to borrow from the
Federal Reserve; and changes in the reserve requirements of depository
institutions. These instruments are effective in influencing economic and
monetary growth, interest rate levels and inflation.
The monetary policies of the Federal Reserve System and other governmental
policies have had a significant effect on the operating results of commercial
banks in the past and are expected to continue to do so in the future. Because
of changing conditions in the national economy and in the money market, as well
as the result of actions by monetary and fiscal authorities, it is not possible
to predict with certainty future changes in interest rates, deposit levels, loan
demand or the business and earnings of Frontier or whether the changing economic
conditions will have a positive or negative effect on operations and earnings.
Bills are pending before the United States Congress and the Alabama
Legislature which could affect the business of Frontier, and there are
indications that other similar bills may be introduced in the future. It cannot
be predicted whether or in what form any of these proposals will be adopted or
the extent to which the business of Frontier may be affected thereby.
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<TABLE>
<CAPTION>
ITEM 1 - STATISTICAL DISCLOSURE
Page(s)
-------
<S> <C>
Loan Portfolio........................................................... 15
Selected Loan Maturity and Interest Rate Sensitivity..................... 15
Securities Portfolio and Securities Portfolio Maturity Schedule.......... 16-17
Maturities of Large Time Deposits........................................ 18
Maturities of Long-term Debt............................................. 19
Return on Equity and Assets.............................................. 20
Capital Adequacy Ratios.................................................. 21
Interest Rate Sensitivity Analysis....................................... 22
Consolidated Average Balances, Interest Income/Expense and Yields/Rates.. 25
Rate/Volume Variance Analysis............................................ 26
Summary of Loan Loss Experience.......................................... 28
Allocation of Loan Loss Reserve.......................................... 28
Nonperforming Assets..................................................... 29
Noninterest Income....................................................... 30
Noninterest Expense...................................................... 30-31
</TABLE>
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ITEM 2 - PROPERTIES
The Company, through its subsidiaries, owns or leases buildings that are
used in the normal course of business. The principal executive offices of the
Company are located at 45 N. Broadway, Sylacauga, Alabama. The Subsidiary Banks
own or lease various offices and facilities in Alabama. Valley National Bank
operates in three locations in Valley, Alabama and First National-America's
Bank operates in two locations in Sylacauga, Alabama and has another branch in
Childersburg, Alabama. Frontier owns four of these locations and leases the
other two.
ITEM 3 - LEGAL PROCEEDINGS
The nature of its business generates a certain amount of litigation against
Frontier involving matters arising in the ordinary course of business. None of
the legal proceedings currently pending or threatened to which Frontier and its
subsidiaries are a party or to which any of their properties are subject will
have, in the opinion of management, a material effect on the business or
financial condition of Frontier or its subsidiaries.
One such matter is an action filed on December 5, 1997, against Frontier, a
subsidiary of First National America's-Bank, in the Circuit Court of Talladega
County, Alabama, styled Betty Swain, individually, and on behalf of herself and
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all others situated vs. Frontier Financial Services, Inc., Case Number CV 97-
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539. The complaint alleges that Frontier violated the Alabama Mini-Code
provisions relating to permissible finance charges. It states an alternative
theory of unjust enrichment or conversion with regard to the alleged excessive
finance charges. Finally, the Complaint contains a count seeking class
certification.
The Company's attorneys have moved to dismiss the allegations made in the
Complaint. The Motion to Dismiss has not yet been ruled upon. In addition, the
company acknowledged receipt of the complaint as notice under Alabama Code
Section 5-19-19(a)(1)(ii) (1975, as amended), and responded to said complaint as
a request for refund for finance charges assessed in an amount in excess of the
amounts authorized by the Alabama Mini-Code. The company researched the claims
made in the above referenced lawsuit, and it appeared that a non-systemic error
occurred with regard to Ms. Swain's account and that as a result, she was
charged an excess finance charge of $4.78. This unintentional overcharge has
been credited to Ms. Swain's account together with interest thereon at the
contract rate. In an effort to address any other unintentional financing
errors, the company reviewed all of their open accounts and determined a total
overcharge of $204.94, which the company has already credited to customer
accounts together with interest. The Company's attorneys have shared this
information with opposing counsel and requested that opposing counsel dismiss
this litigation as their client, the named plaintiff Ms. Swain, and their
potential clients, the purported class, have no damages. As of March 31, 1999,
opposing counsel has been unwilling to dismiss this lawsuit. It is too early to
predict the potential liability, if any, in the case since it has only recently
been filed. However, the Company will vigorously defend all claims against it
in this action.
The Company is currently defending an action filed on April 13, 1998,
against First National-America's Bank in the Circuit Court of Talladega County,
Alabama, styled Willie F. Datcher, Jr., Dorothy Jean Datcher, Nettie L. Datcher,
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Marvin Datcher, Marcus Datcher, Willie E. Datcher, Elton Datcher, and Victor
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Datcher vs. City Bank of Childersburg; First National Bank of Childersburg;
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Jimmy Clark Taylor. Case Number CV 98-160. The complaint alleges that
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beginning in May 1990, defendants, by and through their officers, agents and
employees engaged in a series of fraudulent acts and misrepresentations designed
to defraud the plaintiffs out of considerable monies. It also alleges that a
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bank employee created notes payable on the "Datcher accounts" and converted
monies to his own use. It is too early to predict the potential liability, if
any, in the case since it has only recently been filed. All internal
investigations into this matter show no proof of the allegations. A request has
been sent to City Bank of Childersburg's insurance company requesting coverage
by the insurance that was in place prior to First National America's-Bank's
acquiring City Bank of Childersburg in 1996.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders by solicitation of
proxies or otherwise during the fourth quarter of 1998.
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PART II
ITEM 5 - MARKET OF REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's Class A Common Stock, $.001 par value per share (the "Common
Stock") is traded on the Nasdaq Bulletin Board under the symbol "FIEC." Trading
of the Common Stock commenced in October 1998. The Common Stock has traded at
prices between $22 and $23.50 per share for the limited time it has been traded
on the Nasdaq Bulletin Board.
Prior to the fourth quarter of 1998, there was no established trading
market for the Common Stock and the only purchases and sales of the Common Stock
were in privately negotiated transactions. Therefore, no reliable information is
available as to trades of the Common Stock, or as to the prices at which such
Common Stock has traded. Management has reviewed the limited information
available to the Company as to the ranges at which shares of the Common Stock
has been sold. The following data regarding the Common Stock is provided for
information purposes only, and should not be viewed as indicative of the actual
or market value of the Common Stock.
<TABLE>
<CAPTION>
High Low Dividend
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<S> <C> <C> <C>
1998:
First Quarter.............................. $ 9.00 $ 9.00 $.0720
Second Quarter............................. 10.80 9.00 .1873
Third Quarter.............................. 23.25 22.00 .1900
Fourth Quarter............................. 23.50 22.00 .1900
1997:
First Quarter.............................. $ 9.00 $ 9.00 $.0720
Second Quarter............................. 9.00 9.00 .0720
Third Quarter.............................. 9.00 9.00 .0720
Fourth Quarter............................. 9.00 9.00 .1440
</TABLE>
As of March 15, 1999, the Common Stock was held by approximately 195
shareholders of record. It is the Company's policy to pay dividends quarterly
based on the performance of its subsidiaries. The Company paid annual dividends
of $.36 per share in 1997 and $.64 per share in 1998. Please see chart above
for quarterly dividend information. In addition, in September 1998, the Company
issued a 6.8% stock dividend resulting in the issuance of 144,611 shares of
Common Stock to existing security holders. The Company, through the Subsidiary
Banks, is subject to certain restrictions on the payment of dividends. See
"Note 19 - Restrictions on Subsidiary Dividends, Loans or Advances" in the
"Notes to Consolidated Financial Statements."
RECENT SALES OF UNREGISTERED SECURITIES
On August 24, 1998, the Company issued options to purchase 50,000 each of
Common Stock to Steven R. Townson and Harry I. Brown, Jr. as compensation for
their services to the Company. The options are immediately exercisable at a
price of $10.00 per share. Mr. Brown exercised his option for
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10,000 shares of Common Stock on December 31, 1998. The issuance of the options
and option shares were exempt pursuant to Section 4(2) of the Securities Act of
1933, as amended.
On November 23, 1998, the Company issued 49,337 shares of Common Stock to
three individuals in connection with the merger of The Frontier Agency, Inc.
with Wright-Sprayberry, Inc. The offer and sale of the Common Stock was exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
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ITEM 6 - SELECTED FINANCIAL DATA
The following table presents on a historical basis selected financial data
and ratios for the Company.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ---------- ----------- ----------- ------------
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
EARNINGS SUMMARY:
Interest income......................................... $ 13,883 $ 11,085 $ 8,785 $ 6,180 $ 5,309
Less interest expense................................... 6,294 4,695 3,352 2,076 1,626
Net interest income..................................... 7,589 6,390 5,433 4,104 3,683
Provision for loan losses............................... 1,412 662 564 (98) 393
Net interest income after provision for loan losses.... 6,177 5,728 4,869 4,202 3,290
Noninterest income...................................... 2,283 1,222 885 704 614
Noninterest expense..................................... 7,066 5,036 4,297 3,315 2,958
Income before income taxes.............................. 1,394 1,914 1,457 1,591 946
Applicable income taxes................................. 266 562 410 410 157
Net income.............................................. 1,128 1,352 1,047 1,181 789
PER COMMON SHARE DATA:
Net income - basic...................................... $ .59 $ .96 $ .75 $ .84 $ .56
Net income - diluted.................................... .59 .96 .75 .84 .56
Cash dividends declared per common share................ .64 .36 . 36 .36 .31
SELECTED AVERAGE BALANCES:
Total assets............................................ $ 166,914 $ 126,397 $ 101,743 $ 75,055 $ 69,079
Total loans............................................. 107,393 88,559 67,667 42,049 33,787
Securities.............................................. 36,190 23,100 25,789 24,186 26,893
Earning assets.......................................... 152,224 113,484 95,130 67,557 62,156
Deposits................................................ 127,754 97,092 82,597 62,399 57,937
Shareholders' equity.................................... 17,428 14,132 12,186 10,929 10,552
Shares outstanding (thousands).......................... 1,908 1,403 1,404 1,407 1,425
SELECTED PERIOD-END BALANCES:
Total assets............................................ $ 216,195 $ 134,966 $ 121,547 $79,577 $71,783
Total loans............................................. 136,202 96,631 82,874 48,457 36,890
Securities.............................................. 51,881 24,125 25,516 26,591 25,978
Earning assets.......................................... 195,277 123,276 108,437 75,248 63,486
Deposits................................................ 173,375 100,858 94,499 60,487 57,889
Shareholders' equity.................................... 22,488 14,068 13,119 12,666 11,152
Shares outstanding (thousands).......................... 2,316 1,458 1,404 1,402 1,412
SELECTED RATIOS:
Return on average equity................................ 6.47% 9.57% 8.59% 10.81% 7.48%
Return on average assets................................ 0.68 1.07 1.03 1.57 1.14
Net interest margin (not taxable equivalent)............ 4.29 5.63 5.71 6.07 5.93
Allowance for loan losses to loans...................... 1.34 1.16 1.11 0.80 0.69
Net charge-offs to average loans........................ 1.09 0.53 0.58 (0.55) 1.15
Average equity to average assets........................ 10.44 11.18 11.98 14.56 15.28
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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MANAGEMENT'S STATEMENT ON
RESPONSIBILITY FOR FINANCIAL REPORTING
FRONTIER NATIONAL CORPORATION
The management of Frontier National Corporation is responsible for the
content and integrity of the consolidated financial statements and all other
financial information included in this annual report. Management believes that
the financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis to reflect, in all
material respects, the substance of events and transactions that should be
included, and that the other financial information in the annual report is
consistent with those financial statements. The financial statements
necessarily include amounts that are based on management's best estimates and
judgements.
Management maintains and depends upon Frontier National Corporation's
accounting systems and related systems of internal controls. The internal
control systems are designed to ensure that transactions are properly authorized
and recorded in the Company's financial record and to safeguard the Company's
assets from material loss or misuse. The Company maintains an internal audit
staff which monitors compliance with the Company's systems of internal controls
and reports to management and to the audit committee of the board of directors.
The audit committee of the board of directors, composed solely of outside
directors, has responsibility for recommending to the board of directors the
appointment of the independent auditors for Frontier National Corporation. The
committee meets periodically with the internal auditors and the independent
auditors to review the scope and findings of their respective audits. The
internal auditors, independent auditors and management each have full and free
access to meet privately as well as together with the committee to discuss
internal controls, accounting, auditing, or other financial reporting matters.
The consolidated financial statements of Frontier National Corporation have
been audited by Schauer, Taylor, Cox & Vise, P.C., independent auditors, who
were engaged to express an opinion as to the fairness of presentation of such
financial statements.
Harry I. Brown, Jr. Steven R. Townson
Chairman and President, Chief Financial Officer
Chief Executive Officer and Chief Operating Officer
13
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to focus on significant changes in the
financial condition and results of operations of the Company and its
subsidiaries during the past three years. The discussion and analysis is
intended to supplement and highlight information contained in the accompanying
consolidated financial statements and the selected financial data presented
elsewhere in this report.
SUMMARY
Net income for 1998 was $1,127,816, a 16.6% decrease from 1997 net income.
Net income for 1997 was $1,351,806, a 29.13% increase from the net income of
$1,046,806 in 1996. Net income for 1996 was $1,047,000. Net income per common
share for 1998 was 38.5% lower than in 1997.
The decrease in net income from 1997 to 1998 is primarily attributable to
increased interest expense and salaries and benefits expense coupled with the
expense of the merger. The increase in net income from 1996 to 1997 is primarily
due to an overall increase in total loans. The decrease in net income from 1995
to 1996 was attributable to the increase in provision for loan losses.
The Company plans to continue its objectives of maintaining asset quality
and providing superior service to its customers. Our strategic plan in the
short run includes expanding Frontier Financial to new markets in Alabama as
well as providing Internet banking to new and existing customers. The Company
plans to provide the best value in deposit services and loan products to its
customers.
EARNING ASSETS
Average earning assets at year end 1998 was approximately $152,224,000,
representing an increase of approximately $38,740,000 or 34.1% over year end
1997. The increase was a result of the business combination. Average earning
assets in 1997 increased approximately $18,354,000 or 19.29% over 1996 primarily
due to increase in loan volume.
The management of the Company considers many criteria in managing assets,
including creditworthiness, diversification and structural characteristics,
maturity and interest rate sensitivity. The following table sets forth the
Company's interest-earning assets by category at December 31, in each of the
last three years.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1998 1997 1996
-------------- --------------- ---------------
(In thousands)
<S> <C> <C> <C>
Interest-bearing deposits with banks.................... $ 1,139 $ 480 $ 47
Securities.............................................. 51,881 24,125 25,516
Federal funds sold...................................... 6,055 2,040 -0-
Loans:
Real estate.......................................... 85,131 59,348 44,409
Commercial and other................................. 51,071 37,283 38,465
-------- -------- --------
Total loans...................................... 136,202 96,631 82,874
-------- -------- --------
Interest-earning assets................................. $195,277 $123,276 $108,437
======== ======== ========
</TABLE>
14
<PAGE>
LOAN PORTFOLIO
The Company's average loans increased approximately $18,834,000 or 21.3%
from year end 1997 to 1998. Average loans for 1997 were $88,559,000, an increase
of 30.87% over $67,667,000 in average loans for 1996. The dramatic increase in
loans was a direct result of the business combination of Frontier and FNSC.
Loan growth for 1998 was funded through a mixture of borrowed funds and customer
deposits. Loan growth for 1997 was primarily funded through borrowed funds.
Real estate loans increased by $9,105,000 or 20.5% over 1996.
LOAN PORTFOLIO
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ----------------- ----------------- ----------------- ------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
-------- --------- ------- -------- ------- -------- ------ -------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial and
agricultural.... $ 25,353 18.46% $ 16,227 15.80% $ 15,531 17.83% $ 10,109 19.83% $ 9,246 24.36%
Real estate -
construction.... 2,385 1.74 5,807 5.65 3,589 4.12 973 1.91 794 2.10
Real estate -
mortgage........ 82,746 60.23 53,541 52.13 43,410 49.85 24,154 47.38 17,355 45.73
Consumer........ 26,432 19.22 27,024 26.32 24,486 28.11 15,701 30.81 10,360 27.28
Other........... 467 .35 97 .10 72 .09 37 .07 200 .53
------- ------ ------- ------ ------ ------ ------ ------ ------ ------
137,383 100.00% 102,696 100.00% 87,088 100.00% 50,974 100.00% 37,955 100.00%
====== ====== ====== ====== ======
Less: Unearned
income.......... 1,181 6,065 4,196 2,517 1,065
Allowance for
loan losses..... 1,831 1,120 924 388 448
-------- -------- ------- ------- -------
Net loans....... $134,371 $ 95,511 $81,968 $48,069 $36,442
======== ======== ======= ======= =======
</TABLE>
The following table sets forth maturities of the loan portfolio and the
sensitivity to interest rate changes of the Company's loan portfolio.
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
Rate Structure for Loans
Maturity Maturing Over One Year
----------------------------------------------------------------------------------------------------
Over One
One Year Over Predetermined Floating or
Year or Through Five Interest Adjustable
Less Five Years Years Total Rate Rate
---------- ------------ ---------- ---------- ------------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural.......... $18,802 $6,391 $160 $25,353 $6,551 $-0-
Real estate - construction 2,201 130 54 2,385 184 -0-
------- ------ ---- ------- ------ ----
Total.................... $21,003 $6,521 $214 $27,738 $6,735 $-0-
======= ====== ==== ======= ====== ====
</TABLE>
15
<PAGE>
SECURITIES PORTFOLIO
The Company's securities portfolio increased by 115.1% or $27,755,854 from
1997 to 1998. The balance in the securities portfolio increased due primarily to
the business combination. The 1997 securities portfolio decreased by $1,391,085
over 1996, a decrease of 5.45%.
The Company maintains an investment strategy of seeking portfolio yields
within acceptable risk levels, as well as providing liquidity. The Company
maintains one classification of securities: "Available-for-sale." The
"Available-for-sale" securities are carried at fair market value. At year end
1998, unrealized net gains in the "Available-for-sale" portfolio amounted to
$803,630. At year end 1997, unrealized gains in the "Available-for-sale"
portfolio amounted to $476,937. At the end of 1996, the unrealized gains in
the "Available-for-sale" portfolio amounted to $285,873.
The Company has classified all securities as available-for-sale. The
classification of certain securities as available-for-sale is consistent with
the Company's investment philosophy of maintaining flexibility to manage the
portfolio. Approximately $530,000 of unrealized gain was included in
shareholders' equity related to the available-for-sale investment securities as
of December 31, 1998.
At year end 1998, obligations of the United States Government or its
agencies and obligations of states and political subdivisions, including Fannie
Mae, Freddie Mac, Ginnie Mae and Small Business Administration loans represented
approximately 96.33% of the total securities portfolio.
The following table presents the carrying amounts of the Company's securities
portfolio at December 31, in each of the last three years.
SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
(In thousands)
<S> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. government and agencies................ $ 7,128 $ 5,607 $ 9,433
States and political subdivisions........... 22,193 10,890 7,996
Mortgage-backed securities.................. 20,654 6,071 6,258
Equity securities........................... 1,906 1,557 1,829
-------- -------- --------
Total...................................... $ 51,881 $ 24,125 $ 25,516
======== ======== ========
</TABLE>
16
<PAGE>
SECURITY PORTFOLIO MATURITY SCHEDULE
<TABLE>
<CAPTION>
Maturing
-----------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
--------------- ------------------ ----------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
------- ------ --------- ------- -------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
(amortized cost)
U.S. Government and agencies..... $ 4,528 5.61% $ 1,018 6.49% $ 1,497 7.48% $ -0- 0.00%
Mortgage-backed securities....... 0 0.00 2,329 5.85 2,656 6.31 15,562 5.74
State and municipal.............. 1,007 10.86 2,130 9.12 3,246 8.88 15,198 6.60
Equity securities................ 0 0.00 -0- 0.00 -0- 0.00 1,906 8.13
------- -------- ------- --------
$ 5,535 6.57 $ 5,477 7.25 $ 7,399 7.68 $ 32,666 7.04
======= ======== ======= ========
</TABLE>
There were no securities held by the Company of which the aggregate value
on December 31, 1998 exceeded ten percent of shareholders' equity at that date.
(Securities which are payable from and secured by the same source of revenue or
taxing authority are considered to be securities of a single issuer. Securities
of the U.S. Government and U.S. Government agencies and corporations are not
included.)
DEPOSITS AND BORROWED FUNDS
Generally, all categories of deposits increased in 1998 due to the business
combination. The Company's average deposits rose approximately $30,662,000 or
31.6% from 1997 to 1998. Average deposits increased approximately $14,495,000 or
17.55% from 1996 to 1997. Average deposits increased approximately $20,198,000
or 32.37% from 1995 to 1996. Total deposits increased $72,517,434 or 71.9% from
1997 to 1998. From year end 1996 to year end 1997, total deposits increased
$6,359,213 or 6.73%. The largest area of growth in 1998 was in interest-bearing
deposits, which increased $61,311,000, or 71.9%. The increase can be attributed
to the business combination that took place in 1998. The largest portion of
growth during 1997 was in interest-bearing deposits that increased $5,720,000 or
7.19%. This is due to an increase in brokered deposits. From 1997 to 1998,
interest-bearing transaction deposits increased approximately $17,315,000 or
123.5%, savings deposits increased approximately $8,508,000 or 48.37%, other
time deposits of less than $100,000 increased approximately $21,891,000 or
49.18% and time deposits of $100,000 or more increased approximately $13,596,000
or 148.57%. From 1996 to 1997, interest-bearing transaction deposits decreased
approximately $726,000 or 4.92%, savings deposits increased approximately
$1,604,000 or 10.03%, other time deposits of less than $100,000 increased
approximately $10,779,000 or 31.96% and time deposits of $100,000 or more
decreased approximately $5,937,000 or 39.35%. From 1995 to 1996, interest-
bearing transaction deposits increased $6,773,000 or 50.6%, savings deposits
increased $4,076,000 or 47.14%, other time deposits of less than $100,000
increased $18,021,000 or 91.04%, and time deposits of $100,000 or more increased
by $2,329,000 or 35.43%. This was due to the purchase of deposit from Citizens
Bank of Talladega (successor-in-interest to Talladega Savings and Loan
Association) and the acquisition of City Bank of Childersburg. From year end
1997 to year end 1998, total non-interest-bearing deposits increased $11,206,000
or 71.9%.
17
<PAGE>
The following table sets forth the Company's deposit structure at December
31, in each of the last three years.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1998 1997 1996
---------------- --------------- --------------
(In thousands)
<S> <C> <C> <C>
Noninterest-bearing deposits
Individuals, partnerships and corporations................. $ 25,648 $ 15,505 $ 14,411
U. S. Government and states and political subdivisions..... 203 65 131
Certified and official checks.............................. 942 17 406
--------- --------- --------
Total noninterest-bearing deposits........................ 26,793 15,587 14,948
Interest-bearing deposits
Interest-bearing demand accounts........................... 31,335 14,020 14,746
Saving accounts............................................ 26,099 17,590 15,986
Certificates of deposit, less than $100,000................ 66,401 44,510 33,731
Certificates of deposit, more than $100,000................ 22,747 9,151 15,088
--------- --------- --------
Total interest-bearing deposits........................... 146,582 85,271 79,551
--------- --------- --------
Total deposits............................................ $ 173,375 $ 100,858 $ 94,499
========= ========= ========
</TABLE>
The following table presents a breakdown by category of the average amount
of deposits and the average rate paid on deposits for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- --------------------------- -------------------------
Amount Rate Amount Rate Amount Rate
------------- ------------- ------------- ------------ ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits $ 19,081 0.00% $ 15,555 0.00% $ 14,827 0.00%
Savings deposits..................... 20,132 3.19 15,997 3.08 13,869 3.14
Time deposits........................ 68,358 5.76 50,389 5.73 41,604 5.41
Interest-bearing demand deposits..... 20,183 2.37 15,151 2.45 12,297 2.35
--------- -------- --------
Total deposits...................... $ 127,754 3.96% $ 97,092 3.86% $ 82,597 3.60%
========= ======== ========
</TABLE>
At December 31, 1998, time deposits greater than $100,000 aggregated
approximately $22,747,000. The following table indicates, as of December 31,
1998, the dollar amount of $100,000 or more by the time remaining until maturity
(in thousands):
MATURITIES OF LARGE TIME DEPOSITS
(In thousands)
--------------
<TABLE>
<S> <C>
Three months or less......................... $11,189
Over three through six months................ 2,101
Over six through twelve months............... 5,536
Over twelve months........................... 3,921
-------
Total...................................... $22,747
=======
</TABLE>
18
<PAGE>
Borrowed funds consist primarily of long-term debt. The Subsidiary Banks
had $14,000,000 in available lines to purchase Federal Funds, on an unsecured
basis, from commercial banks. At December 31, 1998, the Subsidiary Banks had no
funds advanced against these lines. The Subsidiary Banks were approved to
borrow up to $40,000,000 under various short-term and long-term programs offered
by the Federal Home Loan Bank of Atlanta. These borrowings are secured under a
blanket lien agreement on certain qualifying mortgage instruments in loan and
investment portfolios. The unused portion of these available funds amounted to
$21,458,000 at year end 1998. Long-term debt consisted of various commitments
with scheduled maturities from one to sixteen years.
The following table sets forth expected debt service for the next five
years based on interest rates and repayment provisions as of December 31, 1998.
MATURITIES OF LONG-TERM DEBT
(In thousands)
--------------
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest in indebtedness.. $ 975 $ 931 $ 878 $ 802 $ 491
Repayment of principal.... 1,506 1,106 353 5,000 2,500
------ ------ ------ ------ ------
$2,481 $2,037 $1,231 $5,802 $2,991
====== ====== ====== ====== ======
</TABLE>
CAPITAL RESOURCES
Shareholders' equity increased $8,420,420 or 59.86% to $22,488,238 as of
December 31, 1998. The increase in shareholders' equity was attributable to the
following reasons; issuance of stock due to the Wright-Sprayberry business
combination, exercised options, merger of FSNC with the Company, retirement and
issuance of treasury stock, and net income minus dividend issues. Shareholders'
equity increased $949,216 or 7.23% to $14,067,818 as of December 31, 1997,
compared with $13,118,602 at the end of 1996, and $12,665,905 at year end 1995.
During 1998, the Company retired 247,065 shares of treasury stock and
purchased 16,000 shares of treasury stock.
A strong capital position, which is vital to the continued profitability of
the Company, also promotes depositor and investor confidence and provides a
solid foundation for the future growth of the organization. The objective of
management is to maintain a level of capitalization that is sufficient to take
advantage of profitable growth opportunities while meeting regulatory
requirements. This is achieved by improving profitability through effectively
allocating resources to more profitable businesses, improving asset quality,
strengthening service quality, and streamlining costs. The primary measures used
by management to monitor the results of these efforts are the ratios of return
on average assets, return on average common equity and average equity to average
assets.
19
<PAGE>
The table below summarizes these and other key ratios for the Company for each
of the last three years.
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Return on average assets........................ .68% 1.07% 1.03%
Return on average common equity................. 6.47 9.57 8.59
Dividend payout ratio........................... 108.87 37.38 48.28
Average common shareholders' equity to average
assets ratio................................... 10.44 11.18 11.98
</TABLE>
In addition, banks and bank holding companies are required to maintain capital
to support, on a risk-adjusted basis, certain off-balance sheet activities such
as loan commitments. The Federal Reserve Board has adopted capital guidelines
governing the activities of bank holding companies. These guidelines require the
maintenance of an amount of capital based on risk-adjusted assets so that
categories of assets with potentially higher credit risk will require more
capital backing than assets with lower risk.
The capital guidelines classify capital into two tiers, referred to as Tier
I and Tier II. Under risk-based capital requirements, total capital consists of
Tier I capital which is generally common shareholders' equity less goodwill and
Tier II capital which is primarily a portion of the allowance for loan losses
and certain qualifying debt instruments. In determining risk-based capital
requirements, assets are assigned risk-weights of 0% to 100%, depending
primarily on the regulatory assigned levels of credit risk associated with such
assets. Off-balance sheet items are considered in the calculation of risk-
adjusted assets through conversion factors established by the regulators. The
framework for calculating risk-based capital requires banks and bank holding
companies to meet the regulatory minimums of 4% Tier I and 8% total risk-based
capital. In 1990, regulators added a leverage computation to the capital
requirements, comparing Tier I capital to total average assets less goodwill.
[The remainder of this page intentionally left blank]
20
<PAGE>
The table below illustrates the Company's regulatory capital ratios under
federal guidelines at December 31, 1998 and 1997:
CAPITAL ADEQUACY RATIOS
<TABLE>
<CAPTION>
Statutory Years ended December 31,
---------------------------------------
Minimum 1998 1997
---------- ---------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Tier I Capital........................................... $ 20,331 $ 12,219
Tier II Capital.......................................... 1,814 1,120
-------- --------
Total Qualifying Capital................................. $ 22,145 $ 13,339
======== ========
Risk Adjusted Total Assets (including
off-balance-sheet exposures)............................. $ 145,123 $ 96,069
======== ========
Adjusted quarterly average assets........................ $ 219,444 $ 132,231
========
Tier I Risk-Based Capital Ratio.......................... 4.0% 14.01% 12.72%
Total Risk-Basked Capital Ratio.......................... 8.0 15.26 13.88
Leverage Ratio........................................... 4.0 9.26 9.24
</TABLE>
On December 31, 1998, the Company and its Subsidiary Banks exceeded the
regulatory minimums and qualified as well capitalized institutions under the
regulations.
LIQUIDITY MANAGEMENT
Liquidity is the ability of a company to convert assets into cash without
significant loss and to raise funds by increasing liabilities. Liquidity
management involves having the ability to meet the day-to-day cash flow
requirements of its customers, whether they are depositors wishing to withdraw
funds or borrowers requiring funds to meet their credit needs.
The primary function of asset/liability management is not only to assure
adequate liquidity in order for the Company to meet the needs of its customer
base, but to maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities so that the Company can profitably deploy its
assets. Both assets and liabilities are considered sources of liquidity funding
and both are, therefore, monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily through
loan repayments and maturities of securities. Additional sources of liquidity
are the investments in federal funds sold and prepayments from the mortgage-
backed securities from the securities portfolio.
The liability portion of the balance sheet provides liquidity through
various interest-bearing and noninterest-bearing deposit accounts. At year end,
the Company had $14,000,000 of federal funds available and a $40,000,000 line of
credit from The Federal Home Loan Bank of which approximately $21,458,000 was
available and unused.
21
<PAGE>
INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate sensitivity is a function of the repricing characteristics of
the Subsidiary Banks' portfolio of assets and liabilities. These repricing
characteristics are the time frames within which the interest-bearing assets and
liabilities are subject to change in interest rates either at replacement or
maturity during the life of the instruments. Sensitivity is measured as the
difference between the volume of assets and liabilities in the Subsidiary Banks'
current portfolio that are subject to repricing in future time periods. The
differences are known as interest sensitivity gaps and are usually calculated
separately for segments of time ranging from zero to thirty days, thirty-one to
ninety days, ninety-one days to one year, one to five years, over five years and
on a cumulative basis.
The following table shows interest sensitivity gaps for different intervals as
of December 31, 1998.
Interest Rate Sensitivity Analysis
<TABLE>
0-30 31-90 90-365 1-5 Over 5
Days Days Days Years Years Total
------ ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets /(1)/
Loans $ 33,679 $ 16,250 $ 21,354 $ 39,673 $ 24,731 $ 135,687
Securities available-for-sale....................... 889 1,416 11,487 14,800 23,289 51,881
Time deposits in other banks........................ 1,140 1,140
Federal funds sold.................................. 6,055 6,055
------- ------- -------- ------- ------- --------
41,763 17,666 32,841 54,473 48,020 194,763
------- ------- -------- ------- ------- --------
Interest-bearing liabilities /(2)/
Demand deposits /(3)/............................... 10,445 10,445 10,445 31,335
Savings deposits /(3)/.............................. 8,700 8,700 8,699 26,099
Time deposits....................................... 8,825 21,127 39,625 17,213 2,358 89,148
Other short-term borrowings /(3)/................... 470 470 471 1,411
Long-term debt...................................... 14,053 3,092 17,145
------- ------- -------- ------- ------- --------
28,440 40,742 59,240 31,266 5,450 165,138
------- -------- -------- ------- ------- --------
Interest sensitivity gap............................. 13,323 (23,076) (26,399) 23,207 42,570
Cumulative interest sensitivity gap.................. 13,323 (9,573) (36,152) 12,945 29,625
Ratio of interest-earning assets to
Interest-bearing liabilities........................ 1.47 .43 .55 1.74 8.81
Cumulative ratio...................................... 1.47 .86 .72 .92 1.18
Ratio of cumulative gap to total
Interest-earning assets............................. .07 (.05) (.19) .06 .15
</TABLE>
(1) Excludes nonaccrual loans and securities
(2) Excludes matured certificates which have not been redeemed by the customer
and on which no interest is accruing.
(3) Demand and savings deposits and other short-term borrowings are assumed to
be subject to movement into other deposit instruments in equal amounts
during the 0-30 day period, the 31-90 day period, and the 91-365 day
period.
The above table indicates that in a rising interest rate environment,
the Company's earnings may be adversely affected in the 0-365 day periods where
liabilities will reprice faster than assets. As seen in the preceding table,
for the first 30 days of repricing opportunity there is an excess of earning
assets over interest-bearing liability of approximately $13.3 million. For the
first 365 days, interest-bearing liabilities
22
<PAGE>
exceed earning assets by $36.1 million. During this one-year time frame, 78% of
all interest-bearing liabilities will reprice compared to 47.5% of all interest-
earning assets. Changes in the mix of earning assets or supporting liabilities
can either increase or decrease the net interest margin without affecting
interest rate sensitivity. In addition, the interest rate spread and the
liability remain the same, thus impacting net interest income. Due to
management's continued emphasis on profitability, many of the higher-yielding
securities presented in the table above have call features, which may result in
such securities having a shorter effective life. This in turn may reduce the
interest rate sensitivity gap presented above. It should be noted, therefore,
that a matched interest-sensitive position by itself would not ensure maximum
net interest income.
Management continually evaluates the condition of the economy, the
pattern of market interest rates, and other economic data to determine the types
of investments that should be made and at what maturities. Using this analysis,
management from time to time assumes calculated interest sensitivity gap
positions to maximize net interest income based upon anticipated movements in
the general level of interest rates.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the principal component of a financial
institution's income stream and represents the spread between interest and fee
income generated from earning assets and the interest expense paid on deposits.
The following discussion is on a fully taxable equivalent basis.
Net interest income increased $1,430,000 or 21.63% to $8,040,000 from
1997 to 1998. Net interest income for 1997 increased $983,000 or 17.47% over
1996, $1,286,000 or 29.62% in 1996 over 1995. The increase in the net interest
income from 1997 to 1998 and 1996 to 1997 is primarily due to increase in total
loans and the business combination.
Interest income was $14,334,000 in 1998, which represented an increase
of $3,029,000 or 26.8% over 1997. Interest income increased $2,326,000 or 25.90%
in 1997 from 1996. In 1998, loan interest income increased $1,927,000 (20.3%) to
$11,413,050 from $9,486,000 in 1997. Interest income produced by the loan
portfolio increased $2,517,000 or 36.12% in 1997 from 1996. Interest income on
investment securities increased $713,000 or 41.62% from 1998 to 1997, and
decreased $207,000 or 10.78% from 1996 to 1997. The decrease in investment
income from 1996 to 1997 is due to a decrease in average investment securities.
Total interest expense increased by $1,343,000 or 40.07% in 1997 from
1996. The interest expense increase from 1996 to 1997 is primarily due to
increase in borrowed funds and brokered CD's. Total interest expense reported at
year end 1998 was $6,294,000, an increase of $1,599,000 or 34.1% over 1997. The
increase from 1997 to 1998 is a result of the business combination that took
place in 1998.
The trend in net interest income is commonly evaluated in terms of
average rates using the net interest margin and the interest rate spread. The
net interest margin, or the net yield on earning assets is computed by dividing
fully taxable equivalent net interest income by average earning assets. This
ratio represents the difference between the average yield on average earning
assets and the average rate paid for all funds used to support those earning
assets. The net interest margin decreased 45 basis points in 1998 from 5.82% at
year end 1997 to 5.28% at year end 1998. The net interest margin decreased 10
basis points in 1997 to 5.82%. The net cost of funds, defined as interest
expense divided by average-earning assets, remained level at 4.14% at year end
1998. The net cost of funds increased 62 basis points from
23
<PAGE>
3.52% in 1996 to 4.14% in 1997. The yield on earning assets declined 54 basis
points to 9.42% at year end 1998. The yield on earning assets increased 52 basis
points to 9.96% in 1997 from 9.44% in 1996.
The interest rate spread measures the difference between the average
yield on earning assets and the average rate paid on interest-bearing sources of
funds. The interest rate spread eliminates the impact of noninterest-bearing
funds and gives a direct perspective on the effect of market interest rate
movements. During recent years, the net interest margins and interests rate
spreads have been under intense pressure to maintain historical levels, due in
part to tax laws that discouraged investment in tax-exempt securities and
intense competition for funds with non-bank institutions. Due to the effects of
the business combination coupled with lower interest rates in 1998, the interest
rate spread decreased 51 basis points to 4.56% from 1997 to 1998. As a result of
higher market interest rates during 1997, the interest rate spread increased 17
basis points from 1996 to 1997. Lower market interest rates during 1996
resulted in an interest rate spread decrease of 39 basis points on a tax
equivalent basis from 1995.
The tables that follow show, for the periods indicated, the daily
average balances outstanding for the major categories of interest-bearing assets
and interest-bearing liabilities, and the average interest rate earned or paid
thereon. Such yields are calculated by dividing income or expense by the
average balance of the corresponding assets or liabilities. Also shown are the
changes in income attributable to changes in volume and changes in rate.
[The remainder of this page intentionally left blank]
24
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
Taxable Equivalent Basis
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ---------------------------- ---------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
--------- -------- ------ --------- ------- ------ --------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans, net of unearned
income (1)............................. $ 107,393 $ 11,413 10.63% $ 88,559 $ 9,486 10.71% $ 67,667 $ 6,969 10.30%
SECURITIES:
Taxable................................. 22,648 1,285 5.67 15,513 1,023 6.59 17,609 1,164 6.61
Tax exempt.............................. 13,542 1,141 8.43 7,587 690 9.09 8,180 756 9.24
--------- -------- --------- ------- --------- -------
Total securities.......................
36,190 2,426 6.70 23,100 1,713 7.42 25,789 1,920 7.45
Time deposits in
other banks............................ 636 27 4.25 208 11 5.29 167 8 4.79
Federal funds sold...................... 8,005 468 5.85 1,617 95 5.88 1,507 82 5.44
--------- -------- --------- ------- --------- -------
Total interest- earning
assets (2)........................... 152,224 14,334 9.42 113,484 11,305 9.96 95,130 8,979 9.44
--------- --------- ---------
Noninterest-earning assets:
Cash and due from banks................. 5,566 4,792 4,718
Accrued interest and
other assets........................... 10,263 9,209 2,606
Allowance for loan losses............... (1,139) (1,088) (711)
--------- --------- ---------
Total assets........................... $ 166,914 $ 126,397 $ 101,743
========= ========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
Demand deposits........................ $ 20,183 $ 479 2.37 $ 15,151 $ 371 2.45 $ 12,297 $ 289 2.35
Savings deposits....................... 20,132 643 3.19 15,997 493 3.08 13,869 435 3.14
Time deposits.......................... 68,358 3,940 5.76 50,389 2,887 5.73 41,604 2,251 5.41
-------- -------- --------- ------- --------- -------
108,673 5,062 4.66 81,537 3,751 4.60 67,770 2,975 4.39
Other short-term
borrowings........................... 188 15 7.98 -0- -0- -0- -0- -0- -0-
Long-term debt......................... 20,674 1,217 5.89 14,473 944 6.52 6,076 377 6.20
-------- -------- --------- ------- --------- -------
Total interest-bearing
Liabilities............................ 129,535 6,294 4.86 96,010 4,695 4.89 73,846 3,352 4.54
-------- ------ ------- ------ ------- ------
Net interest income/net
interest spread......................... 8,040 4.56% 6,610 5.07% 5,627 4.90%
====== ====== ======
Demand deposits......................... 19,081 15,555 14,827
Accrued interest and
other liabilities...................... 870 700 884
Shareholders' equity.................... 17,428 14,132 12,186
-------- --------- ---------
Total liabilities and
shareholders' equity.................. $166,914 $ 126,397 $ 101,743
======== ========= =========
Net yield on earning assets.............. 5.28% 5.82% 5.04%
====== ====== ======
Taxable equivalent adjustment:
Loans................................... 61 53 16
Securities.............................. 390 167 178
-------- ------- -------
Total taxable equivalent
adjustment........................... 451 220 194
-------- ------- -------
Net interest income...................... $ 7,589 $ 6,390 $ 5,433
======== ======= =======
</TABLE>
_________________
(1) Average loans include nonaccrual loans. All loans and deposits are domestic.
(2) Tax equivalent adjustments have been based on an assumed tax rate of 34
percent, and do not give effect to the disallowance for federal income tax
purpose of interest expense related to certain tax-exempt earning assets.
25
<PAGE>
RATE/VOLUME VARIANCE ANALYSIS
TAXABLE EQUIVALENT BASIS
<TABLE>
<CAPTION>
Average Volume Change in Volume
-------------------------------------- -------------------------
1998 1997 1996 1998-1997 1997-1996
--------- --------- -------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans, net of unearned income (1)................... $ 107,393 $ 88,559 $ 67,667 $ 18,834 $ 20,892
Securities:
Taxable............................................. 22,648 15,513 17,609 7,135 (2,096)
Tax exempt.......................................... 13,542 7,587 8,180 5,955 (593)
--------- --------- ------- ---------- ----------
Total Securities................................... 36,190 23,100 25,789 13,090 (2,689)
Interest-bearing deposits with other banks........... 636 208 167 428 41
Federal funds sold................................... 8,005 1,617 1,507 6,388 110
--------- --------- ------- ---------- ----------
Total earning assets............................... 152,224 113,484 95,130 38,740 18,354
--------- --------- ------- ---------- ----------
INTEREST-BEARING LIABILITIES:
Deposits:
Demand.............................................. 20,183 15,151 12,297 5,032 2,854
Savings............................................. 20,132 15,997 13,869 4,135 2,128
Time................................................ 68,358 50,389 41,604 17,969 8,785
--------- --------- ------- ---------- ----------
Total deposits..................................... 108,673 81,537 67,770 27,136 13,767
Other short-term borrowings.......................... 188 -0- -0- 188 0
Long-term borrowings................................. 20,674 14,473 6,076 6,201 8,397
--------- --------- ------- ---------- ----------
Total interest-bearing liabilities................. $ 129,535 $ 96,010 $73,846 $ 33,525 $ 22,164
========= ========= ======= ========== ==========
Net interest income/net interest spread..............
Net yield on earning assets..........................
Net cost of funds....................................
<CAPTION>
Average Rate
--------------------------------------
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
EARNING ASSETS:
Loans, net of unearned income (1)................... 10.63% 10.71% 10.30%
Securities:
Taxable............................................. 5.67 6.59 6.61
Tax exempt.......................................... 8.43 9.09 9.24
Total investment securities........................ 8.70 7.42 7.45
Interest-bearing deposits with other banks........... 4.25 5.23 4.79
Federal funds sold................................... 5.85 5.38 5.44
Total earning assets............................... 9.42 9.96 9.44
INTEREST-BEARING LIABILITIES:
Deposits:
Demand.............................................. 2.37 2.45 2.35
Savings............................................. 3.19 3.08 3.14
Time................................................ 3.76 5.73 5.41
Total deposits..................................... 4.66 4.60 4.39
Other short-term borrowings.......................... 7.98 0.00 0.00
Long-term borrowings................................. 5.89 6.52 6.20
Total interest-bearing liabilities................. 4.86 4.39 4.54
Net interest income/net interest spread.............. 4.56 5.07 4.90
Net yield on earning assets.......................... 5.23 5.82 5.92
Net cost of funds.................................... 4.14 4.14 3.52
</TABLE>
<TABLE>
<CAPTION>
Interest Income/Expense Variance
------------------------------- --------------------------
1998 1997 1996 1998-1997 1997-1996
-------- ------- ------- ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans, net of unearned income (1)................ $ 11,413 $ 9,486 $ 6,969 $ 1,927 $ 2,517
Securities:
Taxable.......................................... 1,285 1,023 1,164 262 (141)
Tax exempt....................................... 1,141 690 756 451 (66)
-------- ------- ------- ------------ -----------
Total investment securities..................... 2,426 1,713 1,920 713 (207)
Interest-bearing deposits with other
banks............................................ 27 11 8 16 3
Federal funds sold................................ 468 95 82 373 13
-------- ------- ------- ------------ -----------
Total earning assets............................ $ 14,334 $11,305 $ 8,979 $ 3,029 $ 2,326
======== ======= ======= ============ ===========
INTEREST-BEARING LIABILITIES:
Deposits:
Demand........................................... $ 479 $ 371 $ 289 $ 108 $ 82
Savings.......................................... 643 493 435 150 58
3,940 2,887 2,251 1,053 636
-------- ------- ------- ------------ -----------
Total deposits.................................. 5,062 3,751 2,975 1,311 776
Other short-term borrowings....................... 15 -0- -0- 15 -0-
Long-term borrowings.............................. 1,217 944 377 273 567
-------- ------- ------- ------------ -----------
Total interest-bearing liabilities.............. 6,294 4,695 3,352 1,599 1,343
Net interest income/net interest
spread........................................... 8,040 6,610 5,627
<CAPTION>
Variance Attributed to (1)
-----------------------------------------
1998 1997
------------------- -------------------
Volume Rate Volume Rate
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EARNING ASSETS:
Loans, net of unearned income (1)................ $ 1,999 $ (72) $ 2,230 $ 287
Securities:
Taxable.......................................... 420 (158) (138) (3)
Tax exempt....................................... 504 (53) (54) (12)
-------- -------- -------- --------
Total Securities................................ 924 (211) (192) (15)
Interest-bearing deposits with other
banks............................................ 2 14 2 1
Federal funds sold................................ 373 -0- 6 7
-------- -------- -------- --------
Total earning assets............................ $ 3,298 $ (269) $ 2,046 $ 280
======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits:
Demand........................................... $ 120 $ (12) $ 69 $ 13
Savings.......................................... 132 18 66 (8)
1,038 15 497 139
-------- -------- -------- --------
Total deposits.................................. 1,290 21 632 144
Other short-term borrowings....................... -0- 15 0 0
Long-term borrowings.............................. 372 (99) 547 20
-------- -------- -------- --------
Total interest-bearing liabilities.............. 1,662 (63) 1,179 164
Net interest income/net interest
spread...........................................
</TABLE>
(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.
26
<PAGE>
ALLOWANCE FOR LOAN LOSSES
Lending officers are responsible for the ongoing review and administration
of each loan. They make the initial identification of loans which present some
difficulty in collection or where there is an indication that the probability of
loss exists. Lending officers are responsible for the collection effort on a
delinquent loan. Senior management is informed of the status of delinquent and
problem loans on a monthly basis.
Senior management makes recommendations monthly to the board of directors
as to charge-offs. Senior management reviews the allowance for possible loan
losses on a monthly basis. The Company's policy is to discontinue interest
accrual when payment of principal and interest is 90 days or more in arrears.
The allowance for possible loan losses represents management's assessment
of the risks associated with extending credit and its evaluation of the quality
of the loan portfolio. Management analyzes the loan portfolio to determine the
adequacy of the allowance for possible loan losses and the appropriate
provisions required to maintain a level considered adequate to absorb
anticipated loan losses. In assessing the adequacy of the allowance, management
reviews the size, quality and risk of loans in the portfolio. Management also
considers such factors as loan loss experience, the amount of past due and
nonperforming loans, specific known risk, the status and amount of nonperforming
assets, underlying collateral values securing loans, current and anticipated
economic conditions and other factors which affect the allowance for potential
credit losses.
While it is the Company's policy to charge off in the current period the
loans in which a loss is considered probable, there are additional risks of
future losses which cannot be quantified precisely or attributed to particular
loans or classes of loans. Because these risks include the state of the economy,
management's judgment as to the adequacy of the allowance is necessarily
approximate and imprecise.
Management believes that the $1,831,241 for December 31, 1998 and
$1,120,012 for December 31, 1997 in the allowance for loan losses were adequate
to absorb known risks in the portfolio. No assurance can be given, however, that
adverse economic circumstances will not result in increased losses in the loan
portfolio, and require greater provisions for possible loan losses in the
future.
[The remainder of this page intentionally left blank]
27
<PAGE>
The following table sets forth certain information with respect to the Company's
loans, net of unearned income, and the allowance for loan losses for the five
years ended December 31, 1998.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of year... $ 1,120 $ 924 $ 387 $ 253 $ 292
Loans charged off:
Commercial, financial and agricultural.......... 5 223 53 4 532
Real Estate - mortgage.......................... 46 -0- 157 2 -0-
Consumer........................................ 1,454 542 298 175 74
-------- ------- ------- ------- -------
Total loans charged off........................ 1,505 765 508 181 606
======== ======= ======= ======= =======
Recoveries on loans previously charged off:
Commercial, financial and agricultural.......... 8 30 34 315 157
Real Estate - mortgage.......................... 27 2 6 6 -0-
Consumer........................................ 305 267 78 93 55
-------- ------- ------- ------- -------
Total recoveries............................... 340 299 118 414 212
======== ======= ======= ======= =======
Net loans charged off............................ 1,165 466 390 (233) 394
Additions due to acquisition..................... 464 -0- 363 -0- -0-
Provision for loan losses........................ 1,412 662 564 (99) 355
-------- ------- ------- ------- -------
Allowance for loan losses at end of period....... $ 1,831 $ 1,120 $ 924 $ 387 $ 253
======== ======= ======= ======= =======
Loans, net of unearned income, at end of period.. $136,202 $96,631 $82,892 $48,457 $36,890
Average loans, net of unearned income,
outstanding for the period...................... 107,393 88,559 67,667 42,674 34,354
Ratio of net charge-offs to net average loans.... 1.09% .53% .58% (.55)% 1.15%
</TABLE>
In evaluating the allowance, management also considers the historical loan
loss experience of the Subsidiary Banks, the amount of past due and
nonperforming loans, current and anticipated economic conditions, lender
requirements and other appropriate information. The Subsidiary Banks allocate
their allowance for loan losses to specific loan categories based on an average
of the previous five years net losses for each loan type.
Management allocated the allowance for loan losses to specific loan classes
as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ----------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DOMESTIC LOANS
Commercial,
financial and
agricultural.... $ 15 1% $ 325 29% $ 83 9% $ 8 2% $ 223 88%
Real estate -
mortgage........ 55 3 11 1 231 25 4 1 -0- -0-
Consumer.......... 1,771 96 784 70 610 66 375 97 30 12
------ ------ ------ ----- ----- ------- ------ ------- ------ --------
$1,831 100% $1,120 100% $ 924 100% $ 387 100% $ 253 100%
------ ------ ------ ----- ----- ------- ------ ------- ------ --------
</TABLE>
28
<PAGE>
NONPERFORMING ASSETS
Nonperforming assets include nonperforming loans and foreclosed real estate
held for sale. Nonperforming loans include loans classified as nonaccrual or
renegotiated. The Company's policy is to place a loan on nonaccrual status when
it is contractually past due 90 days or more as to payment of principal or
interest. At the time a loan is placed on nonaccrual status, interest previously
accrued but not collected is reversed and charged against current earnings.
Recognition of any interest after a loan has been placed on nonaccrual is
accounted for on a cash basis.
The Company had nonperforming assets at December 31, 1998 of approximately
$1,145,000 and $1,748,000 as of December 31, 1997.
The following table presents information concerning outstanding balances of
nonperforming assets at December 31, 1998 and 1997.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
--------------- ------------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans..................................... $ 515 $ 850
Loans past due 90 days or more........................ 354 748
Restructured loans.................................... -0- -0-
------ ------
Total nonperforming loans...................... 869 1,598
Nonaccruing securities................................ -0- -0-
Other real estate..................................... 276 150
------ ------
Total.......................................... $1,145 $1,748
====== ======
RATIOS:
Loan loss allowance to total nonperforming assets.. 1.600 0.641
====== ======
Total nonperforming loans to total loans
(net of unearned interest)..................... 0.008 0.018
====== ======
Total nonperforming assets to total assets......... 0.005 0.012
====== ======
</TABLE>
It is the general policy of the Subsidiary Banks to stop accruing interest
income and place the recognition of interest on a cash basis when any
commercial, industrial or real estate loan is past due as to principal or
interest and the ultimate collection of either is in doubt. Accrual of interest
income on consumer installment loans is suspended when any payment of principal
or interest, or both, is more than ninety days delinquent. When a loan is placed
on a nonaccrual basis, any interest previously accrued but not collected is
reversed against current income unless the collateral for the loan is sufficient
to cover the accrued interest or a guarantor assures payment of interest.
There has been no significant impact on the Company's financial statements
as a result of the provisions of Statement of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan, or Statement of Financial
Accounting Standards No. 118, Accounting by Creditors for Impairment of a Loan-
Income Recognition and Disclosures.
29
<PAGE>
NONINTEREST INCOME
Noninterest income consists of revenues generated from a broad range of
financial services and activities including fee-based services and profits and
commissions earned through credit life insurance sales and other activities. In
addition, gains or losses realized from the sale of investment portfolio
securities are included in noninterest income. Total noninterest income
increased by $1,062,435 or 87.06% for the year ended December 31, 1998 as
compared to 1997. Total noninterest income increased $337,159 or 38.13% in 1997
compared to 1996.
A $222,000 or 23.36% increase in fee income from service charges on deposit
accounts was noted from 1997 to 1998. Fee income from service charges on deposit
accounts increased $215,000 or 29.24% in 1997. Increased insufficient fund fees
associated with totally free checking accounts resulted in an increase in
service charge income in 1996 and 1997. Nonrecurring items of noninterest income
include sales of investment portfolio securities. Included in other noninterest
income are gains on sales of securities of $60,000, $8,000 and $25,000 in 1998,
1997, and 1996. In 1998, the Company had $173,000 of income from earnings in
cash surrender value of various life insurance policies compared to $169,000 for
1997. The earnings for 1996 were $41,000.
The table below sets forth the Company's noninterest income for the periods
indicated.
<TABLE>
<CAPTION>
December 31, Percent Change
------------------------------------------ ---------------------------------
1998 1997 1996 1998/1997 1997/1996
-------------- ------------- ----------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Service charges on deposits............ $ 1,172 $ 950 $ 735 23.37% 29.52%
Insurance commissions.................. 574 63 44 811.11 43.18
Securities gains (losses).............. 60 8 25 650.11 (68.00)
Earnings on cash surrender value
life insurance........................ 173 167 41 3.59 307.32
Proceeds from life insurance........... 83 -0- -0- 0.00 0.00
Other.................................. 222 33 39 572.73 (15.38)
----------- ---------- -------- ------ ------
$ 2,284 $ 1221 $ 884 87.06% 38.12%
=========== ========== ======== ====== ======
</TABLE>
NONINTEREST EXPENSES
From 1997 to 1998, noninterest expense increased $2,030,000 or 40.3%.
Noninterest expense for 1997 increased $739,000 or 17.2% from 1996 increased
$982,000 or 29.62% in 1996 from 1995. For 1998, salaries and benefits expense
was $3,755,000, an increase of $1,133,000 or 43.20% over 1997. This increase can
be attributed to the merger of the Company and FNSC during the third quarter of
1998. Salaries and employee benefits in 1997 increased $460,000 or 21.28% from
1996 to a total of $2,623,000 at year end 1997. Salaries and employee benefits
in 1996 increased $315,000 or 21.69% from 1995. The increase in 1997 and 1996
was due to the acquisition of City Bank of Childersburg which brought an
additional 22 employees to FNSC.
30
<PAGE>
Occupancy expense rose $124,000 or 13.42% from 1997 to 1998. The 1998
occupancy expense increase was a result of the additional property and equipment
added as a result of the merger. Occupancy expense increased by $44,000 or
19.47% in 1997 following an increase of $54,000 or 31.40% in 1996. Occupancy
expense was higher in 1997 due to the addition of fixed assets through the
acquisition of City Bank of Childersburg.
Other noninterest expenses increased at comparable rates and also realized
increases due to the business combinations in 1996 and 1998.
The table below sets forth the Company's noninterest expenses for the
periods indicated.
<TABLE>
<CAPTION>
Years ended December 31, Percent Change
---------------------------------------- -------------------------------
1998 1997 1996 1998/1997 1997/1996
---------- ------------- ------------- -------------- ---------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits............. $3,755 $2,622 $2,162 43.2% 21.2%
Furniture and equipment expense............ 721 655 553 10.1 18.4
Occupancy expense.......................... 327 270 226 21.1 19.5
Professional fees.......................... 267 118 219 126.3 (46.1)
Supplies................................... 206 191 154 7.9 24.0
Advertising................................ 189 146 182 29.4 (19.8)
Director and committee fees................ 169 59 66 186.4 (10.6)
Postage.................................... 148 113 94 30.9 20.2
Regulatory fees and assessments............ 102 54 45 118.5 20.0
Insurance.................................. 87 67 62 29.8 8.1
Other...................................... 1,095 741 534 47.8 38.8
------ ------ ------
Total..................................... $7,066 $5,036 $4,297 40.3% 17.2%
====== ====== ======
</TABLE>
INCOME TAXES
Income tax expense decreased $296,199, or 53 %, to $265,859 for the year
ended December 31, 1998. The effective tax rate as a percentage of pretax
income was 19.1 percent in 1998, 29.4 % in 1997, and 28.2 % in 1996. The
statutory federal rate was 34 % during 1998, 1997, and 1996. The decrease in
the effective tax rate for 1998 was primarily attributable to the Company's
increased investment in tax-advantaged assets. For further information
concerning the provision for income taxes, refer to Note 14, Income Taxes, of
the "Notes to Consolidated Financial Statements."
IMPACT OF INFLATION AND CHANGING PRICES
A bank's asset and liability structure is substantially different from that of
an industrial company in that virtually all assets and liabilities of a bank are
monetary in nature. Management believes the impact of inflation on financial
results depends upon the Company's ability to react to changes in interest rates
and by such reaction to reduce the inflationary impact on performance. Interest
rates do not necessarily move in the same direction, or at the same magnitude,
as the prices of other goods and services. As discussed previously, management
seeks to manage the relationship between interest-sensitive assets and
liabilities in order to protect against wide interest rate fluctuations,
including those resulting from inflation.
31
<PAGE>
OTHER ACCOUNTING ISSUES
In June 1998, the Financial Accounting Standards Board also issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognizes all derivatives
as either assets or liabilities in the statement of financial condition and
measures those instruments at fair value. The accounting for changes in the
fair value of a derivative is to be determined based upon the intended use of
the derivative. For certain hedge designations (cash flow and foreign currency
exposure) the derivative's gain or loss is reported as a component of other
comprehensive income. Other designations require the gain or loss to be
recognized in earnings in the period of change. This statement is effective for
financial statements for periods beginning after June 15, 1999. Management does
not believe that the adoption of SFAS No. 133 will have a material impact on the
Company's financial statements.
YEAR 2000 ISSUES
The Year 2000 issue is the result of potential problems with computer
systems and/or other equipment using computer chips programmed with two digit
dates rather than four (e.g., "98" for 1998). On January 1, 2000, any clock or
date recording mechanism, including date sensitive software, which uses only two
digits to represent the year may recognize a date "00" as 1900 rather than 2000.
Therefore, the problem could be defined as 1999 + 1 = 1900. This could result
in complete system failures or miscalculations causing disruption of operations,
including the inability to process transactions and other similar tasks.
During 1998, First National-America's Bank and Valley National Bank, who
are wholly-owned subsidiaries of Frontier, combined their Year 2000 Task Force
Committees, previously formed during 1997, to serve both banks from the holding
company level. The Committee's first responsibility was to make the Board of
Directors aware of the Year 2000 threat and to review the banks' status
regarding Year 2000 in order to determine the required action in their effort to
prepare for transition into the new millennium.
Outside consultants were engaged to review and assess information
technology ("IT") and non-IT systems used by the Company and its subsidiaries in
order to determine their Year 2000 compliant status. The consultants were to
identify all applications, operating systems and equipment that might be
affected by the Year 2000 problem and to help develop appropriate plans to meet
compliance standards. As part of the assessment phase, the Year 2000 Committee
also defined mission critical systems which included those systems necessary for
core business activities of the institutions. These systems include the
mainframe computer applications such as deposit, loan and general ledger systems
as well as the system operating software. As of December 31, 1998, all mission
critical systems were validated and it is anticipated that all remaining non-
critical systems will be validated no later than June 30, 1999.
The Subsidiary Banks have spent more than $700,000 in renovating its
computer hardware and software to ensure Year 2000 compliance. The renovation
period was completed October 1998. These costs have been capitalized and will be
amortized over the life of the related assets. The Subsidiary Banks have spent
an additional $3,500 to test the core system and $1,000 for a review of the test
results by a CPA firm.
The Subsidiary Banks have evaluated all significant credit customer
relationships to determine any risk represented to the Subsidiary Banks by the
impact of Year 2000 on customers operations. Based on this evaluation, the
Subsidiary Banks are not aware of more than normal credit risk associated with
these relationships and management does not believe that any special additions
to the allowance for loan losses are necessary. This assessment will be
ongoing throughout 1999 in order to identify any changes in the readiness of its
credit customers that could negatively impact the Subsidiary Banks.
32
<PAGE>
The Subsidiary Banks have worked to assess Year 2000 readiness of vendors,
business partners and other counter parties, focusing on those considered
critical to the Subsidiary Banks operations. To analyze possible cash demands
by depositors, we have determined the number of households and projected the
cash demands by doing assumptions of withdrawals per household. Management has
also reviewed all of the banks' funding sources and recently applied to use the
Federal Discount Window as part of our contingency plan for funding.
Management will continue to monitor and evaluate the Year 2000 readiness of
third parties and take appropriate measures to mitigate the risk to the
Subsidiary Banks where Year 2000 noncompliance by third parties could have a
material adverse impact on the financial condition of the Subsidiary Banks.
First National-America's Bank and Valley National Bank have an ongoing Year
2000 customer awareness program with promotions through the news media,
including newspaper articles and radio broadcasts. Brochures have also been
enclosed in customer statements in an effort to ensure that they are kept
abreast of the Subsidiary Banks' Year 2000 status.
Management expects its remediation efforts to occur in a timely manner and
does not anticipate significant disruptions in its operations. Failure to
complete such efforts in a timely fashion could have an adverse impact on the
Subsidiary Banks' financial condition and results of operations. Management has
developed a contingency plan in order to minimize any disruption that might be
caused by the transition. This plan is currently being reviewed for expansion of
detail and will be completed before June 30, 1999.
As financial institutions, the Subsidiary Banks' compliance has been
closely monitored by Federal Regulatory Agencies who completed their last Year
2000 examination during February 1999. As of that date, no regulatory
restrictions have been imposed on us by the federal regulators in connection
with our current Year 2000 plan and implementation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk arising from adverse changes in the fair value of
financial instruments due to a change in interest rates, exchange rates and
equity prices. Frontiers' primary risk is interest rate risk.
The primary objective of Asset/Liability Management at Frontier is to
manage interest rate risk and achieve reasonable stability in net interest
income throughout interest rate cycles. This is achieved by maintaining the
proper balance of rate sensitive earning assets and rate sensitive liabilities.
The relationship of rate sensitive earning assets to rate sensitive liabilities
is the principal factor in projecting the effect that fluctuating interest rates
will have on future net interest income. Rate sensitive earning assets and
interest-bearing liabilities are those that can be repriced to current market
rates within a relatively short time period. Management monitors the rate
sensitivity of earning assets and interest-bearing liabilities over the entire
life of these instruments, but places particular emphasis on the first year and
through three years. Frontier's Asset/Liability Management policy requires
cumulative gap (the ratio of rate sensitive assets to rate sensitive
liabilities) to stay within a +/-20%. At December 31, 1998, Frontier's
cumulative gap is within this range through a five-year time frame with the one-
year cumulative gap at +1%, the two-year at +7% and the three-year at +16%.
Frontier has not experienced a high level of volatility in net interest
income primarily because of the relatively large base of core deposits that do
not reprice on a contractual basis. These deposit products include regular
savings, interest-bearing transaction accounts and money market savings
accounts. Balances for these accounts are reported based on historical
repricing experienced at each bank. However, the rates paid are typically not
directly related to market interest rates, since management has some discretion
in adjusting these rates as market rates change.
33
<PAGE>
Frontier uses additional tools to monitor and manage interest rate
sensitivity. One of the primary tools is simulation analysis. Simulation
analysis is the primary method of estimating earnings at risk and capital at
risk under varying interest rate conditions. Simulation analysis is used to
test the sensitivity of Frontier's net interest income and shareholders' equity
to both the level of interest rates and the slope of the yield curve.
Simulation analysis accounts for the expected timing and magnitude of assets and
liability cash flows, as well as the expected timing and magnitude of deposits
that do not reprice on a contractual basis. In addition, simulation analysis
includes adjustments for the lag between movements in market interest rates on
loans and interest-bearing deposits. These adjustments are made to reflect more
accurately possible future cash flows, repricing behavior and ultimately net
interest income. The estimated impact on Frontier's net interest income before
provision for loan loss sensitivity over a one-year time horizon is shown below.
Such analysis assumes an immediate and sustained parallel shift in interest
rates and the Company's estimate of how interest-bearing transaction accounts
will reprice in each scenario. Actual results will differ from simulated
results due to timing, magnitude and frequency of interest rate changes and
changes in market conditions and management's strategies, among other factors.
<TABLE>
<CAPTION>
Percentage Increase
(Decrease) in Interest
Income/Expense Given
Interest Rate Shifts
-------------------------------
Down 200 Up 200
Basis Points Basis Points
---------------- -------------
<S> <C> <C>
Projected change in:
Interest income...................................................... 3.56% (2.73)%
Interest expense..................................................... 4.24 (2.99)
Net interest income.................................................. 2.94 (2.49)
</TABLE>
34
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Regulation S-X
and by Item 302 of Regulation S-K are set forth in the pages listed below.
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
<TABLE>
<CAPTION>
Page(s)
--------
<S> <C>
Independent Auditors' Report..................................................... 36
Consolidated Statements of Financial Condition as of December 31, 1998 and 1997.. 37
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997, and 1996............................................... 38
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1998, 1997, and 1996............................................... 39
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996............................................... 40-41
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1998, 1997, and 1996............................................... 42
Notes to consolidated financial statements....................................... 43
Quarterly Results (Unaudited).................................................... 74
</TABLE>
35
<PAGE>
SCHAUER, TAYLOR, COX & VISE, P.C.
Certified Public Accountants and Consultants
150 OLDE TOWNE ROAD
BIRMINGHAM, ALABAMA 35216
____________________
Douglas B. Schauer, CPA Telephone (205) 822-3488 Steven W. Brown, CPA
Edward R. Taylor, CPA Wats (800) 466-3488 M. Bryant King, CPA
W. Ernest Cox, CPA Fax (205) 822-3541 Raymond A. Patton, CPA
Donald G. Vise, CPA Russell D. Payne, CPA
Michael Whitehurst, CBA
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Frontier National Corporation and Subsidiaries
Sylacauga, Alabama
We have audited the accompanying consolidated statements of financial condition
of Frontier National Corporation and subsidiaries as of December 31, 1998 and
the related consolidated statements of income, shareholders' equity, cash flows,
and comprehensive income for the year ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated financial statements of
Frontier National Corporation and subsidiaries as of December 31, 1997 and 1996
were audited by other auditors whose report dated March 6, 1998, expressed an
unqualified opinion on those consolidated financial statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Frontier
National Corporation and subsidiaries as of December 31, 1998, and the results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Birmingham, Alabama
March 4, 1999
SCHAUER, TAYLOR, COX & VISE, P.C.
American Institute of CPAs Alabama Society of CPA's
36
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
ASSETS
Cash and due from banks................................................. $ 7,641,568 $ 4,412,680
Interest-bearing deposits with other banks.............................. 1,139,654 479,729
Federal funds sold...................................................... 6,055,000 2,040,000
Securities available-for-sale........................................... 51,880,882 24,125,028
Loans, net of unearned income........................................... 136,202,401 96,631,213
Allowance for loan losses............................................... (1,831,241) (1,120,012)
------------ ------------
NET LOANS............................................................. 134,371,160 95,511,201
------------ ------------
Premises and equipment, net............................................. 5,640,882 2,259,006
Accrued interest........................................................ 1,498,981 864,137
Cash surrender value on life insurance.................................. 4,834,873 3,030,465
Intangible, net......................................................... 1,627,241 1,450,925
Foreclosed real estate.................................................. 275,875 149,826
Other assets............................................................ 1,228,592 643,137
------------ ------------
TOTAL ASSETS.......................................................... $216,194,709 $134,966,134
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing.................................................... $ 26,793,363 $ 15,586,562
Interest-bearing....................................................... 146,581,851 85,271,218
------------ ------------
TOTAL DEPOSITS........................................................ 173,375,214 100,857,780
Dividends payable....................................................... 431,746 -0-
Accrued interest........................................................ 885,019 672,956
Long-term debt.......................................................... 18,557,384 19,042,000
Other liabilities....................................................... 457,107 325,580
------------ ------------
TOTAL LIABILITIES..................................................... 193,706,470 120,898,316
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, par value $.001 per share, 10,000,000 shares authorized,
- -------------------------------------------------------------------------
2,331,683 shares issued of which 2,315,683 were outstanding and
1,704,611 shares issued of which 1,457,546 were outstanding............ 2,332 1,705
Capital surplus......................................................... 14,265,547 5,533,335
Retained earnings....................................................... 8,057,947 9,649,418
Treasury stock, 16,000 and 247,065 shares at cost....................... (368,000) (1,409,957)
Accumulated comprehensive income: net unrealized holding
gains on securities available-for-sale, net of deferred income tax..... 530,414 293,317
------------ ------------
TOTAL SHAREHOLDERS' EQUITY............................................ 22,488,238 14,067,818
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................... $216,194,709 $134,966,134
============ ============
</TABLE>
See notes to consolidated financial statements
37
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans................... $11,351,459 $ 9,433,096 $6,952,351
Interest and dividends on securities
Taxable securities.......................... 1,154,559 1,123,520 1,342,338
Nontaxable securities....................... 750,981 324,259 344,865
Dividends on securities..................... 130,711 90,287 45,457
Interest on deposits with other banks........ 26,795 7,339 18,003
Interest on federal funds sold............... 468,259 106,717 82,363
----------- ----------- ----------
TOTAL INTEREST INCOME...................... 13,882,764 11,085,218 8,785,377
----------- ----------- ----------
INTEREST EXPENSE
Deposits..................................... 5,062,595 3,750,979 2,973,831
Federal funds purchased and securities sold
under repurchase agreements................. 12,820 25,536 114,256
Notes payable................................ 1,218,791 918,278 263,479
----------- ----------- ----------
TOTAL INTEREST EXPENSE..................... 6,294,206 4,694,793 3,351,566
----------- ----------- ----------
NET INTEREST INCOME........................... 7,588,558 6,390,425 5,433,811
Provision for loan losses..................... (1,412,295) (662,155) (564,389)
----------- ----------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES.............................. 6,176,263 5,728,270 4,869,422
NONINTEREST INCOME
Service charges and other fees............... 1,172,108 950,401 735,371
Commission income............................ 573,864 63,176 43,596
Securities gains............................. 60,172 8,075 24,845
Other........................................ 477,765 199,822 80,503
----------- ----------- ----------
TOTAL NONINTEREST INCOME................... 2,283,909 1,221,474 884,315
NONINTEREST EXPENSES
Salaries and benefits........................ 3,755,462 2,622,591 2,161,774
Net occupancy expense........................ 327,028 269,666 225,953
Equipment expense............................ 720,639 654,534 552,979
Amortization expense......................... 174,738 111,456 57,093
Other operating expenses..................... 2,088,630 1,377,633 1,298,723
----------- ----------- ----------
TOTAL NONINTEREST EXPENSES................. 7,066,497 5,035,880 4,296,522
----------- ----------- ----------
Income before income taxes.................... 1,393,675 1,913,864 1,457,215
Provision for income taxes.................... (265,859) (562,058) (410,409)
----------- ----------- ----------
NET INCOME.................................... $ 1,127,816 $ 1,351,806 $1,046,806
=========== =========== ==========
EARNINGS PER COMMON SHARE
Basic........................................ $ .59 $ .96 $ .75
Diluted...................................... .59 .96 .75
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic........................................ 1,907,746 1,402,728 1,404,242
Diluted...................................... 1,921,910 1,402,728 1,404,242
</TABLE>
See notes to consolidated financial statements
38
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated Total
Common Capital Retained Treasury Comprehensive Shareholders'
Stock Surplus Earnings Stock Income Equity
----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1996........ $ 1,200,000 $ 1,002,800 $11,587,777 $(1,401,557) $ 276,885 $ 12,665,905
Reduction of
par value.............. (1,199,880) 1,199,880 -0-
Effect of stock split... 1,440 (1,193) (247) -0-
----------- ----------- ----------- ----------- ----------- -------------
Effect of stock
dividend............... 145 3,325,909 (3,326,054) -0-
Restated beginning
balance................ 1,705 5,527,396 8,261,476 (1,401,557) 276,885 12,665,905
Cash dividends.......... (505,575) (505,575)
Sale of treasury stock.. 5,939 6,600 12,539
Net change in
unrealized gains on
securities available
for sale............... (101,073) (101,073)
Net income 1996......... 1,046,806 1,046,806
----------- ----------- ----------- ----------- ----------- -------------
Balance at
December 31, 1996...... 1,705 5,533,335 8,802,707 (1,394,957) 175,812 13,118,602
Cash dividends.......... (505,095) (505,095)
Purchase of treasury
stock.................. (15,000) (15,000)
Net change in
unrealized gains on
securities available
for sale............... 117,505 117,505
Net income 1997......... 1,351,806 1,351,806
----------- ----------- ----------- ------------ ----------- -------------
Balance at
December 31,1997....... 1,705 5,533,335 9,649,418 (1,409,957) 293,317 14,067,818
Cash dividends.......... (1,227,822) (1,227,822)
Effect of business
combinations........... 864 8,582,222 (81,757) 210,266 8,711,595
Retirement of
treasury stock......... (247) (1,409,710) 1,409,957 -0-
Purchase of treasury
stock.................. (368,000) (368,000)
Proceeds from exercise
of options............. 10 149,990 150,000
Net change in
unrealized gains on
securities available...
for sale............... 26,831 26,831
Net income 1998......... 1,127,816 1,127,816
----------- ----------- ----------- ------------ ----------- ------------
Balance at
December 31, 1998...... $ 2,332 $14,265,547 $ 8,057,945 $ (368,000) $ 530,414 $ 22,488,238
=========== =========== =========== =========== =========== ============
</TABLE>
See notes to consolidated financial statements
39
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................... $ 1,127,816 $ 1,351,806 $ 1,046,806
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization and accretion, net...... 649,165 632,991 471,514
Provision for loan losses.......................... 1,412,295 662,155 564,389
Loss on disposal of assets......................... 25,967 1,320 11,972
Deferred income taxes.............................. (124,907) (109,630) (78,092)
Realized security gains, net....................... (60,172) (8,075) (24,845)
(Gain) loss on disposition of foreclosed
real estate....................................... (179) 28,384 (5,000)
Increase in accrued interest receivable............. (117,861) (8,240) (220,407)
Increase (decrease) in accrued interest payable..... (184,546) 278,614 135,012
Other, net.......................................... (593,387) (428,050) (274,890)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......... 2,134,191 2,401,275 1,626,459
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of securities
available-for-sale.................................. 17,928,633 8,360,089 17,283,060
Purchases of securities available-for-sale........... (26,949,494) (6,761,497) (7,946,055)
Net (increase) decrease in loans to customers........ 7,573,698 (12,851,682) (18,294,400)
Capital expenditures, net............................ (1,429,723) (330,297) (512,215)
Proceeds from disposition of foreclosed real estate.. 62,353 170,153 60,000
Cash received (paid) in acquisitions, net............ 4,422,156 (1,560,257) (2,256,502)
Payment of officers' life insurance premium.......... -0- -0- (2,840,000)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES.............................. 1,607,623 (12,973,491) (14,506,112)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits............................. $ 11,133,726 $ 6,359,213 $ 2,381,073
Net decrease in short-term borrowings................ (108,303) (3,440,000) (310,000)
Proceeds from sale of treasury stock................. -0- -0- 12,539
Purchases of treasury stock.......................... (368,000) (15,000) -0-
Cash dividends....................................... (1,227,822) (505,335) (505,375)
Purchase of deposits................................. -0- -0- 8,492,204
Issuance of long-term debt........................... 5,015,384 9,600,000 7,500,000
Repayment of long-term debt.......................... (10,500,000) (250,000) (1,500,000)
Issuance of common stock............................. 217,014 -0- -0-
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES........... 4,161,999 11,748,878 16,070,441
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.......................................... 7,903,813 1,176,662 3,190,788
Cash and Cash Equivalents at Beginning of Year........ 6,932,409 5,755,747 2,564,959
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............. $ 14,836,222 $ 6,932,409 $ 5,755,747
============ ============ ============
</TABLE>
See notes to consolidated financial statements
40
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest........................................ $ 6,082,143 $4,416,179 $ 3,216,554
Income taxes.................................... 450,648 817,532 476,464
Loans transferred to foreclose real estate....... 206,493 169,798 27,670
Net increase (decrease) in unrealized gains and
losses on securities available-for-sale......... 326,692 191,064 (164,347)
Assets acquired in business combinations......... 75,874,317 -0- 27,946,594
Liabilities assumed in business combinations..... 67,229,736 -0- 24,900,951
</TABLE>
See notes to consolidated financial statements
41
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
NET INCOME................................... $1,127,816 $1,351,806 $1,046,806
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains (losses) arising
during the period......................... 386,865 199,139 (139,502)
Less: Reclassification adjustments for
gains included in net income.............. (60,172) (8,075) (24,845)
---------- ---------- ----------
Net unrealized gains (losses).............. 326,693 191,064 (164,347)
Income tax related to items of other
comprehensive income...................... (89,596) (73,559) 63,274
---------- ---------- ----------
Other comprehensive income................... 237,097 117,505 (101,073)
---------- ---------- ----------
COMPREHENSIVE INCOME......................... $1,364,913 $1,469,311 $ 945,733
========== ========== ==========
</TABLE>
See notes to consolidated financial statements
42
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Frontier National Corporation (the "Company") and its subsidiaries operate
predominantly in the domestic commercial banking industry in East Central
Alabama. The accounting and reporting policies of the Company conform to
generally accepted accounting principles and to general practice within the
banking industry. The following summarizes the most significant of these
policies. First National-America's Bank and Valley National Bank, subsidiaries
of the Company, are commercial bank's which operate branches in Talladega and
Chambers counties, Alabama. Their primary source of revenue is providing loans
to customers, who are predominately small and middle-market businesses and
middle-income individuals. Frontier Financial Services Corporation, a wholly-
owned subsidiary of First National-America's Bank, makes small consumer loans
and has seven offices located in north and central Alabama. The Frontier
Agency, Inc., a wholly-owned subsidiary of First National-America's Bank, sells
and services insurance products aimed at individuals and small to medium sized
businesses at two offices located in Central Alabama. Frontier National
Corporation is the surviving parent company following the business combination
of August 31, 1998 (see note 2).
Basis of Consolidation
- ----------------------
The accompanying consolidated financial statements include the accounts of
Frontier National Corporation and its wholly-owned subsidiaries: First
National-America's Bank (formerly known as First National Bank of Sylacauga),
Valley National Bank, and Frontier Financial Services Corporation (referred to
herein as the "Bank's"), and The Frontier Agency, Inc. All significant
intercompany transactions and balances have been eliminated in consolidation.
Consolidated Statements of Comprehensive Income
- -----------------------------------------------
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income, on December 31, 1998. This statement
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. The
statement requires that an enterprise classify items of other comprehensive
income by their nature in the financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid in capital in the equity section of a statement of financial
condition. Comprehensive income is generally defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during
a period except those resulting from investments by owners and distributions to
owners.
43
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Securities
- ----------
Securities are classified as either held-to-maturity, available-for-sale, or
trading.
Held-to-maturity securities are securities for which management has the ability
and intent to hold on a long-term basis or until maturity. These securities are
carried at amortized cost, adjusted for amortization of premiums, and accretion
of discount to the earlier of the maturity or call date.
Securities available-for-sale represent those securities intended to be held for
an indefinite period of time, including securities that management intends to
use as part of its asset/liability strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk, the need to increase
regulatory capital, or other similar factors. Securities available-for-sale are
recorded at market value with unrealized gains and losses net of any tax effect,
added or deducted directly from shareholders' equity.
Securities carried in trading accounts are carried at market value with
unrealized gains and losses reflected in income.
Realized and unrealized gains and losses are based on the specific
identification method.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary result in write-downs
of the individual securities to their fair value. The related write-downs are
included in earnings as realized losses.
The Company and its subsidiaries have no trading securities or held-to-maturity
securities.
Loans
- -----
Loans are stated at unpaid principal balances, less the allowance for loan
losses, net deferred loan fees and unearned discounts.
Unearned discounts on installment loans are recognized as income over the term
of the loans using a method that approximates the interest method.
Loan origination and commitment fees, as well as certain origination costs, when
material, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method.
44
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Allowance for Possible Loan Losses
- ----------------------------------
A loan is considered impaired, based on current information and events, if it is
probable that the Banks will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Uncollateralized loans are measured for impairment based on the
present value of expected future cash flows discounted at the historical
effective interest rate, while all collateral-dependent loans are measured for
impairment based on the fair value of the collateral. Smaller balance
homogeneous loans, which consist of residential mortgages and consumer loans,
are evaluated collectively and reserves are established based on historical loss
experience.
The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. Increases and decreases in the allowance
due to changes in the measurement of the impaired loans are included in the
provision for loan losses. Loans continue to be classified as impaired unless
they are brought fully current and the collection of scheduled interest and
principal is considered probable. When a loan or portion of a loan is
determined to be uncollectable, the portion deemed uncollectable is charged
against the allowance and subsequent recoveries, if any, are credited to the
allowance.
Management's periodic evaluation of the adequacy of the allowance is based on
the Banks' past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrowers' ability to repay, estimated
value of any underlying collateral, and an analysis of current economic
conditions. While management believes that it has established the allowance in
accordance with generally accepted accounting principles and has taken into
account the views of its regulators and the current economic environment; there
can be no assurance that in the future the Banks' regulators or its economic
environment will not require further increases in the allowance.
Income Recognition On Impaired and Nonaccrual Loans
- ---------------------------------------------------
Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well collateralized and in the process
of collection. If a loan or a portion of a loan is classified as doubtful or is
partially charged off, the loan is generally classified as nonaccrual. Loans
that are on a current payment status or past due less than 90 days may also be
classified as nonaccrual if repayment in full of principal and/or interest is in
doubt.
Loans may be returned to accrual status when all principal and interest amounts
contractually due are reasonably assured of repayment within an acceptable
period of time, and there is a sustained period of repayment performance by the
borrower, in accordance with the contractual terms of interest and principal.
45
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
While a loan is classified as nonaccrual and the future collectability of the
recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding, except in the case of
loans with scheduled amortizations where the payment is generally applied to the
oldest payment due. When the future collectability of the recorded loan balance
is expected, interest income may be recognized on a cash basis. In the case
where a nonaccrual loan has been partially charged off, recognition of interest
on a cash basis is limited to that which would have been recognized on the
recorded loan balance at the contractual interest rate. Receipts in excess of
that amount are recorded as recoveries to the allowance for loan losses until
prior charge offs have been fully recovered. Interest income recognized on a
cash basis was immaterial for the years ended December 31, 1998, 1997 and 1996.
Premises and Equipment
- ----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Expenditures for additions and major improvements that significantly extend the
useful lives of the assets are capitalized. Expenditures for repairs and
maintenance are charged to expense as incurred. The carrying values of assets
traded in are used to adjust the carrying values of the new assets acquired by
trade. Assets which are disposed of are removed from the accounts and the
resulting gains or losses are recorded in operations.
Depreciation is provided generally by accelerated and straight-line methods
based on the estimated useful lives of the respective assets.
Foreclosed Real Estate
- ----------------------
Foreclosed real estate includes both formally foreclosed property and in-
substance foreclosed property. In-substance foreclosed properties are those
properties for which the institution has taken physical possession, regardless
of whether formal foreclosure proceedings have taken place.
At the time of foreclosure, foreclosed real estate is recorded at the lower of
the carrying amount or fair value less cost to sell, which becomes the
property's new basis. Any write-downs based on the asset's fair value at date
of acquisition are charged to the allowance for loan losses. After foreclosure,
these assets are carried at the lower of their new cost basis or fair value less
cost to sell.
Costs incurred in maintaining foreclosed real estate and subsequent adjustments
to the carrying amount of the property are included in income (loss) on
foreclosed real estate.
46
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Income Taxes
- ------------
Income taxes are provided for the tax effects of the transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of the allowance for loan
losses and accumulated depreciation. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or
settled. Deferred tax assets and liabilities are reflected at income tax rates
applicable to the period in which the deferred tax assets or liabilities are
expected to be realized or settled. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the provision
for income taxes.
The Company and its subsidiaries file a consolidated federal income tax return.
The subsidiaries provide for income taxes on a separate return basis and remit
to the Company amounts determined to be currently payable.
Earnings Per Common Share
- -------------------------
The Company adopted SFAS No. 128, Earnings Per Share, on December 31, 1997.
This statement establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock or
potential common stock. This statement replaces the presentation of primary EPS
with a presentation of basic EPS and requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. All prior year earnings per share data have been
restated to reflect the presentation required under SFAS No. 128.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average of common shares outstanding................... 1,907,746 1,402,728 1,404,242
Effect of dilutive options...................................... 14,164 -0- -0-
--------- --------- ---------
Weighted average of common shares outstanding effected
for dilution.................................................... 1,921,910 1,402,728 1,404,242
========= ========= =========
</TABLE>
In September 1998, the Company issued a 6.8 percent stock dividend resulting in
the issuance of 144,611 shares of common stock. Also, in conjunction with the
business combination with Valley National Bank, the Company issued 1,211,940
shares to the existing shareholders of the Company which has been accounted for
as a 13-to-1 stock split. All per share amounts included in these financial
statements have been retroactively adjusted to give effect to the stock dividend
and stock split.
47
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Stock-Based Compensation
- ------------------------
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation; which defines a fair value based method of accounting for an
employee stock option plan. This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans and stock-based
non-employee compensation. These transactions must be accounted for based on the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured. Under the fair value
based method, compensation is measured at the grant date based on the value of
the award and is recognized over the service period, which is usually the
vesting period. However, SFAS No. 123 allows an entity to continue to measure
compensation costs for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No, 25, Accounting for Stock Issued to
Employees. The Company has elected to follow APB No. 25 in accounting for its
stock option plans. The adoption of this statement did not have a material
effect on the Company's consolidated financial statements.
Retirement Plans
- ----------------
The Company and its subsidiaries have a qualified 401(k) profit-sharing plan
covering substantially all of their employees. Eligible participating employees
may elect to contribute tax-deferred contributions. Company contributions
include matching and discretionary annual amounts as determined by the board of
directors.
The Company and its subsidiaries also have provided deferred compensation and
salary continuation plans for certain directors and key employees. These plans
are generally funded through life insurance contracts owned by the Company.
Company contributions to these retirement plans are included in salaries and
benefits.
Off-Balance Sheet Financial Instruments
- ---------------------------------------
In the ordinary course of business the Banks have entered into off-balance sheet
financial instruments consisting of commitments to extend credit, commitments
under credit card arrangements, commercial letters of credit and standby letters
of credit. Such financial instruments are recorded in the financial statements
when they become payable.
The Banks have available as a source of financing a line of credit of
$40,000,000 with the Federal Home Loan Bank of Atlanta of which $21,458,000 was
available and unused.
The Banks also have available as a source of short-term financing the purchase
of federal funds from other commercial banks from available lines totaling
$14,000,000.
48
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Cash Flow Information
- ---------------------
The Company considers all cash and amounts due from depository institutions and
federal funds sold to be cash equivalents for purposes of the statements of cash
flows.
Reclassifications
- -----------------
Certain amounts in 1997 and 1996 have been reclassified to conform with the 1998
presentation.
Recently Issued Accounting Standards
- ------------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. The
provisions of this statement establishes standards for the way that public
business enterprises report information about operating segments in annual and
interim financial reports issued to shareholders. This statement also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This statement requires the reporting of
financial and descriptive information about an enterprise's reportable operating
segments. This statement is effective for financial statements for periods
beginning after December 15, 1997. All of the Bank's offices offer similar
products and services, are located in the same geographic region, and serve the
same customer segments of the market. As a result, management considers all
units as one operating segment and therefore feels that the basic financial
statements and related footnotes provide details related to segment reporting.
Effective for years ending after December 15, 1997, SFAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits, was issued by FASB
which standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefits obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain other
disclosures previously required. The adoption of this statement did not have a
material effect on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board also issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognizes all derivatives
as either assets or liabilities in the statement of financial condition and
measures those instruments at fair value. The accounting for changes in the
fair value of a derivative is to be determined based upon the intended use of
the derivative. For certain hedge designations (cash flow and foreign currency
exposure) the derivative's gain or loss is reported as a component of other
comprehensive income. Other designations require the gain or loss to be
recognized in earnings in the period of change. This statement is effective for
financial statements for periods beginning after June 15, 1999. Management does
not believe that the adoption of SFAS No. 133 will have a material impact on the
Company's financial statements.
49
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 2 - BUSINESS COMBINATIONS
On May 17, 1996, one of the subsidiary banks, First National-America's Bank
("FNAB"), acquired certain deposit liabilities of Citizens Bank of Talladega
(formerly known as Talladega Federal Savings and Loan Association) for
$8,262,265. The total of the deposit liabilities assumed was $8,492,204
resulting in a premium of $229,939 which FNAB is amortizing over a 15-year
period.
First National Sylacauga Corporation acquired the stock of City Banc
Corporation, the parent holding company of City Bank of Childersburg (City Bank)
on June 30, 1996 for $4,471,988. The purchase price was allocated to assets
acquired and liabilities assumed as follows:
<TABLE>
<CAPTION>
<S> <C>
Assets acquired:
Cash........................................................................... $ 2,215,486
Securities..................................................................... 8,206,008
Loans, net..................................................................... 16,180,103
Premises and equipment......................................................... 690,145
Deferred tax asset............................................................. 192,302
Other assets................................................................... 462,550
-----------
Total assets acquired...................................................... 27,946,594
-----------
Liabilities assumed:
Noninterest-bearing deposits................................................... 5,074,862
Interest-bearing deposits...................................................... 18,054,819
Other liabilities.............................................................. 1,771,270
-----------
Total liabilities assumed.................................................. 24,900,951
-----------
Net assets acquired............................................................... 3,045,643
Consideration..................................................................... 4,471,988
-----------
Goodwill.......................................................................... $ 1,426,345
===========
</TABLE>
The goodwill is being amortized by the Company over a 15-year period. Certain
legal and other expenses incurred in connection with the acquisition amounting
to $74,900 are being amortized over a 5-year period. The acquisition has been
accounted for as a purchase with costs allocated to assets acquired and
liabilities assumed based on estimated fair market values for City Bank. Results
of operations since the date of acquisition are included in the consolidated
financial statements.
50
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 2 - BUSINESS COMBINATIONS - CONTINUED
Summarized below are the consolidated results of operations on an unaudited pro
forma basis as if the City Bank acquisition had occurred as of the beginning of
the years presented. The pro forma information gives effect to certain pro
forma adjustments and is based on the Company's and City Bank's historical
consolidated results of operations for the periods presented.
The pro forma financial information does not purport to be indicative of results
of operations that would have occurred had the transactions occurred on the
basis assumed above, nor are they indicative of the results of future operations
of the combined enterprises.
<TABLE>
<CAPTION>
Year Ended
December 31,
1996
--------------
<S> <C>
Total interest income............................................................... $ 9,910,355
==============
Net income.......................................................................... $ 1,145,263
==============
Earnings per weighted average common share:
Net income....................................................................... $ .78
==============
</TABLE>
On December 26, 1997, Frontier Financial Services, Inc. purchased the assets of
Hometown Financial Services, Inc. for $1,560,257. The assets purchased
consisted of loans receivable of $1,541,724 and furniture and fixtures of
$18,533.
On August 31, 1998, Valley National Corporation and subsidiary ("VNC") of
Lanett, Alabama merged with and into First National Sylacauga Corporation
("FNSC") and subsidiary of Sylacauga, Alabama. The merger was accounted for as a
reverse acquisition of VNC by FNSC under the purchase method of accounting due
to FNSC shareholders representing a majority of ownership subsequent to the
merger. The financial statements reflect the ongoing operations of FNSC combined
with the accounts of VNC as of the merger date and thereafter. Upon the
consummation of the merger, the surviving parent company changed its name to
Frontier National Corporation ("FNC"). Operating results and balance sheet
information prior to the merger reflect only the balances of FNSC.
51
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 2 - BUSINESS COMBINATIONS - CONTINUED
The following is summary operating information for FNC showing the effect of the
business combination between FNSC and VNC described in the preceding paragraph
for the years ended December 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
As Effect of (Pro Forma)
Reported Purchase Results
----------- ----------- -------------
<S> <C> <C> <C>
AS OF DECEMBER 31, 1998:
INTEREST INCOME............. $13,882,764 $3,701,200 $17,583,964
INTEREST EXPENSE............ 6,294,206 1,811,561 8,105,767
NET INTEREST INCOME......... 7,588,558 1,889,639 9,478,197
PROVISION FOR LOAN LOSSES... 1,412,295 82,124 1,494,419
NONINTEREST INCOME.......... 2,283,909 464,367 2,748,276
NONINTEREST EXPENSE......... 7,066,497 1,566,199 8,632,696
PROVISION FOR INCOME TAXES.. 265,859 195,719 461,578
NET INCOME.................. 1,127,816 509,964 1,637,780
As of December 31, 1997:
Interest income............. $11,085,218 $5,260,573 $16,345,791
Interest expense............ 4,694,793 2,373,850 7,068,643
Net interest income......... 6,390,425 2,886,723 9,277,148
Provision for loan losses... 662,155 89,751 751,906
Noninterest income.......... 1,221,474 602,215 1,823,689
Noninterest expense......... 5,035,880 2,303,125 7,339,005
Provision for income taxes.. 562,058 294,181 856,239
Net income.................. 1,351,806 801,881 2,153,687
As of December 31, 1996:
Interest income............. $ 8,785,377 $4,742,822 $13,528,199
Interest expense............ 3,351,566 2,120,685 5,472,251
Net interest income......... 5,433,811 2,622,137 8,055,948
Provision for loan losses... 564,389 -0- 564,389
Noninterest income.......... 884,315 505,071 1,389,386
Noninterest expense......... 4,296,522 2,306,172 6,602,694
Provision for income taxes.. 410,409 282,264 692,673
Net income.................. 1,046,806 538,772 1,585,578
</TABLE>
On November 23, 1998, the Frontier Agency Inc., a subsidiary of First National-
America's Bank, purchased two insurance agencies. Brown Insurance Agency
located in Sylacauga, Alabama was purchased with cash and accounted for by the
purchase method of accounting. Wright-Sprayberry, Inc. also located in
Sylacauga, Alabama was purchased with 49,337 shares of Frontier National
Corporation stock and accounted for by the pooling of interest method of
accounting. All real estate was purchased with cash at fair market values. The
Company's previously reported consolidated financial results have not been
restated to include the effect of the acquisitions prior to their respective
acquisition dates since the effect is not material.
52
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Subsidiary Banks are required to maintain reserve balances in cash or on
deposit with the Federal Reserve Bank, based on a percentage of deposits. The
average amount of those reserve balances required were approximately $1,223,000
and $673,000 at December 31, 1998 and 1997, respectively.
NOTE 4 - SECURITIES
The carrying amounts of securities as shown in the consolidated statements of
financial condition and their approximate fair values at December 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- --------------- ---------------
SECURITIES AVAILABLE-FOR-SALE:
------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998:
U.S. GOVERNMENT AND AGENCY
SECURITIES............................. $ 7,042,868 $ 84,723 $ -0- $ 7,127,591
STATE AND POLITICAL
SUBDIVISIONS........................... 21,581,093 622,805 10,664 22,193,234
MORTGAGE-BACKED
SECURITIES............................. 20,546,871 176,152 69,386 20,653,637
EQUITY SECURITIES....................... 1,906,420 -0- -0- 1,906,420
----------- -------- ------- -----------
$51,077,252 $883,680 $80,050 $51,880,882
=========== ======== ======= ===========
December 31, 1997:
U.S. Government and agency
securities............................. $ 5,574,896 $ 39,008 $ 6,342 $ 5,607,562
State and political subdivisions........ 10,473,664 418,121 1,879 10,889,906
Mortgage-backed securities.............. 6,042,931 55,760 27,731 6,070,960
Equity securities....................... 1,556,600 -0- -0- 1,556,600
----------- -------- ------- -----------
$23,648,091 $512,889 $35,952 $24,125,028
=========== ======== ======= ===========
</TABLE>
53
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 4 - SECURITIES - CONTINUED
The contractual maturities of securities available-for-sale at December 31, 1998
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less............................................ $ 5,535,005 $ 5,589,139
Due from one year to five years.................................... 5,477,069 5,637,247
Due from five years to ten years................................... 7,398,763 7,631,570
Due after ten years................................................ 30,759,995 31,116,506
Equity securities.................................................. 1,906,420 1,906,420
----------- -----------
Totals............................................................ $51,077,252 $51,880,882
=========== ===========
</TABLE>
Mortgage backed securities have been included in the maturity tables based upon
the guaranteed payoff date of each security.
Gross realized gains and losses from the sale or maturity of securities
available-for-sale for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Realized gains................................. $64,792 $ 32,487 $ 61,174
Realized (losses).............................. (4,620) (24,412) (36,329)
</TABLE>
Equity securities include a restricted investment in Federal Home Loan Bank
stock which must be maintained to secure the available lines of credit. The
amount of investment in this stock amounted to $1,688,600 and $1,356,400 at
December 31, 1998 and 1997, respectively.
Securities pledged to secure public funds on deposit and for other purposes as
required by law amounted to approximately $30,298,000 and $11,890,000 at
December 31, 1998 and 1997, respectively.
54
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 5 - LOANS
The Banks grant loans to customers primarily in Talladega and Chambers County of
East Central Alabama.
The major classification of loans as of December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Commercial, financial and agricultural............................ $ 25,353,317 $ 16,226,509
Real estate - construction........................................ 2,384,790 5,806,611
Real estate - mortgage............................................ 82,745,788 53,540,966
Consumer.......................................................... 26,432,529 27,023,768
Other............................................................. 466,858 98,494
------------ ------------
137,383,282 102,696,348
Unearned income................................................... 1,180,881 6,065,135
Allowance for loan losses......................................... 1,831,241 1,120,012
------------ ------------
Net loans......................................................... $134,371,160 $ 95,511,201
============ ============
</TABLE>
Certain directors, executive officers and principal shareholders including their
immediate families and associates were loan customers of the Banks during 1998
and 1997. Such loans are made in the ordinary course of business at normal
credit terms, including interest rates and collateral and do not represent more
than a normal risk of collection. Total loans to these persons at December 31,
1998 and 1997, amounted to approximately $3,371,713 and $1,873,546,
respectively. Activity during 1998 in loans to related parties is as follows:
<TABLE>
<S> <C>
Balance at January 1, 1998......................................................... $1,873,546
New loans....................................................................... 465,960
Addition due to acquisition..................................................... 1,916,828
Repayments...................................................................... 884,621
----------
Balance at December 31, 1998....................................................... $3,371,713
==========
</TABLE>
55
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 5 - LOANS - CONTINUED
Information about impaired loans as of and for the years ended December 31 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Loans receivable for which there is a related
allowance for credit losses determined in
accordance with FASB Statement No. 114,
as amended........................ $310,137 $316,258 $ 229,307
Other impaired loans.................................. 263,734 240,605 844,290
-------- -------- ----------
Total impaired loans................................. $573,871 $556,863 $1,073,597
======== ======== ==========
Average monthly balance of impaired loans (based
on month-end balances)............................... $746,908 $815,230 $1,088,291
Related allowance for credit losses................... 133,702 34,334 29,557
Interest income recognized on impaired loans.......... 29,248 77,139 62,842
</TABLE>
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ -----------
<S> <C> <C> <C>
Balance at beginning of year.......................... $ 1,120,012 $ 924,441 $ 387,040
Charge-offs.......................................... (1,504,836) (765,461) (507,623)
Recoveries........................................... 339,348 298,877 118,057
----------- ---------- ---------
Net charge-offs..................................... (1,165,488) (466,584) (389,566)
Provision for loan loss.............................. 1,412,295 662,155 564,389
Addition due to acquisitions......................... 464,422 -0- 362,578
----------- ---------- ---------
Balance at end of year................................ $ 1,831,241 $1,120,012 $ 924,441
=========== ========== =========
</TABLE>
56
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 7 - PREMISES AND EQUIPMENT
Components of premises and equipment included in the consolidated statements of
financial condition at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Land and improvements............................................. $ 979,929 $ 387,383
Buildings and improvements........................................ 4,123,374 1,886,372
Furniture and equipment........................................... 5,403,787 2,811,457
----------- ----------
10,507,090 5,085,212
Less: Accumulated depreciation.................................... 4,866,208 2,826,206
----------- ----------
Premises and equipment, net...................................... $ 5,640,882 $2,259,006
=========== ==========
</TABLE>
The provision for depreciation charged to occupancy and equipment expense for
the years ended December 31, 1998, 1997 and 1996 was $440,404, $514,321, and
$401,844, respectively.
NOTE 8 - DEPOSITS
The major classifications of deposits as of December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Noninterest-bearing demand........................................ $ 26,793,363 $ 15,586,562
NOW accounts...................................................... 31,335,143 14,019,690
Savings........................................................... 26,098,626 17,590,525
Certificates of deposit of $100,000 or more....................... 22,746,669 9,151,392
Time.............................................................. 66,401,413 44,509,611
------------ ------------
Totals........................................................... $173,375,214 $100,857,780
============ ============
</TABLE>
The aggregate amounts of time deposits of $100,000 or more, including
certificates of deposit of $100,000 or more at December 31, 1998 and 1997 were
$22,746,669 and $9,151,392.
Total deposits to related parties at December 31, 1998 amounted to approximately
$5,483,000.
57
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 8 - DEPOSITS - CONTINUED
The maturities of time certificates of deposit and other time deposits issued by
the Subsidiary Banks at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
1999............................................ $70,316,488
2000............................................ 13,510,666
2001............................................ 3,644,585
2002............................................ 1,206,513
2003............................................ 244,518
Thereafter...................................... 225,312
-----------
Total......................................... $89,148,082
===========
</TABLE>
NOTE 9 - LONG-TERM DEBT
Long-term debt consisted of the following as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
SouthTrust Bank...................................................... $ 15,384 $ -0-
-----------
Federal Home Loan Bank (FHLB)........................................ 18,542,000 16,792,000
National Bank of Commerce (NBC)...................................... -0- 2,250,000
----------- -----------
Total.............................................................. $18,557,384 $19,042,000
=========== ===========
</TABLE>
The FHLB advances bear interest at rates ranging from 5.51% to 7.67%. The
advances are payable at various maturities through April 2014. The note is
secured by all 1 - 4 family residential mortgages held by the Subsidiary Banks.
Terms of the note provide for significant penalties in the event of early
repayment.
The SouthTrust Bank note bears interest at 7.75%. Monthly principal and
interest payments of $567.40 are required through May 2001 and one final
installment in June 2001 of all remaining outstanding principal. On February 12,
1999 the loan was paid off.
58
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 9 - LONG-TERM DEBT - CONTINUED
Maturities of long-term debt following December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
1999.................................................................... $ 1,505,806
2000.................................................................... 1,106,261
2001.................................................................... 353,317
2002.................................................................... 5,000,000
2003.................................................................... 2,500,000
Thereafter.............................................................. 8,092,000
-----------
Total................................................................ $18,557,384
===========
</TABLE>
NOTE 10 - SHAREHOLDERS EQUITY
At December 31, 1998 and 1997 Shareholders' Equity of the Company consisted of
the following:
Common Stock: At December 31, 1998 10,000,000 shares authorized, 2,331,683
shares issued and 2,315,683 outstanding with a par value of $0.001 per share.
At December 31, 1997, 1,704,611 shares issued and 1,457,546 outstanding as
retroactively adjusted for the stock split and stock dividend. Voting rights
equal to one vote per share.
Capital Surplus: Represents the funds received in excess of par value upon the
issuance of stock, net of issuance costs and the related effects of the stock
dividend and business combination.
Retained Earnings: Represents the accumulated net earnings of the Company as
reduced by dividends paid to shareholders, merger expenses and retirement of
treasury stock.
Treasury Stock: Represents 16,000 and 247,065 shares of common stock at December
- --------------
31, 1998 and 1997, respectively, at cost. The 1997 number of shares has been
adjusted for the effects of the stock split resulting from the business
combinations.
Stock Dividend: In September 1998, the Company issued a stock dividend resulting
- --------------
in the issuance of 144,611 shares of common stock. In conjunction with the
business combination, the par value of the stock was reduced from $10 per share
to $0.001 per share. All per share amounts included in these financial
statements have been adjusted to give retroactive effect to the stock dividend.
59
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 10 - SHAREHOLDERS EQUITY - CONTINUED
Accumulated Comprehensive Income: Represents the change in equity during each
- --------------------------------
period from the effects of unrealized holding gains and losses on securities
available-for-sale, net of tax.
Stock Split: Additional shares of 1,211,940 were issued to the Company's
- -----------
shareholders resulting from the business combination with Valley National Bank
as described in note 2 to the consolidated financial statements. These
additional shares resulted from the effects of a 13-to-1 split of Company shares
to facilitate the transaction. All per share amounts have been retroactively
adjusted to give effect to this split.
NOTE 11 - REGULATORY CAPITAL MATTERS
The Company and its subsidiary Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and its subsidiary Banks must meet specific capital guidelines that
involve quantitative measures of the Company and its subsidiary banks' assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Subsidiary Banks' capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary banks to maintain minimum amounts and
ratios (set forth in the table below) of Total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes the Company and
its subsidiary banks meet all capital adequacy requirements to which they are
subject as of December 31, 1998.
As of December 31, 1998, the most recent notification from the appropriate
regulatory agencies categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the Banks' category.
60
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 11 - REGULATORY CAPITAL MATTERS - CONTINUED
The Company's and Subsidiary Banks' actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
--------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ -------- ------- ------- -------
(In thousands)
As of December 31, 1998:
- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
Consolidated............. $22,145 15.26% $11,608 8.0% $14,511 10.0%
First National-
America's Bank.......... 12,917 13.43 7,691 8.0 9,614 10.0
Valley National Bank..... 7,296 14.93 3,910 8.0 4,888 10.0
Tier 1 Capital
Consolidated............. 20,331 14.01 5,804 4.0 8,706 6.0
First National-
America's Bank.......... 11,715 12.18 3,846 4.0 5,769 6.0
Valley National Bank..... 6,772 13.86 1,955 4.0 2,933 6.0
Tier 1 Leverage
Consolidated............. 20,331 9.26 8,778 4.0 10,972 5.0
First National-
America's Bank.......... 11,715 8.23 5,697 4.0 7,121 5.0
Valley National Bank..... 6,772 8.76 3,091 4.0 3,863 5.0
As of December 31, 1997:
- ------------------------
Total Capital
Consolidated............. $13,339 13.88% $ 7,686 8.0% $ 9,607 10.0%
First National-
America's Bank.......... 14,678 15.28 7,686 8.0 9,607 10.0
Tier 1 Capital
Consolidated............. 12,219 12.72 3,843 4.0 5,764 6.0
First National-
America's Bank.......... 13,558 14.11 3,843 4.0 5,764 6.0
Tier 1 Leverage
Consolidated............. 12,219 9.24 5,289 4.0 6,612 5.0
First National-
America's Bank.......... 13,558 10.25 5,291 4.0 6,614 5.0
</TABLE>
61
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 12 - STOCK OPTION PLANS
On August 24, 1998, the Company issued a total of 100,000 options to purchase
its common shares to its chief executive officer and its president. Each
received 50,000 options. Each of the stock option agreements contain an option
price of $10.00 per share, the market value of the shares at the time of
issuance.
The following sets forth certain information regarding stock options for the
year ended December 31, 1998.
<TABLE>
<CAPTION>
Fixed Options
Weighted
Average
Exercise
Shares Price
------- --------
<S> <C> <C>
Outstanding at beginning of year............. -0- $ 0.00
Granted...................................... 100,000 10.00
Exercised.................................... 10,000 10.00
Forfeited.................................... -0- 0.00
Outstanding at end of year................... 90,000 $10.00
======= ======
Exercisable at end of year................... 90,000 $10.00
======= ======
</TABLE>
<TABLE>
<CAPTION>
Expiration Options
Number Date Exercisable
------ ---------- -----------
<S> <C> <C> <C>
Options with Exercise Price of $10.00...... 90,000 08-24-07 90,000
</TABLE>
In October 1995, the FASB issued Financial Accounting Standards No. 123,
Accounting and Disclosure of Stock-Based Compensation ("SFAS 123"). SFAS 123 is
effective for years beginning after December 15, 1995, and allows for the option
of continuing to follow Accounting Principles Board Opinion No. 25, Accounting
for Stocks Issued to Employees, and the related Interpretations. The Company
has elected to apply APB Opinion No. 25 in accounting for its incentive stock
options; accordingly, no compensation
62
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 12 - STOCK OPTION PLANS - CONTINUED
cost has been recognized by the Company. The Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below had
compensation cost for the Company's stock option plan been determined based on
the fair value method at the grant date for options under the plan.
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Net Income
As reported................................... $1,127,816
Pro forma..................................... 1,083,861
Basic Earnings Per Share
As reported................................... $ .59
Pro forma..................................... .57
Diluted Earnings Per Share
As reported................................... $ .59
Pro forma..................................... .56
</TABLE>
These options are assumed to be exercised in the calculation of diluted average
common shares outstanding, causing the equivalent number of shares outstanding
on a diluted basis to be 14,164 greater than that used to calculate basic
earnings per share for 1998. There was no dilutive effect on earnings per share
for the year ended December 31, 1998.
The Company's options outstanding have a weighted average contractual life of
ten years. The weighted average fair value of options granted was $.73 in 1998.
The fair value of each grant is estimated using a fair value method with the
following assumptions used for grants in 1998: expected option life of 10 years;
no expected volatility; expected dividend yield of 3.68%; and a risk free
interest rate of 6.00%.
The effects of applying FAS 123 for providing proforma disclosures are not
likely to be representative of the effects on reported earnings for future
years, nor are the dividend estimates representative of commitments on the part
of the Company's Board.
63
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 13 - OTHER OPERATING EXPENSES
Other operating expenses consist of the following for the years ended December
31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Professional fees................. $ 267,167 $ 117,728 $ 218,887
Stationery and supplies........... 205,761 191,068 154,464
Advertising....................... 189,369 145,955 182,303
Director and committee fees....... 168,700 59,450 65,850
Postage........................... 147,875 112,558 93,828
Regulatory fees and assessments... 101,665 54,208 45,000
Insurance......................... 87,149 66,884 62,230
Other............................. 920,944 629,782 476,161
---------- ---------- ----------
Total other operating expenses.. $2,088,630 $1,377,633 $1,298,723
========== ========== ==========
</TABLE>
NOTE 14 - INCOME TAXES
The components of income tax expense for the years ended December 31, 1998,
1997, and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Current
Federal.......................... $355,337 $ 599,645 $431,724
State............................ 35,430 72,043 56,777
Deferred
Federal.......................... (93,534) (121,846) (85,208)
State............................ (31,374) 12,216 7,116
$265,859 $ 562,058 $410,409
======== ========= ========
</TABLE>
Tax effects of securities transactions resulted in an increase in income taxes
for December 31, 1998, 1997, and 1996 of $24,069, $3,230, and $9,938,
respectively.
64
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 14 - INCOME TAXES - CONTINUED
The principal reasons for the difference in the effective tax rate and the
federal statutory rate are as follows for the years ended December 31, 1998,
1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate.............. 34.0% 34.0% 34.0%
Effect on rate of:
Tax-exempt securities......................... (18.3) (5.8) (8.0)
Tax-exempt loan income........................ (2.8) (0.9) (1.7)
Interest expense disallowed................... 2.8 1.8 1.3
State income tax, net of federal tax benefit.. (0.6) 3.8 3.9
Other......................................... 4.0 3.5 (1.3)
------ ------ ------
Effective income tax rate...................... 19.1% 29.4% 28.2%
====== ====== ======
</TABLE>
Federal and state income taxes receivable (payable) as of December 31, 1998 and
1997 included in other assets and other liabilities, respectively, were as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Current
Federal.................................................................................................. $ 125,215 $ 96,645
State.................................................................................................... (71,644) (72,043)
</TABLE>
The components of the deferred income tax asset included in other assets as of
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax asset:
Federal..................................................................................................... $ 638,091 $342,275
State....................................................................................................... 107,201 60,403
--------- ---------
Total deferred income tax asset............................................................................ 745,292 402,678
Deferred tax liability:
Federal..................................................................................................... (580,307) (241,921)
State....................................................................................................... (48,201) (10,288)
Total deferred income tax liability........................................................................ (628,508) (252,206)
--------- ---------
Net deferred tax asset....................................................................................... $ 116,784 $150,472
========= =========
</TABLE>
65
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 14 - INCOME TAXES - CONTINUED
The tax effects of each type of income and expense item that gave rise to
deferred taxes are:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Alternative minimum tax credit carryover........................ $ 126,847 $ -0-
Net unrealized (gains) losses on securities available-for-sale.. (273,216) (183,621)
Depreciation.................................................... (321,339) (58,658)
Allowance for loan losses....................................... 487,107 263,924
Deferred compensation........................................... 113,813 50,879
Write downs on foreclosed real estate........................... -0- 68,530
Other........................................................... (16,428) 9,418
---------- ----------
Net deferred tax asset.......................................... $ 116,784 $ 150,472
========== ==========
</TABLE>
NOTE 15 - RETIREMENT PLANS
The Company and its subsidiaries have established a 401(k) profit-sharing plan
covering substantially all employees, subject to eligibility requirements.
Employees may defer a percentage of their compensation, subject to maximum
limitations, with matching employer contributions subject to limitations. The
Company and its subsidiaries may also make discretionary contributions on an
annual basis. Total retirement expense under this plan included in salary and
benefits for the years ended December 31, 1998, 1997 and 1996 was $83,499,
$103,936 and $86,631, respectively.
The Company and its subsidiaries have also entered into a deferred compensation
agreement with a director and salary continuation plans with certain executive
officers to provide for continued compensation upon retirement. The present
value of the estimated liability under the plans is being accrued over the
expected remaining years of service.
The present value of both plan's accrued benefits amounted to $278,826 and
$125,175 at December 31, 1998 and 1997, respectively. The plans are financed
through life insurance policies owned by the Subsidiary Banks and provide
monthly income to the covered individuals if they remain in service until age 65
by the Subsidiary Banks. (Reduced amounts are payable if employment terminates
prior to age 65). The expense of the plans was $134,524, $100,788, and $24,387
in 1998, 1997, and 1996, respectively.
66
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 16 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company offers a variety of financial
products to its customers to aid them in meeting their requirements for
liquidity, credit enhancement, and interest rate protection. Generally accepted
accounting principles recognize these transactions as contingent liabilities
and, accordingly, they are not reflected in the accompanying financial
statements.
A summary of the Company's commitments and contingent liabilities at December
31, 1998 and 1997, is approximately as follows:
<TABLE>
<CAPTION>
Contract or
Notional Amount
-----------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Commitments to extend credit........................................ $7,246,000 $7,303,000
Credit card commitments............................................. 1,691,000 1,231,000
Standby letters of credit........................................... -0- 158,000
---------- ----------
Totals........................................................... $8,937,000 $8,692,000
========== ==========
</TABLE>
Commitments to extend credit, credit card arrangements, commercial letters of
credit, and standby letters of credit all include exposure to some credit loss
in the event of nonperformance of the customer. The Company's credit policies
and procedures for credit commitments and financial guarantees are the same as
those for extension of credit that are recorded on the statement of financial
condition. Because these instruments have fixed maturity dates, and because
many of them expire without being drawn upon, they do not generally present any
significant liquidity risk to the Company.
Management conducts regular reviews of these instruments on an individual
customer basis, and the results are considered in assessing the adequacy of the
Company's allowance for loan losses. Management does not anticipate any
material losses as a result of these commitments.
NOTE 17 - CONCENTRATIONS OF CREDIT
All of the Banks' loans, commitments and standby letters of credit have been
granted to customers in the Company's market area. Substantially all such
customers are depositors of the Banks. The concentrations of credit by type of
loan are set forth in note 5. The commitments to extend credit relate primarily
to unused commercial lines of credit. Commercial and standby letters of credit
were granted primarily to commercial borrowers.
The Company maintains its cash accounts at various commercial banks in Alabama,
Georgia and Tennessee. The total cash balances are insured by the FDIC up to
$100,000. There were no uninsured balances held at other commercial banks at
December 31, 1998 and 1997.
67
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 18 - LEASES
The Company leased office space and equipment under various operating leases
during 1998 and 1997. The leases provide for renewal options and generally
require the Company to pay maintenance, insurance and property taxes. For the
years ended December 31, 1998, 1997, and 1996, rental expense for such leases
was $94,334, $65,904 and $56,972, respectively.
Future minimum lease payments under such noncancellable operating leases at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
- -------------------------
<S> <C>
1999.......................... $ 56,488
2000.......................... 31,738
2001.......................... 28,366
2002.......................... 9,375
--------
Total minimum lease payments.. $125,967
========
</TABLE>
NOTE 19 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
The Banks are subject to dividend restrictions set forth by their regulators.
Under such restrictions, the Banks may not, without the prior approval of their
regulators declare dividends in excess of the sum of the current year's earnings
plus the retained net earnings from the preceding two years. In January 1998,
First National-America's Bank requested permission from the Office of the
Comptroller of Currency ("OCC") to pay a special dividend of $2,300,000 to First
National Sylacauga Corporation (former name of parent company) in order to pay
off the note payable to National Bank of Commerce (see note 9). First National-
America's Bank received permission from the OCC on February 9, 1998, to pay the
special dividend and First National Sylacauga Corporation then paid in full the
notes payable to NBC.
For the year ending December 31, 1999, the Subsidiary Banks can declare
dividends of $2,000,000 without additional approval of regulatory authorities
plus an additional amount equal to its net profits for 1999.
NOTE 20 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Short-Term Investments: For those short-term instruments, the carrying
amount is a reasonable estimate of fair value.
68
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 20 - FAIR VALUES OF FINANCIAL INSTRUMENTS - CONTINUED
Securities: For securities available-for-sale and securities held-to-maturity,
fair values are based on quoted market prices or dealer quotes. For other
securities, fair value equals quoted market price, if available. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
Loans: For certain homogeneous categories of loans, such as some residential
mortgages, credit card receivables, and other consumer loans, fair value is
estimated using the quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics. The fair value of other types
of loans is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
Accrued Interest Receivable: The carrying amount of accrued interest receivable
approximates its fair value.
Deposits: The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Accrued Interest Payable: The carrying amount of accrued interest payable
approximates its fair value.
Short-Term Borrowings: The carrying amounts of short-term borrowings approximate
their fair values.
Long-Term Debt: Rates currently available to the Bank for debt with similar
terms and remaining maturities are used to estimate fair value of existing debt.
Commitments to Extend Credit, Standby Letters of Credit, and Financial
Guarantees Written: The fair value of commitments, letters of credit, and
financial guarantees is estimated to be approximately the same as the notional
amount of the related commitment.
69
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 20 - FAIR VALUES OF FINANCIAL INSTRUMENTS - CONTINUED
The estimated fair values of the Company's financial instruments as of December
31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- --------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
---------- ---------- --------- ---------
(IN THOUSANDS) (in thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and short-term investments.... $ 14,836 $ 14,836 $ 6,932 $ 6,932
Securities......................... 51,881 51,881 24,125 24,125
Loans.............................. 136,202 136,065 96,631 95,240
Accrued interest receivable........ 1,499 1,499 864 864
---------- ---------- --------- ---------
TOTAL FINANCIAL ASSETS............ $204,418 $204,281 $128,552 $127,161
========== ========== ========= =========
FINANCIAL LIABILITIES
Deposits........................... $173,375 $170,421 $100,858 $101,063
Long-term debt..................... 18,557 17,717 19,042 19,319
Accrued interest payable........... 885 885 673 673
--------- ---------- --------- ---------
TOTAL FINANCIAL LIABILITIES....... $192,817 $189,023 $120,573 $121,055
========= ========== ========= =========
UNRECOGNIZED FINANCIAL INSTRUMENTS
Commitments to extend credit....... $ 8,937 $ 8,937 $ 8,534 $ 8,534
Standby letters of credit.......... -0- -0- 158 158
--------- ---------- --------- ---------
TOTAL UNRECOGNIZED FINANCIAL
INSTRUMENTS..................... $ 8,937 $ 8,937 $ 8,692 $ 8,692
========= ========== ========= =========
</TABLE>
NOTE 21 - YEAR 2000 ISSUES
- --------------------------
The year 2000 issue is the result of shortcomings in many electronic data
processing systems and other electronic equipment that may adversely affect the
Company's operations as early as fiscal year 1999.
The Company has completed an inventory of computer systems and other electronic
equipment that may be affected by the year 2000 issue and that are necessary to
conducting the Company's operations. Based on this inventory, the Company
upgraded or replaced various software and hardware items. Testing and
validation of the system for the year 2000 compliance is currently being
performed.
Because of the unprecedented nature of the Year 2000 issue, its effects and the
success of related remediation efforts will not be fully determinable until the
year 2000 and thereafter.
70
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 22 - CONDENSED PARENT COMPANY INFORMATION
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks....................... $ 144,525 $ 279,520
Investment in subsidiaries (equity method) -
eliminated upon consolidation................ 20,409,325 15,354,773
Dividends receivable from subsidiaries........ 2,000,000 800,000
Premises and equipment, net................... 1,076,771 -0-
Intangible assets............................. -0- 52,430
Other assets.................................. 323,411 76,854
------------ ------------
TOTAL ASSETS................................ $23,954,032 $16,563,577
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt................................ $ -0- $ 2,250,000
Due to subsidiaries........................... 1,014,431 -0-
Dividends payable to shareholders............. 431,746 201,990
Other liabilities............................. 19,617 43,769
TOTAL LIABILITIES........................... 1,465,794 2,495,759
TOTAL SHAREHOLDERS' EQUITY.................. 22,488,238 14,067,818
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.. $23,954,032 $16,563,577
============ ============
</TABLE>
71
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 22 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
INCOME
From subsidiaries - eliminated upon consolidation
Dividends......................................... $ 4,822,910 $1,460,000 $1,600,000
Interest.......................................... 32,742 9,631 43,810
Commissions........................................ 37,163 63,176 43,597
Other income....................................... 11 215 -0-
----------- ---------- ----------
TOTAL INTEREST INCOME............................ 4,892,826 1,533,022 1,687,407
----------- ---------- ----------
EXPENSE
Salaries and employee benefits..................... 537,235 101,793 35,906
Interest........................................... 23,922 186,391 96,894
Other expenses..................................... 400,571 25,858 33,557
----------- ---------- ----------
961,728 314,042 166,357
----------- ---------- ----------
Income before income taxes and equity in
undistributed earnings of subsidiaries............. 3,931,098 1,218,980 1,526,050
Income tax benefit.................................. (190,500) (76,854) (24,296)
Income before equity in undistributed
earnings of subsidiaries........................... 4,121,598 1,295,834 1,550,346
Equity in undistributed earnings of subsidiaries.... (2,993,782) 55,972 (498,540)
----------- ---------- ----------
NET INCOME....................................... $ 1,127,816 $1,351,806 $1,051,806
=========== ========== ==========
</TABLE>
72
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 22 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................... $ 1,127,816 $1,351,806 $ 1,046,806
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of subsidiaries...... 2,993,782 (55,972) 498,540
Provision for depreciation and amortization......... 91,687 14,981 7,490
Increase in dividends receivable.................... (1,200,000) (560,000) -0-
Increase in due to subsidiaries..................... 1,014,431 -0- -0-
Increase (decrease) in dividends payable............ 229,756 (240) 200
Other............................................... (262,089) (56,641) (56,166)
----------- ---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......... 3,995,383 693,934 1,496,870
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale............ (5,000) -0- -0-
Cash received (paid) in acquisitions, net............ 686,472 -0- (4,471,988)
Capital expenditures................................. (1,116,028) -0- -0-
----------- ---------- -----------
NET CASH USED IN (PROVIDED BY)
INVESTING ACTIVITIES.............................. (434,556) -0- (4,471,988)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt........................... -0- -0- 2,500,000
Repayment of long-term debt.......................... (2,250,000) (250,000) -0-
Proceeds from sale of treasury stock................. -0- -0- 12,539
Purchases of treasury stock.......................... (368,000) (15,000) -0-
Issuance of common stock............................. 150,000 -0- -0-
Cash dividends....................................... (1,227,822) (505,095) (505,575)
----------- ---------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES.............................. (3,695,822) (770,095) 2,006,964
----------- ---------- -----------
Net increase (decrease) in cash and cash equivalents.. (134,995) (76,161) (968,154)
Cash and due from banks at beginning of year.......... 279,520 355,681 1,323,835
----------- ---------- -----------
CASH AND DUE FROM BANKS AT END OF YEAR................ $ 144,525 $ 279,520 $ 355,681
=========== ========== ===========
CASH PAID DURING THE YEAR FOR:
Interest............................................. $ 67,691 $ 190,474 $ 49,042
=========== ========== ===========
</TABLE>
73
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 23 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Selected quarterly results of operations for the four quarters ended December 31
are as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C>
1998:
TOTAL INTEREST INCOME....... $3,066 $3,050 $3,343 $4,423 $13,882
TOTAL INTEREST EXPENSE...... 1,315 1,369 1,580 2,030 6,294
PROVISION FOR LOAN LOSSES... 192 405 194 621 1,412
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES.. 1,559 1,276 1,569 1,772 6,176
INVESTMENT SECURITIES
GAINS (LOSSES)............. -0- 60 -0- -0- 60
TOTAL NONINTEREST INCOME.... 332 488 518 886 2,224
TOTAL NONINTEREST EXPENSE... 1,647 1,321 1,627 2,471 7,066
INCOME TAX EXPENSE.......... 30 95 141 -0- 266
NET INCOME.................. 214 408 319 187 1,128
1997:
Total interest income....... $2,618 $2,749 $2,835 $2,883 $11,085
Total interest expense...... 1,077 1,162 1,158 1,298 4,695
Provision for loan losses... 121 159 193 189 662
Net interest income after
provision for loan losses.. 1,420 1,428 1,484 1,396 5,728
Investment securities
Gains (losses)............. 5 1 0 2 8
Total noninterest income.... 322 294 307 291 1,214
Total noninterest expense... 1,251 1,235 1,266 1,284 5,036
Income tax expense.......... 171 186 160 45 562
Net income.................. 325 302 365 360 1,352
</TABLE>
74
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On September 10, 1998 the Company engaged Schauer, Taylor, Cox & Vise, P.C.
certified public accountants to be the independent auditors of the Company's
consolidated financial statements for the year ended December 31, 1998. The
firm of Jackson, Thorton & Co. certified public accountants audited the
Company's consolidated financial statements for the years ended December 31,
1997 and 1996 and their reports expressed unqualified opinions for each of the
respective years. The decision to change auditors was approved by the Board of
Directors on September 10, 1998. This change was not a result of any
disagreement with the previous auditors regarding any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated by reference from the
sections entitled "Election of Directors" and "Executive Compensation" in the
Proxy Statement for the Annual Meeting of Shareholders which is to be filed with
the Securities and Exchange Commission. Additional information is as follows:
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers (as
defined in regulations promulgated by the SEC thereunder) and directors, and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file reports of ownership and changes in ownership with
the SEC. Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on a review of copies of such reports of ownership furnished
to the Company, or written representations that no forms were necessary, the
Company believes that during the past fiscal year all filing requirements
applicable to its officers, directors and greater than ten percent beneficial
owners were complied with except that, due to an administrative error, the
Company's executive officers and directors and persons who own more than ten
percent of a registered class of the Company's equity securities did not timely
file his or her Initial Statement of Beneficial Ownership of Securities. The
required filings were subsequently made. In addition, Mr. Harry I. Brown, Jr.
filed one report reflecting 3 transactions late, due to a misunderstanding of
the applicable reporting requirements.
75
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the
section entitled "Executive Compensation" in the Proxy Statement for the Annual
Meeting of Shareholders which is to be filed with the Securities and Exchange
Commission.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information required by this item is incorporated by reference from the
sections entitled "Outstanding Voting Securities and Principal Shareholders" and
"Election of Directors" in the Proxy Statement for the Annual Meeting of
Shareholders which is to be filed with the Securities and Exchange Commission
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the
sections entitled "Certain Relationships, Related Transactions, and Legal
Proceedings" in the Proxy Statement for the Annual Meeting of Shareholders which
is to be filed with the Securities and Exchange Commission
ITEM 14 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Index of documents filed as part of this report:
Frontier National Corporation and Subsidiaries
Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report..................................................... 36
Consolidated Statements of Financial Condition as of December 31, 1998 and 1997.. 37
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997, and 1996.............................................. 38
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1998, 1997, and 1996.............................................. 39
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996.............................................. 40
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1998, 1997, and 1996.............................................. 42
Notes to Consolidated Financial Statements - December 31, 1998, 1997 and 1996.... 43
Quarterly Results (Unaudited).................................................... 74
</TABLE>
76
<PAGE>
(b) Reports on Form 8-K
During the quarter ended December 31, 1998, Frontier National
Corporation filed the following reports on Form 8-K:
Current report on Form 8-K filed with the Securities and Exchange
Commission dated December 2, 1998, reporting under Item 5 (other
events) the purchase of Wright-Sprayberry, Inc. and Brown Insurance
Agency, Inc.
<TABLE>
<CAPTION>
(c) Exhibits Page
----
<S> <C>
2.1 Merger agreement and Plan of merger between the Valley National
Corporation and First National Sylacauga Corporation dated
February 24, 1998 (incorporated by reference to Exhibit 2 of the
Company's Registration Statement on Form S-4, Registration No.
333-52465).......................................................
2.2 Merger agreement dated November 23, 1998 between Frontier
National Corporation and The Frontier Agency, Inc. and Wright-
Sprayberry, Inc., Cornelia Leigh A. Wright, Carol H. Sprayberry,
Sam H. Wright and Steven E. Sprayberry...........................
3.1 Articles of Incorporation of Frontier National Corporation
(incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-4, Registration No. 333-52465
filed with the Commission).......................................
3.2 Articles and Certificate of Merger of Domestic Corporation into
Valley National Corporation (Name changed to Frontier National
Corporation), dated August 21, 1998 (incorporated by reference to
Exhibit 3 of the Company's Registration Statement on Form 8A,
Registration No.000-24853).......................................
3.3 Bylaws of Frontier National Corporation (incorporated by
reference to Exhibit 3.2 of the Company's Registration Statement
on Form S-4, Registration No. 333-52465).........................
4 Form of Common Stock Certificates (incorporated by reference to
Exhibit 4 of the Company's Registration Statement on Form 8A,
Registration No. 000-24853)......................................
10.1 Employment Agreement with Harry I. Brown, Jr. dated August 24,
1998.............................................................
10.2 Employment Agreement with Steven R. Townson dated August 24,
1998.............................................................
10.3 Stock Option Agreement between Frontier National Corporation and
Steven R. Townson dated August 24, 1998..........................
10.4 Stock Option Agreement between Frontier National Corporation and
Harry I. Brown, Jr. dated August 24, 1998........................
11 Statement of computation of earnings per common share............ 78
12 Statement of computation of ratios............................... 79
16 Letter regarding change in certifying accountant.................
21 Subsidiaries of the Registrant................................... 79
23 Consent of Schauer, Taylor, Cox & Vise, P.C......................
24 Power of Attorney (contained on signature page of this report)...
</TABLE>
Certain financial statement schedules and exhibits have been omitted because
they are not applicable.
77
<PAGE>
EXHIBIT 11 - STATEMENTS RE: COMPUTATION OF PER SHARE EARNINGS
Frontier National Corporation
Computation of Net Income Per Common Share
The following tabulation presents the calculation of basic and diluted earnings
per common share for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income.......................................... $1,127,816 $1,351,806 $1,046,806
========== ========== ==========
Earnings on common shares........................... $1,127,816 $1,351,806 $1,046,806
========== ========== ==========
Weighted average common shares outstanding - basic.. 1,907,756 1,458,027 1,459,444
========== ========== ==========
Basic earnings per common share..................... $ .59 $ .93 $ .72
========== ========== ==========
DILUTED EARNINGS PER SHARE:
Net income.......................................... $1,127,816 $1,351,806 $1,046,806
========== ========== ==========
Weighted average common shares
outstanding........................................ 1,907,746 1,458,027 1,459,444
Net effect of the assumed exercise of stock
options - based on the treasury stock method
using average market price for the year............ 14,164 -0- -0-
---------- ---------- ----------
Weighted average common shares outstanding -
diluted............................................ 1,921,910 1,458,027 1,459,444
========== ========== ==========
Diluted earnings per common share................... $ .59 .93 $ .72
========== ========== ==========
</TABLE>
78
<PAGE>
EXHIBIT 12 - STATEMENTS RE: COMPUTATION OF RATIOS
Frontier National Corporation
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997 1996
------------------------------
<S> <C> <C> <C>
Pretax income............................................. $1,394 $1,914 $1,457
Add fixed charges:
Interest on deposits..................................... 5,063 3,751 2,974
Interest on borrowings................................... 1,231 944 378
Portion of rental expense representing interest expense.. 31 22 19
------ ------ ------
Total fixed charges..................................... 6,325 4,717 3,371
------ ------ ------
Income before fixed charges............................... $7,719 $6,631 $4,828
====== ====== ======
Pretax income............................................. $1,394 $1,914 $1,457
Add fixed charges (excluding interest on deposits):
Interest on borrowings................................... 1,231 944 378
Portion of rental expense representing interest expense.. 31 22 19
------ ------ ------
Total fixed charges..................................... 1,262 966 397
------ ------ ------
Income before fixed charges (excluding interest on
deposits)................................................ $2,656 $2,880 $1,854
====== ====== ======
RATIO OF EARNINGS TO FIXED CHARGES
Including interest on deposits........................... 1.22 1.41 1.43
Excluding interest on deposits........................... 2.10 2.98 4.67
</TABLE>
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
Subsidiaries - Direct/wholly-owned State of Incorporation
- ---------------------------------- ----------------------
First National-America's Bank Alabama
Valley National Bank Alabama
Subsidiaries - Indirect/wholly-owned by First
- ---------------------------------------------
National-America's Bank
- ------------------------
The Frontier Agency, Inc. Alabama
Frontier Financial Services, Inc. Alabama
79
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FRONTIER NATIONAL CORPORATION
Date: April 13, 1999 By: /s/Harry I. Brown, Jr.
-------------- ------------------------
Harry I. Brown, Jr.
Chairman and Chief Executive Officer
Date: April 13, 1999 By: /s/Steven R. Townson
-------------- ----------------------
Steven R. Townson
President, Chief Financial Officer and
Chief Operating Officer
Date: April 13, 1999 By: /s/Kerri C. Newton
-------------- --------------------
Kerri C. Newton
Senior Vice President and
Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Harry I. Brown, Jr., Steven R. Townson and Kerri C.
Newton, and each of them, his true and lawful attorney-in-fact, as agent with
full power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacity, to sign any or all amendments to this Form 10-K
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agents in full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as they might or could be in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, and their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in capacities and on the dates indicated.
Directors Date
--------- ----
/s/ Wesley L. Bowden, Jr. April 13, 1999
- ---------------------------- --------------
Wesley L. Bowden, Jr.
/s/ Harry I. Brown, Jr. April 13, 1999
- -------------------------- --------------
Harry I. Brown, Jr.
/s/ Harry I. Brown, Sr. April 13, 1999
- -------------------------- --------------
Harry I. Brown, Sr.
80
<PAGE>
Directors Date
--------- ----
/s/ Charles M. Reeves April 13, 1999
- ------------------------ --------------
Charles M. Reeves
/s/ Steven E. Sprayberry April 13, 1999
- --------------------------- --------------
Steven E. Sprayberry
/s/ Raymond C. Styres April 13, 1999
- ------------------------ --------------
Raymond C. Styres
/s/ Steven R. Townson April 13, 1999
- ------------------------ --------------
Steven R. Townson
/s/ Christopher N. Zowdrow April 13, 1999
- ----------------------------- --------------
Christopher N. Zowdrow
81
<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
EXHIBITS TO
ANNUAL REPORT ON FORM 10-K
Year Ended December 31, 1998
______________________
Frontier National Corporation
43 North Broadway
Sylacauga, Alabama 35150
- --------------------------------------------------------------------------------
<PAGE>
_____________________
EXHIBIT 2.2
Merger agreement
DATED NOVEMBER 23, 1998 BETWEEN
FRONTIER NATIONAL CORPORATION
AND THE FRONTIER AGENCY, INC. AND
WRIGHT-SPRAYBERRY, INC.,
CORNELIA LEIGH A. WRIGHT,
CAROL H. SPRAYBERRY, SAM H. WRIGHT
AND STEVEN E. SPRAYBERRY
_____________________
1
<PAGE>
MERGER AGREEMENT
DATED NOVEMBER 23, 1998
BETWEEN
FRONTIER NATIONAL CORPORATION and
THE FRONTIER AGENCY, INC.
AND
WRIGHT-SPRAYBERRY, INC.
CORNELIA LEIGH A. WRIGHT
CAROL H. SPRAYBERRY
SAM H. WRIGHT, AND
STEVEN E. SPRAYBERRY
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1
The Merger.................................................................. 1
1.1 The Merger..................................................... 1
1.2 Effective Date................................................. 2
1.3 Effect of the Merger........................................... 2
1.4 Continuation of Business....................................... 2
1.5 Conversion of Shares........................................... 2
1.6 Consideration.................................................. 3
1.7 Exchange of Certificates....................................... 3
1.8 Closing of Transfer Books...................................... 3
1.9 Fractional Shares.............................................. 3
ARTICLE 2
Representations and Warranties of the Target and Target Shareholders........ 4
2.1 Organization................................................... 4
2.2 Capitalization................................................. 4
2.3 Corporate Authorization........................................ 5
2.4 Governmental Authorization..................................... 5
2.5 Non-Contravention.............................................. 5
2.6 Financial Statements........................................... 5
2.7 Absence of Certain Changes..................................... 6
2.8 Accounts Receivable............................................ 7
2.9 Absence of Undisclosed Liabilities............................. 7
2.10 Debt Instruments............................................... 7
2.11 Contracts...................................................... 7
2.12 Taxes.......................................................... 8
2.13 Labor.......................................................... 9
2.14 Employee Benefit Plans......................................... 9
2.15 Investment Representations..................................... 12
2.16 Intellectual Property and Intangible Property.................. 13
2.17 Permits and Licenses........................................... 13
2.18 Compliance with Law and Other Regulations...................... 13
2.19 Litigation..................................................... 14
2.20 Personal Property.............................................. 14
2.21 Real Property.................................................. 14
2.22 Insurance...................................................... 15
2.23 Environmental Matters.......................................... 16
2.24 Bank Accounts.................................................. 16
2.25 Transactions with Related Parties.............................. 16
2.26 Directors, Officers and Employees.............................. 16
2.27 Books and Records.............................................. 17
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
2.28 Adequacy of Disclosure......................................... 17
2.29 Finder's Fees.................................................. 17
2.30 Accounting Matters............................................. 17
2.31 Consents....................................................... 17
2.32 Sole Agreement to Merge or Sell................................ 17
ARTICLE 3
Representations and Warranties of the Purchaser and the Ag.................. 18
3.1 Organization and Power......................................... 18
3.2 Capitalization................................................. 18
3.3 Corporate Authorization........................................ 19
3.4 Governmental Authorization..................................... 19
3.5 Non-Contravention.............................................. 19
3.6 Reports and Financial Statements............................... 20
3.8 Litigation..................................................... 20
3.9 Compliance with Law and Other Regulations...................... 20
ARTICLE 4
Covenants of the Target and Target Shareholders............................. 21
4.1 Affirmative Covenants.......................................... 21
4.2 Access and Information......................................... 21
4.3 Conduct of Business Pending the Transaction.................... 21
4.4 Corporate Authorization........................................ 23
4.5 Pooling Accounting............................................. 24
4.6 Exclusivity.................................................... 24
4.7 Expenses....................................................... 24
4.8 Notification of Certain Matters................................ 24
ARTICLE 5
Covenants of the Purchaser and the Agency................................... 25
5.1 Affirmative Covenants.......................................... 25
5.2 Cooperation.................................................... 25
5.3 Confidential Information....................................... 26
5.4 Expenses....................................................... 26
ARTICLE 6
SECURITIES MATTERS.......................................................... 26
6.1 Securities Compliance.......................................... 26
6.3 Affiliates/Pooling of Interests and Tax Matters................ 27
ARTICLE 7
Conditions Precedent to the Merger.......................................... 28
7.1 Conditions Precedent to Each Party's Obligations............... 28
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
7.2 Conditions Precedent of Purchaser and the Agency................ 29
7.3 Conditions Precedent to Obligations of the Target............... 30
ARTICLE 8
Indemnification............................................................. 31
8.1 Indemnification by the Target and Target Shareholders........... 31
8.2 Indemnification by Purchaser.................................... 32
8.3 Procedure for Indemnification Claims............................ 32
ARTICLE 9
Miscellaneous............................................................... 33
9.1 Termination..................................................... 33
9.2 Amendment....................................................... 34
9.3 Assignment...................................................... 34
9.4 Descriptive Headings............................................ 34
9.5 Notices......................................................... 34
9.6 Governing Law................................................... 35
9.7 Public Announcements............................................ 35
9.8 Survival of Representations and Warranties...................... 36
9.9 Extensions and Waivers.......................................... 36
9.10 Counterparts.................................................... 36
9.11 Entire Agreement................................................ 36
</TABLE>
5
<PAGE>
MERGER AGREEMENT
----------------
This MERGER AGREEMENT (the "Agreement") is made as of November 23, 1998,
(such date being sometimes referred to herein as "the date hereof"), among
Frontier National Corporation, an Alabama corporation (the "Purchaser"), The
Frontier Agency, an Alabama corporation (the "Agency"), Cornelia Leigh A.
Wright, Carol H. Sprayberry, Sam H. Wright, and Steven E. Sprayberry (the
"Target Shareholders") and Wright Sprayberry, Inc., an Alabama corporation (the
"Target") (the Purchaser, the Agency, the Target Shareholders, and the Target
being sometimes collectively referred to herein as the "Parties").
WITNESSETH:
-----------
WHEREAS, the Parties propose to effectuate a transaction by which the
Agency, a wholly-owned subsidiary of First National-America's Bank, which is a
wholly-owned subsidiary of the Purchaser, will merge with and into the Target,
as a result of which (a) the Target, as the surviving corporation, will become a
wholly-owned subsidiary of First National-America's Bank, and (b) the holders of
the outstanding capital stock of the Target will receive the consideration
hereinafter set forth (the "Merger"); and
WHEREAS, the respective Boards of Directors of the Purchaser, the Agency,
and the Target have approved or will approve this Agreement and have determined
that it is desirable and in each of their best interests that the business of
the Target be combined with that of the Purchaser by merger of the Agency with
and into the Target so that the Target will become a wholly-owned subsidiary of
First National-America's Bank as set forth herein; and
WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended; and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling of interests."
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements contained herein, the
Parties hereby agree as follows:
ARTICLE 1
--------
The Merger
----------
1.1 THE MERGER. On the Effective Date (as defined in Section 1.2
----------
herein), the Agency will merge with and into the Target, with the Target being
the surviving corporation (the "Surviving Corporation"), upon the terms and
provisions set forth in this Agreement, the Plan of Merger attached as Exhibit
1.1, and in accordance with the Alabama Business Corporation Act.
1.2 EFFECTIVE DATE. As soon as practicable after the satisfaction
--------------
or waiver of each condition to the Parties' obligations hereunder, the Parties
will take such action as is required by law to make the Merger effective,
including the execution of duly executed Articles of Merger in the form attached
as Exhibit 1.2 in accordance with the provisions the Alabama Business
-----------
Corporation Act, and a
6
<PAGE>
closing will be held on such date (the "Closing Date"). The Merger shall become
effective on the date and as of the time Articles of Merger shall be filed with
the Secretary of State of Alabama, which filing shall occur no later than the
earlier of the second business day following the satisfaction of the conditions
set forth in Article 7 of this Agreement, or December 31, 1998, unless another
date and time is agreed to in writing by the Parties hereto. Such date and time
are herein referred to as the "Effective Date."
1.3 EFFECT OF THE MERGER. The Merger shall have the effect set forth
--------------------
in Section 10-2B-11.06 of the Alabama Business Corporation Act.
1.4 CONTINUATION OF BUSINESS. Immediately following the Effective
------------------------
Date, the business of the Surviving Corporation shall be governed and operated
as follows:
(a) The Articles of Incorporation and Bylaws of the Target in effect
on the Effective Date shall be the Articles of Incorporation and Bylaws of the
Surviving Corporation, to remain unchanged until amended as provided by law.
(b) The officers of the Surviving Corporation immediately after the
Merger shall be those persons identified on Schedule 1.4(b) of this Agreement.
---------------
(c) The directors of the Surviving Corporation immediately after the
Merger shall be those persons identified on Schedule 1.4(c) of this Agreement.
---------------
(d) The name of the Surviving Corporation shall be changed to The
Frontier Agency, Inc.
1.5 CONVERSION OF SHARES. As of the Effective Date, by virtue of the
--------------------
Merger and without any further action on the part of any holder of (i) shares of
Common Stock of the Target ("Target Shares") or (ii) shares of Common Stock of
the Purchaser ("Purchaser Shares"):
(a) Capital Stock of the Agency. Each issued and outstanding share
---------------------------
of capital stock of the Agency shall be converted into and become one (1) fully
paid and nonassessable share of Common Stock, par value $10.00 per share, of the
Surviving Corporation; and
(b) Cancellation of Target Treasury Stock. Each Target Share that is
-------------------------------------
owned by the Target shall automatically be canceled and retired and shall cease
to exist, and no Purchaser Shares or other consideration shall be delivered in
exchange therefor.
(c) Conversion of Target Shares. The Target Shares which are issued
---------------------------
and outstanding immediately prior to the Merger other than Target Shares to be
canceled in accordance with Section 1.5(b), considered in the aggregate, shall
be converted into the right to receive the Consideration (as defined below). As
of the Effective Date, each holder of any certificate representing any such
Target Shares shall cease to have any rights with respect thereto, except the
right to receive the Consideration (as defined below) upon the surrender of such
certificate in accordance with Section 1.7 of this Agreement, and the Purchaser
shall issue certificates representing the Consideration (as defined below).
(d) Shares of Purchaser Shall Remain Outstanding. Subsequent to the
--------------------------------------------
Effective Date, each share of stock of the Purchaser then issued and outstanding
shall remain as the issued and outstanding stock of the Purchaser.
7
<PAGE>
1.6 CONSIDERATION. The Consideration for the Target Shares shall be
-------------
an aggregate of 49,339 Purchaser Shares (the "Consideration"), which shall be
distributed to the Target Shareholder based upon 49.34 Purchaser Shares for each
Target Share owned.
1.7 EXCHANGE OF CERTIFICATES. On the Closing Date, the Target
------------------------
Shareholders shall deliver to the Purchaser the certificates that immediately
prior to the Effective Date represented all issued and outstanding Target Shares
(collectively, the "Target Certificates"). Upon surrender of each of the Target
Certificates, each such shareholder shall be entitled to receive in exchange
therefor a certificate representing his or her respective portion of the
Consideration, as set forth in Section 1.6 of this Agreement, and each of the
Target Certificates so surrendered shall forthwith be canceled.
1.8 CLOSING OF TRANSFER BOOKS. The Consideration issued upon the
-------------------------
surrender of the Target Certificates shall be deemed to have been issued (and
paid) in full satisfaction of all rights pertaining to the Target Shares
theretofore represented by such Target Certificates, and there shall be no
further registration of transfers on the stock transfer books of the Surviving
Corporation of the Target Shares.
1.9 FRACTIONAL SHARES. No fractional share certificate of Purchaser
-----------------
Shares shall be issued in connection with the conversion of the Target Shares
into Purchaser Shares nor will any outstanding fractional share interest entitle
the holder thereof to vote, to receive dividends, or to exercise any other
rights of a shareholder of the Surviving Corporation. In lieu of any such
fractional shares, any holder of Target Shares shall, upon surrender thereof, be
paid in cash the value of each such fraction, which for this purpose shall be
calculated by multiplying such fraction by $986.78.
ARTICLE 2
--------
Representations and Warranties of the Target and Target Shareholders
--------------------------------------------------------------------
The Target and the Target Shareholders, jointly and severally, represent
and warrant to the Purchaser and the Agency as follows:
2.1 ORGANIZATION. The Target is a corporation duly organized,
------------
validly existing, and in good standing under the laws of the State of Alabama
with all necessary corporate power and authority to carry on its business as now
being conducted and to own, operate, utilize and lease the assets, properties
and business now owned, operated, utilized or leased by the Target. The Target
is duly qualified to do business in all other jurisdictions where such
qualification is required, all of which are identified on Schedule 2.1(a)
---------------
hereto, except where the failure to be so qualified will not result in the
forfeiture of a material right or the incurrence of a material penalty or in any
other respect be materially adverse to the business and affairs of the Target.
The Target has delivered to Purchaser correct and complete copies of the
Certificate of Incorporation and the Bylaws of the Target, each as amended to
the date hereof.
The Target has no subsidiaries or interests in, nor has the Target
made advances or loans to, any other corporation, partnership, joint venture, or
other enterprise except as set forth in Schedule 2.1(b) hereto. Each such
---------------
entity is duly organized, validly existing, and in good standing under the laws
of the state set forth in such schedule with all requisite corporate power and
authority to own or lease its properties and to conduct its business as
presently being conducted and is duly qualified, licensed and
8
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authorized to do business, and is in good standing in all jurisdictions in which
it is so require by virtue of ownership, operation or leasing of property or
assets or the conduct of its business. Unless the context hereof clearly
requires otherwise, all references in this Agreement, including this ARTICLE 2
regarding Representations and Warranties, to the Target shall be deemed to be
references to each and all of such entities as well as to the Target. Schedule
--------
2.1(b) sets forth (a) the authorized, issued, and outstanding capital stock of
- ------
each direct and indirect subsidiary of the Target and the percentage of the
outstanding capital stock of each such subsidiary held by the Target and (b) the
nature and amount of any such equity investment, other interest, or advance.
2.2 CAPITALIZATION. The authorized capital stock of the Target
--------------
consists of 1,000 shares of voting common stock, of which 1,000 shares are
issued and outstanding and are owned, beneficially and of record, by the Target
Shareholders and no other persons or entities, with par value of $10.00 per
share. All of the issued and outstanding shares are duly authorized, validly
issued, fully paid, and non assessable. Except as disclosed on Schedule 2.2
------------
hereto, there are no outstanding options, rights, or warrants to purchase or
acquire, or securities convertible into or exchangeable for, any shares of
capital stock of the Target, and there are no contracts, commitments,
agreements, understandings, arrangements, or restrictions which require the
Target to issue, sell, or deliver any shares of capital stock of the Target.
2.3 CORPORATE AUTHORIZATION. The Target has the corporate power to
-----------------------
enter into this Agreement and, subject to any necessary shareholder approval,
shall have the authority to carry out the transactions contemplated hereby. The
Board of Directors of the Target has unanimously determined that this Agreement
and the transactions contemplated hereby, including the Merger, are fair to and
in the best interest of the shareholders of the Target and has authorized that
approval of the Merger be recommended to the shareholders of the Target. As
evidenced by their signatures hereto, each of the Target Shareholders shall vote
his respective shares in favor of the Merger. This Agreement, the execution and
delivery of which have been duly authorized by all necessary corporate action on
the part of the Board of Directors of the Target, constitutes a valid and
binding obligation of the Target.
2.4 GOVERNMENTAL AUTHORIZATION. The execution, delivery and
--------------------------
performance by the Target of this Agreement, and the consummation of the Merger
and other transactions contemplated by this Agreement by the Target do not and
will not require any consent, approval or action by or in respect of, or any
declaration, filing, notice or registration with or to, any governmental or
regulatory body, court, agency, official or authority (each, a "Governmental
Authority"), other than routine filings with the Secretary of State of the State
of Alabama necessary to consummate the Merger, and the filings, consents, and
approvals set forth on Schedule 2.4 hereto.
2.5 NON-CONTRAVENTION. Assuming compliance with the matters referred
-----------------
to in Section 2.4, the execution, delivery and performance by the Target of this
Agreement, and the consummation of the Merger and other transactions
contemplated by this Agreement by the Target and the Target Shareholders does
not and will not (a) contravene or conflict with the Certificate of
Incorporation or Bylaws of the Target, (b) contravene or conflict with or
constitute a violation of any provision of any law, rule, regulation, judgment,
injunction, order or decree currently in effect and binding upon or applicable
to the Target and the Target Shareholders; (c) conflict with, result in a breach
of, constitute a default or an event which, with notice or lapse of time or
both, would constitute a default under, result in the acceleration of, or create
in any party a right to accelerate, terminate, modify, or cancel, any contract,
note, bond, mortgage, indenture, license, lease agreement or other instrument or
obligation to which the Target is a party or by which it or any of its assets or
properties may be bound or (d) result in the creation of any security interest
or lien upon any of the Target's assets.
9
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2.6 FINANCIAL STATEMENTS. The Target has furnished the Purchaser
--------------------
with true and complete copies of its balance sheets as of June 30, 1998 and
1997, and statements of income, stockholder's equity and cash flows of the
Target for the fiscal years then ended, and the notes thereto (the "Target
Statements"). Such financial statements, including the notes thereto, present
fairly, in all material respects, the financial position and the results of
operations and cash flows of the Target at the dates and for the periods
indicated, in each case in conformity with generally accepted accounting
principles consistently applied through prior periods, are correct and complete
in all material respects, and are consistent with the books and records of the
Target.
2.7 ABSENCE OF CERTAIN CHANGES. Except as disclosed on Schedule 2.7
--------------------------
delivered by the Target to the Purchaser, since the Target Interim Statements,
there has not been any material adverse change in the financial position,
working capital, assets, liabilities, reserves, business, or operations of the
Target, and the Target has not:
(a) Engaged in any material transaction outside the ordinary course
of business;
(b) Made any capital expenditures in excess of $2,500 individually or
$10,000 in the aggregate, or outside the ordinary course of business;
(c) Incurred any material indebtedness or leasehold expense;
(d) Entered into any material guaranties outside the ordinary course
of business;
(e) Increased salaries of any of their employees, other than in the
ordinary course of business, or entered into any employment contract, consulting
agreement, or the like;
(f) Adopted, implemented for the first time, or made any material
change in any Employee Benefit Plans (as hereinafter defined);
(g) Entered into a surety or other bond arrangement with respect to
the performance of any contract, lease, agreement or other obligation;
(h) Other than in the ordinary course of business, issued any capital
stock, bonds or other corporate securities, or granted any options, warrants or
other rights calling for the issuance thereof, or borrowed funds;
(i) Declared or made payment of, or set aside for payment, any
dividends or distributions of any assets, or purchased, redeemed or otherwise
acquired any of its capital stock, any securities convertible into capital
stock, or any other securities;
(j) Made any accrual or arrangement for or payment of bonuses or
special compensation of any kind to any director, officer or employee;
(k) Made any change in any method of accounting or accounting
practice;
(l) Waived any right or compromised any claim;
10
<PAGE>
(m) Agreed, whether in writing or otherwise, to do any of the
foregoing; or
(n) Suffered any damage, destruction or loss, whether or not covered
by insurance, materially affecting the business or properties of the Target.
2.8 ACCOUNTS RECEIVABLE. All receivables reflected in the Financial
-------------------
Statements of the Target arose in the ordinary course of business, are legally
enforceable according to their terms, and are collectible to the extent of the
amount thereof net of any reserves for doubtful or uncollectible amounts. The
account records underlying the Financial Statements accurately and fairly
reflect, in reasonable detail, the transactions of the Target, and the Target's
books of account have been maintained in accordance with generally accepted
accounting practices consistently applied. None of the currently outstanding
accounts, notes and other receivables of the Target are subject to any valid
defense, set off, counterclaim or claim for returns or refunds, and no amounts
previously collected by the Target in respect of accounts, notes and other
receivables the Target are subject to any valid defense, set off, counterclaim
or claim for returns or refunds.
2.9 ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed on
----------------------------------
Schedule 2.9 delivered by the Target to the Purchaser, the Target has no
- ------------
material liabilities or obligations of any nature which are required to be
reflected or reserved against in a balance sheet in accordance with generally
accepted accounting principles consistently applied, other than those
liabilities and obligations which are fully reflected and reserved against in
the Target Interim Statement or which have been incurred in the ordinary course
of business and consistent with past practices since the date thereof.
2.10 DEBT INSTRUMENTS. Schedule 2.10 lists all mortgages,
---------------- -------------
indentures, notes, guarantees and other agreements for or relating to borrowed
money (including, without limitation, conditional sales agreements and capital
leases) to which the Target is a party or which have been assumed by the Target
or to which any assets of the Target are subject. The Target has performed all
the obligations required to be performed by any of such agreements to date, and
the Target is not in default in any respect under any of the foregoing.
2.11 CONTRACTS. Except as specified in Schedule 2.11 (and without
--------- -------------
limiting the foregoing), the Target is not a party to any oral or written:
(a) License agreement or distributor, dealer, manufacturer's
representative, franchise, sales agency, advertising, property management or
brokerage agreement;
(b) Agreement with any labor organization or other collective
bargaining unit;
(c) Agreement for the future purchase of materials, supplies,
services, merchandise or equipment involving payments of more than $1,000 over
its remaining term (including, without limitation, periods covered by any option
to renew by either party);
(d) Agreement for the purchase, sale or lease of any real estate;
(e) Agreement for the sale of any of its other assets or the grant of
any preferential rights to purchase any of its assets or rights, other than in
the ordinary course of business;
11
<PAGE>
(f) Agreement which contains any provisions requiring the Target to
indemnify any other party thereto, other than as provided in the Target's
Articles of Incorporation or Bylaws;
(g) Joint venture agreement or other agreement involving the sharing
of profits;
(h) Outstanding loans to or other agreements with any person or
entity or entities controlling, controlled by or under common control with the
Target;
(i) Agreement which restricts the Target's ability to do business in
any particular geographic region, in any particular industry or with any
particular customer;
(j) Agreement providing the Target the right to use the patents,
trademarks, copyrights, know how or the like of others or provide others the
right to use such rights of the Target;
(k) Agreement for the sale of goods or services which requires
compliance with governmental procurement regulations;
(l) Any employment or consulting contract which is not by its terms
terminable at will without penalty;
(m) Any contract or arrangement for bonuses or incentive
compensation, deferred compensation, supplemental retirement payments, or the
like;
(n) Any material plan, contract or arrangement providing for
insurance for any officer or employee or member of his family (other than
conventional life, health, accident or similar plans available to the Target's
employees generally).
Each such agreement listed in Schedule 2.11 is a legal, valid and binding
-------------
obligation of, and is legally enforceable against, the respective Parties
thereto, and there has not occurred an event which (whether with or without
notice, lapse of time or the happening or occurrence of any other event) would
constitute a default thereunder.
2.12 TAXES. The Target has furnished to Purchaser true and complete
-----
copies of all the Target's foreign, federal, state and local tax returns and all
written communications relating to any such tax returns or to any deficiency or
claim proposed and/or asserted, irrespective of the outcome of such matter, but
only to the extent such items relate to tax years (i) which are subject to an
audit, investigation, examination or other proceeding, or (ii) with respect to
which the statute of limitations has not expired. Except as disclosed on
Schedule 2.12:
- -------------
(a) Tax Returns. All tax returns required to be filed with respect
-----------
to the Target have been filed when due in accordance with all applicable laws,
and, as of the time of filing, such returns were accurate and complete in all
material respects; none of the Target's tax returns have been audited and/or
examined by any governmental agency within the past five years; and there is no
action, suit, proceeding, audit, investigation or claim pending or, to the
knowledge of any officer or director of the Target, threatened against or with
respect to the Target in respect of any tax return;
(b) Tax Liability. All taxes shown as due and payable by the Target
-------------
on the returns that have been filed have been duly paid; the Target does not
have, and on the Effective Date will not have,
12
<PAGE>
any liability for taxes payable for or with respect to any periods prior to and
including the Effective Date in excess of the amounts actually paid prior to the
Effective Date or reserved for in financial statements furnished to Purchaser;
the Target is not and will not be as of the Effective Date under any contractual
obligation to pay the tax obligations of any other person, or to pay the tax
obligations with respect to transactions relating to any other period, or to
indemnify any other person with respect to any tax as of the Effective Date;
there are no liens for taxes (other than for current taxes not yet due and
payable) upon the assets the Target; and the Target has neither given, nor been
requested to give, any waivers extending the statutory period of limitation
applicable to any tax return for the Target for any period; and
(c) Tax Elections. No tax elections for purposes of federal,
-------------
foreign, state or local taxes are currently are in effect with respect to the
Target, and no election with respect to such taxes will be made without the
prior written consent of the Purchaser.
2.13 LABOR. Except as disclosed on Schedule 2.13, the Target is in
----- -------------
compliance in all material respects with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, and is not engaged in any unfair labor practice; the Target is
not a party to any collective bargaining or labor agreement or arrangement; no
application for certification as a collective bargaining unit with respect to
the Target is pending or anticipated; there is no unfair labor practice
complaint pending or, to the best knowledge of the Target, threatened against
the Target before the National Labor Relations Board; there are no strikes,
work stoppages, grievance proceedings or other controversies pending, or, to the
knowledge of the Target, threatened or reasonably anticipated between the
Target and any union or any current or former employees of the Target, or
involving any material suppliers.
2.14 EMPLOYEE BENEFIT PLANS. Except as disclosed in Schedule 2.14:
---------------------- -------------
(a) The Target does not maintain any bonus, deferred compensation,
pension, retirement, stock option, stock appreciation, restricted stock, profit
sharing, severance, medical or life insurance, employee stock ownership or stock
purchase plans or other "employee pension benefit plan", as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") or other "employee welfare benefit plan", as defined in Section 3(1)
of ERISA (collectively the "Target Plans"). All of the Target Plans described
in Schedule 2.14 have been operated in all material respects in compliance with
-------------
all applicable laws, including without limitation, the applicable provisions of
ERISA and the Code, and regulations thereunder (collectively the "Employee
Benefit Laws").
(b) With respect to any Target plan which is either an "employee
pension benefit plan" (as defined in Section 3(2) of ERISA) or which is intended
to qualify under Section 401(a) of the Code (collectively, the "Target Pension
Plans"), a favorable determination letter as to the qualification of the plan
under Section 401(a) of the Code has been issued and the related trust has been
determined to be exempt from taxation under Section 501(a) of the Code and, to
the best of the Target's knowledge, no amendment made (or the failure to make
such amendment) to any Target Pension Plan subsequent to the date of such
determination letter has adversely affected the qualified status of any such
Target Pension Plan.
(c) The Target has performed all material obligations required to be
performed by it under, and is not in default under or in violation of, the terms
of any of the Target Plans in any material respect. To the best of the Target's
knowledge, no "disqualified person" (as defined in Section 4975 of the Code) or
"party in interest" (as defined in Section 3(14) of ERISA) has engaged in any
"prohibited
13
<PAGE>
transaction" (as such term is defined in Section 4975 of the Code or Section 406
of ERISA), or breach of fiduciary duties (as described in Section 404 of ERISA)
and no "reportable event" within the meaning of Section 4043 of ERISA has
occurred with respect to any Target Plan. The Target has not incurred, and does
not reasonably expect to incur, any material liability to the Pension Benefit
Guaranty Corporation (except for required premium payments, which payments have
been made when due). No "accumulated funding deficiency," as such term is
defined in Section 302 of ERISA and Section 412 of the Code (whether or not
waived), exists with respect to any of the Target Plans. No "unfunded current
liability" as determined under Section 412(1) of the Code exists with respect to
any Target Plan subject to the minimum funding requirements of Code Section 412,
and, if applicable, Title IV of ERISA. The Target has no liability for any
delinquent contributions within the meaning of Section 515 of ERISA (including,
without limitation, related attorneys' fees, costs, liquidated damages and
interest) or for any arrearages of wages.
(d) The Target is not required to contribute to, and during the five-
year period ending on the Effective Date will not have been required to
contribute to, any "multi-employer plan" as such term is defined in Section
4001(a)(3) of ERISA covering the Target employees, and the Target will not be
subject to any withdrawal liability (whether partial or complete) within the
contemplation of Section 4001 et seq. of ERISA as a result of the transactions
contemplated by this Agreement. The Target has never contributed to, withdrawn
from, or had any employee covered by a multi-employer plan.
(e) No provision of any Target Pension Plan nor any amendment to any
such plan would result in any limitation on Purchaser's right to receive
residual amounts from any such Plan under ERISA Section 4044, including ERISA
Section 4044(d)(2).
(f) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will result in any
material payment becoming due to any Target employee or former employee from
Target under any Target Plan, materially increase any benefits otherwise
payable under any Target Plan, or result in the acceleration of the time of
payment or vesting of any such benefits under any Target Plan to any material
extent.
(g) The Target has no unpaid obligations and liabilities to provide
benefits or contributions with respect to any Target Plan (including, without
limitation, liabilities and obligations currently due and those not yet due that
are attributable to the current plan year or otherwise will become due at a
later date for benefits previously earned). With respect to each Target Plan
subject to Title IV of ERISA, as of the Effective Date, the assets of each such
Plan are at least equal in value to the present value of the accrued benefits
(determined as of the Effective Date) of the participants in such Plans, based
on actuarial methods, tables and assumptions satisfactory to the Purchaser,
which present value is not less than the projected benefit obligation for such
Plan under FAS 87.
(h) The Target has made all contributions and other payments required
by and due under the terms of each Target Plan and has taken no action relating
to any Target Plan that will increase Purchaser's obligation under any such
Plan.
(i) No asset of Target is subject to any lien under Code Section
401(a)(29), ERISA Section 302(f) or Code Section 412(n), ERISA Section 4068 or
arising out of any action filed under ERISA Section 4301(b).
14
<PAGE>
(j) Neither the Target nor any affiliated company that is, or was at
any time after September 2, 1974, together with the Target, treated as a "single
employer" under section 414(b), 414(c), 414(m), or 414(o) of the Code, has
incurred any liability which could subject any of the Parties to this Agreement
to any liability under Section 4062, 4063, or 4064 of ERISA.
(k) There are no negotiations, demands or proposals which are pending
which materially affect matters now covered, or that would be covered, by the
types of plans or agreements listed in Schedule 2.14. There has been no material
-------------
failure to comply with any applicable reporting and disclosure requirements
under Title I or Title IV of ERISA that could subject the Target to any material
civil or any criminal sanction. There are no actions, suits or claims (other
than routine claims for benefits) pending or, to the best of the Target's
knowledge, threatened against the Target or the Target Plans, and to the best of
the Target's knowledge, no facts are known to exist which could reasonably be
expected to give rise to any actions, suits or claims (other than routine claims
for benefits) against the Target or against the Target Plans.
(l) The Target has complied in all material respects with the
requirements of the Consolidated Omnibus Budget Reconciliation Act, as it
relates to employee benefits provided to the Target's employees.
(m) Each welfare plan (including any such welfare plan covering
former employees of the Target) may be amended or terminated without restriction
by Purchaser on or at any time after the Effective Date.
2.15 INVESTMENT REPRESENTATIONS. The Target Shareholders hereby
--------------------------
represent and warrant that:
(a) They understand that the shares of Purchaser Shares they will
receive as part of the Purchase Price are not being registered under the
Securities Act on the ground that the issuance of such shares is exempt both as
not involving a public offering and as an intrastate offering;
(b) They are deemed residents of the State of Alabama, and that they
intend to hold such shares for investment purposes only and not with a view to
the resale or direct or indirect distribution of such shares nor notes or any
interest therein, and they recognize that various exemptions might not be
applicable if they were not bona fide Alabama residents or he they were to
acquire such shares for the purpose of redistribution;
(c) They understand that such shares shall be restricted in their
transferability until such time as counsel for the Purchaser is of the opinion
that the same may be sold or otherwise be disposed of by them in conformity with
the securities laws, which opinion shall not be unreasonably withheld;
15
<PAGE>
(e) They understand that investment in the Purchaser is illiquid;
that they have adequate means of providing for their current needs and
contingencies; and that they have no need for liquidity in this investment; and
(f) They are not currently subject to any order, judgment, or decree
of any court of competent jurisdiction temporarily or preliminarily restraining
or enjoining, or subject to any order, judgment, or decree of any court of
competent jurisdiction entered within the last five (5) years permanently
restraining or enjoining them from engaging in or continuing any conduct or
practice in connection with the purchase or sale of any security or involving
the making of any false filing with any state.
2.16 INTELLECTUAL PROPERTY AND INTANGIBLE PROPERTY. Schedule 2.16
--------------------------------------------- -------------
lists all letters patent, patent applications, service marks, trade names,
trademarks, trademark registrations and applications, copyrights and copyright
applications and registrations both domestic and foreign, presently owned,
possessed or used by the Target in connection with its business (all of the
foregoing, together with all inventions, technology, processes, designs, know-
how, and formula material to the conduct of the Target's business are
hereinafter collectively referred to as the "Intellectual Property"). Except as
disclosed on Schedule 2.16, the Target owns the entire right, title and
interest in and to the Intellectual Property; a) all registrations, applications
for registration and assignments of registrations of any Intellectual Property
has been properly registered in the name of the Target; the Target is not
obligated or under any liability to make any payment, by way of royalties, fees,
or otherwise, to any owner or licensee of, or other claimant to, the
Intellectual Property; the Target has the right to bring action for the
infringement of such Intellectual Property; and no officer or director of the
Target has any knowledge, or has received any notice to the effect, that any
product the Target manufactures or sells or that any service the Target renders,
or that the marketing or use by the Target or another of any such product or
service, may or is claimed to infringe any Intellectual Property or legally
protectable right of another.
2.17 PERMITS AND LICENSES. The Target has all permits, licenses,
--------------------
orders, and approvals of all governmental bodies necessary for it to carry on
its business as presently conducted.
2.18 COMPLIANCE WITH LAW AND OTHER REGULATIONS. Except as disclosed
-----------------------------------------
in Schedule 2.18:
-------------
(a) The Target is not in violation of, and since June 30, 1997, has
not violated, any applicable provisions of law, statute, ordinance, regulation,
judgment, order, injunction, permit, license, certificate or other
authorization, or its governing instruments, which violation, individually or in
the aggregate, could have a material adverse effect on the Target;
(b) The Target is not currently subject to any fine, penalty,
liability or disability as the result of a failure to comply with any
requirement of federal, state, local or foreign law or regulation nor has the
Target received any notice of such noncompliance.
(c) Neither the Target nor any of its officers, directors, employees
or agents (or stockholders, distributors, representatives or other persons
acting on the express, implied or apparent authority of the Target) has paid,
given or received or has offered or promised to pay, give or receive, any bribe
or other unlawful, questionable or unusual payment of money or other thing of
value, any extraordinary discount, or any other unlawful or unusual inducement,
to or from any person, business association or governmental official or entity
in the United States or elsewhere in connection with or in
16
<PAGE>
furtherance of the business of the Target (including, without limitation, any
offer, payment or promise to pay money or other thing of value to any foreign
official or political party (or official thereof) for the purpose of influencing
any act, decision or omission in order to assist the Target in obtaining
business for or with, or directing business to, any person, or to any person,
while knowing that all or a portion of such money or other thing of value with
be offered, given or promised to any such official or party for such purpose).
The business of the Target is not in any manner dependent upon the making or
receipt of such payments, discounts or other inducements.
2.19 LITIGATION. Except as disclosed in the Target Audited
----------
Statements, Target Interim Statements or on Schedule 2.19, there are no
-------------
injunctions, orders, or decrees of any court or administrative agency to which
the Target is subject, and material claims, actions, suits or other litigation
or proceedings or governmental investigations which could result in a judgment
in excess of $5,000 currently pending against the Target, nor is the Target
aware of any basis for any such claim, action, suit or other proceeding. The
Target Shareholders are not a party to, or subject to the provisions of any
judicial decree, judgment or order of any governmental agency the performance or
enforcement of which would materially adversely affect the Target's business or
financial condition or the ability of Target to consummate the transaction
described in this Agreement.
2.20 PERSONAL PROPERTY. Except as disclosed on Schedule 2.20, the
----------------- -------------
Target has good, valid and marketable title to all equipment, machinery and
personal property used in its business. Such personal property is in good
operating condition and repair and is suitable and adequate for the uses for
which it is intended or is being used.
2.21 REAL PROPERTY. Schedule 2.21(a) lists and sets forth the legal
------------- ----------------
description of all Real Property in which the Target possesses an ownership
interest, and Schedule 2.21(b) lists and sets forth a legal description of all
----------------
Real Property leased by the Target from others, and sets forth the owners of
such properties (collectively, the "Real Property"). Except as disclosed on
such Schedules:
(a) Owned Property. The Target has title in fee simple in each
--------------
property listed on Schedule 2.21(a) free and clear of any defect or encumbrance,
----------------
except (i) liens imposed by law and incurred in the ordinary course of business
which in the aggregate do not exceed and will not exceed $1,000; and (ii) minor
easements, defects and exceptions none of which individually, or in the
aggregate, materially interferes with the use of such properties for the
purposes for which they are held.
(b) Leased Property. The Target has valid and binding leases in each
---------------
property listed on Schedule 2.21(b), and the Target is current with respect to
----------------
all payments due under such leases; the Target has complied in all material
respect with its obligations under such leases; and there are no defaults under
any such leases that remain uncured and no condition exists which, with the
lapse of time or giving of notice, or both, would give rise to a default under
any such leases.
(c) Status of Real Property. The Target is entitled to use all of
-----------------------
the Real Property for the purposes for which it is now being used by the Target
without violation of any building code, zoning or other ordinance. The
buildings, structures, fixtures and improvements on each parcel of the Real
Property lie entirely within the boundaries of such parcel of the Real Property
as specified in the legal description set forth in Schedule 2.21(a) or Schedule
---------------- --------
2.21(b) and no structures of any kind encroach on the Real Property. The Target
- -------
has not received any notice (oral or written) from any insurance carrier in
relation to the Real Property which could have an adverse effect on the
insurance coverage or premiums relating to the Real Property or improvements
thereon.
17
<PAGE>
(d) Condemnation. No portion of the Real Property, or any building,
------------
structure, fixture or improvement thereon, is the subject of, or affected by,
any condemnation, taking, eminent domain or inverse condemnation proceeding
currently instituted or pending, and the Target has no knowledge that any of the
foregoing are, or will be, the subject of, or affected by, any such proceeding.
(e) Access to Utilities. The Target has not experienced any
-------------------
restriction in access to and from public roads and to all utilities, including
water, sewer, gas, electric, telephone, drainage and other utilities used by the
Target in the operation of the business as presently conducted and there is no
pending or, to the best of the Target's knowledge, threatened governmental
action which would prohibit or interfere with such access, and, to the best of
the Target's knowledge, no fact or condition exists which, with the mere running
of time, the giving of notice, or both, would result in the termination,
reduction or impairment of the furnishing of service to the real property of
water, sewer, gas, electric, telephone, drainage and other such utility
services.
2.22 INSURANCE. Schedule 2.22 lists all policies of title, fire,
--------- -------------
hazard, casualty, liability, life, worker's compensation and other forms of
insurance of any kind owned or held by the Target. Except as disclosed on
Schedule 2.22, there are no claims by the Target under any such policies as to
- -------------
which coverage has been questioned, denied or disputed by the underwriters of
such policies or bonds; all premiums payable under all such policies have been
paid, and the Target has otherwise complied with the terms and conditions of all
such policies; such policies have been in effect for the entire period of
operation of the Target and remain in full force and effect; such policies
cover all reasonably foreseeable risks associated with the business of the
Target, and are in such amounts, so as to be consistent with its claim history,
and consistent with insurance customarily carried by companies which, with
respect to the Target, are similarly situated and engaged in similar businesses
and own similar properties; such policies are sufficient for compliance by the
Target with all requirements of law and of all agreements to which the Target is
a party or by which the Target is bound; such policies provide they will remain
in full force and effect through December 31, 1998; and no officer or director
of the Target knows of any threatened termination of, or has received written
notice of any premium increase with respect to, any of such policies.
2.23 ENVIRONMENTAL MATTERS. Target is in compliance with all
---------------------
applicable Environmental Laws (as hereinafter defined), and there is no civil,
criminal or administrative judgment, action, suit, demand, claim, hearing,
notice of violation, investigation, proceeding, notice or demand letter pending
or, to Target's knowledge, threatened against Target pursuant to Environmental
Laws which would reasonably be expected to result in a fine, penalty or other
obligation, cost or expense. Except as set forth in Schedule 2.23, there are no
-------------
past or present events, conditions, circumstances, activities, practices,
incidents, agreements, actions or plans which may prevent compliance with, or
which have given rise to or will give rise to liability under, any Environmental
Laws. As used herein, the term "Environmental Laws" shall mean federal, state,
local and foreign laws, principles of common law, regulations and codes, as well
as orders, decrees, judgments or injunctions issued, promulgated, approved or
entered thereunder, relating to pollution, protection of the environment or
public health and safety.
2.24 BANK ACCOUNTS. Schedule 2.24 sets forth the name and location
------------- -------------
of each bank or other financial institution in which the Target has accounts of
any kind (including, without limitation, brokerage accounts) or safe deposit
boxes, all account numbers and the names of all persons authorized to draw
thereon or have access thereto.
18
<PAGE>
2.25 TRANSACTIONS WITH RELATED PARTIES. Except as disclosed on
---------------------------------
Schedule 2.25:
- -------------
(a) The Target does not own any note, bond, debenture or other
indebtedness, and is not otherwise a creditor, of any officer, director or
stockholder of the Target, or any affiliated entity or person of such officer,
director or stockholder.
(b) Other than such contracts or agreements that arise from being an
officer, director or stockholder of the Target, no officer, director or
stockholder of the Target, nor any affiliated entity or person of such officer,
director or stockholder, is currently a party to any written or verbal contract
or agreement with the Target, including, without limitation, any agreement
providing for the furnishing of services by, rental of assets from or to, or
otherwise requiring payments to, such officer, director, stockholder or
affiliated entity or person.
(c) No officer, director or stockholder of the Target, nor any
affiliated entity or person of such officer, director or stockholder, has any
direct or indirect interest in any property, asset or right which is used by the
Target in the conduct of its business.
2.26 DIRECTORS, OFFICERS AND EMPLOYEES. Schedule 2.26 lists all
--------------------------------- -------------
current directors, officers, and employees of the Target showing each such
person's name, position, and annual remuneration, bonuses and fringe benefits
for the current fiscal year and the most recently completed fiscal year.
2.27 BOOKS AND RECORDS. The books of account, stock records, minute
-----------------
books and other records of the Target are true and complete and have been
maintained in accordance with good business practices, and the matters contained
therein are appropriately and accurately reflected in the financial statements
of the Target furnished to Purchaser.
2.28 ADEQUACY OF DISCLOSURE. No representation or warranty contained
----------------------
in this Agreement and no statement contained in any certificate, schedule,
attachment, list or other writing furnished to the Purchaser pursuant to the
provisions hereof contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements herein or
therein not misleading. The copies of all such certificates, schedules,
attachments, lists and other writings which are being furnished to the Purchaser
are complete and correct.
2.29 FINDER'S FEES. Except as disclosed on Schedule 2.29, there is
------------- -------------
no investment banker, broker, finder or other intermediary that has been
retained by or is authorized to act on behalf of the Target which might be
entitled to any fee or commission from the Purchaser, the Target or any other
person upon consummation of the transactions contemplated by this Agreement.
2.30 ACCOUNTING MATTERS. To the best knowledge of the Target
------------------
Shareholders and the Target, after due inquiry and discussion with Horton, Lee,
Burnett et al, neither the Target nor any affiliate thereof has, through the
date of this Agreement, taken or agreed to take any action that (without giving
effect to this Agreement, the transactions contemplated hereby, or actions
relating thereto, or any action taken or agreed to be taken by the Purchaser)
would prevent the Purchaser from accounting for the business combination to be
effected by the Merger as a pooling of interests.
19
<PAGE>
2.31 CONSENTS. Except as disclosed on Schedule 2.32 hereto, no
-------- -------------
consent or approval of or notice to any governmental agency or authority, or any
other person, is necessary in connection with or as a result of the execution
and delivery by Target of this Agreement, the performance by Target or its
obligations under this Agreement, or the continued operation of the Target's
business from and after the Effective Date.
2.32 SOLE AGREEMENT TO MERGE OR SELL. The Target and the Target
-------------------------------
Shareholders have not been or become a party to any merger or business
combination agreement, letter of intent, agreement of sale, or other agreement
obligating Target or any of its subsidiaries or Target Shareholders to sell or
authorize the sale or transfer of Target Shares or any of its subsidiaries, or
to allow Target or any of its subsidiaries to merge or consolidate with, or to
be acquired in any other manner by, any entity or person other than Purchaser.
ARTICLE 3
---------
Representations and Warranties of
---------------------------------
the Purchaser and the Agency
----------------------------
The Purchaser and the Agency, jointly and severally, represent and warrant
to the Target and the Target Shareholders as follows:
3.1 ORGANIZATION AND POWER.
----------------------
(a) The Purchaser is a corporation duly organized, validly existing
and in good standing under the laws of the State of Alabama with all necessary
corporate power and authority to carry on its business as now being conducted
and to own, operate, utilize and lease the assets, properties and business now
owned, operated, utilized or leased by the Purchaser, and is duly qualified to
do business in all other jurisdictions where such qualification is required,
except where the failure to be so qualified will not result in the forfeiture of
a material right or the incurrence of a material penalty or in any other respect
would be materially adverse to the business and affairs of the Purchaser. The
Purchaser has delivered to the Target correct and complete copies of the
Certificate of Incorporation and the Bylaws of the Purchaser, each as amended to
the date hereof.
(b) The Agency is a corporation duly organized, validly existing and
in good standing under the laws of the State of Alabama. The Agency has
delivered to the Target correct and complete copies of the Certificate of
Incorporation and the Bylaws of the Agency, each as amended to the date hereof.
3.2 CAPITALIZATION.
--------------
(a) The authorized capital stock of the Purchaser consists of
10,000,000 shares of Class A Common Stock, with par value of $.001 per share
(the "Purchaser Shares"), of which 2,272,346 shares were validly issued and
outstanding, fully paid and non assessable, as of October 31, 1998. In
addition, as of October 31, 1998, 100,000 shares of the Purchaser Shares were
subject to issuance pursuant to presently outstanding options, 0 shares of the
Purchaser Shares were reserved for future options under presently existing stock
option plans, and 0 shares of the Purchaser Shares were reserved for issuance
under an employee stock purchase plan. There are also 10,000,000 shares of
Class B Common Stock, with a par value of $.001 per share, and 10,000,000 shares
of Preferred Stock, with a par value of $.001
20
<PAGE>
per share, issued, none of which are outstanding. There are no other outstanding
options, rights or warrants to purchase or acquire, or securities convertible
into or exchangeable for, any shares of the Purchaser Shares; and there are no
contracts, commitments, agreements, understandings, arrangements or
restrictions, other than this Agreement, which require the Purchaser to issue,
sell or deliver any shares of Purchaser Shares. The shares of the Purchaser
Shares to be issued to the holders of the Target Shares pursuant to this
Agreement, when so issued, will be duly authorized, validly issued, fully paid,
and non assessable.
(b) The authorized capital stock of the Agency consists of 100 shares
of Common Stock, with par value of $10.00 per share, of which all shares are
validly issued, outstanding, and owned by First National-America's Bank, fully
paid and non assessable, as of the date hereof.
3.3 CORPORATE AUTHORIZATION. The Purchaser and the Agency have the
-----------------------
corporate power to enter into this Agreement and, subject to any necessary
shareholder approval, to carry out the transactions contemplated hereby. This
Agreement, the execution and delivery of which have been duly authorized by all
necessary corporate action (other than shareholder approval, if required) on the
part of the Purchaser and the Agency, and constitutes a valid and binding
obligation of the Purchaser and the Agency.
3.4 GOVERNMENTAL AUTHORIZATION. The execution, delivery and
--------------------------
performance by the Purchaser and the Agency of this Agreement, and the
consummation of the Merger and other transactions contemplated thereby, do not
and will not require any consent, approval or action by or in respect of, or any
declaration, filing or registration with, any Governmental Authority, other than
routine filings with the Secretary of State of the State of Alabama necessary to
consummate the Merger and the applicable requirements of the Securities Act of
1933 (the "Securities Act"), the Securities Exchange Act of 1934 (the "Exchange
Act") and any applicable state securities and blue sky laws in connection with
the offer, sale and delivery of the Purchaser Shares to be issued in the Merger.
3.5 NON-CONTRAVENTION. Assuming compliance with the matters referred
-----------------
to in Section 3.4, the execution, delivery and performance by the Purchaser and
the Agency of this Agreement, and the consummation of the Merger and other
transactions contemplated by this Agreement by the Purchaser and the Agency does
not and will not (a) contravene or conflict with the Certificate of
Incorporation or Bylaws of the Purchaser or the Agency, (b) contravene or
conflict with or constitute a violation of any provision of any law, rule,
regulation, judgment, injunction, order or decree currently in effect and
binding upon or applicable to the Purchaser or the Agency; (c) conflict with,
result in a breach of, constitute a default or an event which, with notice or
lapse of time or both, would constitute a default under, result in the
acceleration of, or create in any party a right to accelerate, terminate,
modify, or cancel, any contract, note, bond, mortgage, indenture, license, lease
agreement or other instrument or obligation to which the Purchaser or the Agency
is a party or by which it or any of its assets or properties may be bound,
except where such conflicts, breaches, defaults, accelerations, modifications,
terminations, or cancellations are not material to the financial condition,
business and affairs of the Purchaser or the Agency; or (d) result in the
creation of any security interest or lien upon any of the Purchaser or the
Agency's assets, except where such security interests or liens are not material
to the financial condition, business and affairs of the Purchaser or the Agency.
3.6 REPORTS AND FINANCIAL STATEMENTS. The Purchaser has previously
--------------------------------
furnished to the Target true and correct copies of its (i) Registration
Statement on Form S-4, (ii) its prospectus dated July 31, 1998, and (iii) all
proxy statements and all other reports or registration statements filed by it
with
21
<PAGE>
the SEC pursuant to the rules and regulations promulgated under the Exchange Act
since June 30, 1998, all in the form (including exhibits) so filed
(collectively, the "Reports"). As of their respective dates, the Reports did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. Each of
the audited financial statements and unaudited interim financial statements
included in the Reports present fairly, in all material respects, the financial
position and the results of operations and cash flows of the Purchaser at the
dates and for the periods indicated, in each case in conformity with generally
accepted accounting principles consistently applied through prior periods.
3.7 FINANCIAL STATEMENTS. The Purchaser has furnished the Target
--------------------
with true and complete copies of the unaudited consolidated balance sheet as of
September 30, 1998, and the unaudited statements of income, stockholder's equity
and changes in financial position for the nine months ended September 30, 1998
(the "Purchaser Interim Statements"). Such financial statements, including the
notes thereto, fairly present the consolidated financial condition and the
results of operations of the Purchaser at the dates and for the periods
indicated, in each case in conformity with generally accepted accounting
principles consistently applied.
3.8 LITIGATION. Except as disclosed in the Purchaser Interim
----------
Statements, there are no claims, actions, suits or other litigation or
proceedings or governmental investigations currently pending against the
Purchaser or the Agency which, if decided adversely to the Purchaser or the
Agency, could result in a material adverse effect on the Purchaser or the
Agency, nor is the Purchaser aware of any basis for any such claim, action, suit
or other proceeding.
3.9 COMPLIANCE WITH LAW AND OTHER REGULATIONS.
-----------------------------------------
(a) Neither the Purchaser nor the Agency is in violation of, and
since December 31, 1997, has not violated, any applicable provisions of law,
statute, ordinance, regulation, judgment, order, injunction, permit, license,
certificate or other authorization, or its governing instruments, which
violation, individually or in the aggregate, could have a material adverse
effect on the Purchaser or the Agency.
(b) Neither the Purchaser nor the Agency is currently subject to any
material fine, penalty, liability or disability as the result of a failure to
comply with any requirement of federal, state, local or foreign law or
regulation nor have the Purchaser or the Agency received any notice of such
noncompliance.
ARTICLE 4
---------
Covenants of the Target and Target Shareholders
-----------------------------------------------
The Target and Target Shareholders agree and covenant with the Purchaser
and the Agency as follows:
4.1 AFFIRMATIVE COVENANTS. From the date hereof through the
----------------------
Effective Date, the Target will take every action reasonably required of it to
satisfy the conditions to closing set forth in this Agreement and otherwise to
ensure the prompt and expedient consummation of the transaction contemplated
hereby, and will exert all reasonable efforts to cause the transaction to be
consummated,
22
<PAGE>
provided in all instances that the representations and warranties of the
Purchaser in this Agreement are correct, that the covenants of the Purchaser and
the Agency in this Agreement are honored, and that the conditions to the
obligations of the Target set forth in this Agreement are not incapable of
satisfaction.
4.2 ACCESS AND INFORMATION. The Target shall afford to the Purchaser
----------------------
and to the Purchaser's accountants, counsel and other representatives reasonable
access during normal business hours and in a manner so as not to interfere with
the normal business operations of the Target throughout the period prior to the
Effective Date to all of its properties, books, contracts, commitments, records
(including, but not limited to, tax returns), and personnel, and, during such
period, the Target shall furnish promptly to the Purchaser (1) all written
communications to its directors or to its shareholders generally, (2) internal
monthly financial statements when and as available, and (3) all other
information concerning its business, properties, and personnel as the Purchaser
may reasonably request.
4.3 CONDUCT OF BUSINESS PENDING THE TRANSACTION. Prior to the
-------------------------------------------
consummation of the transaction or the termination of this Agreement pursuant to
its terms, the Target shall, and each of the officers and directors of the
Target shall cause the Target to, carry on its business only in the usual,
regular and ordinary course and in substantially the same manner as heretofore
conducted. Without limiting the generality of the foregoing, during the period
from the date of this Agreement to the Effective Date, unless the Purchaser
shall otherwise consent in writing, which consent shall not be unreasonably
withheld or delayed, and except as otherwise provided in or contemplated by this
Agreement:
(a) The Target shall use all reasonable efforts to preserve intact
its current business organizations and goodwill, keep available the services of
its current officers and employees, maintain good relationships with customers,
suppliers, distributors, employees, lenders, creditors, licensors, licensees and
others having business dealings or financial relationships with it, to the end
that its goodwill and ongoing businesses shall be unimpaired at the Effective
Date, and it shall immediately notify the Purchaser of any event or occurrence
or emergency material to, and not in the ordinary and usual course of, its
business;
(b) The Target shall continue properly and promptly to file when due
all federal, state, local, foreign, and other tax returns, reports, and
declarations required to be filed by it, and will pay, or make full and adequate
provision for the payment of, all taxes and governmental charges due from or
payable by it;
(c) The Target shall maintain in full force and effect insurance
coverage of a type and amount customary in its business, but not less than that
presently in effect;
(d) The Target shall not amend its Articles of Incorporation or
Bylaws;
(e) The Target shall not (i) declare, set aside, or pay any dividend
or other distribution on any of its capital stock, (ii) split, combine, or
reclassify any of its capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for shares of its
capital stock, or (iii) purchase, redeem or otherwise acquire any shares of its
capital stock or any other securities thereof or any rights, warrants or options
to acquire any such shares or other securities;
(f) The Target shall not issue, deliver, sell, pledge or otherwise
encumber any (i) shares of capital stock of the Target, (ii) other voting
securities of the Target, (iii) any other securities
23
<PAGE>
convertible into such shares or voting securities, or (iv) any rights, warrants
or options to acquire any such shares, voting securities or convertible
securities;
(g) The Target shall not acquire (i) by merging or consolidating
with, or by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, joint venture, association
or other business organization or division thereof or (ii) any assets that
individually or in the aggregate are material to the Target, except purchases of
inventory in the ordinary course of business consistent with past practice;
(h) The Target shall not make or agree to make any equipment leases
or any new capital expenditure or capital expenditures which individually is in
excess of $2,500 or in the aggregate are in excess of $10,000;
(i) The Target shall not sell, lease, mortgage, encumber, or
otherwise dispose of or grant any interest in any of its assets or properties
except sales, encumbrances, and other dispositions or grants in the ordinary
course of business and consistent with past practice, or liens for taxes not
yet due or liens or encumbrances that are not material in amount or effect and
do not impair the use of the property;
(j) The Target shall not incur any indebtedness, except for short
term borrowings incurred in the ordinary course of business consistent with past
practice;
(k) The Target shall not make any loans, advances or capital
contributions to, or investments in, any other person or entity;
(l) The Target shall not make any tax election that could reasonably
be expected to be binding on the Purchaser in the event the transactions
contemplated by this Agreement are consummated, or settle or compromise any tax
liability;
(m) The Target shall not pay, discharge, settle or satisfy any
claims, liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or satisfaction of
(i) liabilities reflected or reserved against in, or contemplated by, the most
recent financial statements (or the notes thereto) of the Target, or (ii)
liabilities incurred in the ordinary course of business consistent with past
practice since the date of such financial statements;
(n) The Target shall not modify, amend or terminate any material
contract or agreement to which it is a party, or waive, release or assign any
material rights or claims thereunder, except in the ordinary course of business;
(o) The Target shall not adopt, enter into, or amend any bonus,
profit-sharing, compensation, stock option, warrant, pension, retirement,
deferred compensation, employment, severance, termination, or other employee
benefit plan, agreement, trust fund, or arrangement for the benefit or welfare
of any officer, director or employee; or agree to any material (in relation to
historical compensation) increase in the compensation payable or to become
payable to, or any increase in the contractual term of employment of, any
officer, director, or employee except, with respect to employees who are not
officers or directors, in the ordinary course of business in accordance with
past practice;
(p) The Target shall not take any action that (without giving effect
to any action taken or agreed to be taken by the Purchaser under this Agreement)
would prevent the Purchaser from accounting
24
<PAGE>
for the business combination to be effected by the Merger as a pooling of
interests or from treating the Merger as a "reorganization" under Section 368(a)
of the Code;
(q) The Target shall not knowingly violate any laws or regulations
applicable to it and its operations; and
(r) The Target shall not enter into any agreement, commitment, or
understanding, whether in writing or otherwise, with respect to any of the
matters referred to in subparagraphs (d) through (q) above.
4.4 CORPORATE AUTHORIZATION. The Target will use its best efforts to
-----------------------
obtain any necessary corporate authorization to consummate the transactions
contemplated by this Agreement. Without limiting the generality of the
foregoing;
(a) Board of Directors. The Board of Directors of the Target, having
------------------
previously determined that this Agreement and the transactions contemplated
hereby, including the Merger, are fair to and in the best interest of the
shareholders of the Target (as warranted in Section 2.3 of this Agreement), (i)
have unanimously approved this Agreement and the transactions contemplated
hereby, including the Merger, and (ii) will unanimously recommend approval and
adoption of this Agreement and the Merger by the shareholders of the Target.
(b) Stockholders' Meeting. The Board of Directors of the Target will
---------------------
call a special meeting of its stockholders (the "Special Meeting") as soon as
reasonably practicable in order that the stockholders may consider and vote upon
the adoption of this Agreement and the approval of the Merger, in accordance
with the Alabama Business Corporation Act.
4.5 POOLING ACCOUNTING. The Target and the Target Shareholders agree
------------------
(i) not to take or permit to be taken any action that would adversely affect the
ability of the Purchaser to treat the Merger as a pooling of interests, and (ii)
to take or cause to be taken such action as may be reasonably required to negate
the impact of any past actions which would adversely affect the ability of the
Purchaser to treat the Merger as a pooling of interests in accordance with
generally accepted accounting principles consistently applied and all published
rules, regulations and policies of the SEC.
4.6 EXCLUSIVITY. The Target shall not, directly or indirectly,
-----------
through any officer, director, employee, representative or agent thereof or any
of their respective affiliates, solicit or encourage (including by way of
furnishing non-public information) or take other action to facilitate any
inquiries or the making of any proposal that constitutes or may reasonably be
expected to lead to an Acquisition Proposal (as defined below) from any person,
or engage in any discussions or negotiations relating thereto or in furtherance
thereof or accept any Acquisition Proposal. For the purposes of this Agreement,
"Acquisition Proposal" means inquiries or proposals regarding (i) any merger,
consolidation, share exchange or sale of substantial assets or similar
transactions involving the Target, (ii) sale of 10% or more of the outstanding
shares of capital stock of the Target, or (ii) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing. The Target shall immediately cease and cause to
be terminated any existing discussions or negotiations with any Parties
conducted prior to the date of this Agreement with respect to any of the
foregoing.
25
<PAGE>
4.7 EXPENSES. In the event of the consummation of the transaction
--------
contemplated hereby, the Target shall pay all costs and expenses associated with
such consummation, including attorney's fees, incurred by it.
4.8 NOTIFICATION OF CERTAIN MATTERS. The Target shall give prompt
-------------------------------
notice to the Purchaser of:
(a) Any notice of, or other communication relating to, a default or
event which, with notice or lapse of time or both, would become a default under
any agreement, instrument or indenture material to the business, assets,
prospects, condition (financial or otherwise) or results of operation of Target;
(b) Any notice or other communication from any third party alleging
that the consent of such third party is or may be required in connection with
the Merger;
(c) Any notice or other communication from any regulating authority
or self-regulatory organization in connection with or pertaining to the Merger;
(d) Any material adverse change in the business, assets, prospects,
condition (financial or otherwise) or results of operation of the Target or the
occurrence of any event which, so far as reasonably can be foreseen, would
result in any such change;
(e) Any claims, actions, proceedings or investigations commenced or,
to the best of its knowledge, threatened, involving or affecting Target or, to
the best of its knowledge, any employee, consultant, director or officer in his
or her capacity as such, of Target, which, if pending on the date hereof, would
have required to be disclosed in the Schedules hereto or which relates to
consummation of the Merger; or
(f) Any other event which would cause the Representations and
Warranties contained in ARTICLE 2 of this Agreement to become incorrect or
misleading as of such date.
ARTICLE 5
---------
Covenants of the Purchaser and the Agency
-----------------------------------------
The Purchaser and the Agency agree and covenant with the Target and the
Target Shareholders as follows:
5.1 AFFIRMATIVE COVENANTS. From the date hereof through the
---------------------
Effective Date, the Purchaser will take every action reasonably required of it
to satisfy the conditions to closing set forth in this Agreement and otherwise
to ensure the prompt and expedient consummation of the transaction contemplated
hereby, and will exert all reasonable efforts to cause the transaction to be
consummated, provided in all instances that the representations and warranties
of the Target in this Agreement are honored and that the conditions to the
obligations of the Purchaser and the Agency set forth in this Agreement are not
incapable of satisfaction and subject, at all times, to the right and ability of
the directors of the Purchaser to satisfy their fiduciary obligations.
26
<PAGE>
5.2 COOPERATION. The Purchaser will cooperate with the Target and
-----------
its counsel, accountants and agents in every way in carrying out the
transactions contemplated by this Agreement and in delivering all documents and
instruments deemed reasonably necessary or useful by the Target.
5.3 CONFIDENTIAL INFORMATION. In the event of the termination of
------------------------
this Agreement, the Purchaser will, and will cause its representatives to,
deliver to the Target or destroy all documents, work papers and other material,
and all copies thereof, obtained by it or on its behalf from the Target as a
result of this Agreement or in connection herewith, whether so obtained before
or after the execution hereof, and will hold in confidence all confidential
information that has been designated as such by the Target in writing or by
appropriate and obvious notation (except for such information that is readily
ascertainable from public or published information or trade sources), and will
not use any such confidential information except in connection with the
transaction contemplated by this Agreement; provided, however, that one set of
such materials may be retained for the legal files of Purchaser.
5.4 EXPENSES. In the event of the consummation of the transaction
--------
contemplated hereby, the Purchaser shall pay all costs and expenses associated
with such consummation, including attorney's fees, incurred by it and the
Agency.
ARTICLE 6
---------
SECURITIES MATTERS
------------------
6.1 SECURITIES COMPLIANCE. As soon as practicable following the date
---------------------
hereof, the Purchaser shall use its reasonable best efforts to comply, prior to
the Effective Date, with all applicable requirements of federal securities laws
and "Blue Sky" or state securities laws in connection with the Merger and the
issuance of the Purchaser Shares.
6.2 PERMITTED TRANSFERS OF UNREGISTERED SECURITIES.
----------------------------------------------
(a) The Target Shareholders understand and agree that the Purchaser
Shares may be transferred by any holder thereof only pursuant to (i) a public
offering thereof registered under the Securities Act, (ii) Rule 144 of the
Securities and Exchange Commission (the "SEC") (or any similar rule in force at
the time of such transfer) if such rule is available, or (iii) any other legally
available exemption from registration.
(b) In connection with the transfer of the Purchaser Shares, or any
part thereof, the holder thereof shall deliver written notice to the Purchaser
describing in reasonable detail the transfer or proposed transfer, together with
an opinion of counsel that it is knowledgeable in securities law matters and
reasonably acceptable to the Purchaser, to the effect that such transfer may be
effected without registration under the Securities Act and under applicable
state securities laws. In addition, if the holder of the securities to be
transferred delivers to the Purchaser an opinion of counsel that no subsequent
transfer of such Purchaser Shares will require registration under the Securities
Act or under applicable state securities laws, the Purchaser shall promptly
deliver new certificates for such Purchaser Shares that do not bear the
restrictive legend set forth in Section 6.1(d) hereof. If the Purchaser is not
required to deliver new certificates for such Purchaser Shares not bearing such
legend, the holder thereof shall not transfer such Purchaser Shares until the
prospective transferee has confirmed to the Purchaser in writing his or its
agreement to be bound by the conditions contained in this Section 6.1.
27
<PAGE>
(c) Any sale of the Purchaser Shares by the Target Shareholders shall
be conducted by or through any member of the National Association of Securities
Dealers, Inc. registered as a NASDAQ market maker in the Common Stock of the
Purchaser (a "NASDAQ Market Maker"). For purposes of this Section 6.1(c), a
"sale" shall include any transfer for value received, but shall not include a
transfer under will or pursuant to applicable laws of descent and distribution.
In the event of any sale of the Purchaser Shares by the Target Shareholders
conducted by or through any NASDAQ Market Maker, the Purchaser shall promptly
upon such sale deliver new certificates for such Purchaser Shares that do not
bear the restrictive legend set forth in Section 6.1(d) hereof.
(d) Restrictive Legends. The Purchaser Shares and any shares of
-------------------
capital stock received in respect thereof, whether by reason of a stock split or
share reclassification thereof, a stock dividend thereon or otherwise, shall be
stamped or otherwise imprinted with a legend in substantially the following
form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES
LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND
APPLICABLE STATE SECURITIES LAWS.
(e) Current Public Information. The Purchaser shall use its best
--------------------------
efforts to file all reports required to be filed by it under the Securities
Exchange Act and the rules and regulations promulgated thereunder and shall take
such further action as any holder of the Purchaser Shares may reasonably
request, all to the extent required to enable any such holder to sell the
Purchaser Shares pursuant to Rule 144 under the Securities Act (as such rule may
be amended from time to time) or any similar rule or regulation then in force.
Upon written request, the Purchaser shall deliver to any holder of any the
Purchaser Shares a written statement as to whether the Purchaser is in
compliance with such requirements.
6.3 AFFILIATES/POOLING OF INTERESTS AND TAX MATTERS. Prior to the
-----------------------------------------------
Effective Date, the Target Shareholders shall deliver to the Purchaser a written
agreement substantially in the form attached as Exhibit 6.3 hereto (the
"Affiliate Letter"). Such affiliates shall not be able to sell, transfer or
otherwise reduce his/her interest in the Purchaser Shares or reduce his/her risk
relating thereto until after such time as the financial results covering at
least thirty days of the combined operations of the Purchaser and the Target
have been published, within the meaning of Section 201-01 of the SEC's
Codification of Financial Reporting Policies, except to the extent permitted by,
and in accordance with, Accounting Series Release 135 and Staff Accounting
Bulletins 65 and 76.
ARTICLE 7
--------
CONDITIONS PRECEDENT TO THE MERGER
----------------------------------
7.1 Conditions Precedent to Each Party's Obligations. The respective
------------------------------------------------
obligation of each party to effect the Merger is subject to the satisfaction on
or prior to the Effective Date of the following conditions each of which shall
not be waivable:
28
<PAGE>
(a) Real Estate. The Agreement to Purchase Real Estate between
-----------
Agency and W-S Properties dated as of this same date shall not have been
terminated or shall not have expired.
(b) No Injunctions or Restraints. No statute, rule, regulation,
----------------------------
executive order, decree, temporary restraining order, preliminary or permanent
injunction or other order enacted, entered, promulgated, enforced or issued by
any court of competent jurisdiction or other Governmental Authority or other
legal restraint or prohibition preventing the consummation of the Merger shall
be in effect, and no suit or other legal proceeding shall have been instituted
seeking any of the foregoing.
(c) Pooling. The Purchaser shall have received from Schauer, Taylor,
-------
Cox & Vise, P.C., as independent auditors of the Purchaser on the Closing Date
letters dated as of the Closing Date, addressed to the Purchaser and in form and
substance reasonably acceptable to the Purchaser, stating that the business
combination to be effected by the Merger may be accounted for as a pooling of
interests by the Purchaser for purposes of its consolidated financial statements
under generally accepted accounting principles and applicable SEC rules and
regulations. No action shall have been taken by any Governmental Authority or
any statute, rule, regulation or order enacted, promulgated or issued by any
Governmental Authority, or any proposal made for any such action by any
Governmental Authority which is reasonably likely to be put into effect, that
would prevent the Purchaser from accounting for the business combination to be
effected by the Merger as a pooling of interests.
(d) Required Consents. Any required consents or approvals of any
-----------------
person to the Merger shall have been obtained and be in full force and effect,
except for those the failure of which to obtain will not have a material adverse
effect on the business, assets, prospects, condition (financial or otherwise) or
results of operations of the Surviving Corporation.
(e) Employment Agreement. The employment agreements attached as
--------------------
Exhibit 7.1 (e) shall be executed.
(f) Board Nominations. Sam H. Wright shall have been nominated to
-----------------
become a member of the Board of Directors of First National-America's Bank, and
Steven E. Sprayberry shall have been nominated to become a member of the Board
of Directors of Purchaser.
7.2 CONDITIONS PRECEDENT OF PURCHASER AND THE AGENCY. The
------------------------------------------------
obligations of the Purchaser and the Agency to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Date of the following
conditions, unless Purchaser or the Agency shall waive such fulfillment:
(a) Representations and Warranties. Except for changes contemplated
------------------------------
by this Agreement and changes occurring in the ordinary course of business, the
representations, warranties and agreements made by the Target and Target
Shareholders herein shall be true in all material respects on and as of the
Effective Date with the same effect as though such representations and
warranties had been made or given on and as of the Effective Date.
(b) Performance of Obligations by Target. The Target shall have
------------------------------------
performed in all material respects the obligations undertaken by it herein and
required to be performed at or prior to the Effective Date.
(c) Corporate Authorization. The Target's Board of Directors shall
-----------------------
have called a Special Meeting of the shareholders of the Target and recommended
to them the approval and adoption of this
29
<PAGE>
Agreement and the Merger, the shareholders of the Target shall have approved the
consummation of the transactions contemplated by this Agreement with no
shareholders dissenting to the Merger, and the Target's Board of Directors shall
have directed the appropriate officers to execute any document or take any
action necessary to give effect to the Merger, all in accordance with the
provisions of the Alabama Business Corporation Act, and the Purchaser shall have
received copies of the resolutions duly adopted by the Board of Directors and
the minutes of the Special Meeting, certified by the Secretary of the Target in
the form attached as Exhibit 7.2(c), evidencing the taking of such actions.
--------------
(d) Incumbency. The signatories to this Agreement shall retain their
----------
respective positions and offices until the Effective Date, and they shall, at
the Effective Date, possess all necessary corporate authority to execute and
deliver any documents necessary to give effect to the transactions contemplated
by this Agreement under the provisions of the Alabama Business Corporation Act
or any other any applicable law.
(e) Opinions. The Purchaser shall have received an opinion dated the
--------
Effective Date of Proctor and Vaughn, counsel to the Target, confirming the
representations and warranties made by the Target at Sections 2.1 through 2.5,
2.19, 2.31 and 7.2(c) of this Agreement stating such counsel's opinion as to
such other matters as Purchaser may reasonably request, and in substantially the
same form as attached hereto as Exhibit 7.2(e), subject to customary limitations
--------------
reasonably acceptable to counsel for the Purchaser. In giving such opinion,
such counsel may rely as to factual matters upon certificates of officers of the
Target, certificates of public officials and any opinion of other attorneys for
the Target.
(f) No Material Adverse Change. There shall not have occurred after
--------------------------
the date hereof any material adverse change in the business, assets, prospects,
condition (financial or otherwise) or results of operations of the Target.
(g) Pre-Merger Review. Purchaser together with such other employees,
-----------------
agents, accountants, advisors and attorneys of Purchaser as Purchaser shall deem
necessary, shall have been allowed access to the books and records of Target and
its subsidiaries for the purpose of conducting a pre-merger review and due
diligence examination. Such pre-merger review shall be conducted within thirty
(30) days of the execution of this Agreement, and any adjustments to the
Consideration requested to be made by Purchaser shall be made within ten (10)
days after the thirty (30) day period has expired. If such adjustments
requested by Purchaser are not accepted by the Target within such period,
Purchaser shall then have ten (10) days to terminate this Agreement. If
Purchaser does not terminate the Agreement within this period, this condition
shall be deemed waived by Purchaser.
7.3 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TARGET. The
-------------------------------------------------
obligation of the Target to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Date of the following conditions,
unless the Target shall waive such fulfillment:
(a) Representations and Warranties. Except for changes contemplated
------------------------------
by this Agreement and changes occurring in the ordinary course of business, the
representations, warranties and agreements made by the Purchaser and the Agency
herein shall be true in all material respects on and as of the Effective Date
with the same effect as though such representations and warranties had been made
or given on and as of the Effective Date.
30
<PAGE>
(b) Performance of Obligations. The Purchaser and the Agency shall
--------------------------
have performed in all material respects the obligations undertaken by them
herein and required to be performed at or prior to the Effective Date.
(c) Corporate Authorization. The Board of Directors of the Purchaser
-----------------------
and the Agency shall have duly adopted resolutions approving the Merger and
directing the appropriate officers to execute any document necessary to give
effect thereto, all in accordance with the provisions of the Alabama Business
Corporation Act, and the Target shall have received copies of such resolutions
certified by the Secretary of the Purchaser in the form attached as Exhibit
-------
7.3(c).
- ------
(d) Incumbency. The signatories to this Agreement shall retain their
----------
respective positions and offices until the Effective Date, and they shall, at
the Effective Date, possess all necessary corporate authority to execute and
deliver any documents necessary to give effect to the transactions contemplated
by this Agreement under the provisions of the Alabama Business Corporation Act
or any other any applicable law.
(e) Opinion. The Target shall have received an opinion dated the
-------
Effective Date of Baker, Donelson, Bearman & Caldwell, a Professional
Corporation, counsel to the Purchaser, confirming the representations and
warranties made by the Purchaser and the Agency at Sections 3.1 through 3.5 of
this Agreement, and in substantially the same form as attached hereto as Exhibit
-------
7.3(e), subject to customary limitations reasonably acceptable to counsel for
- ------
the Purchaser. In giving such opinion, such counsel may rely as to factual
matters upon certificates of officers of the Purchaser, certificates of public
officials and any opinion of other attorneys for the Purchaser.
ARTICLE 8
--------
INDEMNIFICATION
---------------
8.1 INDEMNIFICATION BY THE TARGET AND TARGET SHAREHOLDERS.
-----------------------------------------------------
(a) Indemnity. From and after the Effective Date, the Target and the
---------
Target Shareholders shall jointly and severally defend, indemnify and hold
harmless the Purchaser, the Surviving Corporation and the Agency and their
directors, officers, employees and agents, and all persons acting on their
behalf, from, and reimburse the aforesaid Parties for, any and all Purchaser's
Damages (as defined in Section 8.1(b)), but only to the extent set forth in
Section 8.1(c).
(b) Purchaser's Damages. The term "Purchaser's Damages" shall
-------------------
include all losses, costs, expenses (including reasonable attorneys' fees and
experts' fees and expenses and other costs and expenses incident to any suit,
action, investigation, claim or proceeding), fees, liabilities and damages
sustained by the party entitled to indemnity prior to any reimbursement
therefor:
(i) arising from any breach of a representation or warranty of
the Target or Target Shareholders contained in this Agreement (except in each
case to the extent corrected or disclosed in writing to Purchaser prior to the
Effective Date);
(ii) resulting from a default in the performance of any of the
covenants or obligations that the Target or the Target Shareholders are required
to perform under this Agreement,
31
<PAGE>
except to the extent corrected or performed by the Target or the Target
Shareholders prior to the Effective Date; or
(iii) resulting from any foreign, federal, state or local
income, franchise or other tax payable with respect to the Target's business for
the periods ending on or prior to the Effective Date; provided, however, that
the term "Purchaser's Damages" shall not include damages claimed for any
particular matter which does not exceed $10,000.
8.2 INDEMNIFICATION BY PURCHASER.
----------------------------
(a) Indemnity. From and after the Effective Date, Purchaser shall
---------
indemnify and hold harmless the Target and Target Shareholders and all persons
acting on their behalf from and reimburse the aforesaid Parties for any and all
the Target's Damages, as defined in Section 8.2(b).
(b) Target's Damages. The term "Targets' Damages" shall include all
----------------
losses, costs, expenses (including reasonable attorneys' and experts' fees and
expenses and other costs and expenses incident to any suit, action,
investigation, claim or proceeding), fees, liabilities and damages sustained by
the party entitled to indemnity prior to any reimbursement therefor:
(iv) arising from any breach of a representation or warranty of
the Purchaser or the Agency contained in or made pursuant to this Agreement
(except in each case to the extent corrected or disclosed in writing to the
Target prior to the Effective Date);
(v) resulting from a default in the performance of any of the
covenants or obligations that the Purchaser or the Agency is required to perform
under this Agreement (except to the extent corrected or performed by the
Purchaser or the Agency prior to the Effective Date);
(vi) resulting from or arising in connection with any liability
expressly assumed by the Purchaser or the Agency as contemplated by this
Agreement;
(vii) resulting from or arising in connection with the
Purchaser's or the Surviving Corporation's management, control, ownership or
operation of the assets or business of the Surviving Corporation after the
Effective Date;
(viii) personal injury or property damage resulting from or
arising in connection with any activities of the Purchaser or the Agency, or
their employee's or agents, on the Target's premises prior to the Effective Date
or on the Surviving Corporation's premises after the Effective Date.
8.3 PROCEDURE FOR INDEMNIFICATION Claims.
------------------------------------
(a) If the Target or Target Shareholders or the Purchaser wish to
assert a claim against the other party under this ARTICLE 8, such party shall
give written notice of such claim to the other party, specifying in reasonable
detail the nature of the Purchaser's Damages or the Target's Damages for which
indemnification is claimed, the Section or Sections of this Agreement upon which
such claim is based and the amount claimed in respect thereof ("Notice of
Claim"). Any such Notice of Claim must be submitted prior to the third
anniversary of the Effective Date.
32
<PAGE>
(b) The Target and Target Shareholders and the Purchaser shall
consult and use their best efforts to cooperate in determining whether a Notice
of Claim is entitled to indemnity pursuant to this ARTICLE 8. When the Parties
determine that a Notice of Claim is entitled to indemnity, by agreement or
otherwise, the indemnifying party shall pay to the indemnified party the amount
of the claim by certified check or other means which is acceptable to the
indemnified party.
(c) If any legal proceeding by a third party shall be instituted, or
any claim or demand made, against any indemnified party in respect of which an
indemnifying party may be liable hereunder, the indemnified party shall give
prompt written notice thereof to the indemnifying party. The indemnifying
party, at its expense, and, with the consent of the indemnified party, may
participate in any such legal proceeding and the negotiations and settlement of
any such claim or demand. The indemnifying party shall have the absolute right,
in its sole discretion and without the consent of the indemnified party, to
settle any such legal proceeding, claim or demand so long as all obligations and
liabilities of the indemnified party are extinguished thereby and the interests
of the indemnified party are not otherwise prejudiced.
(d) If the amount of Purchaser's Damages or the Target's Damages paid
shall, at any time subsequent to such payment, be reduced by any recovery,
settlement or otherwise, the amount of such reduction, less any expense incurred
by the party receiving such recovery in connection therewith, shall be promptly
repaid to the indemnifying party.
ARTICLE 9
---------
Miscellaneous
-------------
9.1 TERMINATION. This Agreement may be terminated and the Merger
-----------
abandoned prior to the Effective Date:
(a) by mutual written consent of the Target and the Purchaser at any
time;
(b) by the Target at any time after December 31, 1998, provided that
the Target is not in any material breach of any covenant, agreement,
representation or warranty made by it in this Agreement;
(c) by the Purchaser at any time after December 31, 1998, provided
that the Purchaser is not in any material breach of any covenant, agreement,
representation or warranty made by it in this Agreement; or
(d) by either the Purchaser or Target if there are any material
inaccuracies, misrepresentations or breaches of the other's representations and
warranties hereunder, or if the other has breached or failed to perform any of
its material covenants or agreements contained herein.
In the event of termination, each of the Parties shall be responsible
for its own expenses and neither Purchaser nor Target shall have any further
liability to the other hereunder, except that (a) Section 5.4 shall survive such
termination; and (b) if such termination results from willful breach, the non-
breaching party may pursue such remedies as may be legally available to it.
33
<PAGE>
9.2 AMENDMENT. The Parties may, by mutual agreement of the
---------
respective Boards of Directors of Target and Purchaser, amend, modify or
supplement this Agreement or any Schedule or Exhibit to the Agreement in such
manner as may be agreed upon by them in writing, at any time before or after
approval of the Merger and the transactions contemplated thereby by the
shareholders of Purchaser and Target, provided that no such amendment,
modification or supplement shall be made which reduces the Consideration or
changes the tax consequences without the further approval of the shareholders of
the Target. This Agreement may be amended at any time and, as amended, restated
by the President of the Purchaser and the Target, without the necessity for
approval by their respective Boards of Directors or shareholders, to correct
typographical errors or to change erroneous references or cross-references, or
to make such other changes which are immaterial to the substance of the
transactions contemplated hereby. This Agreement may not be otherwise amended
except by an instrument in writing signed on behalf of all the Parties hereto.
Otherwise, this Agreement may not be amended, modified or supplemented in whole
or in part except by an instrument in writing executed by each party to this
Agreement.
9.3 ASSIGNMENT. The Parties agree that neither this Agreement nor
----------
any rights created hereby shall be assignable by any party.
9.4 DESCRIPTIVE HEADINGS. The descriptive headings are for
--------------------
convenience of reference only and shall not control or affect the meaning or
construction of any provision of this Agreement.
9.5 NOTICES. All notices or other communications that are required
-------
or permitted hereunder shall be in writing and sufficient if delivered
personally, by facsimile or other electronic transmission or sent by registered
or certified mail, postage prepaid, addressed as follows:
If to the Target and/or Target Shareholders:
Wright-Sprayberry, Inc.
Sam H. Wright or
Steven E. Sprayberry
106 North Broadway Avenue
Sylacauga, Alabama 35150
With a copy to:
Barry D. Vaughn, Esq.
Proctor and Vaughn
P.O. Box 2129
Sylacauga, Alabama 35150-2129
Telephone: (256) 249-8527
Telecopier: (256) 245-7123
Internet: [email protected]
If to Purchaser:
Frontier National Corporation
Harry I. Brown, Jr.
43 North Broadway
Sylacauga, Alabama 35150
34
<PAGE>
With a copy to:
Steven J. Eisen
Baker, Donelson, Bearman & Caldwell
1700 Nashville City Center
511 Union Street
Nashville, Tennessee 37219
Telephone: (615) 726-5600
Telecopier: (615) 726-0464
9.6 GOVERNING LAW. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Alabama applicable to
contracts made and to be performed entirely within such State.
9.7 PUBLIC ANNOUNCEMENTS. So long as this Agreement is in effect,
--------------------
each of the Purchaser and the Target shall not, and shall cause their respective
officers, directors, employees and agents not to, issue or cause the publication
of any press release or other announcement or statement with respect to this
Agreement or the Merger without the consent of the other, which shall not be
unreasonably withheld or delayed, except where such release, announcement or
statement is required by applicable law or any listing agreement with any
national securities exchange (including NASDAQ) on which its securities are
listed or traded, in which case Purchaser or Target, as the case may be, will
deliver simultaneously a copy of such release, announcement or statement to the
other.
9.8 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
------------------------------------------
and warranties made by any party to this Agreement shall be deemed made for the
purpose of inducing the other party to enter into this Agreement. The
representations and warranties contained in this Agreement shall be deemed to be
made on the date hereof and on the Effective Date and shall survive the Closing
Date for a period of three (3) years from the Closing Date, except as to tax
matters which shall survive for the period of time necessary for state and
federal statutes of limitations to run on the filing of the state and federal
tax returns of Target for the year ended June 30, 1998. All of the Target's
Schedules hereto will be updated as necessary to make them true and correct as
of the Effective Date.
9.9 EXTENSIONS AND WAIVERS. At any time prior to the Effective Date,
----------------------
the Parties hereto, by action taken by the Boards of Directors of the Purchaser
and the Target or their duly authorized officers, may: (i) extend the time for
the performance of any of the obligations or other acts of the other Parties
hereto, (ii) waive any inaccuracies in the representations and warranties of the
other Parties contained herein or in any document delivered pursuant hereto, and
(iii) waive compliance with any of the covenants or agreements of the other
Parties or with any of the conditions to the obligations of the waiving party
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party. No such waiver or extension shall imply any
further waiver or extension.
9.10 COUNTERPARTS. For the convenience of the Parties and to
------------
facilitate the filing of this Agreement with regulatory authorities, any number
of counterparts hereof may be executed, and each such counterpart shall be
deemed to be an original instrument, but all such counterparts together shall
constitute but one agreement.
35
<PAGE>
9.11 ENTIRE AGREEMENT. This Agreement: (i) constitutes the entire
----------------
Agreement between the Parties hereto and supersedes all other prior agreements
and undertakings, both written and oral, of the Parties, or any of them, with
respect to the subject matter hereof; and (ii) is not intended to confer upon
any other person or entity any rights or remedies hereunder.
IN WITNESS WHEREOF, the undersigned officers of each of the Parties to this
Agreement, pursuant to authority duly given by their respective Boards of
Directors, have caused this Agreement to be duly executed.
FRONTIER NATIONAL CORPORATION
By: /s/ Harry I. Brown, Jr.
-------------------------------
Title: Chairman & CEO
----------------------------
THE FRONTIER AGENCY
By: /s/ Harry I. Brown, Jr.
-------------------------------
Title: President
----------------------------
WRIGHT-SPRAYBERRY, INC.
By: /s/ Sam H. Wright
-------------------------------
Title: President
----------------------------
/s/ Cornelia Leigh A. Wright
----------------------------------
CORNELIA LEIGH A. WRIGHT
/s/ Carol H. Sprayberry
----------------------------------
CAROL H. SPRAYBERRY
/s/ Sam H. Wright
----------------------------------
SAM H. WRIGHT
/s/ Steven E. Sprayberry
----------------------------------
STEVEN E. SPRAYBERRY
36
<PAGE>
_____________________
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
WITH HARRY I BROWN, JR.
_____________________
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made effective as of August 24, 1998, by and between
FRONTIER NATIONAL CORPORATION ("Frontier") and HARRY I. BROWN, JR. (the
"Executive").
WHEREAS, the Executive has heretofore served as President and Chief
Operating Officer of First National-America's Bank (the "Bank") and is
experienced in all phases of the business of the Bank;
WHEREAS, Frontier wishes to be assured of the continued services of the
Executive, and the Executive is willing to serve in the employ of the Bank and
Frontier on a full-time basis; and
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereby agree as follows:
1. Employment. Frontier agrees to employ Executive as Chairman of the
----------
Board and Chief Executive Officer and to cause Bank to continue the Executive in
its employ as President and Chief Executive Officer, and the Executive agrees to
such employment, for the period stated in paragraph 3 hereof and upon the other
terms and conditions herein provided.
2. Responsibilities. The Executive agrees to perform such services not
----------------
inconsistent with his position as shall from time to time be assigned to him by
the Board of Directors of Frontier or the Bank.
3. Term and Duties.
---------------
a. Term of Employment. The initial term of employment under this
------------------
Agreement shall be for the period commencing August 24, 1998, and on the fifth
anniversary of such date. After each year under this Agreement, the Executive's
period of employment shall be extended for one (1) year in addition to the
original term unless 120 days prior to such year period, Frontier gives notice
to the Executive that the term will not be so extended. Any earlier termination
of employment by Frontier, which is subject to terms described further below,
shall require a vote of 3/4ths of the Board of Directors of Frontier.
b. Duties. During the period of his employment hereunder and except
------
for illnesses, reasonable vacation periods, and reasonable leaves of absence,
the Executive shall devote his business time, attention, skill, and efforts to
the faithful performance of his duties hereunder; provided, however, the
Executive may, from time to time, serve, or continue to serve, on the boards of
directors, of, and hold any other offices or positions in, companies or
organizations, which do not present any material conflict of interest with
Frontier or its subsidiaries, or unfavorably affect the performance of the
Executive's duties pursuant to this Agreement, or will not violate any
applicable statute or regulation.
4. Compensation and Reimbursement of Expenses.
------------------------------------------
a. Compensation. Frontier agrees, or causes the Bank to pay the
------------
Executive during the term of this Agreement a salary at the rate of $125,000 per
annum; provided, that the rate of such salary shall be reviewed by the Board of
Frontier not less often than annually. Such rate of salary, or increased rate
of salary, if any, as the case may be, may be further increased (but not
decreased) from time to time in such amounts as the Board of Frontier in its
discretion may decide. Such salary shall be payable in accordance with the
customary payroll practices of Frontier, but in no event less frequently than
monthly.
38
<PAGE>
b. Bonuses. The Executive shall be entitled to participate in an
-------
equitable manner in any incentive bonus plan or program maintained by Frontier
for senior executives of its subsidiaries. No other compensation provided for
in this Agreement shall be deemed a substitute for the Executive's right to
participate in such incentive bonus plan or program.
c. Director Fees. To the extent Executive serves as a director of
-------------
Frontier or Bank, he shall also receive the board or committee fees payable to
all board or committee members.
d. Reimbursement of Expenses. The Bank shall pay or reimburse the
-------------------------
Executive for all reasonable travel and other expenses incurred by the Executive
in the performance of his obligations under this Agreement. Frontier further
agrees, or causes Bank, to provide the Executive with the full-time use of an
automobile of a make and model selected by the Executive, not more than two
years' old and commensurate with his position during his period of employment
(or alternatively, a monthly car allowance of $600) and to reimburse the
Executive for all initiation fees and dues associated with membership in
professional, social, civic and service clubs which the Executive joins or has
joined and which membership, in whole or part, furthers the interests of or
promotes the interest of Frontier or assists the Executive in business
relationships on behalf of Frontier.
5. Participation in Benefit Plans.
------------------------------
a. Except as otherwise provided in this Agreement, the payments
provided in paragraphs 4, 7, and 9 hereof are in addition to any benefits to
which the Executive may be, or may become, entitled under any general group
hospitalization, health, dental care, or sick leave plan, life or other
insurance or death benefit plan, or workmen's compensation, disability or social
security, travel or accident insurance, or executive contingent compensation
plan, including, without limitation, capital accumulation and termination pay
programs, restricted stock or stock purchase plan, stock option plan, retirement
income, tax-qualified retirement plan, supplemental pension plan (excess benefit
plan), or other present or future group employee benefit plan or program of the
Bank or Frontier for which general employees of the Bank or Frontier are or
shall become eligible, and the Executive shall be eligible to receive during the
period of his employment under this Agreement, and during any subsequent period
for which he shall be entitled to receive payments from Frontier under paragraph
7 or paragraph 10, all fringe benefits and emoluments for which executive
employees of the Bank and general employees of Frontier are eligible under every
such plan or program to the extent permissible under the general terms and
provisions of such plans or programs and in accordance with the provisions
thereof.
b. Following his termination of employment (for any reason) with the
Bank and Frontier at any time after attaining age 62, the Executive shall be
entitled to receive all benefits generally provided to retirees by the Bank or
Frontier, including, but not limited to, retiree medical coverage, if any, for
the Executive and his spouse under the Frontier Group Medical Plan on the same
terms as other Frontier retirees but without regard to any "length of service"
requirement to establish eligibility for such retiree medical coverage.
6. Vacation and Sick Leave. At such reasonable times as the Board of
-----------------------
Directors of Frontier shall in its discretion permit, the Executive shall be
entitled, without loss of pay, to absent himself voluntarily from the
performance of his employment under this Agreement, all such voluntary absences
to count as vacation time; provided that:
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a. The Executive shall be entitled to annual vacation in accordance
with the policies as periodically established by the Board of Directors of
Frontier for senior management of Frontier or the Bank, which shall in no event
be less than four weeks per annum.
b. The Executive shall not be entitled to receive any additional
compensation from Frontier or the Bank on account of his failure to take a
vacation; nor shall he be entitled to accumulate unused vacation from one fiscal
year to the next except to the extent authorized by the Board of Directors of
Frontier.
c. In addition to the aforesaid paid vacations, the Executive shall
be entitled, without loss of pay, to absent himself voluntarily from the
performance of his employment with Frontier or the Bank for such additional
periods of time and for such valid and legitimate reasons as the Board of
Directors of Frontier in its discretion may determine. Further, the Board may
grant to the Executive a leave or leaves of absence with or without pay at such
time or times and upon such terms and conditions as the Board in its discretion
may determine.
d. In addition, the Executive shall be entitled to an annual sick
leave as established by the Board of Directors of Frontier or the Bank but in no
event in an amount less than that provided for pursuant to the policy currently
in effect as of the date of this Agreement. In the event any sick leave time
shall not have been used during any year, such leave shall accrue to subsequent
years only to the extent authorized by the Board.
e. Upon termination of employment, the Executive shall be entitled to
receive additional compensation from Frontier or the Bank for unused sick leave
or vacation time only to the extent provided under the general policies of
Frontier or the Bank.
7. Benefits Payable Upon Disability.
--------------------------------
a. Primary Disability Benefits. In the event of the Disability (as
---------------------------
hereinafter defined) of the Executive, Frontier shall continue, or cause Bank,
to pay the Executive the monthly compensation provided in paragraph 4 hereof
during the period of his disability provided, however, that in the event the
Executive is disabled for a continuous period exceeding eighteen (18) calendar
months, Frontier may, at its election, terminate the Agreement, in which event
the Executive shall be entitled to receive the benefits described in paragraph
7(b).
As used in this Agreement, the term "disability" shall mean the
complete inability of the Executive to perform his duties under this Agreement
as determined by an independent physician selected with the approval of Frontier
and the Executive.
b. Secondary Disability Benefits. In the event that Frontier elects
-----------------------------
to terminate this Agreement pursuant to Section 7(a), then in lieu of any other
benefits the Executive would have been entitled to hereunder, Frontier shall
pay, or cause Bank to pay, to the Executive a monthly disability benefit equal
to seventy (70) percent of his monthly salary at the time he became disabled.
Payment of such disability benefit shall commence on the last day of the month
following the month for which the final payment under paragraph 7(a) was made
and cease with the earlier of (i) the payment for the month in which the
Executive dies or (ii) the payment for the month preceding the month in which
the Executive attains age 65.
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c. Disability Benefit Offset. Any amounts payable under paragraph 7(a)
-------------------------
or 7(b) shall be reduced by any amounts paid to the Executive under any other
disability program maintained by Frontier in which the Executive participates;
however, such payments shall not be reduced by the amount of any payments
pursuant to social security and workmen's compensation.
d. Service During Disability. During the period the Executive is
-------------------------
entitled to receive payments under paragraphs 7(a) and (b), the Executive shall,
to the extent that he is physically and mentally able to do so, furnish
information and assistance to the Bank and Frontier.
8. Grant of Stock Options. Upon the effective date of this Agreement, the
----------------------
Executive shall be granted 50,000 options to purchase Frontier Class A Common
Stock (at $10.00 per share which is deemed the fair market value on such date)
under the Frontier Nonqualified Stock Plan ("Stock Plan") or any similar plan
then maintained by Frontier. Such options shall be issued in accordance with
the terms of the Stock Plan and shall be exercisable over a ten-year period as
provided under the Stock Plan, but in any event, such options shall be fully
exercisable no later than the date of the Executive's retirement. Following the
Executive's retirement, such options shall remain exercisable for a period equal
to the greater of (a) ninety (90) days from the date of the Executive's
retirement or (b) the period specified by the Stock Option Committee of the
Board of Directors of Frontier.
9. Payments to the Executive Upon Termination of Employment.
--------------------------------------------------------
a. Event of Termination. Upon the occurrence of an Event of Termination
--------------------
(as hereinafter defined) during the period of the Executive's employment under
this Agreement, the provisions of this paragraph 9 shall apply. As used in this
Agreement, an "Event of Termination" shall mean the termination of the
Executive's employment hereunder for any reason other than "cause" or retirement
at or after the normal retirement age under any qualified retirement plan(s)
maintained by Frontier or termination pursuant to Paragraph 7. A termination
for "cause" shall include termination because of the Executive's personal
dishonesty, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final cease-
and-desist order, or material breach or any provision of this Agreement. In the
event of termination for cause the Executive shall have no right to receive
compensation or other benefits for any period after such termination; provided,
however, that, the Executive shall be entitled to receive all vested benefits as
of the date of such termination.
b. Event of Termination. Upon the occurrence of an Event of
--------------------
Termination, Frontier shall pay, or cause Bank to pay, to the Executive monthly,
or in the event of his subsequent death, to his designated beneficiary or
beneficiaries, or to his estate, as the case may be, as severance pay or
liquidated damages, or both, during the period below described a sum equal to
the highest monthly rate of salary paid to the Executive at any time under this
Agreement. Such payments shall commence on the last day of the month following
the date of said Event of Termination and shall continue until the date this
Agreement would have expired but for said occurrence, with such occurrence being
viewed as a determination by Frontier not to extend the Agreement as provided
for in paragraph 3.
c. Event of Termination After Change of Control. If, after a "Change of
--------------------------------------------
Control" (as hereinafter defined) of Frontier or the Bank, any of the parties
hereto (including Executive), or their successors or assigns, shall terminate
the employment of the Executive during the period of employment under this
Agreement for any reason other than "cause," as defined in paragraph 9(a),
retirement at or after the normal retirement age under any tax-qualified
retirement plan(s) maintained by Frontier,
41
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termination pursuant to paragraph 7, or nonrenewal, or otherwise change the
present capacity or circumstances in which the Executive is employed as set
forth in paragraphs 1 or 2 of this Agreement or cause a reduction in the
Executive's responsibilities or authority or compensation or other benefits
provided under this Agreement without the Executive's written consent, then the
Executive, or his beneficiaries, dependents and estate, as the case may be,
shall be entitled to the following:
i. The Executive shall receive, in addition to any amount payable
under Section 9(b), a sum equal to the total amount of the present value of 2.99
times the average annual compensation payable under this Agreement and
includible by the Executive in gross income for the most recent five taxable
years ending before the date on which the ownership or control of Frontier or
the Bank changed. Such amount shall be payable to the Executive over the three
(3) years following the occurrence of an Event of Termination under this
paragraph 9(c) in the same manner that his salary was previously paid.
ii. During the period in which Executive is being paid under
paragraph 9(c), the Executive, his dependents, beneficiaries and estate shall
continue to be covered under all employee benefit plans of the Bank or Frontier,
including, without limitation, any Frontier tax-qualified retirement plans, as
if the Executive was still employed during such period under this Agreement.
iii. If and to the extent that benefits or service credit for
benefits provided by paragraph 9(c)(ii) shall not be payable or provided under
any such plans to the Executive, his dependents, beneficiaries and estate, by
reason of his no longer being an employee of Frontier or the Bank, as a result
of termination of employment, Frontier shall itself pay or provide for payment
of such benefits and service credit for benefits to the Executive, his
dependents, beneficiaries and estate. Any such payment relating to retirement
shall commence on a date selected by the Executive which must be a date on which
payments under any Frontier tax-qualified retirement plan(s) may commence.
iv. The Executive shall not be required to mitigate the amount of
any payment provided for in this Agreement by seeking other employment or
otherwise nor shall any amounts received from other employment or otherwise by
the Executive offset in any manner the obligations of Frontier hereunder.
d. Change of Control. Paragraph 9(c) shall become operative upon the
-----------------
occurrence of a Change of Control of Frontier or the Bank. For purposes of this
Agreement, "Change of Control" means the sale of substantially all of the assets
of Frontier or the Bank, or the acquisition, whether directly, indirectly,
beneficially (within the meaning of Rule 13d-3 of the Securities Exchange Act of
1934, as amended (the "Act")), or of record, of securities of Frontier or the
Bank representing twenty-five percent (25%) or more in the aggregate voting
power of Frontier's or the Bank's then-outstanding Common Stock by any "person"
(within the meaning of Sections 13(d) and 14(d) of the Act), including any
corporation or group of associated persons acting in concert, other than (i)
Frontier or its subsidiaries and/or (ii) any tax-qualified employee stock
ownership plan of Frontier or its subsidiaries, including a trust established
pursuant to any such plan; provided, that a Change of Control will not result
from (A) a transfer of voting securities of Frontier or the Bank by a person who
is the beneficial owner, directly or indirectly, of twenty-five percent (25%) or
more of the voting securities of Frontier or the Bank (a "25 Percent Owner") to
(i) a member of such 25 Percent Owner's lifetime or by will or the laws of
descent and distribution; (ii) any trust as to which the 25 Percent Owner or a
member (or members) of his immediate family (within the meaning of Rule 16a-1(e)
of the Act) is the beneficiary; (iii) any trust as to which the 25 Percent Owner
is the settlor with sole power to revoke; (iv) any entity over which such 25
Percent Owner has the power, directly or in directly, to direct or cause the
direction of the management and policies of the entity,
42
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whether through the ownership of voting securities, by contract or otherwise; or
(v) any charitable trust, foundation or corporation under Section 501(c)(3) of
the Code which is funded by the 25 Percent Owner; or (B) the acquisition of
voting securities of Frontier or the Bank, by either (i) a person who was a 25
Percent Owner on the effective date of the Agreement or (ii) a person, trust or
other entity described in the foregoing clauses (A)(i)-(v) of this subsection;
or (C) the spin-off or other distribution by Frontier to its shareholders of the
capital stock or assets of Frontier or the Bank.
e. Suspension and Special Regulatory Rules.
i. If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of Frontier's or the Bank's affairs by a notice
served under section 8(e)(3) or section (g)(1) of the Federal Deposit Insurance
Act ("FDI Act"), the Bank's obligations under this Agreement shall be suspended
as of the date of service of such notice, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank shall (i) pay
the Executive all or part of the compensation withheld while its contract
obligations were suspended and (ii) reinstate in whole or in part any of its
obligations which were suspended.
ii. If the Executive is removed and/or permanently prohibited from
participating in the conduct of Frontier's or the Bank's affairs by an order
issued under section 8(e)(4) or section (g)(1) of the FDI Act, all obligations
Frontier under this Agreement shall terminate as of the effective date of the
order; however, no vested rights of the Executive shall be affected by such
termination.
iii. If Frontier or the Bank is in default (as defined in section
3(x)(1) of the FDI Act), all obligations under this Agreement shall terminate as
of the date of default; however, no vested rights of the Executive shall be
affected by such termination.
iv. All obligations under this Agreement shall be terminated, except
to the extent that it may be determined that continuation of this Agreement is
necessary for the continued operation of the Bank, (1) by the Federal Reserve
System ("Fed") at the time the Federal Deposit Insurance Corporation ("FDIC")
enters into an agreement to provide assistance to or on behalf of the Bank under
the authority contained in Section 13(c) of the FDI Act; or (2) the Fed at any
time the Fed approves a supervisory merger to resolve problems related to the
operation of Frontier or when Frontier is determined by the Fed to be in an
unsafe or unsound condition. No vested rights of the Executive shall be
affected by such action.
f. Termination of Employment of, or by, the Executive. The Board of
--------------------------------------------------
Directors of Frontier may terminate the employment of the Executive at any time;
in the event of such termination, the provisions of this paragraph 9 shall fully
apply. The Executive may terminate his service under this Agreement at any time
upon three (3) months written notice to Frontier. In the event of the
Executive's voluntary termination of employment under this paragraph 9(f), the
provisions of paragraph 9(a)-(e) shall not apply and the Executive shall be
entitled to receive his salary, bonus, and other employee benefits through his
date of termination and such termination shall be without prejudice to any other
benefits as to which the Executive is vested. For a period of two (2) years
after voluntary termination as stated in this paragraph, Executive will not,
directly or indirectly, individually or in combination with any other person,
(i) enter into the employ of or render any service to or act in concert with any
person, partnership, corporation, or other entity engaged in any business
similar to that of Frontier or its subsidiaries wholly or partly within a
twenty-five (25) mile radius of any office of Frontier or any of its
subsidiaries; (ii) become interested in any of the businesses described in (i)
as a proprietor, partner, shareholder, director, officer,
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principal, agent, employee, consultant, or in any other relationship or capacity
(nothing contained in this sentence shall prohibit Executive from maintaining a
stock interest in any company listed on the New York or American stock exchanges
or whose shares are quoted on NASDAQ; or (iii) entice or induce any employee of
Frontier or its subsidiaries to leave the employ of Frontier or its subsidiaries
or to work with Executive or with any person or entity with whom Executive is or
becomes associated.
10. Source of Payments; Frontier Guarantee. Except as to any payments
--------------------------------------
made pursuant to paragraph 9(c), all payments to the Executive under the terms
of any provision of this Agreement shall be paid in cash from the general funds
of Frontier or the Bank, and no special or separate fund shall be established
and no other segregation of assets shall be made to assure payment. The
Executive shall have no right, title, or interest whatever in or to any
investments which Frontier may make to aid the Bank in meeting its obligations
hereunder. Any obligation of the Bank to make any payments or provide any
benefits under this Agreement shall, in all events and without limitation, be
guaranteed by Frontier and its successors and assigns and such guarantee shall
inure to the benefit of the Executive and his successors and assigns.
11. Confidential Information. The Executive shall not, to the detriment
------------------------
of Frontier or the Bank, knowingly disclose or reveal to any authorized person
any confidential information relating to Frontier or the Bank, their
subsidiaries or affiliates, or to any of the businesses operated by them, and
the Executive confirms that such information constitutes the exclusive property
of Frontier. The Executive shall not otherwise knowingly act or conduct himself
(i) to the material detriment of Frontier, or (ii) in a manner which is inimical
or contrary to the interests thereof.
12. Federal Income Tax Withholding. The Bank or Frontier may withhold
------------------------------
from any benefits payable under this Agreement all federal, state, city or other
taxes as shall be required pursuant to any law or governmental regulation or
ruling.
13. Effect of Prior Agreements. This Agreement contains the entire
--------------------------
understanding between the parties hereto and supersedes any prior employment
agreement between the Bank or any predecessor of the Bank and the Executive.
14. Payment of Legal Expenses. The Bank shall pay all legal fees and
-------------------------
expenses (as such fees and expenses are incurred) which the Executive may incur
as a result of any action ultimately found in favor of the Executive contesting
the validity or enforceability of this Agreement, and the Executive shall be
entitled to receive interest thereon for the period of any delay in payment from
the date such payment was due at the rate determined by adding two hundred basis
points to the six month Treasury Bill rate.
15. Consolidation, Merger, or Sale of Assets. Nothing in this Agreement
----------------------------------------
shall preclude Frontier from (i) consolidating or merging into or with, or
causing the Bank from consolidating or merging into or with or (ii) transferring
all or substantially all of its assets or the assets of the Bank to, another
corporation which assumes this Agreement and all obligations and undertakings of
the Frontier and the Bank hereunder.
16. General Provisions.
------------------
a. Nonassignability. Neither this Agreement nor any right or interest
hereunder shall be assignable by the Executive, his beneficiaries, or legal
representatives without the Employers' prior written consent; provided, however,
that nothing in this paragraph 16(a) shall preclude (i) the Executive
44
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from designating a beneficiary to receive any benefits payable hereunder upon
his death, or (ii) the Executors, administrators, or other legal representatives
of the Executive or his estate from assigning any rights hereunder to the person
or persons entitled thereto.
b. No Attachment. Except as required by law, no right to receive
-------------
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to execution, attachment, levy, or similar process of assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect.
c. Binding Agreement. This Agreement shall be binding upon, and inure
-----------------
to the benefit of, the Executive, the Bank, and Frontier, and their respective
permitted successors and assigns.
d. Acknowledgment. Executive acknowledges that a similar employment
--------------
agreement in being executed with Steven R. Townson. Executive acknowledges that
Mr. Townson's salary shall be 5% less than Executive's and all other benefits
shall be the same.
17. Modification and Waiver.
-----------------------
a. Amendment of Agreement. This Agreement may not be modified or
----------------------
amended except by an instrument in writing signed by the parties hereto.
b. Waiver. No term or condition of this Agreement shall be deemed to
------
have been waived, nor shall there be an estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than the specifically waived.
c. Severability. If, for any reason, any provision of this Agreement
------------
is held invalid, such invalidity shall not affect any other provision of this
Agreement not held so invalid, and each such other provision shall to the full
extent consistent with law continue in full force and effect. If any provision
of this Agreement shall be held invalid in part, such invalidity shall in no way
affect the rest of such provision, together with all other provisions of this
Agreement, shall to the full extent consistent with law continue in full force
and effect.
18. Headings. The headings of paragraph herein are included solely for
--------
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. Applicable Law. This Agreement has been executed and delivered in the
--------------
State of Alabama, and its validity, interpretation, performance, and enforcement
shall be governed the laws of said State, except to the extent Federal law is
governing. Any payment to the Executive hereunder shall be subject to and
conditioned upon compliance with 12 U.S.C. '1828(k) and any regulations
promulgated thereunder.
20. Arbitration. In the event the Executive has a dispute regarding the
-----------
operations of Frontier with other executives with similar employment contracts,
the parties shall in good faith attempt to resolve any such dispute promptly by
negotiation between the executives and members of the Board of Directors. Any
such executive may give the other executive written notice of any dispute not
resolved in the normal
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course of business. Within fifteen (15) days after delivery of the notice, the
receiving executive shall submit to the other executive a written response. The
notice and the response shall include (a) a statement of each executive's
position and a summary of the arguments supporting that position, and (b) the
name of one board member who will represent that executive and of any other
person who will accompany the executive. Within thirty (30) days after delivery
of the disputing executive's notice, the executives and their representatives
shall meet at a mutually acceptable time and place, and thereafter as often as
they reasonably deem necessary, to attempt to resolve the dispute. All
reasonable requests for information made by one executive to the other will be
honored. If the matter has not been resolved within sixty (60) days of the
disputing executive's notice, or if the executives fail to meet within thirty
(30) days, either executive may request that the full Board of Directors meet to
resolve the dispute.
IN WITNESS WHEREOF, Frontier has caused this Agreement to be executed by
its officer thereunto duly authorized, and the Executive has signed this
Agreement, all as of the day and year first above written.
FRONTIER NATIONAL CORPORATION
By: /s/ Steven R. Townson
-----------------------------------
Title: President
---------------------------------
/s/ Harry I. Brown, Jr.
---------------------------------------
Harry I. Brown, Jr.
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_____________________
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
WITH STEVEN R. TOWNSON
_____________________
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made effective as of August 24, 1998, by and between
FRONTIER NATIONAL CORPORATION ("Frontier") and STEVEN R. TOWNSON (the
"Executive").
WHEREAS, the Executive has heretofore served as President and Chief
Executive Officer of Valley National Bank (the "Bank") and is experienced in all
phases of the business of the Bank;
WHEREAS, Frontier wishes to be assured of the continued services of the
Executive, and the Executive is willing to serve in the employ of the Bank and
Frontier on a full-time basis; and
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereby agree as follows:
1. Employment. Frontier agrees to employ Executive as Vice Chairman of
----------
the Board, President, and Chief Operating Officer and to cause Bank to continue
the Executive in its employ as President and Chief Executive Officer, and the
Executive agrees to such employment, for the period stated in paragraph 3 hereof
and upon the other terms and conditions herein provided.
2. Responsibilities. The Executive agrees to perform such services not
----------------
inconsistent with his position as shall from time to time be assigned to him by
the Board of Directors of Frontier or the Bank.
3. Term and Duties.
---------------
a. Term of Employment. The initial term of employment under this
------------------
Agreement shall be for the period commencing August 24, 1998, and on the fifth
anniversary of such date. After each year under this Agreement, the Executive's
period of employment shall be extended for one (1) year in addition to the
original term unless 120 days prior to such year period, Frontier gives notice
to the Executive that the term will not be so extended. Any earlier termination
of employment by Frontier, which is subject to terms described further below,
shall require a vote of 3/4ths of the Board of Directors of Frontier.
b. Duties. During the period of his employment hereunder and except for
------
illnesses, reasonable vacation periods, and reasonable leaves of absence, the
Executive shall devote his business time, attention, skill, and efforts to the
faithful performance of his duties hereunder; provided, however, the Executive
may, from time to time, serve, or continue to serve, on the boards of directors,
of, and hold any other offices or positions in, companies or organizations,
which do not present any material conflict of interest with Frontier or its
subsidiaries, or unfavorably affect the performance of the Executive's duties
pursuant to this Agreement, or will not violate any applicable statute or
regulation.
4. Compensation and Reimbursement of Expenses.
------------------------------------------
a. Compensation. Frontier agrees, or causes the Bank to pay the
------------
Executive during the term of this Agreement a salary at the rate of $125,000 per
annum; provided, that the rate of such salary shall be reviewed by the Board of
Frontier not less often than annually. Such rate of salary, or increased rate
of salary, if any, as the case may be, may be further increased (but not
decreased) from time to time
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in such amounts as the Board of Frontier in its discretion may decide. Such
salary shall be payable in accordance with the customary payroll practices of
Frontier, but in no event less frequently than monthly.
b. Bonuses. The Executive shall be entitled to participate in an
-------
equitable manner in any incentive bonus plan or program maintained by Frontier
for senior executives of its subsidiaries. No other compensation provided for
in this Agreement shall be deemed a substitute for the Executive's right to
participate in such incentive bonus plan or program.
c. Director Fees. To the extent Executive serves as a director of
-------------
Frontier or Bank, he shall also receive the board or committee fees payable to
all board or committee members.
d. Reimbursement of Expenses. The Bank shall pay or reimburse the
-------------------------
Executive for all reasonable travel and other expenses incurred by the Executive
in the performance of his obligations under this Agreement. Frontier further
agrees, or causes Bank, to provide the Executive with the full-time use of an
automobile of a make and model selected by the Executive, not more than two
years' old and commensurate with his position during his period of employment
(or alternatively, a monthly car allowance of $600) and to reimburse the
Executive for all initiation fees and dues associated with membership in
professional, social, civic and service clubs which the Executive joins or has
joined and which membership, in whole or part, furthers the interests of or
promotes the interest of Frontier or assists the Executive in business
relationships on behalf of Frontier.
5. Participation in Benefit Plans.
------------------------------
a. Except as otherwise provided in this Agreement, the payments provided
in paragraphs 4, 7, and 9 hereof are in addition to any benefits to which the
Executive may be, or may become, entitled under any general group
hospitalization, health, dental care, or sick leave plan, life or other
insurance or death benefit plan, or workmen's compensation, disability or social
security, travel or accident insurance, or executive contingent compensation
plan, including, without limitation, capital accumulation and termination pay
programs, restricted stock or stock purchase plan, stock option plan, retirement
income, tax-qualified retirement plan, supplemental pension plan (excess benefit
plan), or other present or future group employee benefit plan or program of the
Bank or Frontier for which general employees of the Bank or Frontier are or
shall become eligible, and the Executive shall be eligible to receive during the
period of his employment under this Agreement, and during any subsequent period
for which he shall be entitled to receive payments from Frontier under paragraph
7 or paragraph 10, all fringe benefits and emoluments for which executive
employees of the Bank and general employees of Frontier are eligible under every
such plan or program to the extent permissible under the general terms and
provisions of such plans or programs and in accordance with the provisions
thereof.
b. Following his termination of employment (for any reason) with the
Bank and Frontier at any time after attaining age 62, the Executive shall be
entitled to receive all benefits generally provided to retirees by the Bank or
Frontier, including, but not limited to, retiree medical coverage, if any, for
the Executive and his spouse under the Frontier Group Medical Plan on the same
terms as other Frontier retirees but without regard to any "length of service"
requirement to establish eligibility for such retiree medical coverage.
6. Vacation and Sick Leave. At such reasonable times as the Board of
-----------------------
Directors of Frontier shall in its discretion permit, the Executive shall be
entitled, without loss of pay, to absent himself
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voluntarily from the performance of his employment under this Agreement, all
such voluntary absences to count as vacation time; provided that:
a. The Executive shall be entitled to annual vacation in accordance with
the policies as periodically established by the Board of Directors of Frontier
for senior management of Frontier or the Bank, which shall in no event be less
than four weeks per annum.
b. The Executive shall not be entitled to receive any additional
compensation from Frontier or the Bank on account of his failure to take a
vacation; nor shall he be entitled to accumulate unused vacation from one fiscal
year to the next except to the extent authorized by the Board of Directors of
Frontier.
c. In addition to the aforesaid paid vacations, the Executive shall be
entitled, without loss of pay, to absent himself voluntarily from the
performance of his employment with Frontier or the Bank for such additional
periods of time and for such valid and legitimate reasons as the Board of
Directors of Frontier in its discretion may determine. Further, the Board may
grant to the Executive a leave or leaves of absence with or without pay at such
time or times and upon such terms and conditions as the Board in its discretion
may determine.
d. In addition, the Executive shall be entitled to an annual sick leave
as established by the Board of Directors of Frontier or the Bank but in no event
in an amount less than that provided for pursuant to the policy currently in
effect as of the date of this Agreement. In the event any sick leave time shall
not have been used during any year, such leave shall accrue to subsequent years
only to the extent authorized by the Board.
e. Upon termination of employment, the Executive shall be entitled to
receive additional compensation from Frontier or the Bank for unused sick leave
or vacation time only to the extent provided under the general policies of
Frontier or the Bank.
7. Benefits Payable Upon Disability.
--------------------------------
a. Primary Disability Benefits. In the event of the Disability (as
hereinafter defined) of the Executive, Frontier shall continue, or cause Bank,
to pay the Executive the monthly compensation provided in paragraph 4 hereof
during the period of his disability provided, however, that in the event the
Executive is disabled for a continuous period exceeding eighteen (18) calendar
months, Frontier may, at its election, terminate the Agreement, in which event
the Executive shall be entitled to receive the benefits described in paragraph
7(b).
As used in this Agreement, the term "disability" shall mean the
complete inability of the Executive to perform his duties under this Agreement
as determined by an independent physician selected with the approval of Frontier
and the Executive.
b. Secondary Disability Benefits. In the event that Frontier elects to
-----------------------------
terminate this Agreement pursuant to Section 7(a), then in lieu of any other
benefits the Executive would have been entitled to hereunder, Frontier shall
pay, or cause Bank to pay, to the Executive a monthly disability benefit equal
to seventy (70) percent of his monthly salary at the time he became disabled.
Payment of such disability benefit shall commence on the last day of the month
following the month for which the final payment under paragraph 7(a) was made
and cease with the earlier of (i) the payment for the month
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in which the Executive dies or (ii) the payment for the month preceding the
month in which the Executive attains age 65.
c. Disability Benefit Offset. Any amounts payable under paragraph 7(a)
-------------------------
or 7(b) shall be reduced by any amounts paid to the Executive under any other
disability program maintained by Frontier in which the Executive participates;
however, such payments shall not be reduced by the amount of any payments
pursuant to social security and workmen's compensation.
d. Service During Disability. During the period the Executive is
-------------------------
entitled to receive payments under paragraphs 7(a) and (b), the Executive shall,
to the extent that he is physically and mentally able to do so, furnish
information and assistance to the Bank and Frontier.
8. Grant of Stock Options. Upon the effective date of this Agreement, the
----------------------
Executive shall be granted 50,000 options to purchase Frontier Class A Common
Stock (at $10.00 per share which is deemed the fair market value on such date)
under the Frontier Nonqualified Stock Plan ("Stock Plan") or any similar plan
then maintained by Frontier. Such options shall be issued in accordance with
the terms of the Stock Plan and shall be exercisable over a ten-year period as
provided under the Stock Plan, but in any event, such options shall be fully
exercisable no later than the date of the Executive's retirement. Following the
Executive's retirement, such options shall remain exercisable for a period equal
to the greater of (a) ninety (90) days from the date of the Executive's
retirement or (b) the period specified by the Stock Option Committee of the
Board of Directors of Frontier.
9. Payments to the Executive Upon Termination of Employment.
--------------------------------------------------------
a. Event of Termination. Upon the occurrence of an Event of
Termination (as hereinafter defined) during the period of the Executive's
employment under this Agreement, the provisions of this paragraph 9 shall apply.
As used in this Agreement, an "Event of Termination" shall mean the termination
of the Executive's employment hereunder for any reason other than "cause" or
retirement at or after the normal retirement age under any qualified retirement
plan(s) maintained by Frontier or termination pursuant to Paragraph 7. A
termination for "cause" shall include termination because of the Executive's
personal dishonesty, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, or material breach or any provision of this Agreement.
In the event of termination for cause the Executive shall have no right to
receive compensation or other benefits for any period after such termination;
provided, however, that, the Executive shall be entitled to receive all vested
benefits as of the date of such termination.
b. Event of Termination. Upon the occurrence of an Event of
Termination, Frontier shall pay, or cause Bank to pay, to the Executive monthly,
or in the event of his subsequent death, to his designated beneficiary or
beneficiaries, or to his estate, as the case may be, as severance pay or
liquidated damages, or both, during the period below described a sum equal to
the highest monthly rate of salary paid to the Executive at any time under this
Agreement. Such payments shall commence on the last day of the month following
the date of said Event of Termination and shall continue until the date this
Agreement would have expired but for said occurrence, with such occurrence being
viewed as a determination by Frontier not to extend the Agreement as provided
for in paragraph 3.
c. Event of Termination After Change of Control. If, after a "Change of
Control" (as hereinafter defined) of Frontier or the Bank, any of the parties
hereto (including Executive), or their successors or assigns, shall terminate
the employment of the Executive during the period of employment
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under this Agreement for any reason other than "cause," as defined in paragraph
9(a), retirement at or after the normal retirement age under any tax-qualified
retirement plan(s) maintained by Frontier, termination pursuant to paragraph 7,
or nonrenewal, or otherwise change the present capacity or circumstances in
which the Executive is employed as set forth in paragraphs 1 or 2 of this
Agreement or cause a reduction in the Executive's responsibilities or authority
or compensation or other benefits provided under this Agreement without the
Executive's written consent, then the Executive, or his beneficiaries,
dependents and estate, as the case may be, shall be entitled to the following:
i. The Executive shall receive, in addition to any amount payable
under Section 9(b), a sum equal to the total amount of the present value of 2.99
times the average annual compensation payable under this Agreement and
includible by the Executive in gross income for the most recent five taxable
years ending before the date on which the ownership or control of Frontier or
the Bank changed. Such amount shall be payable to the Executive over the three
(3) years following the occurrence of an Event of Termination under this
paragraph 9(c) in the same manner that his salary was previously paid.
ii. During the period in which Executive is being paid under
paragraph 9(c), the Executive, his dependents, beneficiaries and estate shall
continue to be covered under all employee benefit plans of the Bank or Frontier,
including, without limitation, any Frontier tax-qualified retirement plans, as
if the Executive was still employed during such period under this Agreement.
iii. If and to the extent that benefits or service credit for
benefits provided by paragraph 9(c)(ii) shall not be payable or provided under
any such plans to the Executive, his dependents, beneficiaries and estate, by
reason of his no longer being an employee of Frontier or the Bank, as a result
of termination of employment, Frontier shall itself pay or provide for payment
of such benefits and service credit for benefits to the Executive, his
dependents, beneficiaries and estate. Any such payment relating to retirement
shall commence on a date selected by the Executive which must be a date on which
payments under any Frontier tax-qualified retirement plan(s) may commence.
iv. The Executive shall not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other employment or
otherwise nor shall any amounts received from other employment or otherwise by
the Executive offset in any manner the obligations of Frontier hereunder.
d. Change of Control. Paragraph 9(c) shall become operative upon the
-----------------
occurrence of a Change of Control of Frontier or the Bank. For purposes of this
Agreement, "Change of Control" means the sale of substantially all of the assets
of Frontier or the Bank, or the acquisition, whether directly, indirectly,
beneficially (within the meaning of Rule 13d-3 of the Securities Exchange Act of
1934, as amended (the "Act")), or of record, of securities of Frontier or the
Bank representing twenty-five percent (25%) or more in the aggregate voting
power of Frontier's or the Bank's then-outstanding Common Stock by any "person"
(within the meaning of Sections 13(d) and 14(d) of the Act), including any
corporation or group of associated persons acting in concert, other than (i)
Frontier or its subsidiaries and/or (ii) any tax-qualified employee stock
ownership plan of Frontier or its subsidiaries, including a trust established
pursuant to any such plan; provided, that a Change of Control will not result
from (A) a transfer of voting securities of Frontier or the Bank by a person who
is the beneficial owner, directly or indirectly, of twenty-five percent (25%) or
more of the voting securities of Frontier or the Bank (a "25 Percent Owner") to
(i) a member of such 25 Percent Owner's lifetime or by will or the laws of
descent and distribution; (ii) any trust as to which the 25 Percent Owner or a
member (or members) of his immediate family (within the meaning of Rule 16a-1(e)
of the Act) is the beneficiary; (iii) any trust as to which the 25 Percent Owner
is the settlor with sole power to revoke; (iv) any entity over which such 25
Percent Owner has the
52
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power, directly or in directly, to direct or cause the direction of the
management and policies of the entity, whether through the ownership of voting
securities, by contract or otherwise; or (v) any charitable trust, foundation or
corporation under Section 501(c)(3) of the Code which is funded by the 25
Percent Owner; or (B) the acquisition of voting securities of Frontier or the
Bank, by either (i) a person who was a 25 Percent Owner on the effective date of
the Agreement or (ii) a person, trust or other entity described in the foregoing
clauses (A)(i)-(v) of this subsection; or (C) the spin-off or other distribution
by Frontier to its shareholders of the capital stock or assets of Frontier or
the Bank.
e. Suspension and Special Regulatory Rules.
---------------------------------------
i. If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of Frontier's or the Bank's affairs by a notice
served under section 8(e)(3) or section (g)(1) of the Federal Deposit Insurance
Act ("FDI Act"), the Bank's obligations under this Agreement shall be suspended
as of the date of service of such notice, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank shall (i) pay
the Executive all or part of the compensation withheld while its contract
obligations were suspended and (ii) reinstate in whole or in part any of its
obligations which were suspended.
ii. If the Executive is removed and/or permanently prohibited
from participating in the conduct of Frontier's or the Bank's affairs by an
order issued under section 8(e)(4) or section (g)(1) of the FDI Act, all
obligations Frontier under this Agreement shall terminate as of the effective
date of the order; however, no vested rights of the Executive shall be affected
by such termination.
iii. If Frontier or the Bank is in default (as defined in section
3(x)(1) of the FDI Act), all obligations under this Agreement shall terminate as
of the date of default; however, no vested rights of the Executive shall be
affected by such termination.
iv. All obligations under this Agreement shall be terminated,
except to the extent that it may be determined that continuation of this
Agreement is necessary for the continued operation of the Bank, (1) by the
Federal Reserve System ("Fed") at the time the Federal Deposit Insurance
Corporation ("FDIC") enters into an agreement to provide assistance to or on
behalf of the Bank under the authority contained in Section 13(c) of the FDI
Act; or (2) the Fed at any time the Fed approves a supervisory merger to resolve
problems related to the operation of Frontier or when Frontier is determined by
the Fed to be in an unsafe or unsound condition. No vested rights of the
Executive shall be affected by such action.
f. Termination of Employment of, or by, the Executive. The Board of
Directors of Frontier may terminate the employment of the Executive at any time;
in the event of such termination, the provisions of this paragraph 9 shall fully
apply. The Executive may terminate his service under this Agreement at any time
upon three (3) months written notice to Frontier. In the event of the
Executive's voluntary termination of employment under this paragraph 9(f), the
provisions of paragraph 9(a)-(e) shall not apply and the Executive shall be
entitled to receive his salary, bonus, and other employee benefits through his
date of termination and such termination shall be without prejudice to any other
benefits as to which the Executive is vested. For a period of two (2) years
after voluntary termination as stated in this paragraph, Executive will not,
directly or indirectly, individually or in combination with any other person,
(i) enter into the employ of or render any service to or act in concert with any
person, partnership, corporation, or other entity engaged in any business
similar to that of Frontier or its subsidiaries wholly or partly within a
twenty-five (25) mile radius of any office of Frontier or any of its
subsidiaries; (ii) become interested in any of the businesses described in (i)
as a proprietor, partner, shareholder, director, officer,
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principal, agent, employee, consultant, or in any other relationship or capacity
(nothing contained in this sentence shall prohibit Executive from maintaining a
stock interest in any company listed on the New York or American stock exchanges
or whose shares are quoted on NASDAQ; or (iii) entice or induce any employee of
Frontier or its subsidiaries to leave the employ of Frontier or its subsidiaries
or to work with Executive or with any person or entity with whom Executive is or
becomes associated.
10. Source of Payments; Frontier Guarantee. Except as to any payments
--------------------------------------
made pursuant to paragraph 9(c), all payments to the Executive under the terms
of any provision of this Agreement shall be paid in cash from the general funds
of Frontier or the Bank, and no special or separate fund shall be established
and no other segregation of assets shall be made to assure payment. The
Executive shall have no right, title, or interest whatever in or to any
investments which Frontier may make to aid the Bank in meeting its obligations
hereunder. Any obligation of the Bank to make any payments or provide any
benefits under this Agreement shall, in all events and without limitation, be
guaranteed by Frontier and its successors and assigns and such guarantee shall
inure to the benefit of the Executive and his successors and assigns.
11. Confidential Information. The Executive shall not, to the detriment
------------------------
of Frontier or the Bank, knowingly disclose or reveal to any authorized person
any confidential information relating to Frontier or the Bank, their
subsidiaries or affiliates, or to any of the businesses operated by them, and
the Executive confirms that such information constitutes the exclusive property
of Frontier. The Executive shall not otherwise knowingly act or conduct himself
(i) to the material detriment of Frontier, or (ii) in a manner which is inimical
or contrary to the interests thereof.
12. Federal Income Tax Withholding. The Bank or Frontier may withhold
------------------------------
from any benefits payable under this Agreement all federal, state, city or other
taxes as shall be required pursuant to any law or governmental regulation or
ruling.
13. Effect of Prior Agreements. This Agreement contains the entire
--------------------------
understanding between the parties hereto and supersedes any prior employment
agreement between the Bank or any predecessor of the Bank and the Executive.
14. Payment of Legal Expenses. The Bank shall pay all legal fees and
-------------------------
expenses (as such fees and expenses are incurred) which the Executive may incur
as a result of any action ultimately found in favor of the Executive contesting
the validity or enforceability of this Agreement, and the Executive shall be
entitled to receive interest thereon for the period of any delay in payment from
the date such payment was due at the rate determined by adding two hundred basis
points to the six month Treasury Bill rate.
15. Consolidation, Merger, or Sale of Assets. Nothing in this Agreement
----------------------------------------
shall preclude Frontier from (i) consolidating or merging into or with, or
causing the Bank from consolidating or merging into or with or (ii) transferring
all or substantially all of its assets or the assets of the Bank to, another
corporation which assumes this Agreement and all obligations and undertakings of
the Frontier and the Bank hereunder.
16. General Provisions.
------------------
a. Nonassignability. Neither this Agreement nor any right or interest
---------------
hereunder shall be assignable by the Executive, his beneficiaries, or legal
representatives without the Employers' prior written consent; provided, however,
that nothing in this paragraph 16(a) shall preclude (i) the Executive from
designating a beneficiary to receive any benefits payable hereunder upon his
death, or (ii) the
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Executors, administrators, or other legal representatives of the Executive or
his estate from assigning any rights hereunder to the person or persons entitled
thereto.
b. No Attachment. Except as required by law, no right to receive
-------------
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to execution, attachment, levy, or similar process of assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect.
c. Binding Agreement. This Agreement shall be binding upon, and inure to
-----------------
the benefit of, the Executive, the Bank, and Frontier, and their respective
permitted successors and assigns.
d. Acknowledgment. Executive acknowledges that a similar employment
--------------
agreement in being executed with Steven R. Townson. Executive acknowledges that
Mr. Townson's salary shall be 5% less than Executive's and all other benefits
shall be the same.
17. Modification and Waiver.
-----------------------
a. Amendment of Agreement. This Agreement may not be modified or amended
----------------------
except by an instrument in writing signed by the parties hereto.
b. Waiver. No term or condition of this Agreement shall be deemed to
------
have been waived, nor shall there be an estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than the specifically waived.
c. Severability. If, for any reason, any provision of this Agreement is
------------
held invalid, such invalidity shall not affect any other provision of this
Agreement not held so invalid, and each such other provision shall to the full
extent consistent with law continue in full force and effect. If any provision
of this Agreement shall be held invalid in part, such invalidity shall in no way
affect the rest of such provision, together with all other provisions of this
Agreement, shall to the full extent consistent with law continue in full force
and effect.
18. Headings. The headings of paragraph herein are included solely for
--------
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. Applicable Law. This Agreement has been executed and delivered in the
--------------
State of Alabama, and its validity, interpretation, performance, and enforcement
shall be governed the laws of said State, except to the extent Federal law is
governing. Any payment to the Executive hereunder shall be subject to and
conditioned upon compliance with 12 U.S.C. '1828(k) and any regulations
promulgated thereunder.
20. Arbitration. In the event the executive has a dispute regarding the
-----------
operations of Frontier with other executives with similar employment contracts,
the parties shall in good faith attempt to resolve any such dispute promptly by
negotiation between the executives and members of the Board of Directors. Any
such executive may give the other executive written notice of any dispute not
resolved in the normal course of business. Within fifteen (15) days after
delivery of the notice, the receiving executive shall submit to the other
executive a written response. The notice and the response shall include (a) a
statement
55
<PAGE>
of each executive's position and a summary of the arguments supporting
that position, and (b) the name of one board member who will represent that
executive and of any other person who will accompany the executive. Within
thirty (30) days after delivery of the disputing executive's notice, the
executives and their representatives shall meet at a mutually acceptable time
and place, and thereafter as often as they reasonably deem necessary, to attempt
to resolve the dispute. All reasonable requests for information made by one
executive to the other will be honored. If the matter has not been resolved
within sixty (60) days of the disputing executive's notice, or if the executives
fail to meet within thirty (30) days, either executive may request that the full
Board of Directors meet to resolve the dispute.
IN WITNESS WHEREOF, Frontier has caused this Agreement to be executed by
its officer thereunto duly authorized, and the Executive has signed this
Agreement, all as of the day and year first above written.
FRONTIER NATIONAL CORPORATION
By: /s/ Harry I. Brown, Jr.
--------------------------
Title: Chief Executive Officer
--------------------------
/s/ Steven R. Townson
---------------------
Steven R. Townson
56
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_____________________
EXHIBIT 10.3
STOCK OPTION AGREEMENT BETWEEN
FRONTIER NATIONAL CORPORATION AND
STEVEN R. TOWNSON DATED AUGUST 24, 1998
_____________________
57
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FRONTIER NATIONAL CORPORATION
CLASS A COMMON STOCK OPTION
NUMBER 2
1. GENERAL PROVISIONS. Frontier National Corporation, an Alabama
------------------
corporation (herein called the "Company," for value received, and other good and
valuable consideration, receipt of which is hereby acknowledged, hereby
certifies that Steven R. Townson, or his/her/its registered assigns (herein
called the "Option Holder") is entitled to purchase shares of the fully paid and
nonassessable Class A Common Stock, $.001 par value per share, of the Company
(such number and character of such shares being subject to adjustment as
provided in paragraph 4 below), at Exercise Price set forth herein by
surrendering this Option executed by the Option Holder and by paying in full the
Exercise Price for the number of shares of Class A Common Stock as to which this
Option is exercised. No fractional shares shall be issued hereunder, and
instead, any fractional shares created by exercise hereunder shall be purchased
by the Company at the rate of the Exercise Price then in effect.
2. EXPIRATION DATE. This Option shall expire and all right hereunder
---------------
shall cease on the tenth anniversary of the date of this Option, but in any
event, such Option shall be fully exercisable no later than the date of the
Option Holder's retirement from employment with the Company pursuant to his
employment agreement with the Company. Following the Option Holder's
retirement, such Option shall remain exercisable for a period equal to the
greater of (a) ninety (90) days from the date of the Option Holder's retirement,
(b) twelve (12) months from the date of the Option Holder's death, or (c) the
period specified by the Stock Option Committee of the Board of Directors of the
Company.
3. NUMBER OF SHARES COVERED BY OPTION; EXERCISE PRICE. The number of
--------------------------------------------------
shares of the Company's Class A Common Stock for which this Option may be
exercised shall be 50,000 shares subject to adjustment as provided in paragraph
4 below, which may be purchased as a whole or in part any time. The price per
share for the shares purchased upon exercise of this Option shall be $10.00 per
share, subject to adjustment as provided in paragraph 4 below (the "Exercise
Price").
4. ADJUSTMENTS IN NUMBER OF SHARES AND EXERCISE PRICE. If at any time
--------------------------------------------------
during the period when this Option may be exercised, the Company shall declare
or pay a dividend or dividends payable in shares of its Class A Common Stock (or
any security convertible into or granting rights to purchase shares or such
Class A Common Stock) or split the then outstanding shares of its Class A Common
Stock into a greater number of shares, the number of shares of Class A Common
Stock which may be purchased upon the exercise of this Option in effect at the
time of taking of a record for such dividend or at the time of such stock split
shall be proportionately increased and the Exercise Price proportionately
decreased as of such time; and conversely, if at any time the Company shall
contract the number of outstanding shares of its Class A Common Stock by
combining such shares into a smaller number of shares, the number of shares
which may be purchased upon the exercise of this Option at the time of such
action shall be proportionately decreased and the Exercise Price proportionately
increased as of such time. If the Company declares or pays a dividend or makes
a distribution on shares of its Class A Common Stock payable otherwise than out
of earnings or earned surplus, then thereafter the Option Holder, upon the
exercise hereof, will be entitled to receive the number of shares of Class A
Common Stock to be received upon exercise of this Option determined as stated
above and, in addition and without further payment, the cash, stock or other
securities and other property which the Option Holder would have received by way
of dividends and distributions (otherwise than out of such earnings or surplus)
as if the Option Holder (i) had exercised this Option immediately prior to the
declaration of such dividend or the making of such distribution so as to be
entitled thereto, and (ii) had retained all dividends in stock or securities
payable in respect of such Class A Common Stock or in respect of any stock or
securities paid as dividends and distributions and originating directly or
indirectly from such Class A Common Stock. For the purposes of
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the foregoing a dividend other than in cash shall be considered payable out of
earnings or earned surplus only to the extent that such earnings or surplus are
charged an amount equal to the fair value of such dividend.
Appropriate and similar adjustment of the number of shares which may be
purchased upon the exercise of this Option and of the Exercise Price shall also
be made in the event of any other capital adjustment, recapitalization,
reorganization, or reclassification of the Company's Class A Common Stock, or
any consolidation of the Company with, or a merger of the Company into, any
other Company, or a sale, lease or other transfer of all or substantially all of
the assets of the Company, or a distribution by the Company of its assets with
respect to its Class A Common Stock as a liquidating or partial liquidating
dividend, or the happening of any other similar event affecting the Class A
Common Stock. In any such event, the Option Holder shall have the right
thereafter to exercise this Option for the acquisition of any kind and amount of
shares of stock and other securities and property to which the Option Holder
would have been entitled if the Option Holder had purchased Class A Common Stock
of the Company by the full exercise of this Option immediately prior to such
capital adjustment, recapitalization, reorganization, reclassification,
consolidation, merger, sale, lease, transfer, distribution or other similar
event, and the Company shall make lawful provision therefor as a part of such
event. The Company shall not effect any such consolidation, merger, sale, lease
or similar transfer involving another Company unless, upon or prior to the
consummation thereof, the successor Company or the Company to which the property
of the Company has been consolidated, merger, sold, leased or otherwise
transferred shall assume by written instrument the obligation to deliver to the
Option Holder such shares of stock, securities, cash or property as in
accordance with the foregoing provisions of the Option Holder shall be entitled
to receive.
5. RESERVATION OF SHARES. The Company shall at all times reserve and keep
---------------------
available a number of its authorized but unissued shares of its Class A Common
Stock sufficient to permit the exercise in full of this Option.
6. SALE OF OPTION OR SHARES. Neither this Option nor the shares to be
------------------------
issued hereunder have been registered under the Securities Act, or under the
securities laws of any state. Neither this Option nor such shares to be issued
hereunder, when issued, may be sold, transferred, pledged or hypothecated in the
absence of an effective registration statement for this Option, or the shares to
be issued hereunder, as the case may be, under the Securities Act, and such
registration or qualification as may be necessary under the securities laws of
any state, or an opinion of counsel satisfactory to the Company that such
registration or qualification is not required. The certificate or certificates
evidencing all or any of the shares to be issued hereunder shall bear the
following legend:
"The shares evidenced by this certificate have not been registered under the
Securities Act of 1933, as amended, or under the securities laws of any state.
The shares may not be sold, transferred, pledged or hypothecated in the absence
of any effective registration statement under the Securities Act of 1933, as
amended, and such registration or qualification as may be necessary under the
securities laws of any state, or an opinion of counsel satisfactory to the
Company that such registration or qualification is not required."
This Option shall be registered on the books of the Company, which shall be
kept by it at its principal office for the purpose and shall be transferable
only on said books by the registered owner hereof in person or by duly
authorized attorney upon surrender of this Option properly endorsed, and only in
compliance with the provisions of the preceding paragraph. In case of the
exercise hereof in part only, the Company will deliver to the Option Holder a
new Option of like tenor in the name of the Option Holder evidencing the right
to purchase the number of shares as to which this Option has not been exercised.
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7. GOVERNING LAW. This Option is to be construed and enforced in
-------------
accordance with and governed by the laws of the State of Alabama.
IN WITNESS WHEREOF, the Company has caused this Option to be issued in its
corporate name by its duly appointed officer.
DATED: August 24, 1998 FRONTIER NATIONAL CORPORATION
---------------
By: /s/ Harry I. Brown, Jr.
--------------------------
Title: Chief Executive Officer
------------------------
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_____________________
EXHIBIT 10.4
STOCK OPTION AGREEMENT BETWEEN
FRONTIER NATIONAL CORPORATION AND
HARRY I. BROWN, JR. DATED AUGUST 24, 1998
_____________________
61
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FRONTIER NATIONAL CORPORATION
CLASS A COMMON STOCK OPTION
NUMBER 1
1. GENERAL PROVISIONS. Frontier National Corporation, an Alabama
------------------
corporation (herein called the "Company," for value received, and other good and
valuable consideration, receipt of which is hereby acknowledged, hereby
certifies that Harry I. Brown, Jr., or his/her/its registered assigns (herein
called the "Option Holder") is entitled to purchase shares of the fully paid and
nonassessable Class A Common Stock, $.001 par value per share, of the Company
(such number and character of such shares being subject to adjustment as
provided in paragraph 4 below), at Exercise Price set forth herein by
surrendering this Option executed by the Option Holder and by paying in full the
Exercise Price for the number of shares of Class A Common Stock as to which this
Option is exercised. No fractional shares shall be issued hereunder, and
instead, any fractional shares created by exercise hereunder shall be purchased
by the Company at the rate of the Exercise Price then in effect.
2. EXPIRATION DATE. This Option shall expire and all right hereunder
---------------
shall cease on the tenth anniversary of the date of this Option, but in any
event, such Option shall be fully exercisable no later than the date of the
Option Holder's retirement from employment with the Company pursuant to his
employment agreement with the Company. Following the Option Holder's
retirement, such Option shall remain exercisable for a period equal to the
greater of (a) ninety (90) days from the date of the Option Holder's retirement,
(b) twelve (12) months from the date of the Option Holder's death, or (c) the
period specified by the Stock Option Committee of the Board of Directors of the
Company.
3. NUMBER OF SHARES COVERED BY OPTION; EXERCISE PRICE. The number of
--------------------------------------------------
shares of the Company's Class A Common Stock for which this Option may be
exercised shall be 50,000 shares subject to adjustment as provided in paragraph
4 below, which may be purchased as a whole or in part any time. The price per
share for the shares purchased upon exercise of this Option shall be $10.00 per
share, subject to adjustment as provided in paragraph 4 below (the "Exercise
Price").
4. ADJUSTMENTS IN NUMBER OF SHARES AND EXERCISE PRICE. If at any time
--------------------------------------------------
during the period when this Option may be exercised, the Company shall declare
or pay a dividend or dividends payable in shares of its Class A Common Stock (or
any security convertible into or granting rights to purchase shares or such
Class A Common Stock) or split the then outstanding shares of its Class A Common
Stock into a greater number of shares, the number of shares of Class A Common
Stock which may be purchased upon the exercise of this Option in effect at the
time of taking of a record for such dividend or at the time of such stock split
shall be proportionately increased and the Exercise Price proportionately
decreased as of such time; and conversely, if at any time the Company shall
contract the number of outstanding shares of its Class A Common Stock by
combining such shares into a smaller number of shares, the number of shares
which may be purchased upon the exercise of this Option at the time of such
action shall be proportionately decreased and the Exercise Price proportionately
increased as of such time. If the Company declares or pays a dividend or makes a
distribution on shares of its Class A Common Stock payable otherwise than out of
earnings or earned surplus, then thereafter the Option Holder, upon the exercise
hereof, will be entitled to receive the number of shares of Class A Common Stock
to be received upon exercise of this Option determined as stated above and, in
addition and without further payment, the cash, stock or other securities and
other property which the Option Holder would have received by way of dividends
and distributions (otherwise than out of such earnings or surplus) as if the
Option Holder (i) had exercised this Option immediately prior to the declaration
of such dividend or the making of such distribution so as to be entitled
thereto, and (ii) had retained all dividends in stock or securities payable in
respect of such Class A Common Stock or in respect of any stock or securities
paid as dividends and distributions and originating directly or indirectly from
such Class A Common Stock. For the purposes of the foregoing a dividend other
than in cash shall be considered payable out of earnings or earned surplus
62
<PAGE>
only to the extent that such earnings or surplus are charged an amount equal to
the fair value of such dividend.
Appropriate and similar adjustment of the number of shares which may be
purchased upon the exercise of this Option and of the Exercise Price shall also
be made in the event of any other capital adjustment, recapitalization,
reorganization, or reclassification of the Company's Class A Common Stock, or
any consolidation of the Company with, or a merger of the Company into, any
other Company, or a sale, lease or other transfer of all or substantially all of
the assets of the Company, or a distribution by the Company of its assets with
respect to its Class A Common Stock as a liquidating or partial liquidating
dividend, or the happening of any other similar event affecting the Class A
Common Stock. In any such event, the Option Holder shall have the right
thereafter to exercise this Option for the acquisition of any kind and amount of
shares of stock and other securities and property to which the Option Holder
would have been entitled if the Option Holder had purchased Class A Common Stock
of the Company by the full exercise of this Option immediately prior to such
capital adjustment, recapitalization, reorganization, reclassification,
consolidation, merger, sale, lease, transfer, distribution or other similar
event, and the Company shall make lawful provision therefor as a part of such
event. The Company shall not effect any such consolidation, merger, sale, lease
or similar transfer involving another Company unless, upon or prior to the
consummation thereof, the successor Company or the Company to which the property
of the Company has been consolidated, merger, sold, leased or otherwise
transferred shall assume by written instrument the obligation to deliver to the
Option Holder such shares of stock, securities, cash or property as in
accordance with the foregoing provisions of the Option Holder shall be entitled
to receive.
5. RESERVATION OF SHARES. The Company shall at all times reserve and keep
---------------------
available a number of its authorized but unissued shares of its Class A Common
Stock sufficient to permit the exercise in full of this Option.
6. SALE OF OPTION OR SHARES. Neither this Option nor the shares to be
------------------------
issued hereunder have been registered under the Securities Act, or under the
securities laws of any state. Neither this Option nor such shares to be issued
hereunder, when issued, may be sold, transferred, pledged or hypothecated in the
absence of an effective registration statement for this Option, or the shares to
be issued hereunder, as the case may be, under the Securities Act, and such
registration or qualification as may be necessary under the securities laws of
any state, or an opinion of counsel satisfactory to the Company that such
registration or qualification is not required. The certificate or certificates
evidencing all or any of the shares to be issued hereunder shall bear the
following legend:
"The shares evidenced by this certificate have not been registered under the
Securities Act of 1933, as amended, or under the securities laws of any state.
The shares may not be sold, transferred, pledged or hypothecated in the absence
of any effective registration statement under the Securities Act of 1933, as
amended, and such registration or qualification as may be necessary under the
securities laws of any state, or an opinion of counsel satisfactory to the
Company that such registration or qualification is not required."
This Option shall be registered on the books of the Company, which shall be
kept by it at its principal office for the purpose and shall be transferable
only on said books by the registered owner hereof in person or by duly
authorized attorney upon surrender of this Option properly endorsed, and only in
compliance with the provisions of the preceding paragraph. In case of the
exercise hereof in part only, the Company will deliver to the Option Holder a
new Option of like tenor in the name of the Option Holder evidencing the right
to purchase the number of shares as to which this Option has not been exercised.
63
<PAGE>
7. GOVERNING LAW. This Option is to be construed and enforced in
-------------
accordance with and governed by the laws of the State of Alabama.
IN WITNESS WHEREOF, the Company has caused this Option to be issued in its
corporate name by its duly appointed officer.
DATED: August 24, 1998 FRONTIER NATIONAL CORPORATION
----------------
By: /s/ Steven R. Townson
----------------------------
Title: President
-------------------------
64
<PAGE>
EXHIBIT 11 - STATEMENTS RE: COMPUTATION OF PER SHARE EARNINGS
Frontier National Corporation
Computation of Net Income Per Common Share
The following tabulation presents the calculation of basic and diluted earnings
per common share for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income.......................................... $1,127,816 $1,351,806 $1,046,806
========== ========== ==========
Earnings on common shares........................... $1,127,816 $1,351,806 $1,046,806
========== ========== ==========
Weighted average common shares outstanding - basic.. 1,907,756 1,458,027 1,459,444
========== ========== ==========
Basic earnings per common share..................... $ .59 $ .93 $ .72
========== ========== ==========
DILUTED EARNINGS PER SHARE:
Net income.......................................... $1,127,816 $1,351,806 $1,046,806
========== ========== ==========
Weighted average common shares
outstanding........................................ 1,907,746 1,458,027 1,459,444
Net effect of the assumed exercise of stock
options - based on the treasury stock method
using average market price for the year............ 14,164 -0- -0-
---------- ---------- ----------
Weighted average common shares outstanding -
diluted............................................ 1,921,910 1,458,027 1,459,444
========== ========== ==========
Diluted earnings per common share................... $ .59 .93 $ .72
========== ========== ==========
</TABLE>
78
<PAGE>
EXHIBIT 12 - STATEMENTS RE: COMPUTATION OF RATIOS
Frontier National Corporation
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997 1996
------------------------------
<S> <C> <C> <C>
Pretax income............................................. $1,394 $1,914 $1,457
Add fixed charges:
Interest on deposits..................................... 5,063 3,751 2,974
Interest on borrowings................................... 1,231 944 378
Portion of rental expense representing interest expense.. 31 22 19
------ ------ ------
Total fixed charges..................................... 6,325 4,717 3,371
------ ------ ------
Income before fixed charges............................... $7,719 $6,631 $4,828
====== ====== ======
Pretax income............................................. $1,394 $1,914 $1,457
Add fixed charges (excluding interest on deposits):
Interest on borrowings................................... 1,231 944 378
Portion of rental expense representing interest expense.. 31 22 19
------ ------ ------
Total fixed charges..................................... 1,262 966 397
------ ------ ------
Income before fixed charges (excluding interest on
deposits)................................................ $2,656 $2,880 $1,854
====== ====== ======
RATIO OF EARNINGS TO FIXED CHARGES
Including interest on deposits........................... 1.22 1.41 1.43
Excluding interest on deposits........................... 2.10 2.98 4.67
</TABLE>
<PAGE>
________________________
EXHIBIT 16
LETTER REGARDING CHANGE
IN CERTIFYING ACCOUNTANT
________________________
65
<PAGE>
[LETTERHEAD OF JACKSON THORNTON & CO., P.C.]
April 9, 1999
Securities and Exchange Commission
450/th/ Street, N.W.
Washington, D.C. 20549
Commissioners:
We have read and agree with the statements relating to the termination of the
client-auditor relationship between Frontier National Corporation and Jackson
Thornton & Co., P.C., included under "Item 9 - Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure" in Frontier National
Corporation's 1998 Form 10-K.
Sincerely,
/s/ Jackson Thornton & Co., P.C.
Jackson Thornton & Co., P.C.
66
<PAGE>
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
Subsidiaries - Direct/wholly-owned State of Incorporation
- ---------------------------------- ----------------------
First National-America's Bank Alabama
Valley National Bank Alabama
Subsidiaries - Indirect/wholly-owned by First
- ---------------------------------------------
National-America's Bank
- ------------------------
The Frontier Agency, Inc. Alabama
Frontier Financial Services, Inc. Alabama
<PAGE>
_______________________
EXHIBIT 23
CONSENT OF
INDEPENDENT AUDITORS
_______________________
67
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion in this Annual Report on Form 10-K of
Frontier National Corporation, of our report on the consolidated financial
statements of financial condition of Frontier National Corporation and
Subsidiaries, dated March 4, 1999.
We also consent to the incorporation by reference in the Registration
Statement (Form S-I, Registration No. 333-70103) pertaining to the Frontier
National Corporation KSOP of our report dated March 4, 1999, with respect to the
consolidated financial statements of Frontier National Corporation and
subsidiaries included in this Annual Report on Form 10-K.
/s/ Schauer, Taylor, Cox & Vise, P.C.
Birmingham, Alabama
April 12, 1999
Schauer, Taylor, Cox & Vise, P.C.
68
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,641,568
<INT-BEARING-DEPOSITS> 1,139,654
<FED-FUNDS-SOLD> 6,055,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 51,880,882
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 136,202,401
<ALLOWANCE> 1,831,241
<TOTAL-ASSETS> 216,194,709
<DEPOSITS> 173,375,214
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,773,872
<LONG-TERM> 18,557,384
0
0
<COMMON> 2,332
<OTHER-SE> 22,485,906
<TOTAL-LIABILITIES-AND-EQUITY> 216,194,709
<INTEREST-LOAN> 11,351,459
<INTEREST-INVEST> 2,036,251
<INTEREST-OTHER> 495,054
<INTEREST-TOTAL> 13,882,764
<INTEREST-DEPOSIT> 5,062,595
<INTEREST-EXPENSE> 1,231,611
<INTEREST-INCOME-NET> 7,588,558
<LOAN-LOSSES> 1,412,295
<SECURITIES-GAINS> 60,172
<EXPENSE-OTHER> 7,066,497
<INCOME-PRETAX> 1,393,675
<INCOME-PRE-EXTRAORDINARY> 265,859
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,127,816
<EPS-PRIMARY> .59
<EPS-DILUTED> .59
<YIELD-ACTUAL> 3.88
<LOANS-NON> 515,000
<LOANS-PAST> 354,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,120,012
<CHARGE-OFFS> 1,505,000
<RECOVERIES> 340,000
<ALLOWANCE-CLOSE> 1,831,241
<ALLOWANCE-DOMESTIC> 1,831,241
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
