<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 MARCH 31, 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 April 30, 2000: 3,415,502
<PAGE>
FRONTIER NATIONAL CORPORATION
March 31, 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
Financial Condition and Results of Operations 11 - 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Part 2. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 2000
(Unaudited) December 31, 1999
-------------- -----------------
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS $ 7,271,130 $ 6,902,010
INTEREST BEARING DEPOSITS WITH OTHER BANKS 3,057,029 102,066
FEDERAL FUNDS SOLD 1,300,000 6,640,000
SECURITIES AVAILABLE FOR SALE 50,617,323 50,357,787
LOANS, NET OF UNEARNED INCOME 152,228,259 139,706,383
ALLOWANCE FOR LOAN LOSSES (1,954,427) (1,849,356)
PREMISES AND EQUIPMENT, NET 7,650,011 6,806,237
ACCRUED INTEREST RECEIVABLE 1,849,150 1,651,255
CASH SURRENDER VALUE ON LIFE INSURANCE 5,121,609 5,073,986
INTANGIBLE ASSETS, NET 1,462,684 1,497,013
FORECLOSED REAL ESTATE 357,299 305,965
OTHER ASSETS 1,596,600 2,021,807
------------ ------------
TOTAL ASSETS $230,556,667 $219,215,153
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
NON-INTEREST BEARING DEPOSITS $ 26,193,455 $ 24,512,607
INTEREST BEARING DEPOSITS 152,369,193 147,914,373
------------ ------------
TOTAL DEPOSITS 178,562,648 172,426,980
------------ ------------
DIVIDENDS PAYABLE - 438,697
ACCRUED INTEREST PAYABLE 970,986 925,364
LONG-TERM DEBT 29,042,000 24,042,000
OTHER LIABILITIES 1,277,555 1,190,927
------------ ------------
TOTAL LIABILITIES 209,853,189 199,023,968
------------ ------------
SHAREHOLDERS' EQUITY
COMMON STOCK ($.001 PAR VALUE; 10,000,000
SHARES AUTHORIZED, 3,497,497 ISSUED OF
WHICH 3,415,863 ARE OUTSTANDING AT
MARCH 31, 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 14,264,448 14,263,104
RETAINED EARNINGS 9,023,178 8,774,744
TREASURY STOCK, AT COST (81,634 SHARES AT
MARCH 31, 2000 AND 83,140 SHARES AT
DECEMBER 31, 1999) (1,146,981) (1,170,483)
ACCUMULATED COMPREHENSIVE INCOME (LOSS):
NET UNREALIZED HOLDING GAINS ON
SECURITIES AVAILABLE FOR SALE, NET OF
DEFERRED INCOME TAX (1,440,665) (1,679,678)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 20,703,478 20,191,185
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $230,556,667 $219,215,153
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
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FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
------------------------
2000 1999
---------- ----------
INTEREST INCOME
INTEREST AND FEES ON LOANS $3,578,902 $3,250,758
INTEREST AND DIVIDENDS ON SECURITIES
TAXABLE SECURITIES 469,798 464,212
NONTAXABLE SECURITIES 328,468 258,025
INTEREST EARNED ON DEPOSITS WITH OTHER BANKS 10,462 17,848
INTEREST EARNED ON FEDERAL FUNDS SOLD 71,392 212,237
---------- ----------
TOTAL INTEREST INCOME 4,459,022 4,203,080
INTEREST EXPENSE
INTEREST ON DEPOSITS 1,651,835 1,597,453
INTEREST ON BORROWED FUNDS 361,112 293,481
---------- ----------
TOTAL INTEREST EXPENSE 2,012,947 1,890,934
NET INTEREST INCOME 2,446,075 2,312,146
PROVISION FOR LOAN LOSSES (196,767) (194,305)
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,249,308 2,117,841
NONINTEREST INCOME
SERVICE CHARGES ON DEPOSIT ACCOUNTS 315,191 349,187
COMMISSION INCOME 358,853 284,505
OTHER OPERATING INCOME 157,984 116,066
SECURITIES GAINS - -
---------- ----------
TOTAL NONINTEREST INCOME 832,028 749,758
NONINTEREST EXPENSE
SALARIES AND EMPLOYEE BENEFITS 1,107,424 1,082,764
NET OCCUPANCY EXPENSE 371,790 334,190
OTHER OPERATING EXPENSES 647,545 671,375
---------- ----------
TOTAL NONINTEREST EXPENSES 2,126,759 2,088,329
INCOME BEFORE INCOME TAXES 954,577 779,270
PROVISION FOR INCOME TAXES (270,558) (200,834)
---------- ----------
NET INCOME $ 684,019 $ 578,436
========== ==========
BASIC EARNINGS PER COMMON SHARE $ 0.20 $ 0.17
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 3,415,745 3,473,525
EARNINGS PER COMMON SHARE ASSUMING DILUTION $ 0.20 $ 0.16
WEIGHTED AVERAGE SHARES
OUTSTANDING ASSUMING DILUTION 3,461,848 3,518,658
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
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FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
---------------------
2000 1999
--------- --------
NET INCOME $ 684,019 $578,436
OTHER COMPREHENSIVE, NET OF TAX:
UNREALIZED GAINS (LOSSES) ON SECURITIES:
UNREALIZED HOLDING GAINS (LOSSES) ARISING
DURING THE PERIOD 378,822 (80,915)
LESS: RECLASSIFICATION ADJUSTMENTS FOR GAINS
(LOSSES) INCLUDED IN NET INCOME - -
--------- --------
NET UNREALIZED GAINS (LOSSES) 378,822 (80,915)
INCOME TAX RELATED TO ITEMS OF OTHER
COMPREHENSIVE INCOME (LOSS) (139,809) 32,687
--------- --------
OTHER COMPREHENSIVE INCOME (LOSS) 239,013 (48,228)
--------- --------
COMPREHENSIVE INCOME (LOSS) $ 923,032 $530,208
========= ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------------
2000 1999
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 794,041 $ 1,558,793
INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE 377,062 4,057,504
PURCHASES OF SECURITIES AVAILABLE FOR SALE (250,000) (2,206,750)
NET (INCREASE) DECREASE IN LOANS TO CUSTOMERS (12,706,678) 5,552,811
PURCHASES OF PREMISES AND EQUIPMENT (996,647) (364,467)
PROCEEDS FROM SALES OF FIXED ASSETS 10,867 130,363
PROCEEDS FROM SALE OF FORECLOSED REAL ESTATE 50,112 -
------------ -----------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (13,515,284) 7,169,461
------------ -----------
FINANCING ACTIVITIES:
NET INCREASE (DECREASE) IN DEPOSITS 6,432,899 6,461,880
NET INCREASE IN SHORT-TERM BORROWINGS 121,863 313,261
DIVIDENDS PAID (874,282) (431,747)
PROCEEDS FROM SALE OF TREASURY STOCK 32,096 -
TREASURY STOCK PURCHASED (7,250) -
PROCEEDS FROM NOTES PAYABLE, NET 5,000,000 3,500,000
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,705,326 9,843,394
------------ -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,015,917) 18,571,648
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,644,076 14,836,223
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,628,159 $33,407,871
============ ===========
</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, 2000
(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, 1999 $3,498 $14,263,104 $8,774,744 $(1,679,678) $(1,170,483) $20,191,185
CASH DIVIDENDS -
COMMON - - (435,585) - - (435,585)
PURCHASE OF TREASURY STOCK - - - - (7,250) (7,250)
REISSUANCE OF TREASURY STOCK - 1,344 - - 30,752 32,096
NET CHANGE IN
UNREALIZED GAINS
ON SECURITIES - - - 239,013 - 239,013
NET INCOME - MARCH 31, 2000 - - 684,019 - - 684,019
------ ----------- ---------- ----------- ----------- -----------
BALANCE AT
MARCH 31, 2000 $3,498 $14,264,448 $9,023,178 $(1,440,665) $(1,146,981) $20,703,478
====== =========== ========== =========== =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
MARCH 31, 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 in 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 three-month period ended March 31,
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 28 percent and 26 percent for the three
months ended March 31, 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 March 31, 2000, the Company had net unrealized losses of $2,329,581 in
available-for-sale securities that are reflected in the presented assets and
resulted in a decrease in shareholders' equity of $1,440,665, 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 March 31, 2000 was $239,013. See also Note D -
Shareholders' Equity.
NOTE D - Shareholders' Equity
During the first three months of 2000, cash dividends of $435,585 are charged
against equity. Equity was increased by $239,013 for the decrease in net
unrealized losses on securities. Treasury stock was purchased during the first
quarter decreasing shareholders' equity $7,250. Treasury stock was also
reissued increasing shareholders' equity $32,096. See also Note E - Stock Split
and Note F - Treasury Stock.
NOTE E - 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.
NOTE F - Treasury Stock
During the first quarter, 500 shares of common stock were acquired and placed in
treasury at cost and 2,006 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 81,634 shares at March 31, 2000, respectively.
NOTE G - 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 H - 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.
9
<PAGE>
NOTE I - Subsequent Events
On April 17, 2000, the company granted stock options to officers and directors
under the Frontier National Corporation 1999 Statutory-Nonstatutory Stock Option
Plan.
Officers of the company were granted a total of 43,500 incentive stock options
at an exercise price of $10.125 (the fair market value on the grant date).
These options vest over a five year time period at 20% on each anniversary of
the grant date and expire on April 17, 2010 ten years from the grant date.
Directors of the Company were granted a total of 22,500 nonqualified stock
options at an exercise price of $10.125 (the fair market value on the grant
date). These options are immediately exercisable and expire on the one-year
anniversary date of the directors termination of service to the Board.
The earnings per share assuming dilution calculations do not reflect the stock
options granted on April 17, 2000 since they were granted after quarter-end.
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 March 31, 2000
Form 10-Q.
FINANCIAL CONDITION
March 31, 2000 compared to December 31, 1999
Loans
Loans comprised the largest single category of the Company's earning assets on
March 31, 2000. Loans, net of unearned income and reserve for loan losses, were
65.18% of total assets at March 31, 2000 and 62.89% of total assets at December
31, 1999. Total net loans were $150,273,832 at March 31, 2000, representing a
9.01% 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
$5,080,464 from December 31, 1999 to March 31, 2000. Investment securities and
federal funds sold at March 31, 2000 were $51,917,323 compared with $56,997,787
at December 31, 1999, reflecting an 8.91% decrease.
Asset Quality
Between December 31, 1999 and March 31, 2000, the Company experienced an
increase in nonperforming assets (defined as nonaccrual loans, loans past due 90
days or more, restructured loans, nonaccruing securities, and other real estate)
from $1.605 million to $1.678 million. The ratio of loan loss allowance to total
nonperforming assets increased from 1.152 to 1.165, the ratio of nonperforming
loans to total loans was unchanged at .011. 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 $178,562,648 at March 31, 2000 increased $6,135,668 (3.56%)
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 $1,680,848 or 6.86% from year-end 1999
to March 31, 2000, and interest bearing deposits increased $4,454,820 (3.01%)
from year-end 1999.
11
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Long-term Debt
At March 31, 2000 and December 31, 1999, the Company had notes payable totaling
$29,042,000, and $24,042,000, respectively.
Maturities of long-term debt for the years ending December 31 are as follows:
2000 $ 1,100,000
2001 350,000
2002 -
2003 5,000,000
2004 5,500,000
Thereafter 17,092,000
-----------
Total $29,042,000
===========
Shareholders' Equity
Company shareholders' equity increased $512,293 from December 31, 1999 to March
31, 2000, due to net income of $684,019, the declaration of cash dividends of
$435,585, the decrease of unrealized losses on securities available-for-sale
totaling $239,013 net of deferred tax asset, the purchase of treasury stock of
$7,250 and the reissuance of treasury stock of $32,096.
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 $38.165 million or
25.07% of the total loan portfolio at March 31, 2000 and there are $0.605
million of 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 March
31, 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 $20,681,000 at March 31, 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 $22,636,000 at March 31, 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
Three months ended March 31, 2000 and 1999
Summary
Net earnings of the Company for the three months ended March 31, 2000 were
$684,019 compared to $578,436 for the same period in 1999, representing an
18.25% increase. This increase was due to a 5.79% increase in net interest
income primarily a result of loan growth, an increase in noninterest income of
10.97% primarily from nonbank subsidiaries, and expense control that held
noninterest expenses to an increase of only 1.84%.
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, 2000 increased $255,942 (6.09%) 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 three
months ended March 31, 2000 increased $122,013 or 6.45% over the corresponding
period
13
<PAGE>
of 1999. As a result of these factors, net interest income increased $133,929
or 5.79% in the three months ended March 31, 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 $196,767 for the three months ended
March 31, 2000 compared to $194,305 for the same period of 1999. Charge-offs
exceeded recoveries by $90,845 for the three months ended March 31, 2000. The
reserve for loan losses as a percent of outstanding loans, net of unearned
income, was 1.28% at March 31, 2000 compared to 1.32% at year-end 1999.
Non-interest Income
Non-interest income for the three months ended March 31, 2000 was $832,028
compared to $749,758 for the same period of 1999. This 10.97% increase was
primarily due to insurance commissions of $358,853 in the first three months of
2000 as compared to $284,505 in the same period of 1999. Significant components
of non-interest income are as follows: Service charges on deposits decreased
$33,996 (9.74%), insurance commissions increased $74,348, and other operating
income increased $41,918.
Non-interest Expenses
Non-interest expenses for the three months ended March 31, 2000 were $2,126,759
reflecting a 1.84% increase over the same period of 1999. The primary
components of non-interest expenses are salaries and employee benefits, which
increased to $1,107,424 for the three months ended March 31, 2000, 2.28% higher
than in the same period of 1999. Occupancy costs increased $37,600 and other
operating expenses decreased $23,830.
Income Taxes
The Company attempts to maximize its net income through active tax planning.
The provision for income taxes of $270,558 for the three months ended March 31,
2000 increased $69,724 compared to the same period of 1999, due to the increase
in income before income taxes. Taxes as a percent of earnings increased from
25.77% to 28.34%. The effective tax rate of approximately 28.34% 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.
14
<PAGE>
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.
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. 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.
15
<PAGE>
PART 2. OTHER INFORMATION
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 March 31, 2000, one report was filed for
Frontier National Corporation on Form 8-K announcing the 1999
earnings of the corporation and the declaration of a cash dividend on
January 17, 2000.
16
<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
Dated: May 15, 2000 By: /s/ STEVEN R. TOWNSON
---------------------
Steven R. Townson
President and Chief Executive Officer
17
<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, 2000 and 1999.
Average shares outstanding have been retroactively adjusted on an equivalent
share basis for the effects of the stock dividend as discussed in the notes to
consolidated financial statements.
<TABLE>
<CAPTION>
Three Months
Ended March 31
----------------------
2000 1999
---------- ----------
<S> <C> <C>
Basic Earnings Per Share:
Net income......................... $ 684,019 $ 578,436
---------- ----------
Earnings on common shares.......... $ 684,019 $ 578,436
========== ==========
Weighted average common shares
outstanding - basic............... 3,415,745 3,473,525
---------- ----------
Basic earnings per common share.... $ .20 $ .17
---------- ----------
Diluted Earnings Per Share:
Net income......................... $ 684,019 $ 578,436
========== ==========
Weighted average common shares
outstanding - diluted............. 3,461,848 3,518,658
---------- ----------
Diluted earnings per common share.. $ .20 $ .16
---------- ----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 7,271,130
<INT-BEARING-DEPOSITS> 3,057,029
<FED-FUNDS-SOLD> 1,300,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,617,323
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 152,228,259
<ALLOWANCE> 1,954,427
<TOTAL-ASSETS> 230,556,667
<DEPOSITS> 178,562,648
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,248,541
<LONG-TERM> 29,042,000
0
0
<COMMON> 3,498
<OTHER-SE> 20,699,980
<TOTAL-LIABILITIES-AND-EQUITY> 230,556,667
<INTEREST-LOAN> 3,578,902
<INTEREST-INVEST> 798,266
<INTEREST-OTHER> 81,854
<INTEREST-TOTAL> 4,459,022
<INTEREST-DEPOSIT> 1,651,835
<INTEREST-EXPENSE> 2,012,947
<INTEREST-INCOME-NET> 2,446,075
<LOAN-LOSSES> 196,767
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,126,759
<INCOME-PRETAX> 954,577
<INCOME-PRE-EXTRAORDINARY> 954,577
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 684,019
<EPS-BASIC> .20
<EPS-DILUTED> .20
<YIELD-ACTUAL> 1.60
<LOANS-NON> 975
<LOANS-PAST> 346
<LOANS-TROUBLED> 32
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,849,356
<CHARGE-OFFS> 183,944
<RECOVERIES> 92,248
<ALLOWANCE-CLOSE> 1,954,427
<ALLOWANCE-DOMESTIC> 1,954,427
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
