<PAGE>
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 SEPTEMBER 30, 2000
[_] 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 October 31, 2000: 3,420,798
<PAGE>
FRONTIER NATIONAL CORPORATION
September 30, 2000 Form 10-Q
TABLE OF CONTENTS
Page No.
--------
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 - 15
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
Part 2. Other Information
Item 1. Legal Proceedings 17 - 18
Item 6. Exhibits and Reports on Form 8-K 18
2
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS $ 7,728,075 $ 6,902,010
INTEREST BEARING DEPOSITS WITH OTHER BANKS 355,477 102,066
FEDERAL FUNDS SOLD - 6,640,000
SECURITIES AVAILABLE FOR SALE 43,298,035 50,357,787
LOANS, NET OF UNEARNED INCOME 159,064,451 139,706,383
ALLOWANCE FOR LOAN LOSSES (1,979,293) (1,849,356)
PREMISES AND EQUIPMENT, NET 8,241,806 6,806,237
ACCRUED INTEREST RECEIVABLE 1,959,082 1,651,255
CASH SURRENDER VALUE ON LIFE INSURANCE 5,256,194 5,073,986
INTANGIBLE ASSETS, NET 1,401,736 1,497,013
FORECLOSED REAL ESTATE 256,107 305,965
OTHER ASSETS 1,922,510 2,021,807
------------ ------------
TOTAL ASSETS $227,504,180 $219,215,153
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
NONINTEREST BEARING DEPOSITS $ 25,292,913 $ 24,512,607
INTEREST BEARING DEPOSITS 152,163,509 147,914,373
------------ ------------
TOTAL DEPOSITS 177,456,422 172,426,980
------------ ------------
FEDERAL FUNDS PURCHASED 300,000 -
DIVIDENDS PAYABLE - 438,697
ACCRUED INTEREST PAYABLE 1,247,406 925,364
LONG-TERM DEBT 25,442,000 24,042,000
OTHER LIABILITIES 1,529,833 1,190,927
------------ ------------
TOTAL LIABILITIES 205,975,661 199,023,968
------------ ------------
SHAREHOLDERS' EQUITY
COMMON STOCK ($.001 PAR VALUE; 10,000,000 SHARES
AUTHORIZED, 3,497,497 ISSUED OF WHICH 3,418,243 ARE
OUTSTANDING AT SEPTEMBER 30, 2000; $.001 PAR VALUE,
10,000,000 SHARES AUTHORIZED, 3,497,497 ISSUED OF WHICH
3,414,357 WERE OUTSTANDING AT DECEMBER 31, 1999) 3,498 3,498
CAPITAL SURPLUS 14,249,151 14,263,104
RETAINED EARNINGS 9,337,255 8,774,744
TREASURY STOCK, AT COST (79,254 SHARES AT SEPTEMBER 30,
2000 AND 83,140 SHARES AT DECEMBER 31, 1999) (1,103,421) (1,170,483)
ACCUMULATED COMPREHENSIVE INCOME (LOSS): NET UNREALIZED
HOLDING GAINS ON SECURITIES AVAILABLE FOR SALE,
NET OF DEFERRED INCOME TAX (957,964) (1,679,678)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 21,528,519 20,191,185
============ ============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $227,504,180 $219,215,153
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- ----------------------------
2000 1999 2000 1999
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
INTEREST AND FEES ON LOANS $3,780,934 $3,118,543 $11,071,919 $ 9,516,084
INTEREST AND DIVIDENDS ON SECURITIES
TAXABLE SECURITIES 419,675 536,212 1,327,728 1,533,165
NONTAXABLE SECURITIES 273,770 292,659 900,734 816,514
INTEREST EARNED ON DEPOSITS WITH OTHER BANKS 4,002 10,201 18,474 40,417
INTEREST EARNED ON FEDERAL FUNDS SOLD 8,839 90,442 112,944 523,232
---------- ---------- ----------- -----------
TOTAL INTEREST INCOME 4,487,220 4,048,057 13,431,799 12,429,412
INTEREST EXPENSE
INTEREST ON DEPOSITS 1,796,466 1,497,523 5,148,776 4,669,834
INTEREST ON BORROWED FUNDS 413,012 312,805 1,182,636 910,338
---------- ---------- ----------- -----------
TOTAL INTEREST EXPENSE 2,209,478 1,810,328 6,331,412 5,580,172
NET INTEREST INCOME 2,277,742 2,237,729 7,100,387 6,849,240
PROVISION FOR LOAN LOSSES (243,853) (103,820) (470,616) (482,599)
---------- ---------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,033,889 2,133,909 6,629,771 6,366,641
NONINTEREST INCOME
SERVICE CHARGES ON DEPOSIT ACCOUNTS 471,678 367,687 1,232,029 1,089,651
COMMISSION INCOME 385,566 259,544 1,125,013 847,975
OTHER OPERATING INCOME 71,081 102,128 317,623 336,257
SECURITIES GAINS (LOSSES) (4,056) 39,004 (1,142) 39,022
---------- ---------- ----------- -----------
TOTAL NONINTEREST INCOME 924,269 768,363 2,673,523 2,312,905
NONINTEREST EXPENSE
SALARIES AND EMPLOYEE BENEFITS 1,222,008 1,101,091 3,451,928 3,244,966
NET OCCUPANCY EXPENSE 441,661 365,715 1,214,555 1,026,885
OTHER OPERATING EXPENSES 873,348 663,991 2,183,734 2,069,275
---------- ---------- ----------- -----------
TOTAL NONINTEREST EXPENSES 2,537,017 2,130,797 6,850,217 6,341,126
INCOME BEFORE INCOME TAXES 421,141 771,475 2,453,077 2,338,420
PROVISION FOR INCOME TAXES 7,385 (260,082) (583,357) (635,822)
---------- ---------- ----------- -----------
NET INCOME $ 428,526 $ 511,393 $ 1,869,720 $ 1,702,598
========== ========== =========== ===========
BASIC EARNINGS PER COMMON SHARE $ 0.13 $ 0.15 $ 0.55 $ 0.49
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 3,418,243 3,440,010 3,416,748 3,460,060
EARNINGS PER COMMON SHARE ASSUMING DILUTION $ 0.12 $ 0.15 $ 0.54 $ 0.49
WEIGHTED AVERAGE SHARES
OUTSTANDING ASSUMING DILUTION 3,492,566 3,485,010 3,485,083 3,505,060
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- ----------------------------
2000 1999 2000 1999
--------- --------- ---------- -----------
<S> <C> <C> <C> <C>
NET INCOME $ 428,526 $ 511,393 $1,869,720 $ 1,702,598
OTHER COMPREHENSIVE, NET OF TAX:
UNREALIZED GAINS (LOSSES) ON SECURITIES:
UNREALIZED HOLDING GAINS (LOSSES) ARISING
DURING THE PERIOD 867,773 (863,485) 1,149,773 (2,467,574)
LESS: RECLASSIFICATION ADJUSTMENTS FOR
(GAINS) LOSSES INCLUDED IN NET INCOME 4,056 (39,004) 1,142 (39,022)
--------- --------- ---------- -----------
NET UNREALIZED GAINS (LOSSES) 871,829 (902,489) 1,150,915 (2,506,596)
INCOME TAX RELATED TO ITEMS OF OTHER
COMPREHENSIVE INCOME (LOSS) (327,376) 309,681 (429,201) 924,146
--------- --------- ---------- -----------
OTHER COMPREHENSIVE INCOME (LOSS) 544,453 (592,808) 721,714 (1,582,450)
--------- --------- ---------- -----------
COMPREHENSIVE INCOME (LOSS) $ 972,979 $ (81,415) $2,591,434 $ 120,148
========= ========= ========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,700,428 $ 2,991,240
INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE 8,482,535 16,306,555
PURCHASES OF SECURITIES AVAILABLE FOR SALE (250,000) (20,703,780)
NET (INCREASE) DECREASE IN LOANS TO CUSTOMERS (19,833,701) 4,278,523
PURCHASES OF PREMISES AND EQUIPMENT (1,958,094) (1,391,968)
PROCEEDS FROM SALES OF FIXED ASSETS - 156,788
PROCEEDS FROM SALE OF FORECLOSED REAL ESTATE 148,941 -
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (13,410,319) (1,353,882)
------------ ------------
FINANCING ACTIVITIES:
NET INCREASE (DECREASE) IN DEPOSITS 5,029,441 (5,169,310)
NET INCREASE IN SHORT-TERM BORROWINGS 412,722 473,836
DIVIDENDS PAID (1,745,905) (1,319,207)
PROCEEDS FROM SALE OF TREASURY STOCK 91,609 -
TREASURY STOCK PURCHASED (38,500) (545,417)
PROCEEDS FROM NOTES PAYABLE, NET 1,400,000 5,500,000
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 5,149,367 (1,060,098)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,560,524) 577,260
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,644,076 14,836,223
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,083,552 $ 15,413,483
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON CAPITAL RETAINED TREASURY COMPREHENSIVE
STOCK SURPLUS EARNINGS STOCK INCOME (LOSS) TOTAL
------ ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1999 $3,498 $14,263,104 $ 8,774,744 $(1,170,483) $(1,679,678) $20,191,185
CASH DIVIDENDS -
COMMON - - (1,307,209) - - (1,307,209)
PURCHASE OF TREASURY STOCK - - - (38,500) - (38,500)
REISSUANCE OF TREASURY STOCK - (13,953) - 105,562 - 91,609
NET CHANGE IN
UNREALIZED GAINS (LOSSES)
ON SECURITIES - - - - 721,714 721,714
NET INCOME - SEPTEMBER 30, 2000 - - 1,869,720 - - 1,869,720
------ ----------- ----------- ----------- ------------ -----------
BALANCE AT
SEPTEMBER 30, 2000 $3,498 $14,249,151 $ 9,337,255 $(1,103,421) $ (957,964) $21,528,519
====== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE A - Basis of Presentation
The consolidated financial statements include the accounts of Frontier National
Corporation (the "Company") and its wholly-owned subsidiaries, Frontier National
Bank, Lanett, Alabama, Frontier National Bank, Sylacauga, Alabama, 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 nine-month period ended September 30,
2000, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto for Frontier National
Corporation and subsidiaries for the year ended December 31, 1999, included in
Form 10-K filed in March 2000.
NOTE B - Income Taxes
The effective tax rates of approximately 24 percent and 27 percent for the nine
months ended September 30, 2000 and 1999, 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 September 30, 2000, the Company had net unrealized losses of $1,557,488 in
available-for-sale securities that are reflected in the presented assets and
resulted in a decrease in shareholders' equity of $957,964, net of deferred tax
asset. There were no trading securities.
8
<PAGE>
The net increase in shareholders' equity as a result of the SFAS 115 adjustment
from December 31, 1999 to September 30, 2000 was $721,714. See also Note D -
Shareholders' Equity.
NOTE D - Shareholders' Equity
During the first nine months of 2000, cash dividends of $1,307,209 were charged
against equity. Equity was increased by $721,714 for the decrease in net
unrealized losses on securities. Treasury stock was purchased during the first
quarter decreasing shareholders' equity $38,500. Treasury stock was also
reissued increasing shareholders' equity $91,609.
NOTE E - Treasury Stock
During the first nine months of 2000, 3,000 shares of common stock were acquired
and placed in treasury at cost and 6,886 were reissued and accounted for on a
first-in-first-out method. The treasury stock balance represents 83,140 shares
at December 31, 1999 and 79,254 shares at September 30, 2000.
NOTE F - 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 G - 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.
NOTE H - Stock Options
Officers of the company hold a total of 191,000 incentive stock options at
various exercise prices all of which are the fair market value on the various
grant dates. These options vest over a five-year time period at 20% on each
anniversary of the grant date and expire ten years from the grant date.
Directors of the Company hold a total of 27,500 nonqualified stock options at
various exercise prices all of which are the fair market value on the grant
date. These options are immediately
9
<PAGE>
exercisable and expire on the one-year anniversary date of the director's
termination of service to the Board.
10
<PAGE>
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 September 30,
2000 Form 10-Q.
FINANCIAL CONDITION
September 30, 2000 compared to December 31, 1999
Loans
Loans comprised the largest single category of the Company's earning assets on
September 30, 2000. Loans, net of unearned income and reserve for loan losses,
were 69.05% of total assets at September 30, 2000 and 62.89% of total assets at
December 31, 1999. Total net loans were $157,085,158 at September 30, 2000,
representing a 13.95% increase from the December 31, 1999 total of $137,857,027.
This increase is the result of loan growth since December 31, 1999.
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 decreased
$13,699,752 from December 31, 1999 to September 30, 2000. Investment securities
and federal funds sold at September 30, 2000 were $43,298,035 compared with
$56,997,787 at December 31, 1999, reflecting a 24.04% decrease.
Asset Quality
Between December 31, 1999 and September 30, 2000, 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 $1.894 million to $1.746 million. The ratio of loan loss allowance to total
nonperforming assets increased from .98 to 1.13, the ratio of nonperforming
loans to total loans remained constant at .011. All of these ratios are
favorable as compared to industry averages. Classified assets are defined as
loans that are subject to general financial duress or deterioration of the
collateral securing the assets. Classified assets are not considered
nonperforming assets. The company did experience an increase in classified
assets during the quarter that could be indicative of a potential increase in
nonperforming assets in future periods.
Deposits
Total deposits of $177,456,422 at September 30, 2000 increased $5,029,442
(2.92%) over total deposits of $172,426,980 at year-end 1999. Deposits are the
Company's primary source of funds with which to support its earning assets.
Non-interest bearing deposits increased $780,306 or 3.18% from year-end 1999 to
September 30, 2000, and interest bearing deposits increased $4,249,136 (2.87%)
from year-end 1999.
11
<PAGE>
Long-term Debt
At September 30, 2000 and December 31, 1999, the Company had notes payable
totaling $25,442,000, and $24,042,000, respectively.
Maturities of long-term debt for the years ending December 31 are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ -
2001 350,000
2002 -
2003 -
2004 5,500,000
Thereafter 19,592,000
-----------
Total $25,442,000
===========
</TABLE>
Shareholders' Equity
Company shareholders' equity increased $1,337,334 from December 31, 1999 to
September 30, 2000, due to net income of $1,869,720, the declaration of cash
dividends of $1,307,209, the decrease of unrealized losses on securities
available-for-sale totaling $721,714 net of deferred tax asset, the purchase of
treasury stock of $38,500 and the reissuance of treasury stock of $91,609.
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 $47.046 million or
29.58% of the total loan portfolio at September 30, 2000 and there are no
investment securities maturing within one year. Other sources of liquidity
include short-term investments such as federal funds sold.
12
<PAGE>
The liability portion of the balance sheet provides liquidity through various
customers' interest bearing and non-interest bearing deposit accounts. At
September 30, 2000, 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 $21,087,000 at September 30,
2000. 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 $23,066,000 at September 30, 2000.
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 requirements.
RESULTS OF OPERATIONS
Nine months and Three months ended September 30, 2000 and 1999
Summary
Net earnings of the Company for the nine months ended September 30, 2000 were
$1,869,720 compared to $1,702,598 for the same period in 1999, representing a
9.82% increase. This increase was due to a 4.13% increase in net interest
income after provision for loan losses primarily a result of loan growth coupled
with decreases in loan loss provisions, an increase in noninterest income of
15.59% primarily from nonbank subsidiaries, and expense control that held
noninterest expenses to an increase of 8.03%.
Net earnings of the Company for the three months ended September 30, 2000 were
$428,526 compared to $511,393 for the same period in 1999, representing a
decrease of 16.20%. The decrease is attributable to an increase in provision
for loan losses during the third quarter of 2000 of $140,033 over the third
quarter of 1999 coupled with an increase in noninterest expenses during the
quarter and offset by an increase in noninterest income, net interest income and
a decrease in provision for income taxes.
13
<PAGE>
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 nine months
ended September 30, 2000 increased $1,002,387 (8.06%) from the same period in
1999. This increase was due to higher average outstanding balances of earning
assets and increased rates earned on those assets. Interest expense for the nine
months ended September 30, 2000 increased $751,240 or 13.46% over the
corresponding period of 1999. As a result of these factors, net interest income
increased $251,147 or 3.67% in the nine months ended September 30, 2000,
compared to the same period of 1999.
Revenue from earning assets of the Company during the three months ended
September 30, 2000 increased $439,163 (10.85%) from the same period in 1999.
This increase was also due to higher average outstanding balances of earning
assets and higher rates earned on those assets. Interest expense for the three
months ended September 30, 2000 increased $399,150 or 22.05% over the
corresponding period of 1999. As a result of these factors, net interest income
increased $40,013 or 1.79% in the three months ended September 30, 2000,
compared to the same period of 1999.
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 $470,616 for the nine months ended
September 30, 2000 compared to $482,599 for the same period of 1999. Charge-
offs exceeded recoveries by approximately $341,000 for the nine months ended
September 30, 2000. The reserve for loan losses as a percent of outstanding
loans, net of unearned income, was 1.24% at September 30, 2000 compared to 1.32%
at year-end 1999.
The provision for loan losses for the three month period ended September 30,
2000 was $243,853 compared to $103,820 for the same period of 1999 representing
a $140,033 increase. This increase in the provision for loan losses is a
result of a decrease in recoveries as compared to the same period in 1999,
growth in the loan portfolio, and the deterioration of a single credit during
the quarter resulting in a higher reserve requirement for that credit.
Noninterest Income
Noninterest income for the nine months ended September 30, 2000 was $2,673,523
compared to $2,312,905 for the same period of 1999. This 15.59% increase was
primarily due to commission income of $1,125,013 in the first nine months of
2000 as compared to $847,975 in the same period of 1999. Changes in the
components of noninterest income are as follows: Service charges on deposits
increased $142,378 (13.07%), insurance commissions increased $277,038, other
operating income decreased $18,634 and securities gains or losses decreased
noninterest income by $40,164.
Noninterest income for the three months ended September 30, 2000, increased
$155,906 or 20.29%. The primary result of this increase is from increased
service charge income of $103,991 and increased commission income of $126,022.
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Noninterest Expenses
Noninterest expenses for the nine months ended September 30, 2000 were
$6,850,217 reflecting a 8.03% increase over the same period of 1999. The
primary components of noninterest expenses are salaries and employee benefits,
which increased to $3,451,928 for the nine months ended September 30, 2000,
6.38% higher than in the same period of 1999. Occupancy costs increased
$187,670 and other operating expenses increased $114,459.
Noninterest expenses for the three months ended September 30, 2000 were
$2,537,017 reflecting a 19.06% increase over the same period of 1999. The
primary components of noninterest expenses are salaries and employee benefits,
which increased $120,917 for the three months ended September 30, 2000, 10.98%
higher than in the same period of 1999. Occupancy costs increased $75,946 and
other operating expenses increased $209,357.
Income Taxes
The Company attempts to maximize its net income through active tax planning.
The provision for income taxes of $583,357 for the nine months ended September
30, 2000 decreased $52,465 compared to the same period of 1999. Taxes as a
percent of earnings decreased from 27.19% to 23.78%. The effective tax rate of
approximately 24% is less than the statutory rate principally because of the
effect of tax-exempt interest income.
Year 2000 Issues
The Year 2000 issue was the result of shortcomings in many electronic data
processing systems and other electronic equipment that could have adversely
affected the Company's operations as early as fiscal year 1999.
The Company completed an inventory of computer systems and other electronic
equipment that could have been affected by the Year 2000 issue and that were
necessary to conducting the Company's operations. Based on this inventory, the
Company upgraded or replaced various software and hardware items and then tested
and validated them for Year 2000 compliance.
Expenses for Year 2000 issues in 1999 were negligible and the Company's
management does not believe that any Year 2000 issues will affect the financial
condition or results of operations in 2000.
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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%.
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. Net income is
not materially impacted during simulation analysis under different rate
scenarios.
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PART 2. OTHER INFORMATION
Item 1. Legal Proceedings
1. Clarence Ray Vincent and Vickie Lynn Vincent v. First National -
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America's Bank, et al., Case No. CV 99-466. This action was filed on
----------------------
October 1, 1999 in the Circuit Court of Talladega County, Alabama. The
Complaint alleges that Mr. Vincent was told that he had to obtain certain
insurance in order for him to obtain credit from the Bank and that Mr.
Vincent was required to pay charges in excess of those permitted by law.
The Bank has denied any wrongdoing and its attorneys are vigorously
defending this action.
The parties are engaged in discovery. The Bank's attorneys have filed a
motion for summary judgment seeking dismissal of this case prior to the
necessity of a jury trial. The parties are discussing settlement and it is
likely that this matter will shortly be concluded. In the event that it
cannot be successfully resolved by agreement, the Bank is confident that it
will prevail.
2. Brenda Andrews v. Valley National Corporation a/k/a Valley National
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Bank; et al., Case No. CV 00-160, pending in the Circuit Court of Chambers
------------
County, Alabama. This action was filed on July 14, 2000. Ms. Andrews
alleges a number of claims against the Company and its Chief Executive
Officer and Chief Financial Officer in her Complaint, including negligent
hiring, wanton hiring, and civil conspiracy, which all essentially arise
out of her main claim, that her employment was unlawfully terminated
because of her age. Although discovery has just commenced in this action
and it is too early to state with certainty any details about its possible
outcome, the Company vigorously denies any and all wrongdoing. The Company
is vigorously defending this action and is hopeful that these claims will
soon be dismissed. The plaintiff's deposition is scheduled for November 13,
2000.
3. Frontier National Corporation v. Wanda Faye Johnson and Carol Turnham,
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Case No. CV 2000-454, pending in the Circuit Court of Talladega County,
Alabama. Carol Turnham and Wanda Faye Johnson are former employees of
Valley National Bank. Their employment was terminated by the Company
pursuant to a reduction in force. On August 25, 2000, the Company was
served with a demand letter from an attorney for Johnson and Turnham. The
letter alleged that the employees were terminated based upon their age in
violation of the Alabama Age Discrimination in Employment Act ("ADEA").
The company vehemently denies that the employment decisions affecting these
two employees were based upon age. Given the disputed issue, the Company
filed a Declaratory Judgment action in Talladega County on August 29, 2000,
seeking to have the Court rule that the Company is in no way liable to the
former employees. The employees have filed a motion to have the case
transferred to Chambers County and we have noticed their depositions.
Given that the case is in this early stage, we are unable to assess with
certainty the potential for liability, but we intend to vigorously defend
the Company's position and aggressively challenge the Plaintiffs' claims.
4. Cagle's Inc. v. Valley National Bank, Case No. 00-A-851-E. On June 30,
------------------------------------
2000, a complaint alleging breach of duty, negligence and gross negligence
against Frontier National Bank, Lanett, Alabama in connection with its
acceptance for deposit of five
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checks totaling $1,138,611 was filed in federal court in Alabama. The
plaintiff, a publicly traded poultry processing concern, alleges that the
Bank knew or should have known that the checks were not authorized. The
plaintiff seeks unspecified compensatory and punitive damages and attorney
fees, although it has apparently recovered $800,000 to $900,000 from the
Bank's depositor. The Bank denies any liability and intends to defend
against the allegations vigorously.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Statement RE: Computation of Earnings per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended September 30, 2000, no reports were filed for
Frontier National Corporation on Form 8-K.
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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
November 14, 2000 By: /s/ STEVEN R. TOWNSON
----------------------------------
Steven R. Townson
President, Chief Executive Officer and
Chief Financial Officer
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