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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number: 000-24853
FRONTIER NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Alabama 72-1355228
(State of Incorporation) (IRS Employer Identification No.)
43 N. Broadway
Sylacauga, AL 35150
(Address of Principal Executive Office)
334-644-5419
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A, Common Stock, .001 par Outstanding at July 25, 1999:3,442,231
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FRONTIER NATIONAL CORPORATION
June 30, 1999 Form 10-Q
TABLE OF CONTENTS
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Page No.
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Part 1. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Consolidated Statement of Shareholders' Equity 7
Notes to Consolidated Financial Statements 8 - 10
Item 2. Management's Discussion and Analysis of 11 - 16
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part 2. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999
(Unaudited) December 31, 1998
ASSETS -------------------- -----------------
<S> <C> <C>
CASH AND DUE FROM BANKS $ 8,839,999 $ 7,641,569
INTEREST BEARING DEPOSITS WITH OTHER BANKS 877,779 1,139,654
FEDERAL FUNDS SOLD 7,180,000 6,055,000
SECURITIES AVAILABLE FOR SALE 56,028,934 51,880,882
LOANS, NET OF UNEARNED INCOME 130,536,269 136,202,401
ALLOWANCE FOR LOAN LOSSES (1,887,283) (1,831,241)
PREMISES AND EQUIPMENT, NET 5,961,018 5,640,882
CASH SURRENDER VALUE ON LIFE INSURANCE 4,951,953 4,834,873
ACCRUED INTEREST RECEIVABLE 1,611,423 1,498,981
INTANGIBLE ASSETS, NET 1,337,075 1,627,241
OTHER ASSETS 1,765,799 1,504,467
-------------------- -----------------
TOTAL ASSETS $ 217,202,966 $ 216,194,709
==================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
NON-INTEREST BEARING DEPOSITS $ 24,370,987 $ 26,793,363
INTEREST BEARING DEPOSITS 146,755,046 146,581,851
-------------------- -----------------
TOTAL DEPOSITS 171,126,033 173,375,214
-------------------- -----------------
DIVIDENDS PAYABLE 443,823 431,746
ACCRUED INTEREST PAYABLE 973,712 885,019
LONG-TERM DEBT 22,042,000 18,557,384
OTHER LIABILITIES 1,272,309 457,106
-------------------- -----------------
TOTAL LIABILITIES 195,857,877 193,706,469
-------------------- -----------------
SHAREHOLDERS' EQUITY
COMMON STOCK ($.001 PAR VALUE; 10,000,000 SHARES
AUTHORIZED, 3,497,497 ISSUED OF WHICH 3,442,231 ARE
OUTSTANDING AT JUNE 30, 1999; $.001 PAR VALUE,
10,000,000 SHARES AUTHORIZED, 3,497,497 ISSUED OF WHICH
3,473,497 WERE OUTSTANDING AT DECEMBER 31, 1998) 3,498 3,498
CAPITAL SURPLUS 14,265,547 14,265,547
RETAINED EARNINGS 8,360,522 8,056,781
TREASURY STOCK, AT COST (55,266 SHARES AT
JUNE 30, 1999 AND 24,000 SHARES AT DECEMBER 31, 1998) (825,250) (368,000)
ACCUMULATED COMPREHENSIVE INCOME (LOSS): NET UNREALIZED
HOLDING GAINS ON SECURITIES AVAILABLE FOR SALE,
NET OF DEFERRED INCOME TAX (459,228) 530,414
-------------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 21,345,089 22,488,240
-------------------- -----------------
-------------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 217,202,966 $ 216,194,709
-------------------- -----------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
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FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------- ----------------------------
1999 1998 1999 1998
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
INTEREST AND FEES ON LOANS $3,146,782 $2,541,184 $6,397,540 $5,157,846
INTEREST AND DIVIDENDS ON SECURITIES
TAXABLE SECURITIES 532,741 150,552 996,953 387,972
NONTAXABLE SECURITIES 265,830 268,416 523,855 407,875
INTEREST EARNED ON DEPOSITS WITH OTHER BANKS 12,368 6,885 30,216 12,072
INTEREST EARNED ON FEDERAL FUNDS SOLD 220,553 83,068 432,790 149,769
----------- ---------- ---------- ----------
TOTAL INTEREST INCOME 4,178,274 3,050,105 8,381,354 6,115,534
INTEREST EXPENSE
INTEREST ON DEPOSITS 1,574,858 1,076,669 3,172,311 2,120,409
INTEREST ON BORROWED FUNDS 304,052 292,721 597,533 563,935
----------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 1,878,910 1,369,390 3,769,844 2,684,344
NET INTEREST INCOME 2,299,364 1,680,715 4,611,510 3,431,190
PROVISION FOR LOAN LOSSES (184,474) (405,150) (378,779) (596,800)
----------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,114,890 1,275,565 4,232,731 2,834,390
NONINTEREST INCOME
SERVICE CHARGES ON DEPOSIT ACCOUNTS 372,777 282,014 721,964 503,757
COMMISSION INCOME 303,926 61,025 588,431 61,025
OTHER OPERATING INCOME 118,063 144,733 234,129 255,223
SECURITIES GAINS 18 59,791 18 60,172
----------- ---------- ---------- ----------
TOTAL NONINTEREST INCOME 794,784 547,563 1,544,542 880,177
NONINTEREST EXPENSE
SALARIES AND EMPLOYEE BENEFITS 1,061,111 725,721 2,143,875 1,759,494
NET OCCUPANCY EXPENSE 326,980 195,364 661,170 405,232
OTHER OPERATING EXPENSES 733,909 399,999 1,405,284 803,354
----------- ---------- ---------- ----------
TOTAL NONINTEREST EXPENSES 2,122,000 1,321,084 4,210,329 2,968,080
INCOME BEFORE INCOME TAXES 787,674 502,044 1,566,944 746,487
PROVISION FOR INCOME TAXES (174,906) (93,990) (375,740) (123,990)
----------- ---------- ---------- ----------
NET INCOME $ 612,768 $ 408,054 $1,191,204 $ 622,497
=========== ========== ========== ==========
BASIC EARNINGS PER COMMON SHARE $ 0.18 $ 0.19 $ 0.34 $ 0.30
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 3,468,368 2,104,092 3,470,786 2,104,092
EARNINGS PER COMMON SHARE ASSUMING DILUTION $ 0.17 $ 0.19 $ 0.34 $ 0.30
WEIGHTED AVERAGE SHARES
OUTSTANDING ASSUMING DILUTION 3,513,429 2,104,092 3,515,847 2,104,092
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
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FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------------------------------------------
1999 1998 1999 1998
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
NET INCOME $ 612,768 $ 408,054 $ 1,191,204 $ 622,497
OTHER COMPREHENSIVE, NET OF TAX:
UNREALIZED GAINS (LOSSES) ON SECURITIES:
UNREALIZED HOLDING GAINS (LOSSES) ARISING
DURING THE PERIOD (1,523,174) 105,127 (1,604,089) 100,295
LESS: RECLASSIFICATION ADJUSTMENTS FOR GAINS
INCLUDED IN NET INCOME (18) (59,792) (18) (60,172)
----------- ----------- ------------ -------------
NET UNREALIZED GAINS (LOSSES) (1,523,192) 45,335 (1,604,107) 40,123
INCOME TAX RELATED TO ITEMS OF OTHER
COMPREHENSIVE INCOME 581,778 (17,456) 614,465 (15,448)
----------- ----------- ------------ -------------
OTHER COMPREHENSIVE INCOME (LOSS) (941,414) 27,879 (989,642) 24,675
----------- ----------- ------------ -------------
COMPREHENSIVE INCOME (LOSS) $ (328,646) $ 435,933 $ 201,562 $ 647,172
=========== =========== ============ =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
SIX MONTHS ENDED
JUNE 30
------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,361,666 $ 1,153,788
INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE 6,387,930 5,252,824
PURCHASES OF SECURITIES AVAILABLE FOR SALE (12,244,861) (9,775,951)
LOAN PAYDOWNS, NET 5,304,875 7,368,416
PURCHASES OF PREMISES AND EQUIPMENT (719,085) (275,402)
PROCEEDS FROM SALES OF FIXED ASSETS 130,363 -
PROCEEDS FROM SALE OF FORECLOSED REAL ESTATE - 5,320
PAYMENT OF OFFICERS' LIFE INSURANCE PREMIUMS - (9,588)
------------ ------------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (1,140,778) 2,565,619
------------ ------------
FINANCING ACTIVITIES:
NET INCREASE (DECREASE) IN DEPOSITS (1,662,635) 3,894,362
NET INCREASE IN SHORT-TERM BORROWINGS 335,936 -
DIVIDENDS PAID (875,384) (302,985)
TREASURY STOCK PURCHASED (457,250) -
PROCEEDS FROM NOTES PAYABLE 3,500,000 250,000
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 840,667 3,841,377
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,061,555 7,560,784
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,836,223 6,932,409
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,897,778 $ 14,493,193
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
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FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY
STOCK SURPLUS EARNINGS INCOME (LOSS) STOCK TOTAL
--------- ------------- ------------ --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1998 $ 3,498 $ 14,265,547 $ 8,056,781 $ 530,414 $ (368,000) $ 22,488,240
CASH DIVIDENDS -
COMMON - - (887,463) - - (887,463)
PURCHASE OF TREASURY STOCK - - - - (457,250) (457,250)
NET CHANGE IN
UNREALIZED GAINS
ON SECURITIES - - - (989,642) - (989,642)
NET INCOME - JUNE 30, 1999 - - 1,191,204 - - 1,191,204
--------- ------------- ------------ --------------- ----------- -------------
BALANCE AT
JUNE 30, 1999 $ 3,498 $ 14,265,547 $ 8,360,522 $ (459,228) $ (825,250) $ 21,345,089
========= ============= ============ =============== =========== =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
JUNE 30, 1999
(UNAUDITED)
NOTE A - Basis of Presentation
The consolidated financial statements include the accounts of Frontier National
Corporation (the "Company") and its wholly-owned subsidiaries, Valley National
Bank, First National-America's Bank, Frontier Financial Services, Inc., and The
Frontier Agency, Inc., collectively, the Bank. The accompanying unaudited
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six-month period ended June 30, 1999, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto for Frontier National Corporation and
subsidiaries for the year ended December 31, 1998, included in Form 10-K filed
in April 1999.
NOTE B - Income Taxes
The effective tax rates of approximately 24 percent and 17 percent for the six
months ended June 30, 1999 and 1998, respectively, are less than the statutory
rate principally because of the effect of tax-exempt interest income.
NOTE C - Securities
The Company applies the accounting and reporting requirements of Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities ("SFAS115"). This pronouncement requires that all
investments in debt securities be classified as either "held-to-maturity"
securities, which are reported at amortized cost; trading securities, which are
reported at fair value, with unrealized gains and losses included in earnings;
or "available-for-sale" securities, which are reported at fair value, with
unrealized gains and losses excluded from earnings and reported in a separate
component of shareholders' equity (net of deferred tax effect).
At June 30, 1999, the Company had net unrealized losses of $800,477 in
available-for-sale securities which are reflected in the presented assets and
resulted in a decrease in shareholders' equity of $459,228, net of deferred tax
asset. There were no trading securities. The net decrease
8
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in shareholders' equity as a result of the SFAS 115 adjustment from December 31,
1998 to June 30, 1999 was $989,642. See also Note D - Shareholders' Equity.
NOTE D - Shareholders' Equity
During the first six months of 1999, cash dividends of $887,463 are charged
against equity. Equity was also decreased by $989,642 for the change in net
unrealized gains on securities. Treasury stock was purchased during the month
of June decreasing shareholders' equity $457,250. A 3-for-2 stock split was
announced on April 20, 1999. The stock split did not change total stockholders'
equity balances. See also Note G - Stock Split and Note H - Treasury Stock.
NOTE E - Business Combination
On August 24, 1998, Valley National Corporation 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 of 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. Upon the consummation of the merger the surviving company
changed its name to Frontier National Corporation. Operating results and
balance sheet information prior to the merger reflect only the balances of FNSC.
The impact of the merger on financial condition was an increase to FNSC total
assets of approximately $76 million and an increase in liabilities and equity of
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 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.
NOTE F - Stock Dividend
In September 1998, the Company's Board of Directors declared a 6.8 percent
common stock dividend to shareholders of record as of September 21, 1998. This
stock dividend resulted in the issuance of an additional 144,611 shares of the
Company's common stock. Total stockholders' equity was unaffected from this
stock dividend. All earnings per share calculations have been retroactively
adjusted as if the stock dividend had occurred at the beginning of each period
presented.
NOTE G - Stock Split
In April 1999, the Company's Board of Directors declared a 3-for-2 stock split
effective May 20, 1999. All earnings per share calculations have been
retroactively adjusted as if the stock split had occurred at the beginning of
each period presented.
9
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NOTE H - Treasury Stock
During the month of June, 31,266 shares of common stock were acquired and placed
in treasury at cost. The treasury stock balance represents 55,266 and 24,000
shares at June 30, 1999 and December 31, 1998, respectively.
NOTE I - Segment Reporting
All of the Company'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.
NOTE J - Forward-Looking Statements
Certain statements in this report are forward-looking in nature and relate to
trends and events that may affect the Company's future financial position and
operating results. Such statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The terms
"expect," "anticipate," "intend," and "project" and similar words or expressions
are intended to identify forward-looking statements. These statements speak
only as of the date of this report. The statements are based on current
expectations, are inherently uncertain, are subject to risks, and should be
viewed with caution. Actual results and experience may differ materially from
the forward-looking statements as a result of many factors, including changes in
economic conditions in the markets served by the Company, increasing competition
and other unanticipated events and conditions. It is not possible to foresee or
identify all such factors. The Company makes no commitment to update any
forward-looking statements or to disclose any facts, events, or circumstances
after the date hereof that may affect the accuracy of any forward- looking
statement.
10
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion is intended to assist an understanding of the Company and its
Subsidiaries' financial condition and results of operations. Unless the context
otherwise indicates, "the Company" shall include the Company and its
Subsidiaries. This analysis should be read in conjunction with the consolidated
financial statements and related notes appearing in Item 1 of the June 30, 1999
Form 10-Q.
FINANCIAL CONDITION
June 30, 1999 compared to December 31, 1998
Loans
Loans comprised the largest single category of the Company's earning assets on
June 30, 1999. Loans, net of unearned income and reserve for loan losses, were
59.23% of total assets at June 30, 1999 and 62.15% of total assets at December
31, 1998. Total net loans were $128,648,986 at June 30, 1999, representing a
4.26% decrease from the December 31, 1998 total of $134,371,160. This decrease
is the result of loan pay-downs since December 31, 1998.
Investment Securities and Other Earning Assets
The investment securities portfolio is used to make various term investments, to
provide a source of liquidity and to serve as collateral to secure certain
government deposits. Federal funds sold are a tool in managing the daily cash
position of the Company. Investment securities and federal funds sold increased
$5,273,052 from December 31, 1998 to June 30, 1999. This increase was due
primarily to deposit growth and loan pay-downs. Investment securities and
federal funds sold at June 30, 1999 were $63,208,934 compared with $57,935,882
at December 31, 1998, reflecting a 9.10% increase.
Asset Quality
Between December 31,1998 and June 30, 1999, the Company experienced a decrease
in nonperforming assets (defined as nonaccrual loans, loans past due 90 days or
more, restructured loans, nonaccruing securities, and other real estate) from
$1.591 million to $1.251 million. The ratio of loan loss allowance to total
nonperforming assets increased from 1.15 to 1.43. The ratio of nonperforming
assets to total assets increased from .007 to .009, the ratio of nonperforming
loans to total loans decreased from .013 to .0096. All of these ratios are
favorable as compared to industry averages, and management is aware of no
factors that would suggest that they are prone to erosion in future periods.
Deposits
Total deposits of $171,126,033 at June 30, 1999 decreased $2,249,181 (1.30%)
over total deposits of $173,375,214 at year-end 1998. Deposits are the
Company's primary source of funds with which to support its earning assets.
Non-interest bearing deposits decreased $2,422,376 or 9.04% from year-end 1998
to June 30, 1999, and interest bearing deposits increased $173,195 (0.12%) from
year-end 1998.
11
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Long-term Debt
At June 30, 1999 and December 31, 1998, the Company had notes payable totaling
$22,042,000, and $18,557,384, respectively.
Maturities of long-term debt for the years ending December 31 are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 1,100,000
2001 350,000
2002 5,000,000
2003 2,500,000
2004 5,500,000
Thereafter 7,592,000
-----------
Total $22,042,000
===========
</TABLE>
Shareholders' Equity
Company shareholders' equity decreased $1,143,151 from December 31, 1998 to June
30, 1999, due to net income of $1,191,204, the declaration of cash dividends of
$887,463, the decrease of unrealized gains on securities available-for-sale to
an unrealized loss totaling $989,642 net of deferred tax asset and the purchase
of treasury stock of $457,250.
Liquidity Management
Liquidity is defined as the ability of a company to convert assets into cash or
cash equivalents without significant loss. Liquidity management involves
maintaining the Banks' 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. Without proper liquidity
management, the Bank would not be able to perform the primary function of a
financial intermediary and would, therefore, not be able to meet the production
and growth needs of the communities it serves.
The primary function of asset and liability management is not only to assure
adequate liquidity in order for the Bank 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 Bank can also meet the investment
requirements of its shareholders. Daily monitoring of the sources and uses of
funds is necessary to maintain an acceptable cash position that meets both
requirements. In the banking environment, 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
principal repayments and sales of investment and trading account securities.
Loans that mature in one year or less equaled approximately $47,371,000 or
36.29% of the total loan portfolio at June 30, 1999 and there are $5,728,332 of
investment securities maturing within one year. Other sources of liquidity
include short-term investments such as federal funds sold.
12
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The liability portion of the balance sheet provides liquidity through various
customers' interest bearing and non-interest bearing deposit accounts. At June
30, 1999, funds were also available through the purchase of federal funds from
correspondent commercial banks from available lines of up to an aggregate of
$14,000,000. Each of the Company's subsidiary banks is a member of the Federal
Home Loan Bank of Atlanta. Membership provides the Company with additional
lines of credit for liquidity needs. The Company has also established a line of
credit under the parent company for $5,000,000.
Capital Resources
A strong capital position is vital to the continued profitability of the Company
because it promotes depositor and investor confidence and provides a solid
foundation for future growth of the organization. The Company has provided the
majority of its capital requirements through the retention of earnings.
Bank regulatory authorities are placing increased emphasis on the maintenance of
adequate capital. In 1990, new risk-based capital requirements became
effective. The guidelines take into consideration risk factors, as defined by
regulators, associated with various categories of assets, both on and off the
balance sheet. Under the guidelines, capital strength is measured in two tiers
which are used in conjunction with risk-adjusted assets to determine the risk-
based capital ratios. The Company's Tier I capital, which consists of common
equity less goodwill, amounted to approximately $21,293,000 at June 30, 1999.
Tier II capital components include supplemental capital components such as
qualifying allowance for loan losses and qualifying subordinated debt. Tier I
capital plus the Tier II capital components are referred to as Total Risk-Based
capital and was approximately $23,026,000 at June 30, 1999.
The Company's current capital positions exceed the regulatory guidelines.
Management has reviewed and will continue to monitor the Company's asset mix and
product pricing, and the loan loss allowance, which are the areas determined to
be most affected by these new requirements.
RESULTS OF OPERATIONS
Six months ended June 30, 1999 and 1998
Summary
Net earnings of the Company for the six months ended June 30, 1999 were
$1,191,204 compared to $622,497 for the same period in 1998, representing a
91.36% increase. This increase was due principally to the business combination
of Valley National Corporation and First National Sylacauga Corporation on
August 24, 1998 and the acquisition of Wright-Sprayberry Insurance, Inc. and
Brown Insurance Agency, Inc. in November 1998.
Net Interest Income
Net interest income, the difference between interest earned on assets and the
cost of interest-bearing liabilities, is the largest component of the Company's
net income. Revenue from earning assets of the Company during the six months
ended June 30, 1999 increased $2,265,820 (37.05%) from the same period in 1998.
This increase was due to higher average outstanding balances of earning assets.
Interest expense for the six months ended June 30, 1999 increased $1,085,500 or
40.44% over the corresponding period of 1998. As a result of these factors, net
interest income
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increased $1,180,320 or 34.40% in the six months ended June 30, 1999, compared
to the same period of 1998.
Provision for Loan Losses
The provision for loan losses represents the charge against current earnings
necessary to maintain the reserve for loan losses at a level which management
considers appropriate. This level is determined based upon the Company's
historical charge-offs, management's assessment of current economic conditions,
the composition of the loan portfolio and the levels of nonaccruing and past due
loans. The provision for loan losses was $378,779 for the six months ended June
30, 1999 compared to $596,800 for the same period of 1998. Charge-offs exceeded
recoveries by $322,737 for the six months ended June 30, 1999. The reserve for
loan losses as a percent of outstanding loans, net of unearned income, was 1.46%
at June 30, 1999 compared to 1.34% at year-end 1998.
Non-interest Income
Non-interest income for the six months ended June 30, 1999 was $1,544,542
compared to $880,177 for the same period of 1998. This 75.48% increase was
primarily due to an increase in commissions realized of $527,406 in the first
six months of 1998 as compared to the same period of 1998. Significant
components of non-interest income are as follows: Service charges on deposits
increased $218,207 (43.32%), insurance commissions increased $527,406, and other
operating income decreased $21,094.
Non-interest Expenses
Non-interest expenses for the six months ended June 30, 1999 were $4,210,329
reflecting a 41.85% increase over the same period of 1998. The primary
components of non-interest expenses are salaries and employee benefits, which
increased to $2,143,875 for the six months ended June 30, 1999, 21.85% higher
than in the same period of 1998. Occupancy costs increased $255,938 primarily
because the company has invested extensively in data processing equipment in
preparation for the merger, the combination of each subsidiary's data processing
functions and preparation for the year 2000.
Income Taxes
The Company attempts to maximize its net income through active tax planning.
The provision for income taxes of $375,740 for the six months ended June 30,
1999 increased $251,750 compared to the same period of 1998, due to the increase
in income before tax. Taxes as a percent of earnings increased from 16.61% to
23.98%. The effective tax rate of approximately 23.98% is less than the
statutory rate principally because of the effect of tax-exempt interest income.
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
14
<PAGE>
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 that 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 June 30, 1999, all mission critical systems
were successfully validated or tested by the Company's software vendor and a
Certified Public Accounting firm reviewed the results. Also, software for all
ATM systems was successfully tested.
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 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 Banks have evaluated all significant credit customer relationships to
determine any risk represented to the Banks by the impact of Year 2000 on
customers operations. Based on this evaluation, the 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.
The Banks have worked to assess Year 2000 readiness of vendors, business
partners and other counter parties, focusing on those considered critical to the
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 Banks
where Year 2000 noncompliance by third parties could have a material adverse
impact on the financial condition of the 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
15
<PAGE>
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 has completed its remediation and validation efforts as required by
its regulators, the Comptroller of the Currency, and anticipates no disruptions
in any of its operations. However, in the event of a disruption to business due
to natural disasters, utility outages or other occurrences, a Contingency and
Business Resumption plan has been implemented so that operations will not be
interrupted and customers will continue to be served in a prompt manner. These
plans will be tested on or before August 31, 1999 to ensure the adequacy of the
plan.
As financial institutions, the Banks' compliance has been closely monitored by
Federal Regulatory Agencies who completed their last Year 2000 examination
during July 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.
16
<PAGE>
Item 3. 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 June 30, 1999, Frontier's cumulative
gap is well within this range through a five-year time frame with the one-year
cumulative gap at-4.71%, the two-year at +0.84% and the three-year at +4.29%.
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.
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 stockholders' 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. Although net
income is not materially impacted during simulation analysis under different
rate scenarios, Frontier is slightly asset sensitive meaning that net interest
income would increase with an increase in interest rates.
17
<PAGE>
PART 2. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 17, 1999, the Company held its 1999 Annual Meeting of Shareholders.
The following items were presented to a vote of holders (the
"Shareholders") of the Company's outstanding Common Stock.
1. The Shareholders elected (a) Harry I Brown, Jr., (b) Steven R.
Townson, (c) Wesley L. Bowden, Jr., (d) Harry I. Brown, Sr., (e)
Charles M. Reeves, Jr., (f) Raymond C. Styres, (g) Christopher N.
Zodrow, (h) Steven E. Sprayberry to the Company's Board of
Directors to serve as directors for the ensuing year and until
successors are appointed or elected.
2. The Shareholders adopted the 1999 Statuatory-Nonstatuatory Stock
Option Plan.
3. The shareholders appointed Schauer, Taylor, Cox & Vise, P.C. as
the Company's auditors for the 1999 fiscal year.
4. The shareholders amended the Articles of Incorporation changing
the principal address of the company to 43 North Broadway,
Sylacauga, Alabama, 35150.
The number of votes for each of the above is summarized in the table below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Item Submitted to Shareholders For Against Abstain Total
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(1)(a)Election of Harry I. Brown, Jr. 1,716,905 0 0 1,716,905
- ---------------------------------------------------------------------------------------------------
(1)(b)Election of Steven R. Townson 1,711,779 5,126 0 1,716,905
- ---------------------------------------------------------------------------------------------------
(1)(c)Election of Wesley L. Bowden, Jr. 1,716,905 0 0 1,716,905
- ---------------------------------------------------------------------------------------------------
(1)(d)Election of Harry I. Brown, Sr. 1,716,905 0 0 1,716,905
- ---------------------------------------------------------------------------------------------------
(1)(e)Election of Charles M. Reeves, Jr. 1,716,905 0 0 1,716,905
- ---------------------------------------------------------------------------------------------------
(1)(f)Election of Raymond C. Styres 1,716,905 0 0 1,716,905
- ---------------------------------------------------------------------------------------------------
(1)(g)Election of Christopher N. Zodrow 1,716,905 0 0 1,716,905
- ---------------------------------------------------------------------------------------------------
(1)(h)Electrion of Steven E. Sprayberry 1,716,905 0 0 1,716,905
- ---------------------------------------------------------------------------------------------------
(2)Adoption of 1999 Statuatory-Nonstatuatory 1,699,201 11,296 6,408 1,716,905
Stock Option Plan
- ---------------------------------------------------------------------------------------------------
(3)Appointment of Schauer, Taylor, Cox & 1,699,219 9,612 8,074 1,716,905
Vise, P.C. as auditors
- ---------------------------------------------------------------------------------------------------
(4)Amendment to Articles of Incorporation 1,710,497 0 6,408 1,716,905
- ---------------------------------------------------------------------------------------------------
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Statement RE: Computation of Earnings per Share
(b) Reports on Form 8-K
During the quarter ended June 30, 1999, one report was filed for
Frontier National Corporation on Form 8-K announcing a 3-for-2 stock
split to all shareholders as of record on April 20, 1999.
Additionally, the Board announced that it will initiate a stock
repurchase plan to purchase up to 5% of outstanding shares in the open
market beginning in May, 1999.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRONTIER NATIONAL CORPORATION
Date: August 16, 1999 By: /s/ STEVEN R. TOWNSON
------------------------------------------
Steven R. Townson
President and Chief Executive Officer
19
<PAGE>
Exhibit 11
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
The following tabulation presents the calculation of basic and diluted earnings
per common share for the three and six-month periods ended June 30, 1999 and
1998. Average shares outstanding have been retroactively adjusted on an
equivalent share basis for the effects of the business combination, the stock
dividend and the stock split as discussed in the notes to consolidated financial
statements.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
------------------------ ----------------------
1999 1998 1999 1998
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Net income......................... $ 612,768 $ 408,054 $1,191,204 $ 622,497
============ ========== ========== ==========
Earnings on common shares.......... $ 612,768 $ 408,054 $1,191,204 $ 622,497
============ ========== ========== ==========
Weighted average common shares
outstanding - basic............... 3,468,368 2,104,092 3,470,786 2,104,092
============ ========== ========== ==========
Basic earnings per common share.... $ .18 $ .19 $ .34 $ .29
============ ========== ========== ==========
Diluted Earnings Per Share:
Net income......................... $ 612,768 $ 408,054 $1,191,204 $ 622,497
============ ========== ========== ==========
Weighted average common shares
outstanding - diluted............. 3,513,429 2,104,092 3,515,847 2,104,092
============ ========== ========== ==========
Diluted earnings per common share.. $ .17 $ .19 $ .34 $ .29
============ ========== ========== ==========
</TABLE>
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,839,999
<INT-BEARING-DEPOSITS> 877,779
<FED-FUNDS-SOLD> 7,180,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 56,829,411
<INVESTMENTS-MARKET> 56,028,934
<LOANS> 130,536,269
<ALLOWANCE> 1,887,283
<TOTAL-ASSETS> 217,202,966
<DEPOSITS> 171,126,033
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,689,844
<LONG-TERM> 22,042,000
0
0
<COMMON> 3,498
<OTHER-SE> 21,341,591
<TOTAL-LIABILITIES-AND-EQUITY> 217,202,966
<INTEREST-LOAN> 6,397,540
<INTEREST-INVEST> 1,953,598
<INTEREST-OTHER> 30,216
<INTEREST-TOTAL> 8,381,354
<INTEREST-DEPOSIT> 3,172,311
<INTEREST-EXPENSE> 3,769,844
<INTEREST-INCOME-NET> 4,611,510
<LOAN-LOSSES> 378,779
<SECURITIES-GAINS> 18
<EXPENSE-OTHER> 4,210,329
<INCOME-PRETAX> 1,566,944
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,191,204
<EPS-BASIC> .34
<EPS-DILUTED> .34
<YIELD-ACTUAL> 4.88
<LOANS-NON> 659,000
<LOANS-PAST> 389,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,831,241
<CHARGE-OFFS> 613,000
<RECOVERIES> 290,263
<ALLOWANCE-CLOSE> 1,887,283
<ALLOWANCE-DOMESTIC> 1,887,283
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
