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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 MARCH 31, 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 April 30, 1999:
2,315,683
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FRONTIER NATIONAL CORPORATION
March 31, 1999 Form 10-Q
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TABLE OF CONTENTS
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 Shareholder's Equity 7
Notes to Consolidated Financial Statements 8 - 9
Item 2. Management's Discussion and Analysis of 10 - 13
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART 2.OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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<CAPTION>
MARCH 31, 1999
(UNAUDITED) DECEMBER 31, 1998
-------------------- --------------------------
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS $ 7,954,767 $ 7,641,569
INTEREST BEARING DEPOSITS WITH OTHER BANKS 628,104 1,139,654
FEDERAL FUNDS SOLD 24,825,000 6,055,000
SECURITIES AVAILABLE FOR SALE 49,893,190 51,880,882
LOANS, NET OF UNEARNED INCOME 130,514,533 136,202,401
ALLOWANCE FOR LOAN LOSSES (1,919,917) (1,831,241)
PREMISES AND EQUIPMENT, NET 5,727,869 5,640,882
CASH SURRENDER VALUE ON LIFE INSURANCE 4,893,023 4,834,873
ACCRUED INTEREST 1,366,527 1,498,981
INTANGIBLE ASSETS, NET 1,364,637 1,627,241
OTHER ASSETS 1,675,070 1,504,467
-------------------- --------------------------
TOTAL ASSETS $ 226,922,803 $ 216,194,709
==================== ==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
NON-INTEREST BEARING DEPOSITS $ 27,076,338 $ 26,793,363
INTEREST BEARING DEPOSITS 152,174,216 146,581,851
-------------------- --------------------------
TOTAL DEPOSITS 179,250,554 173,375,214
-------------------- --------------------------
DIVIDENDS PAYABLE 443,049 431,746
ACCRUED INTEREST 1,033,104 885,019
LONG-TERM DEBT 22,042,000 18,557,384
OTHER LIABILITIES 1,578,669 457,106
-------------------- --------------------------
TOTAL LIABILITIES 204,347,376 193,706,469
-------------------- --------------------------
SHAREHOLDERS' EQUITY
COMMON STOCK ($.001 PAR VALUE; 10,000,000 SHARES
AUTHORIZED, 3,497,525 ISSUED OF WHICH 3,473,525 ARE
OUTSTANDING AT MARCH 31, 1999; .001 PAR VALUE,
10,000,000 SHARES AUTHORIZED, 3,497,525 ISSUED OF WHICH
3,473,525 WERE OUTSTANDING AT DECEMBER 31, 1998) 3,498 3,498
CAPITAL SURPLUS 14,265,547 14,265,547
RETAINED EARNINGS 8,192,196 8,056,781
TREASURY STOCK, AT COST (24,000 SHARES AT
MARCH 31, 1999 AND DECEMBER 31, 1998) (368,000) (368,000)
ACCUMULATED COMPREHENSIVE INCOME: NET UNREALIZED
HOLDING GAINS ON SECURITIES AVAILABLE FOR SALE,
NET OF DEFERRED INCOME TAX 482,186 530,414
-------------------- --------------------------
TOTAL STOCKHOLDERS' EQUITY 22,575,427 22,488,240
==================== ==========================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 226,922,803 $ 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)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
INTEREST INCOME
INTEREST AND FEES ON LOANS $ 3,250,758 $ 2,616,662
INTEREST ON SECURITIES
TAXABLE SECURITIES 464,212 237,420
NONTAXABLE SECURITIES 258,025 139,459
INTEREST EARNED ON DEPOSIT ACCOUNTS 17,848 5,187
INTEREST EARNED ON FEDERAL FUNDS SOLD 212,237 66,701
-------------- -------------
TOTAL INTEREST INCOME 4,203,080 3,065,429
INTEREST EXPENSE
INTEREST ON DEPOSITS 1,597,453 1,043,740
INTEREST ON BORROWED FUNDS 293,481 271,214
-------------- -------------
TOTAL INTEREST EXPENSE 1,890,934 1,314,954
NET INTEREST INCOME 2,312,146 1,750,475
PROVISION FOR LOAN LOSSES (194,305) (191,650)
-------------- -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,117,841 1,558,825
NONINTEREST INCOME
SERVICE CHARGES ON DEPOSIT ACCOUNTS 349,187 221,743
INSURANCE COMMISSIONS 284,505 -
OTHER OPERATING INCOME 116,066 110,490
SECURITIES GAINS - 381
-------------- -------------
TOTAL NONINTEREST INCOME 749,758 332,614
NONINTEREST EXPENSE
SALARIES AND EMPLOYEE BENEFITS 1,082,764 1,033,773
NET OCCUPANCY EXPENSE 334,190 209,868
OTHER OPERATING EXPENSES 671,375 403,355
-------------- -------------
TOTAL NONINTEREST EXPENSES 2,088,329 1,646,996
INCOME BEFORE INCOME TAXES 779,270 244,443
PROVISION FOR INCOME TAXES (200,834) (30,000)
-------------- -------------
NET INCOME $ 578,436 $ 214,443
============== =============
BASIC EARNINGS PER COMMON SHARE $ 0.17 $ 0.10
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 3,473,525 2,104,092
EARNINGS PER COMMON SHARE ASSUMING DILUTION $ 0.16 $ 0.10
WEIGHTED AVERAGE SHARES
OUTSTANDING ASSUMING DILUTION 3,518,658 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
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
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1999 1998
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NET INCOME $ 578,436 $ 214,443
OTHER COMPREHENSIVE, NET OF TAX:
UNREALIZED GAINS ON SECURITIES:
UNREALIZED HOLDING GAINS (LOSSES) ARISING DURING THE PERIOD (80,915) (5,211)
LESS: RECLASSIFICATION ADJUSTMENTS FOR GAINS INCLUDED IN NET INCOME - (381)
---------------- -----------------
NET UNREALIZED GAINS (LOSSES) (80,915) (5,592)
INCOME TAX RELATED TO ITEMS OF OTHER COMPREHENSIVE INCOME 32,687 2,153
---------------- -----------------
OTHER COMPREHENSIVE INCOME (LOSS) (48,228) (3,439)
---------------- -----------------
COMPREHENSIVE INCOME $ 530,208 $ 211,004
================ =================
</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>
THREE MONTHS ENDED
MARCH 31
-----------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,558,793 $ 314,406
INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE 4,057,504 2,823,319
PURCHASES OF SECURITIES AVAILABLE FOR SALE (2,206,750) (7,732,696)
LOAN PAYDOWNS, NET 5,552,811 -
LOANS MADE TO CUSTOMERS, NET - 1,108,981
CAPITAL EXPENDITURES (364,467) (84,909)
PROCEEDS FROM SALES OF FIXED ASSETS 130,363 -
PAYMENT OF OFFICERS' LIFE INSURANCE PREMIUMS - (4,796)
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES 7,169,461 (3,890,101)
------------- -------------
FINANCING ACTIVITIES
NET INCREASE IN DEPOSITS 6,461,880 4,591,498
NET INCREASE IN SHORT-TERM BORROWINGS 313,261 -
DIVIDENDS PAID (431,747) (100,995)
PROCEEDS FROM NOTES PAYABLE 3,500,000 250,000
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,843,394 4,740,503
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 18,571,648 1,164,808
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,836,223 4,892,409
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 33,407,871 $ 6,057,217
============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
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FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
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ACCUMULATED
COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY
STOCK SURPLUS EARNINGS INCOME STOCK TOTAL
--------- ------------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1998 $ 2,332 $ 14,265,547 $ 8,057,975 $ 530,414 $(368,000) $ 22,488,268
CASH DIVIDENDS -
COMMON - - (443,049) - - (443,049)
NET CHANGE IN
UNREALIZED GAINS
ON SECURITIES - - - (48,228) - (48,228)
NET INCOME - MARCH 31, 1999 - - 578,436 - - 578,436
-------- ------------- ------------ ------------ --------- ------------
BALANCE AT
MARCH 31, 1999 $ 2,332 $ 14,265,547 $ 8,193,362 $ 482,186 $(368,000) $ 22,575,427
======== ============= ============ ============ ========= ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
MARCH 31, 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 Corporation,
and The Frontier Agency, Inc., collectively, the Bank. The accompanying
unaudited 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 three-month period ended March 31, 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 First National
Sylacauga Corporation 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 25 percent and 12 percent for the three
months ended March 31, 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 March 31, 1999, the Company had net unrealized gains of $722,715 in
available-for-sale securities which are reflected in the presented assets and
resulted in an increase in shareholders' equity of $482,186, net of deferred tax
liability. There were no trading securities. The net
8
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decrease in shareholders' equity as a result of the SFAS 115 adjustment from
December 31, 1998 to March 31, 1999 was $48,228. See also Note D - Shareholders'
Equity.
NOTE D - SHAREHOLDERS' EQUITY
During the first quarter of 1999, cash dividends of $443,049 are charged against
equity. Equity was also decreased by $48,228 for the change in net unrealized
gains on securities. A 3-for-2 stock split was announced on April 20, 1999.
The stock split did not change total stockholders' equity. See also Note G -
Stock Split.
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
to shareholders 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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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 financial
statements and related notes appearing in Item 1 of the March 31, 1999 Form 10-
Q.
FINANCIAL CONDITION
March 31, 1999 compared to December 31, 1998
LOANS
Loans comprised the largest single category of the Company's earning assets on
March 31, 1999. Loans, net of unearned income and reserve for loan losses, were
57.51% of total assets at March 31, 1999 and 62.99% of total assets at December
31, 1998. Total net loans were $130,514,533 at March 31, 1999, representing a
4.18% decrease from the December 31, 1998 total of $136,202,401. 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
$16,782,308 from December 31, 1998 to March 31, 1999. This increase was due
primarily to deposit growth and loan pay-downs. Investment securities and
federal funds sold at March 31, 1999 were $74,718,190 compared with $57,935,882
at December 31, 1998, reflecting a 28.97% increase.
ASSET QUALITY
Between December 31,1998 and March 31, 1999, the Company experienced a slight
decline in the quality of its assets as measured by three key ratios. The ratio
of loan loss allowance to total nonperforming assets (defined as nonaccrual
loans, loans past due 90 days or greater, restructured loans, nonaccruing
securities, and other real estate) decreased from 2.11 to 1.28. The ratio of
nonperforming assets to total assets increased from .0040 to .0066, the ratio of
nonperforming loans to total loans increased to .0093 from .0064. These ratios
declined due to an increase in past dues and nonaccruals. All three 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 $179,250,554 at March 31, 1999 increased $5,875,340 (3.39%)
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.
Noninterest-bearing deposits increased $282,975 or 1.06% from year-end 1998 to
March 31, 1999, and interest-bearing deposits increased $5,592,365 (3.82%) from
year-end 1998.
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LONG-TERM DEBT
At March 31, 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 increased $87,187 from December 31, 1998 to March
31, 1999, due to net income of $578,436, the declaration of cash dividends of
$443,049 and the decrease of unrealized gains on securities available for sale
totaling $48,228 net of deferred tax liability.
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 Bank's 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 on sales of investment and trading account securities.
Loans that mature in one year or less equaled approximately $25,327,000 or
19.41% of the total loan portfolio at March 31, 1999 and there are $5,933,000 of
investment securities maturing within one year. Other sources of liquidity
include short-term investments such as federal funds sold.
The liability portion of the balance sheet provides liquidity through various
customers' interest-bearing and noninterest-bearing deposit accounts. At March
31, 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
11
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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 $20,927,000 at March 31, 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 is referred to as Total Risk-Based capital and
was $22,668,000 at March 31, 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
Three months ended March 31, 1999 and 1998
SUMMARY
Net earnings of the company for the three months ended March 31, 1999 were
$578,436 compared to $214,443 for the same period in 1998, representing a
169.74% 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 and 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 three months
ended March 31, 1999 increased $1,137,651 (37.11%) from the same period in 1998.
This increase was due to higher average outstanding balances of earning assets.
Interest expense for the three months ended March 31, 1999 increased $575,980 or
43.80% over the corresponding period of 1998. As a result of these factors, net
interest income increased $561,671 or 32.09% in the three months ended March 31,
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 Bank's historical
charge-offs, management's assessment of current
12
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economic conditions, the composition of the loan portfolio and the levels of
nonaccruing and past due loans. The provision for loan losses was $194,305 for
the three months ended March 31, 1999 compared to $191,650 for the same period
of 1998. Charge-offs exceeded recoveries by $105,629 for the three months ended
March 31, 1999. The reserve for loan losses as a percent of outstanding loans,
net of unearned income, was 1.47% at March 31, 1999 compared to 1.34% at year-
end 1998.
NONINTEREST INCOME
Noninterest income for the three months ended March 31, 1999 was $749,758
compared to $332,614 for the same period of 1998. This 125.41% increase was
primarily due to an increase in insurance commissions realized of $284,505 in
the first three months of 1998 as compared to the same period of 1998.
Significant components of noninterest income are as follows: Service charges on
deposits increased $127,444 (57.47%), insurance commissions increased $284,505,
and other operating income increased $5,576.
NONINTEREST EXPENSES
Noninterest expenses for the three months ended March 31, 1999 were $2,088,329
reflecting a 26.80% increase over the same period of 1998. The primary
components of noninterest expenses are salaries and employee benefits, which
increased to $1,082,764 for the three months ended March 31, 1999, 4.74% higher
than in the same period of 1998. Occupancy costs increased $124,322 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 $200,834 for the three months ended March 31,
1999 increased $170,834 compared to the same period of 1998, due to the increase
in income before tax. Taxes as a percent of earnings increased from 12.27% to
25.77%. The effective tax rate of approximately 25.77% 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
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 missions 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.
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 plans and implementation.
13
<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 March 31, 1999, Frontier's cumulative
gap is well within this range through a five-year time frame with the one-year
cumulative gap at -1.9%, the two-year at +.7% and the three-year at +5.2%.
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.
14
<PAGE>
PART 2. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K
During the quarter ended March 31, 1999, no reports were filed for
Frontier National Corporation on Form 8-K.
15
<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
By: /s/ STEVEN R. TOWNSON
--------------------------
Steven R. Townson
President and Chief Operating Officer
16
<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-month periods ended March 31, 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 the consolidated financial
statements.
<TABLE>
<CAPTION>
Three Months
Ended March 31
-------------------------
1999 1998
------------ ----------
<S> <C> <C>
Basic net income..................... $ 578,436 $ 214,443
=========== ==========
Basic earnings on common shares...... $ 578,436 $ 214,443
=========== ==========
Weighted average common shares
outstanding - basic................. 3,473,525 2,104,092
=========== ==========
Basic earnings per common share...... $ .17 $ .10
=========== ==========
Basic net income per common share.... $ .17 $ .10
=========== ==========
Diluted net income................... $ 578,436 $ 214,443
=========== ==========
Diluted earnings on common shares.... $ 578,436 $ 214,443
=========== ==========
Weighted average common shares
outstanding - diluted............... 3,518,658 2,104,092
=========== ==========
Diluted earnings per common share.... $ .16 $ .10
=========== ==========
Diluted net income per common share.. $ .16 $ .10
=========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,954,767
<INT-BEARING-DEPOSITS> 628,104
<FED-FUNDS-SOLD> 24,825,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 48,170,475
<INVESTMENTS-MARKET> 49,893,190
<LOANS> 130,514,533
<ALLOWANCE> 1,919,917
<TOTAL-ASSETS> 226,922,803
<DEPOSITS> 179,250,554
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,054,822
<LONG-TERM> 22,042,000
0
0
<COMMON> 2,332
<OTHER-SE> 22,573,095
<TOTAL-LIABILITIES-AND-EQUITY> 226,922,803
<INTEREST-LOAN> 3,250,758
<INTEREST-INVEST> 722,237
<INTEREST-OTHER> 230,085
<INTEREST-TOTAL> 4,203,080
<INTEREST-DEPOSIT> 1,597,453
<INTEREST-EXPENSE> 1,890,934
<INTEREST-INCOME-NET> 2,312,146
<LOAN-LOSSES> 194,305
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,088,329
<INCOME-PRETAX> 779,270
<INCOME-PRE-EXTRAORDINARY> 578,436
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 578,436
<EPS-PRIMARY> .17
<EPS-DILUTED> .16
<YIELD-ACTUAL> 8.35
<LOANS-NON> 345,000
<LOANS-PAST> 219,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,122,000
<ALLOWANCE-OPEN> 1,831,241
<CHARGE-OFFS> 234,739
<RECOVERIES> 129,110
<ALLOWANCE-CLOSE> 1,919,917
<ALLOWANCE-DOMESTIC> 1,919,917
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
