SECURITIES AND EXCHANGE COMMISSIONS
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NO. 000-24853
FRONTIER NATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ALABAMA 72-1355228
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(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
43 NORTH BROADWAY
SYLACAUGA, ALABAMA 35150
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(334) 644-5419
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
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(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS:
YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. |_|
AS OF MARCH 26, 2000 THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY
NON-AFFILIATES WAS $23,874,537.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S CLASS OF COMMON
STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT MARCH 15, 2000
- ----------------------------- -----------------------------
COMMON STOCK, $.001 PAR VALUE 3,415,863
DOCUMENTS INCORPORATED BY REFERENCE PART OF 10-K IN WHICH INCORPORATED
- --------------------------------------- ----------------------------------
PROXY STATEMENT FOR 2000 ANNUAL MEETING PART III
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PART I
ITEM 1 - BUSINESS
Frontier National Corporation ("Frontier" or the "Company"),
incorporated in Alabama, is a bank holding company that commenced operations in
1997 as Valley National Corporation. The Company is headquartered in Sylacauga,
Alabama and engages in a variety of banking services. Its principal assets are
the capital stock of Frontier National Bank in Lanett, Alabama and Frontier
National Bank in Sylacauga, Alabama (the "Subsidiary Banks"), both are
wholly-owned subsidiaries of the Company and are national banking associations.
Frontier National Bank in Lanett was formerly named Valley National Bank and
Frontier National Bank in Sylacauga was formerly named First National-America's
Bank. As part of the Company's strategic plan, the names were officially changed
on November 29, 1999. At December 31, 1999, Frontier had total assets of $219
million and stockholders' equity of $20.2 million.
EMPLOYEES
As of December 31, 1999, Frontier and its subsidiaries had
approximately 127 full-time employees. The employees are not represented by a
collective bargaining unit. Frontier believes its relationship with its
employees to be good.
BANKING SERVICES
Commercial banking is Frontier's predominant business, with special
emphasis in retail banking, including the acceptance of checking and savings
deposits, and the making of commercial, real estate, personal, home improvement,
automobile and other installment and term loans. It also offers collections,
notary public services, and other customary bank services to its customers.
Frontier provides ancillary financial services through two wholly owned
subsidiaries of Frontier National Bank in Sylacauga, Alabama. Frontier Financial
Services, Inc., an Alabama corporation ("Frontier Financial"), formed in 1993,
is a consumer finance company located in four Alabama cities. The Frontier
Agency, Inc. is an insurance agency that was recently formed and is
headquartered in Sylacauga, Alabama.
BUSINESS COMBINATIONS
On April 30, 1999, the Frontier Agency Inc., a subsidiary of Frontier
National Bank in Sylacauga entered into an asset purchase agreement with the
Lawrence-Jones Insurance and Real Estate Agency, Inc. whereas assets valuing
$136,700 were purchased with cash.
COMPETITION
All phases of Frontier's banking activities are highly competitive.
Frontier competes actively with regional and community banks, as well as finance
companies, credit unions and other financial institutions located in its service
areas.
FORWARD-LOOKING STATEMENTS
In this report and in documents incorporated herein by reference, the
Company may make statements related to the future results of the Company that
may be considered "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company's actual results may
differ materially from those included in the forward-looking statements.
Forward-looking statements are typically identified by the words "believe,
expect, anticipate, intend, estimate" and similar expressions. These statements
may relate to, among other things, unforeseen or unanticipated
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costs, loan loss reserve adequacy, simulation of changes in interest rates and
litigation results. Actual results may differ materially from those expressed or
implied by such forward-looking statements as a result of certain risks and
uncertainties, including, but not limited to, changes in political and economic
conditions, interest rate fluctuations, competitive product and pricing
pressures within the Company's markets, equity and fixed income market
fluctuations, personal and corporate customer's bankruptcies, inflation,
acquisitions and integrations of acquired businesses, technological change,
changes in law, changes in fiscal, monetary, regulatory and tax policies,
monetary fluctuations, success in gaining regulatory approvals when required as
well as other risks and uncertainties, many of which are beyond the Company's
control.
SUPERVISION AND REGULATION
The following summary of the Bank Holding Company Act ("BHC Act") and
of the other acts described herein is qualified in its entirety by express
reference to each of the particular acts.
BANK HOLDING COMPANY ACT OF 1956. Frontier is a bank holding company
within the meaning of the federal BHC Act, and is registered with the Board of
Governors of the Federal Reserve System (the "Board"). Frontier is required to
file with the Board annual reports and such additional information as the Board
may require pursuant to the BHC Act. The Board may also make examinations of
Frontier and its subsidiaries.
The BHC Act requires every bank holding company to obtain the prior
approval of the Board before acquiring direct or indirect ownership or control
of more than 5% of the voting shares of any bank which is not majority owned by
Frontier. The BHC Act prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
outstanding voting shares of any company which is not a bank and from engaging
in any business other than banking or furnishing services to or performing
services for its subsidiaries. The 5% limitation is not applicable to ownership
of shares in any company the activities of which the Board has determined to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto.
In addition, and subject to certain exceptions, the BHC Act and the
Change in Bank Control Act, together with regulations thereunder, require Board
approval (or, depending on the circumstances, no notice of disapproval) prior to
any person or company acquiring "control" of a bank holding company, such as
Frontier. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the bank holding
company. Control is rebuttably presumed to exist if a person acquires 10% or
more but less than 25% of any class of voting securities and either the bank
holding company has registered securities under Section 12 of the Exchange Act
or no other person will own a greater percentage of that class of voting
securities immediately after the transaction. The regulations provide a
procedure for challenge of the rebuttable control presumption.
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Interstate Banking and Branching Act"), bank holding companies
may acquire banks in states other than their home states without regard to the
permissibility of such acquisitions under state law, but subject to any state
requirement that the bank has been organized and operating for a minimum period
of time, not to exceed five years, and the requirement that the bank holding
company, prior to or following the proposed acquisition, controls no more than
10% of the total amount of deposits of insured depository institutions in the
United States and less than 30% of such deposits in that state (or such lesser
or greater amount set by state law). The Interstate Banking and Branching Act
also authorizes banks to merge across state lines, thereby creating interstate
branches. This provision, which became effective June 1, 1997, allowed each
state, prior to the effective date, the opportunity to "opt out" of this
provision, thereby
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prohibiting interstate branching within that state. Alabama did not adopt
legislation to "opt out" of the interstate branching provisions.
Frontier National Bank in Lanett and Frontier National Bank in
Sylacauga are "affiliates" of Frontier within the meaning of the Federal Reserve
Act. This act places restrictions on a bank's loans or extensions of credit to,
purchases of or investments in the securities of, and purchases of assets from
an affiliate, a bank's loans or extensions of credit to third parties
collateralized by the securities or obligations of an affiliate, the issuance of
guarantees, acceptances, and letters of credit on behalf of an affiliate, and
certain bank transactions with an affiliate, or with respect to which an
affiliate acts as agent, participates, or has a financial interest. Furthermore,
a bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services.
Under Federal Reserve Board policy, Frontier is expected to act as a
source of financial strength to its Subsidiary Banks and to commit resources to
support its subsidiaries. This support may be required at times when, absent
such Federal Reserve Board policy, Frontier may not be inclined to provide it.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), a depository institution insured by the FDIC can be held liable for
any loss incurred by, or reasonably expected to be incurred by, the FDIC after
August 9, 1989 in connection with (a) the default of a commonly controlled
FDIC-insured depository institution or (b) any assistance provided by the FDIC
to any commonly controlled FDIC-insured depository institution "in danger of
default." "Default" is defined generally as the appointment of a conservator or
receiver and "in danger of default" is defined generally as the existence of
certain conditions indicating that a default is likely to occur in the absence
of regulatory assistance. Under FDICIA (see discussion below) a bank holding
company may be required to guarantee the capital plan of an undercapitalized
depository institution. Any capital loans by a bank holding company to any of
its subsidiary banks are subordinate in right of payment to deposits and to
certain other indebtedness of such subsidiary bank. In the event of a bank
holding company's bankruptcy, any commitment by the bank holding company to a
federal bank regulatory agency to maintain the capital of a subsidiary bank will
be assumed by the bankruptcy trustee and entitled to a priority of payment.
NATIONAL BANKING ACT; FEDERAL DEPOSIT INSURANCE ACT. Both subsidiary
banks are incorporated under the National Banking Act, as amended, and are
subject to the applicable provisions of that law. As national banking
associations, both are subject to the supervision of the Office of the
Comptroller of the Currency ("OCC") and to regular examination by that agency.
In addition, both are members of the FDIC and its deposits are insured by the
FDIC. Therefore, both are subject to examination and regulation by the FDIC.
A number of federal statutes as regulations limit the amount of
dividends that can be paid by both subsidiary banks and Frontier. The amount of
dividends that a subsidiary national bank may declare in one year, without
approval of the OCC, is the sum of the bank's net profits for that year and its
retained net profits for the preceding two years. Under the rules of the OCC,
the calculation of net profits is more restrictive under certain circumstances.
In addition, the declaration and payments of dividends by the subsidiary bank's
Boards are subject to the rules and regulations of the FRB governing the amount
of dividends which may be paid to shareholders, the manner in which dividends
are paid, and the methods, if any, by which capital stock and surplus may be
retired and reduced.
The Subsidiary Banks also are subject to regulation respecting the
maintenance of certain minimum capital levels (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Capital Resources"
and "Liquidity"), and will be required to file annual reports and such
additional information as the National Banking Act and FDIC regulations require.
They are also subject to certain restrictions on loan amounts, interest rates,
"insider" loans to officers, directors and principal
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shareholders, tie-in arrangements, and transactions with affiliates, as well as
many other matters. Strict compliance at all times with state and federal
banking laws is required.
The Gramm-Leach-Bliley Act adopted in November 1999 has been referred
to as the most important banking bill in over 60 years. The most significant
provisions ratify new powers for banks and bank holding companies, especially in
the areas of securities and insurance. The Act also includes requirements
regarding the privacy and protection of customer information held by financial
institutions, as well as many other providers of financial services. There are
provisions providing for functional regulation of the various services provided
by institutions among different regulators. There are other provisions which
limit the future expansion of unitary thrift holding companies which now prevent
companies like Wal-Mart from owning a thrift institution. Finally, among many
other sections of the Act, there is some relief for small banks from the
regulatory burden of the Community Reinvestment Act. The regulatory agencies are
required to adopt many new regulations to implement the Act.
Under the Community Reinvestment Act ("CRA"), as implemented by Federal
Reserve Board and OCC regulations, holding companies and national banks have a
continuing and affirmative obligation consistent with their safe and sound
operation to help meet the credit needs of their entire community, including low
and moderate-income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community. The CRA requires the
Federal Reserve Board and the OCC, in connection with their examination of
holding companies or banks, to assess the companies' record of meeting the
credit needs of their communities and to take such record into account in its
evaluation of certain applications by such institution. The FIRREA amended the
CRA to require public disclosure of an institution's CRA rating and to require
that the Federal Reserve Board and the OCC provide a written evaluation of an
institution's CRA performance utilizing a four-tiered descriptive rating system
in lieu of the then existing five-tiered numerical rating system. Frontier and
its subsidiaries are subject to these regulations.
Alabama law contains limitations on the interest rates that may be
charged on various types of loans. The operations of banks are also affected by
various consumer laws and regulations, including those relating to equal credit
opportunity and regulation of consumer lending practices. All national banks
must become and remain insured banks under the FDIC. (See 12 U.S.C. ss. 1811, et
seq.).
The U.S. federal and state banking agencies have broad enforcement
powers over bank holding companies and their subsidiaries, including, in the
case of the federal agencies, the power to terminate deposit insurance, impose
substantial fines and other civil penalties and, in the most severe cases, to
appoint a conservator or receiver for a depository institution. Failure to
maintain adequate capital or to comply with applicable laws, regulations and
supervisory agreements could subject Frontier or its subsidiaries to these
enforcement provisions.
EFFECT OF GOVERNMENTAL POLICIES
Frontier and its subsidiaries are affected by the policies of
regulatory authorities, including the Federal Reserve System. An important
function of the Federal Reserve System is to regulate the national money supply.
Among the instruments of monetary policy used by the Federal Reserve are:
purchases and sales of U.S. Government securities in the marketplace; changes in
the discount rate, which is the rate any depository institution must pay to
borrow from the Federal Reserve; and changes in the reserve requirements of
depository institutions. These instruments are effective in influencing economic
and monetary growth, interest rate levels and inflation.
The monetary policies of the Federal Reserve System and other
governmental policies have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to
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do so in the future. Because of changing conditions in the national economy and
in the money market, as well as the result of actions by monetary and fiscal
authorities, it is not possible to predict with certainty future changes in
interest rates, deposit levels, loan demand or the business and earnings of
Frontier or whether the changing economic conditions will have a positive or
negative effect on operations and earnings.
Bills are pending before the United States Congress and the Alabama
Legislature which could affect the business of Frontier, and there are
indications that other similar bills may be introduced in the future. It cannot
be predicted whether or in what form any of these proposals will be adopted or
the extent to which the business of Frontier may be affected thereby.
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ITEM 1 - STATISTICAL DISCLOSURE
Page(s)
Loan Portfolio........................................................... 13
Selected Loan Maturity and Interest Rate Sensitivity..................... 13
Securities Portfolio..................................................... 14
Securities Portfolio Maturity Schedule................................... 15
Maturities of Large Time Deposits........................................ 16
Maturities of Long-Term Debt............................................. 17
Return on Equity and Assets.............................................. 18
Capital Adequacy Ratios.................................................. 19
Interest Rate Sensitivity Analysis....................................... 20
Consolidated Average Balances, Interest Income/Expense and Yields/Rates.. 23
Rate/Volume Variance Analysis............................................ 24
Summary of Loan Loss Experience.......................................... 26
Allocation of Loan Loss Reserve.......................................... 26
Nonperforming Assets..................................................... 27
Noninterest Income....................................................... 28
Noninterest Expense...................................................... 28-29
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ITEM 2 - PROPERTIES
The Company, through its subsidiaries, owns or leases buildings that
are used in the normal course of business. The principal executive offices of
the Company are located at 43 N. Broadway, Sylacauga, Alabama. The Subsidiary
Banks own various offices and facilities in Alabama. Frontier National Bank in
Lanett operates in one location in Lanett, Alabama and two in Valley, Alabama
and Frontier National Bank in Sylacauga operates in one location in Sylacauga,
Alabama and has another branch in Childersburg, Alabama. Frontier owns four of
these locations and leases the other one. An additional branch in Sylacauga,
Alabama is currently under construction with expected completion in the second
quarter of the year 2000. Frontier National Bank in Sylacauga has purchased land
in Chelsea, Alabama and Frontier National Bank in Lanett has purchased land in
Auburn, Alabama. Both land purchases are for the purpose of building a branch at
each location. Frontier National Corporation is also constructing a building in
Sylacauga, Alabama for use in data processing services for its subsidiary banks.
The building is expected to be complete in the second quarter of the year 2000.
ITEM 3 - LEGAL PROCEEDINGS
1. Betty Swain, et al. v. Frontier Financial Services, Inc., Case No. CV
97-539. This action was filed on December 5, 1997 against Frontier
Financial Services, Inc., a subsidiary of Frontier National Bank in
Sylacauga, in the Circuit Court of Talladega County, Alabama. The
Complaint in this action alleges alternative theories of violation of
the Alabama Mini-Code relating to permissible finance charges and to
unjust enrichment or conversion. The plaintiffs seek certification as a
class action.
The Company's attorneys have moved to dismiss the allegations made in
the Complaint. This motion has not yet been ruled upon. Further, the
Company maintains that plaintiffs' claim cannot succeed since, among
other things, it is barred by the applicable provisions of the Alabama
Mini-Code. The Company continues to deny any and all liability and has
demanded that opposing counsel dismiss this lawsuit. It is too early to
predict the potential liability in this matter; however, the Company
continues to vigorously defend the claims and hopes to have this matter
dismissed in the near future.
2. Willie F. Datcher, Jr. v. The City Bank of Childersburg, et al., Case
No. CV 98-160. This action was filed in the Circuit Court of Talladega
County on April 13, 1998. The Complaint alleges that a bank, which has
subsequently been acquired by the Company, engaged in fraudulent acts
relating to customers' accounts. The Company has vigorously denied any
and all liability and continues to defend this action. The Company is
hopeful that this matter will soon be dismissed.
3. Clarence Ray Vincent and Vickie Lynn Vincent v. First
National-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 Company has denied any wrongdoing and its
attorneys are vigorously defending this action. Discovery has not yet
commenced in the action and, therefore, it is too early to tell about
any potential liability.
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders by solicitation
of proxies or otherwise during the fourth quarter of 1999.
PART II
ITEM 5 - MARKET OF REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
The Company's Class A Common Stock, $.001 par value per share (the
"Common Stock") is traded on the Nasdaq Bulletin Board under the symbol "FIEC."
Trading of the Common Stock commenced in October 1998. The Common Stock has
traded at prices between $14 and $16.19 per share during 1999.
Prior to the fourth quarter of 1998, there was no established trading
market for the Common Stock and the only purchases and sales of the Common Stock
were in privately negotiated transactions. Therefore, no reliable information is
available as to trades of the Common Stock, or as to the prices at which such
Common Stock has traded. Management has reviewed the limited information
available to the Company as to the ranges at which shares of the Common Stock
has been sold. The following data regarding the Common Stock is provided for
information purposes only, and should not be viewed as indicative of the actual
or market value of the Common Stock.
High Low Dividend
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1999:
First Quarter...................... $ 15.06 $ 14.72 $ .1900
Second Quarter..................... 16.19 14.25 .1900
Third Quarter...................... 16.13 14.06 .1275
Fourth Quarter..................... 15.50 14.00 .1275
1998:
First Quarter...................... $ 6.00 $ 6.00 $ .0480
Second Quarter..................... 7.20 6.00 .1249
Third Quarter...................... 15.50 14.67 .1267
Fourth Quarter..................... 15.67 14.67 .1267
As of March 20, 2000, the Common Stock was held by approximately 192
shareholders of record. It is the Company's policy to pay dividends quarterly
based on the performance of its subsidiaries. The Company paid annual dividends
of $.635 per share in 1999 and $.43 per share in 1998. Please see chart above
for quarterly dividend information. In addition, in May 1999, the Company
declared a 3-for-2 stock split resulting in the issuance of 1,157,548 shares of
common stock to existing shareholders. The amounts in the tables above which
occurred prior to the stock split have been retroactively adjusted to reflect
the effects of the split. The Company, through the Subsidiary Banks, is subject
to certain restrictions on the payment of dividends. See "Note 19 - Restrictions
on Subsidiary Dividends, Loans or Advances" in the "Notes to Consolidated
Financial Statements."
RECENT SALES OF UNREGISTERED SECURITIES
There have been no sales of unregistered securities during 1999.
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ITEM 6 - SELECTED FINANCIAL DATA
The following table presents on a historical basis selected financial
data and ratios for the Company.
<TABLE>
<CAPTION>
<S> <C>
Years ended December 31,
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1999 1998 1997 1996 1995
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(Dollars in thousands except per share data)
EARNINGS SUMMARY:
Interest income ...................................... $ 17,315 $ 13,883 $ 11,085 $ 8,785 $ 6,180
Less interest expense ................................ 8,146 6,294 4,695 3,352 2,076
Net interest income .................................. 9,169 7,589 6,390 5,433 4,104
Provision for loan losses ............................ 497 1,412 662 564 (98)
Net interest income after provision for loan losses . 8,672 6,177 5,728 4,869 4,202
Noninterest income ................................... 3,102 2,283 1,222 885 704
Noninterest expense .................................. 8,597 7,066 5,036 4,297 3,315
Income before income taxes ........................... 3,177 1,394 1,914 1,457 1,591
Applicable income taxes .............................. 694 266 562 410 410
Net income ........................................... 2,483 1,128 1,352 1,047 1,181
PER COMMON SHARE DATA:
(Retroactively adjusted to give effect to stock split)
Net income - basic ................................... $ 0.72 $ 0.39 $ 0.64 $ 0.50 $ 0.56
Net income - diluted ................................. 0.71 0.39 0.64 0.50 0.56
Cash dividends declared per common share ............. 0.51 0.43 0.24 0.24 0.24
SELECTED AVERAGE BALANCES:
Total assets ......................................... $220,833 $166,914 $126,397 $101,743 $ 75,055
Total loans .......................................... 134,416 107,393 88,559 67,667 42,049
Securities ........................................... 52,407 36,190 23,100 25,789 24,186
Earning assets ....................................... 199,126 152,224 113,484 95,130 67,557
Deposits ............................................. 172,731 127,754 97,092 82,597 62,399
Shareholders' equity ................................. 21,655 17,428 14,132 12,186 10,929
Shares outstanding (thousands) ....................... 3,451 1,908 1,403 1,404 1,407
SELECTED PERIOD-END BALANCES:
Total assets ......................................... $219,215 $216,195 $134,966 $121,547 $ 79,577
Total loans .......................................... 139,706 136,202 96,631 82,874 48,457
Securities ........................................... 50,358 51,881 24,125 25,516 26,591
Earning assets ....................................... 196,806 195,277 123,276 108,437 75,248
Deposits ............................................. 172,427 173,375 100,858 94,499 60,487
Shareholders' equity ................................. 20,191 22,488 14,068 13,119 12,666
Shares outstanding (thousands) ....................... 3,414 2,316 1,458 1,404 1,402
SELECTED RATIOS:
Return on average equity ............................. 11.47% 6.47% 9.57% 8.59% 10.81%
Return on average assets ............................. 1.12 0.68 1.07 1.03 1.57
Net interest margin (not taxable equivalent) ......... 4.61 4.29 5.63 5.71 6.07
Allowance for loan losses to loans ................... 1.32 1.34 1.16 1.11 0.80
Net charge-offs to average loans ..................... 0.36 1.09 0.53 0.58 (0.55)
Average equity to average assets ..................... 9.81 10.44 11.18 11.98 14.56
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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MANAGEMENT'S STATEMENT ON
RESPONSIBILITY FOR FINANCIAL REPORTING
FRONTIER NATIONAL CORPORATION
The management of Frontier National Corporation is responsible for the
content and integrity of the consolidated financial statements and all other
financial information included in this annual report. Management believes that
the financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis to reflect, in all
material respects, the substance of events and transactions that should be
included, and that the other financial information in the annual report is
consistent with those financial statements. The financial statements necessarily
include amounts that are based on management's best estimates and judgements.
Management maintains and depends upon Frontier National Corporation's
accounting systems and related systems of internal controls. The internal
control systems are designed to ensure that transactions are properly authorized
and recorded in the Company's financial record and to safeguard the Company's
assets from material loss or misuse. The Company maintains an internal audit
staff which monitors compliance with the Company's systems of internal controls
and reports to management and to the audit committee of the board of directors.
The audit committee of the board of directors, composed solely of
outside directors, has responsibility for recommending to the board of directors
the appointment of the independent auditors for Frontier National Corporation.
The committee meets periodically with the internal auditors and the independent
auditors to review the scope and findings of their respective audits. The
internal auditors, independent auditors and management each have full and free
access to meet privately as well as together with the committee to discuss
internal controls, accounting, auditing, or other financial reporting matters.
The consolidated financial statements of Frontier National Corporation
have been audited by Schauer, Taylor, Cox & Vise, P.C., independent auditors,
who were engaged to express an opinion as to the fairness of presentation of
such financial statements.
Harry I. Brown, Jr. Steven R. Townson
Chairman of the Board Vice Chairman of the Board,
President and
Chief Executive Officer
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to focus on significant changes in
the financial condition and results of operations of the Company and its
subsidiaries during the past three years. The discussion and analysis is
intended to supplement and highlight information contained in the accompanying
consolidated financial statements and the selected financial data presented
elsewhere in this report.
SUMMARY
Net income for 1999 was $2,482,940, a 120.15% increase from 1998 net
income. Net income for 1998 was $1,127,816, a 16.6% decrease from the net income
of $1,351,806 in 1997. Net income per common share for 1999 was 84.62% higher
than in 1998.
The increase in net income from 1998 to 1999 is due to the increase in
net interest income and the efficiencies derived after the merger. The decrease
in net income from 1997 to 1998 is primarily attributable to increased interest
expense and salaries and benefits expense coupled with the expense of the
merger. The increase in net income from 1996 to 1997 is primarily due to an
overall increase in total loans.
The Company plans to continue its objectives of maintaining asset
quality and providing superior service to its customers. Our strategic plan in
the short run includes expanding both Frontier National Banks to new markets in
Alabama as well as providing Internet banking to new and existing customers. The
Company plans to provide the best value in deposit services and loan products to
its customers.
EARNING ASSETS
Average earning assets for the year end 1999 was approximately
$199,126,000, representing an increase of approximately $46,902,000 or 30.81%
over 1998. The increase was a result of the business combination. Average
earning assets in 1998 increased approximately $38,740,000 or 34.14% over 1997
as a result of the business combination.
The management of the Company considers many criteria in managing
assets, including creditworthiness, diversification and structural
characteristics, maturity and interest rate sensitivity. The following table
sets forth the Company's interest-earning assets by category at December 31, in
each of the last three years.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1999 1998 1997
------------- --------------- ---------------
(In thousands)
<S> <C> <C> <C>
Interest-bearing deposits with banks... $ 102 $ 1,139 $ 480
Securities............................. 50,358 51,881 24,125
Federal funds sold..................... 6,640 6,055 2,040
Loans:
Real estate......................... 89,298 85,131 59,348
Commercial and other................ 50,408 51,071 37,283
------------- --------------- ---------------
Total loans....................... 139,706 136,202 96,631
------------- --------------- ---------------
Interest-earning assets ............... $ 196,806 $ 195,277 $ 123,276
============= =============== ===============
</TABLE>
12
<PAGE>
LOAN PORTFOLIO
The Company's average loans increased approximately $27,023,000 or
25.16% from 1998 to 1999. Average loans for 1998 were $107,393,000, an increase
of 21.27% over $88,559,000 in average loans for 1997. Loan growth for 1999 was
funded through customer deposits. Loan growth for 1998 was funded through a
mixture of borrowed funds and customer deposits.
LOAN PORTFOLIO
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ---------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
-------- -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial and
agricultural..... $ 27,616 19.45% $25,353 18.46% $16,227 15.80% $15,531 17.83% $10,109 19.83%
Real estate -
construction..... 7,307 5.15 2,385 1.74 5,807 5.65 3,589 4.12 973 1.91
Real estate -
mortgage......... 81,991 57.75 82,746 60.23 53,541 52.13 43,410 49.85 24,154 47.38
Consumer........... 23,108 16.27 26,432 19.23 27,024 26.32 24,486 28.11 15,701 30.81
Other.............. 1,959 1.38 467 .34 97 .10 72 .09 37 .07
-------- -------- ------- ------ ------ ------ ------- ------- ------- -------
141,981 100.00% 137,383 100.00% 102,696 100.00% 87,088 100.00% 50,974 100.00%
======== ====== ====== ======= =======
Less: Unearned
income........... 2,275 1,181 6,065 4,196 2,517
Allowance for
loan losses...... 1,849 1,831 1,120 924 388
-------- ------- ------ ------- -------
Net loans.......... $137,857 $134,371 $95,511 $81,968 $48,069
======== ======== ======= ======= =======
</TABLE>
The following table sets forth maturities of the loan portfolio and the
sensitivity to interest rate changes of the Company's loan portfolio.
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
Rate Structure for Loans
Maturity Maturing Over One Year
------------------------------------------------------------------------------------
Over One
One Year Over Predetermined Floating or
Year or Through Five Interest Adjustable
Less Five Years Years Total Rate Rate
---- ---------- ----- ----- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural .............. $21,252 $ 6,317 $ 47 $27,616 $ 5,997 $ 367
Real estate - construction..... 6,622 618 67 7,307 229 456
------- ------- ------- ------- ------- -------
Total ......................... $27,874 $ 6,935 $ 114 $34,923 $ 6,226 $ 823
======= ======= ======= ======= ======= =======
</TABLE>
13
<PAGE>
SECURITIES PORTFOLIO
The Company's securities portfolio decreased by 2.94% or $1,523,095
from 1998 to 1999. The 1998 securities portfolio increased by $27,755,854 over
1997, an increase of 115.1% due to the business combination.
The Company maintains an investment strategy of seeking portfolio
yields within acceptable risk levels, as well as providing liquidity. The
Company maintains one classification of securities: "Available-for-sale." The
"Available-for-sale" securities are carried at fair market value. At year-end
1999, unrealized net losses in the "Available-for-sale" portfolio amounted to
$2,708,403. At year-end 1998, unrealized gains in the "Available-for-sale"
portfolio amounted to $803,630. At the end of 1997, the unrealized gains in the
"Available-for-sale" portfolio amounted to $476,937.
The Company has classified all securities as available-for-sale. The
classification of certain securities as available-for-sale is consistent with
the Company's investment philosophy of maintaining flexibility to manage the
portfolio. Approximately $1,680,000 of unrealized loss was included in
shareholders' equity related to the available-for-sale securities as of December
31, 1999.
At year-end 1999, obligations of the United States Government or its
agencies and obligations of states and political subdivisions, including Fannie
Mae, Freddie Mac, Ginnie Mae and Small Business Administration loans represented
approximately 86.16% of the total securities portfolio.
The following table presents the carrying amounts of the Company's securities
portfolio at December 31, in each of the last three years.
SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- ---------------
(In thousands)
<S> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. government and agencies.................. $ 6,723 $ 7,128 $ 5,607
States and political subdivisions............. 26,312 22,193 10,890
Mortgage-backed securities.................... 10,354 20,654 6,071
Other debt securities......................... 5,551 -- --
Equity securities............................. 1,418 1,906 1,557
-------------- -------------- ---------------
Total....................................... $ 50,358 $ 51,881 $ 24,125
============== ============== ===============
</TABLE>
14
<PAGE>
SECURITY PORTFOLIO MATURITY SCHEDULE
<TABLE>
<CAPTION>
Maturing
---------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
---------------- ----------------- ---------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
SECURITIES AVAILABLE-FOR-SALE:
(amortized cost)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agencies $ -- 0.00 $ 6,007 5.59% $ 1,000 7.02% $ -- 0.00
Mortgage-backed securities . -- 0.00 -- 0.00 -- 0.00 10,994 6.44
State and municipal ........ 755 9.09 1,030 7.44 3,015 6.25 22,991 5.34
Other debt securities ...... -- 0.00 -- 0.00 5,851 6.43 -- 0.00
Equity securities .......... -- 0.00 -- 0.00 -- 0.00 1,423 7.22
------- ---- ------- ---- ------- ---- ------- ----
$ 755 9.09 $ 7,037 6.02 $ 9,866 6.35 $35,408 5.76
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
There were no securities held by the Company of which the aggregate
value on December 31, 1999 and 1998 exceeded ten percent of shareholders' equity
at that date. (Securities which are payable from and secured by the same source
of revenue or taxing authority are considered to be securities of a single
issuer. Securities of the U.S. Government and U.S. Government agencies and
corporations are not included.)
DEPOSITS AND BORROWED FUNDS
The Company's average deposits rose approximately $44,977,000 or 35.21%
from 1998 to 1999. Average deposits increased approximately $30,662,000 or 31.6%
from 1997 to 1998. Average deposits increased approximately $14,495,000 or
17.55% from 1996 to 1997. Total deposits decreased $948,000 or .55% from
year-end 1998 to year-end 1999. From year-end 1997 to year-end 1998, total
deposits increased $72,517,000 or 71.9%. From 1998 to 1999 noninterest-bearing
deposits decreased $2,280,000 or 8.51%, while interest-bearing demand accounts
decreased $1,832,000 or 5.84%, savings accounts decreased $1,407,000 or 5.39%,
certificates of deposit less than $100,000 increased $1,149,000 or 1.73% and
certificates of deposits of more than $100,000 increased $3,422,000 or 21.18%.
From 1997 to 1998, interest-bearing transaction deposits increased approximately
$17,315,000 or 123.5%, savings deposits increased approximately $8,508,000 or
48.37%, other time deposits of less than $100,000 increased approximately
$21,891,000 or 49.18% and time deposits of $100,000 or more increased
approximately $13,596,000 or 148.57%. From 1996 to 1997, interest-bearing
transaction deposits decreased approximately $726,000 or 4.92%, savings deposits
increased approximately $1,604,000 or 10.03%, other time deposits of less than
$100,000 increased approximately $10,779,000 or 31.96%, and time deposits of
$100,000 or more decreased approximately $5,937,000 or 39.35%.
15
<PAGE>
The following table sets forth the Company's deposit structure at
December 31, in each of the last three years.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1999 1998 1997
-------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
Noninterest-bearing deposits
Individuals, partnerships and corporations................. $ 22,825 $ 25,648 $ 15,505
U. S. Government and states and political subdivisions..... 114 203 65
Certified and official checks.............................. 1,574 942 17
-------------- ------------- -------------
Total noninterest-bearing deposits....................... 24,513 26,793 15,587
Interest-bearing deposits
Interest-bearing demand accounts........................... 29,503 31,335 14,020
Saving accounts............................................ 24,692 26,099 17,590
Certificates of deposit, less than $100,000................ 67,550 66,401 44,510
Certificates of deposit, more than $100,000................ 26,169 22,747 9,151
-------------- ------------- -------------
Total interest-bearing deposits.......................... 147,914 146,582 85,271
-------------- ------------- -------------
Total deposits........................................... $ 172,427 $ 173,375 $ 100,858
============== ============= =============
</TABLE>
The following table presents a breakdown by category of the average
amount of deposits and the average rate paid on deposits for the periods
indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------
1999 1998 1997
----------------------- ------------------------ ---------------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits $ 26,491 0.00% $ 19,081 0.00% $ 15,555 0.00%
Savings deposits...................... 26,803 3.06 20,132 3.19 15,997 3.08
Time deposits......................... 88,917 5.34 68,358 5.76 50,389 5.73
Interest-bearing demand deposits...... 30,520 2.19 20,183 2.37 15,151 2.45
------------ ------------ -----------
Total deposits..................... $ 172,731 3.61% $ 127,754 3.96% $ 97,092 3.86%
============ ============ ===========
</TABLE>
At December 31, 1999, time deposits greater than $100,000 aggregated
approximately $26,169,000 The following table indicates, as of December 31,
1999, the dollar amount of $100,000 or more by the time remaining until maturity
(in thousands):
MATURITIES OF LARGE TIME DEPOSITS
(In thousands)
Three months or less...................................... $ 11,297
Over three through six months............................. 3,155
Over six through twelve months............................ 7,518
Over twelve months........................................ 4,199
---------
Total................................................ $ 26,169
=========
16
<PAGE>
Borrowed funds consist primarily of long-term debt. The Subsidiary
Banks had $14,000,000 in available lines to purchase Federal Funds, on an
unsecured basis, from commercial banks. At December 31, 1999, the Subsidiary
Banks had no funds advanced against these lines. The Subsidiary Banks were
approved to borrow up to $41,584,782 under various short-term and long-term
programs offered by the Federal Home Loan Bank of Atlanta. These borrowings are
secured under a blanket lien agreement on certain qualifying mortgage
instruments in loan and securities portfolios. The unused portion of these
available funds amounted to $17,542,782 at year-end 1999. Funds are also
available through an arrangement through the Federal Reserve Discount window. At
December 31, 2000, no funds were advanced on the window. Long-term debt
consisted of various commitments with scheduled maturities from one to sixteen
years.
The following table sets forth expected debt service for the next five
years based on interest rates and repayment provisions as of December 31, 1999.
MATURITIES OF LONG-TERM DEBT
(In thousands)
2000 2001 2002 2003 2004
------ ------ ------ ------ ------
Interest in indebtedness .... $1,251 $1,198 $1,198 $1,093 $ 809
Repayment of principal ...... 1,100 350 -- 2,500 5,500
------ ------ ------ ------ ------
$2,351 $1,548 $1,198 $3,593 $6,309
====== ====== ====== ====== ======
CAPITAL RESOURCES
Shareholders' equity decreased $2,297,053 or 10.21% to $20,191,185 as
of December 31, 1999. The decrease in shareholders' equity was attributable to
the following reasons; net change in unrealized gains or losses on available for
sale securities; purchase and issuance of treasury stock, and net income minus
dividend issues. Shareholders' equity increased $8,420,420 or 59.86% to
$22,488,238 as of December 31, 1998, compared with $14,067,818 at the end of
1997, and $13,118,602 at year-end 1996.
During 1999, the Company purchased 64,233 shares of treasury stock,
reissued 5,359 shares of treasury stock, and received 8,266 in the 3-for-2 stock
split.
A strong capital position, which is vital to the continued
profitability of the Company, also promotes depositor and investor confidence
and provides a solid foundation for the future growth of the organization. The
objective of management is to maintain a level of capitalization that is
sufficient to take advantage of profitable growth opportunities while meeting
regulatory requirements. This is achieved by improving profitability through
effectively allocating resources to more profitable businesses, improving asset
quality, strengthening service quality, and streamlining costs. The primary
measures used by management to monitor the results of these efforts are the
ratios of return on average assets, return on average common equity and average
equity to average assets.
17
<PAGE>
The table below summarizes these and other key ratios for the Company for each
of the last three years.
RETURN ON EQUITY AND ASSETS
1999 1998 1997
------- ------- -------
Return on average assets ..................... 1.12% .68% 1.07%
Return on average common equity .............. 11.47 6.47 9.57
Dividend payout ratio ........................ 71.08 108.87 37.38
Average common shareholder's equity to average
assets ratio .............................. 9.81 10.44 11.18
In addition, banks and bank holding companies are required to maintain
capital to support, on a risk-adjusted basis, certain off-balance sheet
activities such as loan commitments. The Federal Reserve Board has adopted
capital guidelines governing the activities of bank holding companies. These
guidelines require the maintenance of an amount of capital based on
risk-adjusted assets so that categories of assets with potentially higher credit
risk will require more capital backing than assets with lower risk.
The capital guidelines classify capital into two tiers, referred to as
Tier I and Tier II. Under risk-based capital requirements, total capital
consists of Tier I capital which is generally common shareholders' equity less
goodwill and Tier II capital which is primarily a portion of the allowance for
loan losses and certain qualifying debt instruments. In determining risk-based
capital requirements, assets are assigned risk-weights of 0% to 100%, depending
primarily on the regulatory assigned levels of credit risk associated with such
assets. Off-balance sheet items are considered in the calculation of
risk-adjusted assets through conversion factors established by the regulators.
The framework for calculating risk-based capital requires banks and bank holding
companies to meet the regulatory minimums of 4% Tier I and 8% total risk-based
capital. In 1990, regulators added a leverage computation to the capital
requirements, comparing Tier I capital to total average assets less goodwill.
[The remainder of this page intentionally left blank]
18
<PAGE>
The table below illustrates the Company's regulatory capital ratios
under federal guidelines at December 31, 1999 and 1998:
CAPITAL ADEQUACY RATIOS
<TABLE>
<CAPTION>
Years ended December 31,
Statutory -------------------------------
Minimum 1999 1998
------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Tier I Capital.......................................... $ 20,375 $ 20,331
Tier II Capital......................................... 1,849 1,814
------------ ------------
Total Qualifying Capital................................ $ 22,224 $ 22,145
============ ============
Risk Adjusted Total Assets (including
off-balance-sheet exposures)......................... $ 152,570 $ 145,123
============ ============
Adjusted quarterly average assets....................... $ 218,757 $ 219,444
============ ============
Tier I Risk-Based Capital Ratio......................... 4.0% 13.35% 14.01%
Total Risk-Basked Capital Ratio......................... 8.0 14.57 15.26
Leverage Ratio.......................................... 4.0 9.31 9.26
</TABLE>
On December 31, 1999, the Company and its Subsidiary Banks exceeded the
regulatory minimums and qualified as well capitalized institutions under the
regulations.
LIQUIDITY MANAGEMENT
Liquidity is the ability of a company to convert assets into cash
without significant loss and to raise funds by increasing liabilities. Liquidity
management involves having the ability to meet the day-to-day cash flow
requirements of its customers, whether they are depositors wishing to withdraw
funds or borrowers requiring funds to meet their credit needs.
The primary function of asset/liability management is not only to
assure adequate liquidity in order for the Company to meet the needs of its
customer base, but to maintain an appropriate balance between interest-sensitive
assets and interest-sensitive liabilities so that the Company can profitably
deploy its assets. Both assets and liabilities are considered sources of
liquidity funding and both are, therefore, monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily
through loan repayments and maturities of securities. Additional sources of
liquidity are the investments in federal funds sold and prepayments from the
mortgage-backed securities from the securities portfolio.
The liability portion of the balance sheet provides liquidity through
various interest-bearing and noninterest-bearing deposit accounts. At year end,
the Company had $14,000,000 of federal funds available and a $41,584,782 line of
credit from The Federal Home Loan Bank of which $17,542,782 was available and
unused.
19
<PAGE>
INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate sensitivity is a function of the repricing
characteristics of the Subsidiary Banks' portfolio of assets and liabilities.
These repricing characteristics are the time frames within which the
interest-bearing assets and liabilities are subject to change in interest rates
either at replacement or maturity during the life of the instruments.
Sensitivity is measured as the difference between the volume of assets and
liabilities in the Subsidiary Banks' current portfolio that are subject to
repricing in future time periods. The differences are known as interest
sensitivity gaps and are usually calculated separately for segments of time
ranging from zero to thirty days, thirty-one to ninety days, ninety-one days to
one year, one to five years, over five years and on a cumulative basis.
The following table shows interest sensitivity gaps for different intervals as
of December 31, 1999.
INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
0-30 31-90 90-365 1-5 Over 5
Days Days Days Years Years Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest-earning assets (1)
Loans .......................................... $ 46,643 $ 9,135 $ 24,796 $ 44,049 $ 14,210 $138,833
Securities available-for-sale .................. 150 -- 609 6,838 42,761 50,358
Time deposits in other banks ................... 102 -- -- -- -- 102
Federal funds sold ............................. 6,640 -- -- -- -- 6,640
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities (2) .................... 53,535 9,135 25,405 50,887 56,971 195,933
-------- -------- -------- -------- -------- --------
Demand deposits (3) ............................ 9,834 9,834 9,835 -- -- 29,503
Savings deposits (3) ........................... 8,230 8,230 8,232 -- -- 24,692
Time deposits .................................. 21,346 11,067 43,543 17,763 -- 93,719
Other short-term borrowings (3)................. -- -- -- -- -- --
Long-term debt ................................. -- -- 1,100 8,350 14,592 24,042
-------- -------- -------- -------- -------- --------
39,410 29,131 62,710 26,113 14,592 171,956
-------- -------- -------- -------- -------- --------
Interest sensitivity gap ......................... $ 14,125 $(19,996) $(37,305) $ 24,774 $ 42,379 $ 23,977
======== ======== ======== ======== ======== ========
Cumulative interest sensitivity gap .............. $ 14,125 $ (5,871) $(43,176) $(18,402) $ 23,977
======== ======== ======== ======== ========
Ratio of interest-earning assets to
Interest-bearing liabilities ................... 1.36 0.31 0.41 1.95 3.90
Cumulative ratio .................................... 1.36 0.91 0.67 0.88 1.14
Ratio of cumulative gap to total
Interest-earning assets ........................ 0.07 (0.03) (0.22) (0.09) 0.12
</TABLE>
(1) Excludes nonaccrual loans and securities
(2) Excludes matured certificates which have not been redeemed by the customer
and on which no interest is accruing.
(3) Demand and savings deposits and other short-term borrowings are assumed to
be subject to movement into other deposit instruments in equal amounts
during the 0-30 day period, the 31-90 day period, and the 91-365 day
period.
The above table indicates that in a rising interest rate environment,
the Company's earnings may be adversely affected in the 0-365 day periods where
liabilities will reprice faster than assets. As seen in the preceding table, for
the first 30 days of repricing opportunity there is an excess of earning assets
over interest-bearing liability of approximately $14.125 million. For the first
365 days, interest-bearing liabilities exceed earning assets by $43.176 million.
During this one-year time frame, 76% of all interest-bearing liabilities will
reprice compared to 45% of all interest-earning assets. Changes in the mix of
20
<PAGE>
earning assets or supporting liabilities can either increase or decrease the net
interest margin without affecting interest rate sensitivity. In addition, the
interest rate spread and the liability remain the same, thus impacting net
interest income. Due to management's continued emphasis on profitability, many
of the higher-yielding securities presented in the table above have call
features, which may result in such securities having a shorter effective life.
The long-term debt presented in this section is shown on its call date since
management fully expects this debt to be called under the current interest rate
environment. It should be noted that a matched interest-sensitive position by
itself would not ensure maximum net interest income.
Management continually evaluates the condition of the economy, the
pattern of market interest rates, and other economic data to determine the types
of investments that should be made and at what maturities. Using this analysis,
management from time to time assumes calculated interest sensitivity gap
positions to maximize net interest income based upon anticipated movements in
the general level of interest rates.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the principal component of a financial
institution's income stream and represents the spread between interest and fee
income generated from earning assets and the interest expense paid on deposits.
The following discussion is on a fully taxable equivalent basis.
Net interest income increased $1,770,000 or 22.01% to $9,810,000 from
1998 to 1999. Net interest income for 1998 increased $1,430,000 or 21.63% over
1997, $983,000 or 17.47% in 1997 over 1996. The increase in the net interest
income from 1998 to 1999 and 1997 to 1998 is primarily due to increase in total
loans and the business combination.
Interest income was $17,955,000 in 1999, which represented an increase
of $3,621,000 or 25.26% over 1998. Interest income increased $3,029,000 or
26.80% in 1998 from 1997. In 1999, loan interest income increased $2,102,000
(18.42%) to $13,515,000 from $11,413,000 in 1998. Interest income produced by
the loan portfolio increased $1,927,000 or 20.3% in 1998 from 1997. Interest
income on securities increased $1,309,000 or 53.96% from 1998 to 1999, and
increased $713,000 or 41.62% from 1997 to 1998.
Total interest expense increased by $1,599,000 or 34.1% in 1998 from
1997. The interest expense increase from 1997 to 1998 is primarily due to the
business combination that took place in 1998. Total interest expense reported at
year-end 1999 was $8,145,000, an increase of $1,851,000 or 29.41% over 1998. The
increase from 1998 to 1999 is a result of an increase in interest-bearing
liabilities.
The trend in net interest income is commonly evaluated in terms of
average rates using the net interest margin and the interest rate spread. The
net interest margin, or the net yield on earning assets is computed by dividing
fully taxable equivalent net interest income by average earning assets. This
ratio represents the difference between the average yield on average earning
assets and the average rate paid for all funds used to support those earning
assets. The net interest margin decreased 35 basis points in 1999 from 5.28% at
year-end 1998 to 4.93% at year-end 1999. The net interest margin decreased 54
basis points in 1998 to 5.28%. The net cost of funds, defined as interest
expense divided by average-earning assets, decreased 5 basis points to 4.09% at
year-end 1999. The net cost of funds remained level at 4.14% from 1997 to 1998.
The yield on earning assets declined 40 basis points to 9.02% at year-end 1999.
The yield on earning assets declined 54 basis points to 9.42% in 1998 from 9.96%
in 1997.
21
<PAGE>
The interest rate spread measures the difference between the average
yield on earning assets and the average rate paid on interest-bearing sources of
funds. The interest rate spread eliminates the impact of noninterest-bearing
funds and gives a direct perspective on the effect of market interest rate
movements. During recent years, the net interest margins and interests rate
spreads have been under intense pressure to maintain historical levels, due in
part to tax laws that discouraged investment in tax-exempt securities and
intense competition for funds with non-bank institutions. From 1998 to 1999, the
interest rate spread decreased 37 basis points to 4.19%. Due to the effects of
the business combination coupled with lower interest rates in 1998, the interest
rate spread decreased 51 basis points to 4.56% from 1997 to 1998.
The tables that follow show, for the periods indicated, the daily
average balances outstanding for the major categories of interest-bearing assets
and interest-bearing liabilities, and the average interest rate earned or paid
thereon. Such yields are calculated by dividing income or expense by the average
balance of the corresponding assets or liabilities. Also shown are the changes
in income attributable to changes in volume and changes in rate.
[The remainder of this page intentionally left blank]
22
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
Taxable Equivalent Basis
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- --------------------------- ------------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans, net of unearned
income (1) .............. $ 134,416 $ 13,515 10.05% $107,393 $ 11,413 10.63% $ 88,559 $ 9,486 10.71%
Securities:
Taxable .................... 31,743 2,012 6.34 22,648 1,285 5.67 15,513 1,023 6.59
Tax exempt ................. 20,664 1,723 8.34 13,542 1,141 8.43 7,587 690 9.09
--------- -------- -------- -------- -------- --------
Total securities ........ 52,407 3,735 7.13 36,190 2,426 6.70 23,100 1,713 7.42
Time deposits in
other banks ............. 785 48 6.11 636 27 4.25 208 11 5.29
Federal funds sold ......... 11,518 657 5.70 8,005 468 5.85 1,617 95 5.88
--------- -------- -------- -------- -------- --------
Total interest- earning
assets (2) .............. 199,126 17,955 9.02 152,224 14,334 9.42 113,484 11,305 9.96
Noninterest-earning assets:
Cash and due from banks ..... 7,569 5,566 4,792
Accrued interest and
other assets ............ 16,055 10,263 9,209
Allowance for loan losses ... (1,917) (1,139) (1,088)
--------- -------- --------
Total assets ............ $ 220,833 $ 166,914 $126,397
========= ========= ========
LIABILITIES AND SHAREHOLDERS
EQUITY
Interest-bearing liabilities:
Demand deposits ............ $ 30,520 668 2.19 $ 20,183 479 2.37 $ 15,151 371 2.45
Savings deposits ........... 26,803 821 3.06 20,132 643 3.19 15,997 493 3.08
Time deposits .............. 88,917 4,750 5.34 68,358 3,940 5.76 50,389 2,887 5.73
--------- -------- -------- -------- -------- --------
146,240 6,239 4.27 108,673 5,062 4.66 81,537 3,751 4.60
Other short-term
borrowings .............. 102 7 6.86 188 15 7.98 -- -- 0.00
Long-term debt ............. 22,459 1,899 8.46 20,674 1,217 5.89 14,473 944 6.52
--------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities ............. 168,801 8,145 4.83 129,535 6,294 4.86 96,010 4,695 4.89
-------- -------- --------
Net interest income/net
interest spread ............ 9,810 4.19% 8,040 4.56% 6,610 5.07%
==== ==== ====
Noninterest-bearing
liabilities:
Demand deposits ............. 26,491 19,081 15,555
Accrued interest and
other liabilities ....... 3,886 870 700
Shareholders equity ......... 21,655 17,428 14,132
--------- -------- --------
Total liabilities and
shareholders equity ..... $220,833 $166,914 $126,397
========= ========= ========
Net yield on earning assets .. 4.93% 5.28% 5.82%
==== ==== ====
Taxable equivalent adjustment:
Loans ....................... 51 61 53
Securities .................. 589 390 167
--------- -------- --------
Total taxable equivalent
adjustment ............. 640 451 220
--------- -------- --------
Net interest income .......... $ 9,170 $ 7,589 $ 6,390
========= ======== ========
</TABLE>
- --------------------
(1) Average loans include nonaccrual loans. All loans and deposits are
domestic.
(2) Tax equivalent adjustments have been based on an assumed tax rate of 34
percent, and do not give effect to the disallowance for federal income tax
purpose of interest expense related to certain tax-exempt earning assets.
23
<PAGE>
RATE/VOLUME VARIANCE ANALYSIS
TAXABLE EQUIVALENT BASIS
<TABLE>
<CAPTION>
Average Volume Change in Volume Average Rate
----------------------------- --------------------- ----------------------
1999 1998 1997 1999-1998 1998-1997 1999 1998 1997
---- ---- ---- --------- --------- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans, net of unearned income (1) $134,416 $107,393 $ 88,559 $ 27,023 $ 18,834 10.05% 10.63% 10.71%
Securities:
Taxable ......................... 31,743 22,648 15,513 9,095 7,135 6.34 5.67 6.59
Tax exempt ...................... 20,664 13,542 7,587 7,122 5,955 8.34 8.43 9.09
-------- -------- -------- -------- --------
Total securities .............. 52,407 36,190 23,100 16,217 13,090 7.13 8.70 7.42
Interest-bearing deposits with other
banks .............................. 785 636 208 149 428 6.11 4.25 5.23
Federal funds sold.................. 11,518 8,005 1,617 3,513 6,388 5.70 5.85 5.38
-------- -------- -------- -------- --------
Total earning assets .......... $199,126 $152,224 $113,484 $ 46,902 $ 38,740 9.02 9.42 9.96
======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits:
Demand .......................... $ 30,520 $ 20,183 $ 15,151 $ 10,337 $ 5,032 2.19 2.37 2.45
Savings ......................... 26,803 20,132 15,997 6,671 4,135 3.06 3.19 3.08
Time ............................ 88,917 68,358 50,389 20,559 17,969 5.34 3.76 5.73
-------- -------- -------- -------- --------
Total deposits ................ 146,240 108,673 81,537 37,567 27,136 4.27 4.66 4.60
Other short-term borrowings ........ 102 188 -- (86) 188 6.86 7.98 0.00
Long-term borrowings ............... 22,459 20,674 14,473 1,785 6,201 8.46 5.89 6.52
-------- -------- -------- -------- --------
Total interest-bearing
liabilities ..................... $168,801 $129,535 $ 96,010 $ 39,266 $ 33,525 4.83 4.86 4.39
======= ======= ======== ======== ========
Net interest income/net interest 4.19 4.56 5.07
spread..............................
Net yield on earning assets......... 4.93 5.23 5.82
Net cost of funds................... 4.09 4.14 4.14
Variance Attributed to (1)
---------------------------------------
Interest Income/Expense Variance 1999 1998
------------------- ------------------
1999 1998 1997 1999-1998 1998-1997 Volume Rate Volume Rate
------- ------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
EARNING ASSETS:
Loans, net of unearned income (1) $13,515 $11,413 $ 9,486 $ 2,102 $ 1,927 $ 2,751 $ (649) $ 1,999 $ (72)
Securities:
Taxable ....................... 2,012 1,285 1,023 727 262 562 165 420 (158)
Tax exempt .................... 1,723 1,141 690 582 451 594 (12) 504 (53)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total securities ............ 3,735 2,426 1,713 1,309 713 1,156 153 924 (211)
Interest-bearing deposits
with other banks .............. 48 27 11 21 16 2 19 2 14
Federal funds sold .............. 657 468 95 189 373 201 (12) 373 --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total earning assets ........ 17,955 14,334 11,305 3,621 3,029 4,110 (489) 3,298 (269)
------- ------- ------- ------- ------- ------- ------- ------- -------
INTEREST-BEARING
LIABILITIES:
Deposits:
Demand ........................ 668 479 371 189 108 228 (39) 120 (12)
Savings ....................... 821 643 493 178 150 205 (27) 132 18
Time........................... 4,750 3,940 2,887 810 1,053 1,114 (304) 1,038 15
------- ------- ------- ------- ------- ------- ------- ------- -------
Total deposits .............. 6,239 5,062 3,751 1,177 1,311 1,547 (370) 1,290 21
Other short-term borrowings ..... 7 15 -- (8) 15 (6) (2) -- 15
Long-term borrowings ............ 1,899 1,217 944 682 273 113 569 372 (99)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities ............... 8,145 6,294 4,695 1,851 1,599 1,654 197 1,662 (63)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net interest income/net interest
spread ........................ $ 9,810 $ 8,040 $ 6,610 $ 1,770 $ 1,430 $ 2,456 $ (686) $ 1,636 $ (206)
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
24
<PAGE>
ALLOWANCE FOR LOAN LOSSES
Lending officers are responsible for the ongoing review and
administration of each loan. They make the initial identification of loans which
present some difficulty in collection or where there is an indication that the
probability of loss exists. Lending officers are responsible for the collection
effort on a delinquent loan. Senior management is informed of the status of
delinquent and problem loans on a monthly basis.
Senior management makes recommendations monthly to the board of
directors as to charge-offs. Senior management reviews the allowance for
possible loan losses on a monthly basis. The Company's policy is to discontinue
interest accrual when payment of principal and interest is 90 days or more in
arrears.
The allowance for possible loan losses represents management's
assessment of the risks associated with extending credit and its evaluation of
the quality of the loan portfolio. Management analyzes the loan portfolio to
determine the adequacy of the allowance for possible loan losses and the
appropriate provisions required to maintain a level considered adequate to
absorb anticipated loan losses. In assessing the adequacy of the allowance,
management reviews the size, quality and risk of loans in the portfolio.
Management also considers such factors as loan loss experience, the amount of
past due and nonperforming loans, specific known risk, the status and amount of
nonperforming assets, underlying collateral values securing loans, current and
anticipated economic conditions and other factors which affect the allowance for
potential credit losses.
While it is the Company's policy to charge off in the current period
the loans in which a loss is considered probable, there are additional risks of
future losses which cannot be quantified precisely or attributed to particular
loans or classes of loans. Because these risks include the state of the economy,
management's judgment as to the adequacy of the allowance is necessarily
approximate and imprecise.
Management believes that the $1,849,356 for December 31, 1999 and
$1,831,241 for December 31, 1998 in the allowance for loan losses were adequate
to absorb known risks in the portfolio. No assurance can be given, however, that
adverse economic circumstances will not result in increased losses in the loan
portfolio, and require greater provisions for possible loan losses in the
future.
[The remainder of this page intentionally left blank]
25
<PAGE>
The following table sets forth certain information with respect to the Company's
loans, net of unearned income, and the allowance for loan losses for the five
years ended December 31, 1999.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- -------- --------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of year............ $ 1,831 $ 1,120 $ 924 $ 387 $ 253
Loans charged off:
Commercial, financial and agricultural.................. 78 5 223 53 4
Real Estate - mortgage.................................. 39 46 -- 157 2
Consumer................................................ 856 1,454 542 298 175
---------- -------- --------- --------- ----------
Total loans charged off............................... 973 1,505 765 508 181
---------- -------- --------- --------- ----------
Recoveries on loans previously charged off:
Commercial, financial and agricultural.................. 63 8 30 34 315
Real Estate - mortgage.................................. 54 27 2 6 6
Consumer................................................ 377 305 267 78 93
---------- -------- --------- --------- ----------
Total recoveries...................................... 494 340 299 118 414
---------- -------- --------- --------- ----------
Net loans charged off..................................... 479 1,165 466 390 (233)
Additions due to acquisition.............................. -- 464 -- 363 --
Provision for loan losses................................. 497 1,412 662 564 (99)
---------- -------- --------- --------- ----------
Allowance for loan losses at end of period................ $ 1,849 $ 1,831 $ 1,120 $ 924 $ 387
========== ======== ========= ========= ==========
Loans, net of unearned income, at end of period........... $ 139,706 $136,202 $ 96,631 $ 82,892 $ 48,457
Average loans, net of unearned income,
outstanding for the period.............................. 134,416 107,393 88,559 67,667 42,674
Ratio of net charge-offs to net average loans............. .36% 1.09% .53% .58% (.55)%
</TABLE>
In evaluating the allowance, management also considers the historical
loan loss experience of the Subsidiary Banks, the amount of past due and
nonperforming loans, current and anticipated economic conditions, lender
requirements and other appropriate information. The Subsidiary Banks have
allocated their allowance for loan losses to specific loan categories as
follows:
ALLOCATION OF LOAN LOSS RESERVE
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ----------------- ---------------- ---------------- -----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
-------- -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DOMESTIC LOANS
Commercial,
financial and
agricultural..... $ 648 35% $ 15 1% $ 325 29% $ 83 9% $ 8 2%
Real estate -
mortgage......... 185 10 55 3 11 1 231 25 4 1
Consumer........... 1,016 55 1,761 96 784 70 610 66 375 97
-------- -------- ------ -------- ------ -------- ------ -------- ------ --------
$ 1,849 100% $ 1,831 100% $1,120 100% $ 924 100% $ 387 100%
======== ======= ======= ===== ====== ====== ======= ====== ======= ======
</TABLE>
26
<PAGE>
NONPERFORMING ASSETS
Nonperforming assets include nonperforming loans and foreclosed real
estate held for sale. Nonperforming loans include loans classified as nonaccrual
or renegotiated. The Company's policy is to place a loan on nonaccrual status
when it is contractually past due 90 days or more as to payment of principal or
interest. At the time a loan is placed on nonaccrual status, interest previously
accrued but not collected is reversed and charged against current earnings.
Recognition of any interest after a loan has been placed on nonaccrual is
accounted for on a cash basis.
The Company had nonperforming assets of approximately $1,605,000,
$1,145,000, and $1,748,000 as of December 31, 1999, 1998, and 1997,
respectively.
The following table presents information concerning outstanding
balances of nonperforming assets at December 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
NONPERFORMING ASSETS (1)
December 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- ------------
(In thousands)
<S> <C> <C> <C>
Nonaccruing loans................................................. $ 873 $ 515 $ 850
Loans past due 90 days or more.................................... 426 354 748
Restructured loans................................................ -- -- --
------------- ------------- ------------
Total nonperforming loans...................................... 1,299 869 1,598
Nonaccruing securities............................................ -- -- --
Other real estate................................................. 306 276 150
------------- ------------- ------------
Total........................................................ $ 1,605 $ 1,145 $ 1,748
============= ============= ============
Ratios:
Loan loss allowance to total nonperforming assets.............. 1.152 1.600 0.641
============= ============= ============
Total nonperforming loans to total loans
(net of unearned interest)................................. 0.011 0.008 0.018
============= ============= ============
Total nonperforming assets to total assets................... 0.007 0.005 0.012
============= ============= ============
</TABLE>
It is the general policy of the Subsidiary Banks to stop accruing
interest income and place the recognition of interest on a cash basis when any
commercial, industrial or real estate loan is past due as to principal or
interest and the ultimate collection of either is in doubt. Accrual of interest
income on consumer installment loans is suspended when any payment of principal
or interest, or both, is more than ninety days delinquent. When a loan is placed
on a nonaccrual basis, any interest previously accrued but not collected is
reversed against current income unless the collateral for the loan is sufficient
to cover the accrued interest or a guarantor assures payment of interest.
There has been no significant impact on the Company's financial
statements as a result of the provisions of Statement of Financial Accounting
Standards No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, or
Statement of Financial Accounting Standards No. 118, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN-INCOME RECOGNITION AND DISCLOSURES.
- ------------
(1) Information as of December 31, 1996 and 1995 is not readily available.
27
<PAGE>
NONINTEREST INCOME
Noninterest income consists of revenues generated from a broad range of
financial services and activities including fee-based services and profits and
commissions earned through credit life insurance sales and other activities. In
addition, gains or losses realized from the sale of securities are included in
noninterest income. Total noninterest income increased by $818,000 or 35.80% for
the year ended December 31, 1999 as compared to 1998. Total noninterest income
increased $1,062,000 or 87.06% in 1998 compared to 1997.
A $251,000 or 21.43% increase in fee income from service charges on
deposit accounts was noted from 1998 to 1999. Fee income from service charges on
deposit accounts increased $222,000 or 23.36% in 1998. Nonrecurring items of
noninterest income include sales of securities. Included in other noninterest
income are gains on sales of securities of $39,000, $60,000, and $8,000 in 1999,
1998, and 1997. In 1999, the Company had $265,000 of income from earnings in
cash surrender value of various life insurance policies compared to $173,000 for
1998 and $167,000 for 1997.
The table below sets forth the Company's noninterest income for the
periods indicated.
<TABLE>
<CAPTION>
December 31, Percent Change
-------------------------------------------- --------------------------
1999 1998 1997 1998/1997 1998/1997
--------------- -------------- ------------ -------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Service charges on deposits................. $ 1,423 $ 1,172 $ 950 21.42% 23.37%
Insurance commissions....................... 1,129 574 63 96.69 811.11
Securities gains (losses)................... 39 60 8 (35.00) 650.11
Earnings on cash surrender value
life insurance........................... 265 173 167 53.18 3.59
Proceeds from life insurance................ 2 83 -- (97.59) 0.00
Other....................................... 244 222 33 9.91 572.73
--------------- -------------- ------------
$ 3,102 $ 2,284 $ 1,221 35.81% 87.06%
=============== ============== ============
</TABLE>
NONINTEREST EXPENSES
From 1998 to 1999, noninterest expense increased $1,531,000 or 21.7%.
Noninterest expense for 1998 increased $2,030,000 or 40.3% from 1997. For 1999,
salaries and benefits expense was $4,363,000, an increase of $608,000 or 16.2%
over 1998. Salaries and employee benefits in 1998 increased $1,133,000 or 43.2%
from 1997 to a total of $3,755,000 at year-end 1998. The increase in 1999 and
1998 were mostly attributable to the merger during the third quarter of 1998.
Occupancy and equipment expense rose $363,000 or 34.6% from 1998 to
1999. The 1999 expense increase was a result of the additional property and
equipment added as a result of the merger. Occupancy expense increased by
$123,000 or 13.3% in 1998.
Other noninterest expenses increased at comparable rates and also
realized increases due to the business combination in 1998.
28
<PAGE>
The table below sets forth the Company's noninterest expenses for the
periods indicated.
<TABLE>
<CAPTION>
Years ended December 31, Percent Change
------------------------- -----------------------
1999 1998 1997 1999/1998 1998/1997
---- ---- ---- --------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $4,363 $3,755 $ 2,622 16.2% 43.2%
Occupancy and equipment expense 1,411 1,048 925 34.6 13.3
Professional fees 596 404 118 47.5 242.4
Director and committee fees 295 169 59 74.6 186.4
Supplies 257 206 191 24.8 7.9
Advertising 191 189 146 1.1 29.4
Insurance 179 87 67 105.7 29.9
Postage 149 148 113 0.7 30.9
Amortization expense 130 175 111 (25.7) 57.7
Regulatory fees and assessments 99 102 54 (2.9) 88.9
Other 927 783 630 10.4 24.3
------ ------ -------
Total $8,597 $7,066 $ 5,036 21.7% 40.3%
====== ====== =======
</TABLE>
INCOME TAXES
Income tax expense increased $427,823 or 160.92%, to $693,682 for the
year ended December 31, 1999. The effective tax rate as a percentage of pretax
income was 21.8% in 1999, 19.1% in 1998, and 29.4% in 1997. The statutory
federal rate was 34.0% during 1999, 1998, and 1997. The lower effective tax rate
is primarily attributable to the Company's investment in tax-advantaged assets.
For further information concerning the provision for income taxes, refer to Note
14, Income Taxes, of the "Notes to Consolidated Financial Statements."
IMPACT OF INFLATION AND CHANGING PRICES
A bank's asset and liability structure is substantially different from
that of an industrial company in that virtually all assets and liabilities of a
bank are monetary in nature. Management believes the impact of inflation on
financial results depends upon the Company's ability to react to changes in
interest rates and by such reaction to reduce the inflationary impact on
performance. Interest rates do not necessarily move in the same direction, or at
the same magnitude, as the prices of other goods and services. As discussed
previously, management seeks to manage the relationship between
interest-sensitive assets and liabilities in order to protect against wide
interest rate fluctuations, including those resulting from inflation.
OTHER ACCOUNTING ISSUES
In June 1998, the Financial Accounting Standards Board also issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognizes
all derivatives as either assets or liabilities in the statement of financial
condition and measures those instruments at fair value. The accounting for
changes in the fair value of a derivative is to be determined based upon the
intended use of the derivative. For certain hedge designations (cash flow and
foreign currency exposure) the derivative's gain or loss is reported as a
component of other comprehensive income. Other designations require the gain or
loss to be recognized in earnings in the period of change. Management does not
believe that the adoption of SFAS No. 133 will have a material impact on the
Company's financial statements. This statement amended as to effective date by
SFAS No. 137 is effective for financial statements for periods beginning after
June 15, 2000.
29
<PAGE>
YEAR 2000 ISSUES
The Year 2000 issue is 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 may be 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. Testing and
validation of the systems for Year 2000 has been performed.
Expenses for Year 2000 issues in 1999 were negligible and the Company's
management does not believe the effects of Year 2000 will have any material
impact on the Company's financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk arising from adverse changes in the fair value
of financial instruments due to a change in interest rates, exchange rates and
equity prices. Frontiers' primary risk is interest rate risk.
The primary objective of Asset/Liability Management at Frontier is to
manage interest rate risk and achieve reasonable stability in net interest
income throughout interest rate cycles. This is achieved by maintaining the
proper balance of rate sensitive earning assets and rate sensitive liabilities.
The relationship of rate sensitive earning assets to rate sensitive liabilities
is the principal factor in projecting the effect that fluctuating interest rates
will have on future net interest income. Rate sensitive earning assets and
interest-bearing liabilities are those that can be repriced to current market
rates within a relatively short time period. Management monitors the rate
sensitivity of earning assets and interest-bearing liabilities over the entire
life of these instruments, but places particular emphasis on the first year and
through three years. Frontier's Asset/Liability Management policy requires
cumulative gap (the ratio of rate sensitive assets to rate sensitive
liabilities) to stay within a +/-20%. At December 31, 1999, Frontier's
cumulative gap is -22% due to long-term debt that management expects to be
called in the current interest rate environment. The long-term debt that
management fully expects to be called, consists of $7,000,000 in 31-90 days and
$3,600,000 in 90-365 days. When this debt is called, management anticipates
replacing it with various other debt structures that will in turn reduce our
interest rate sensitivity in the 1-year time frame.
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 shareholders' equity to
both the level of interest rates and the slope of the yield curve. Simulation
analysis accounts for the expected timing and magnitude of assets and liability
cash flows, as well as the expected timing and magnitude of deposits that do not
reprice on a contractual basis. In addition, simulation analysis includes
adjustments for the lag between movements in market interest rates on loans and
interest-bearing deposits. These adjustments are made to reflect more accurately
possible future
30
<PAGE>
cash flows, repricing behavior and ultimately net interest income. The estimated
impact on Frontier's net interest income before provision for loan loss
sensitivity over a one-year time horizon is shown below. Such analysis assumes
an immediate and sustained parallel shift in interest rates and the Company's
estimate of how interest-bearing transaction accounts will reprice in each
scenario. Actual results will differ from simulated results due to timing,
magnitude and frequency of interest rate changes and changes in market
conditions and management's strategies, among other factors.
Percentage Increase
(Decrease) in Interest
Income/Expense Given
Interest Rate Shifts
---------------------------
Down 200 Up 200
Basis Points Basis Points
------------ ------------
Projected change in:
Interest income............................... (.71)% 5.87%
Interest expense.............................. (13.88) 14.71
Net interest income........................... (.70) (2.45)
[The remainder of this page intentionally left blank]
31
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Regulation
S-X and by Item 302 of Regulation S-K are set forth in the pages listed below.
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Independent Auditors' Report................................................................................ 33
Consolidated Statements of Financial Condition as of December 31, 1999 and 1998............................. 34
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998, and 1997........................................................................ 35
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998, and 1997........................................................................ 36
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998, and 1997........................................................................ 37
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1999, 1998, and 1997........................................................................ 39
Notes to Consolidated Financial Statements.................................................................. 40
Quarterly Results (Unaudited)............................................................................... 69
</TABLE>
32
<PAGE>
SCHAUER, TAYLOR, COX & VISE, P.C.
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
150 OLDE TOWNE ROAD
BIRMINGHAM, ALABAMA 35216
DOUGLAS B. SCHAUER, CPA TELEPHONE - 205.822.3488 STEVEN W. BROWN, CPA
EDWARD R. TAYLOR, CPA WATS - 800.466.3488 M. BRYANT KING, CPA
W. ERNEST COX, CPA FAX - 205.822.3541 RAYMOND A. PATTON, CPA
DONALD G. VISE, CPA EMAIL - [email protected] RUSSELL D. PAYNE, CPA
MICHAEL WHITEHURST, CBA
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Frontier National Corporation and Subsidiaries
Sylacauga, Alabama
We have audited the accompanying consolidated statements of financial condition
of Frontier National Corporation and subsidiaries as of December 31, 1999 and
1998 and the related consolidated statements of income, shareholders' equity,
cash flows, and comprehensive income for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated financial statements of Frontier
National Corporation and subsidiaries as of December 31, 1997 were audited by
other auditors whose report dated March 6, 1998, expressed an unqualified
opinion on those consolidated financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1999 and 1998 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Frontier National Corporation and subsidiaries as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
Birmingham, Alabama
January 27, 2000
SCHAUER, TAYLOR, COX & VISE, P.C.
MEMBER OF AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS, SEC PRACTICE
SECTION AND ALABAMA SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
33
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from banks...................................................... $ 6,902,010 $ 7,641,568
Interest-bearing deposits with other banks................................... 102,066 1,139,654
Federal funds sold........................................................... 6,640,000 6,055,000
Securities available-for-sale................................................ 50,357,787 51,880,882
Loans, net of unearned income................................................ 139,706,383 136,202,401
Allowance for loan losses.................................................... (1,849,356) (1,831,241)
--------------- ---------------
NET LOANS.................................................................. 137,857,027 134,371,160
Premises and equipment, net.................................................. 6,806,237 5,640,882
Accrued interest............................................................. 1,651,255 1,498,981
Cash surrender value on life insurance....................................... 5,073,986 4,834,873
Intangible, net.............................................................. 1,497,013 1,627,241
Foreclosed real estate....................................................... 305,965 275,875
Other assets................................................................. 2,021,807 1,228,593
--------------- ---------------
TOTAL ASSETS............................................................. $ 219,215,153 $ 216,194,709
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing........................................................ $ 24,512,607 $ 26,793,363
Interest-bearing........................................................... 147,914,373 146,581,851
--------------- ---------------
TOTAL DEPOSITS........................................................... 172,426,980 173,375,214
Dividends payable............................................................ 438,697 431,746
Accrued interest............................................................. 925,364 885,019
Long-term debt............................................................... 24,042,000 18,557,384
Other liabilities............................................................ 1,190,927 457,108
--------------- ---------------
TOTAL LIABILITIES........................................................ 199,023,968 193,706,471
--------------- ---------------
SHAREHOLDERS' EQUITY
Common stock, par value $.001 per share, 10,000,000 shares authorized,
3,497,497 shares issued of which 3,414,357 were outstanding and
2,331,683 shares issued of which 2,315,683 were outstanding................ 3,498 2,332
Capital surplus.............................................................. 14,263,104 14,265,547
Retained earnings............................................................ 8,774,744 8,057,945
Treasury stock, 83,140 and 16,000 shares at cost............................. (1,170,483) (368,000)
Accumulated comprehensive income: net unrealized holding gains
(losses) on securities available-for-sale, net of deferred income tax...... (1,679,678) 530,414
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY............................................... 20,191,185 22,488,238
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................... $ 219,215,153 $ 216,194,709
=============== ===============
</TABLE>
See notes to consolidated financial statements
34
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ---------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans................................ $ 13,463,888 $ 11,351,459 $ 9,433,096
Interest and dividends on securities
Taxable securities...................................... 1,902,010 1,154,559 1,123,520
Nontaxable securities................................... 1,133,587 750,981 324,259
Dividends on securities................................. 110,182 130,711 90,287
Interest on deposits with other banks..................... 47,967 26,795 7,339
Interest on federal funds sold............................ 657,485 468,259 106,717
---------------- --------------- ---------------
TOTAL INTEREST INCOME................................. 17,315,119 13,882,764 11,085,218
---------------- --------------- ---------------
INTEREST EXPENSE
Deposits.................................................. 6,237,639 5,062,595 3,750,979
Federal funds purchased and securities sold
under repurchase agreements............................. 8,754 12,820 25,536
Notes payable............................................. 1,899,325 1,218,791 918,278
---------------- --------------- ---------------
TOTAL INTEREST EXPENSE................................ 8,145,718 6,294,206 4,694,793
---------------- --------------- ---------------
NET INTEREST INCOME.......................................... 9,169,401 7,588,558 6,390,425
Provision for loan losses.................................... (497,388) (1,412,295) (662,155)
---------------- --------------- ---------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES........................................... 8,672,013 6,176,263 5,728,270
NONINTEREST INCOME
Service charges and other fees............................ 1,423,287 1,172,108 950,401
Commission income......................................... 1,128,910 573,864 63,176
Securities gains.......................................... 39,023 60,172 8,075
Other..................................................... 510,395 477,765 199,822
---------------- --------------- ---------------
TOTAL NONINTEREST INCOME.............................. 3,101,615 2,283,909 1,221,474
NONINTEREST EXPENSES
Salaries and benefits..................................... 4,363,457 3,755,462 2,622,591
Net occupancy and equipment expense....................... 1,410,810 1,047,667 924,200
Amortization expense...................................... 129,829 174,738 111,456
Other operating expenses.................................. 2,692,910 2,088,630 1,377,633
---------------- --------------- ---------------
TOTAL NONINTEREST EXPENSES............................ 8,597,006 7,066,497 5,035,880
---------------- --------------- ---------------
Income before income taxes................................... 3,176,622 1,393,675 1,913,864
Provision for income taxes................................... (693,682) (265,859) (562,058)
---------------- --------------- ---------------
NET INCOME................................................... $ 2,482,940 $ 1,127,816 $ 1,351,806
================ =============== ===============
EARNINGS PER COMMON SHARE
Basic..................................................... $ .72 $ .39 $ .64
Diluted................................................... .71 .39 .64
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic..................................................... 3,450,628 2,861,619 2,104,092
Diluted................................................... 3,485,342 2,882,865 2,104,092
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated Total
Common Capital Retained Treasury Comprehensive Shareholders'
Stock Surplus Earnings Stock Income Equity
- ------------------------------------- ------------- ------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1997.... $ 1,705 $ 5,533,335 $ 8,802,707 $ (1,394,957) $ 175,812 $ 13,118,602
Cash dividends........ (505,095) (505,095)
Purchase of treasury
stock.............. (15,000) (15,000)
Net change in
unrealized gains on
securities available
for sale........... 117,505 117,505
Net income 1997....... 1,351,806 1,351,806
------------- ------------ ------------ ------------- --------------- --------------
Balance at
December 31,1997... 1,705 5,533,335 9,649,418 (1,409,957) 293,317 14,067,818
Cash dividends........ (1,227,822) (1,227,822)
Effect of business
combinations....... 864 8,582,222 (81,757) 210,266 8,711,595
Retirement of
treasury stock..... (247) (1,409,710) 1,409,957 --
Purchase of treasury
stock.............. (368,000) (368,000)
Proceeds from exercise
of options......... 10 149,990 150,000
Net change in
unrealized gains on
securities available
for sale........... 26,831 26,831
Net income 1998....... 1,127,816 1,127,816
------------- ------------ ------------ ------------- --------------- --------------
BALANCE AT
DECEMBER 31, 1998.. 2,332 14,265,547 8,057,945 (368,000) 530,414 22,488,238
EFFECT OF STOCK SPLIT 1,166 (1,166) --
CASH DIVIDENDS........ (1,764,975) (1,764,975)
PURCHASE OF TREASURY
STOCK.............. (884,637) (884,637)
ISSUANCE OF
TREASURY STOCK..... (2,443) 82,154 79,711
NET CHANGE IN
UNREALIZED GAINS ON
SECURITIES AVAILABLE
FOR SALE........... (2,210,092) (2,210,092)
NET INCOME 1999....... 2,482,940 2,482,940
------------- ------------ ------------ ------------- --------------- --------------
BALANCE AT
DECEMBER 31, 1999 $ 3,498 $ 14,263,104 $ 8,774,744 $ (1,170,483) $ (1,679,678) $ 20,191,185
============= ============ ============ ============= =============== ==============
</TABLE>
See notes to consolidated financial statements
36
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 2,482,940 $ 1,127,816 $ 1,351,806
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization and accretion, net......... 786,361 649,165 632,991
Provision for loan losses............................. 497,388 1,412,295 662,155
Loss on disposal of assets............................ 25,967 1,320
Deferred income taxes................................. (44,000) (124,907) (109,630)
Realized security gains, net.......................... (39,023) (60,172) (8,075)
(Gain) loss on disposition of foreclosed
real estate......................................... 34,349 (179) 28,384
Increase in accrued interest receivable................. (152,274) (117,861) (8,240)
Increase (decrease) in accrued interest payable......... 40,345 (184,546) 278,614
Other, net.............................................. 968,430 (593,387) (428,050)
---------------- --------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 4,574,516 2,134,191 2,401,275
---------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of securities
available-for-sale...................................... 22,786,159 17,928,633 8,360,089
Purchases of securities available-for-sale................ (24,837,868) (26,949,494) (6,761,497)
Net (increase) decrease in loans to customers............. (4,147,744) 7,573,698 (12,851,682)
Capital expenditures, net................................. (1,719,694) (1,429,723) (330,297)
Proceeds from disposition of foreclosed real estate....... 100,050 62,353 170,153
Cash received (paid) in acquisitions, net................. -- 4,422,156 (1,560,257)
---------------- --------------- ---------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES................................ (7,819,097) 1,607,623 (12,973,491)
---------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits....................... (948,234) 11,133,726 6,359,213
Net increase (decrease) in short-term borrowings.......... 85,954 (108,303) (3,440,000)
Proceeds from sale of treasury stock...................... 79,711 -- --
Purchases of treasury stock............................... (884,637) (368,000) (15,000)
Cash dividends............................................ (1,764,975) (1,227,822) (505,335)
Issuance of long-term debt................................ 5,500,000 5,015,384 9,600,000
Repayment of long-term debt............................... (15,384) (10,500,000) (250,000)
Issuance of common stock.................................. -- 217,014 --
---------------- --------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES............... 2,052,435 4,161,999 11,748,878
---------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................................... (1,192,146) 7,903,813 1,176,662
Cash and Cash Equivalents at Beginning of Year............... 14,836,222 6,932,409 5,755,747
---------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR..................... $ 13,644,076 $ 14,836,222 $ 6,932,409
================ =============== ===============
</TABLE>
See notes to consolidated financial statements.
37
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ---------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest.............................................. $ 8,105,373 $ 6,082,143 $ 4,416,179
Income taxes.......................................... 210,450 450,648 817,532
Loans transferred to foreclose real estate.............. 224,983 206,493 169,798
Net increase (decrease) in unrealized gains and
losses on securities available-for-sale............... (3,512,033) 326,693 191,064
Assets acquired in business combinations................ -- 75,874,317 --
Liabilities assumed in business combinations............ -- 67,229,736 --
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ---------------
<S> <C> <C> <C>
NET INCOME................................................... $ 2,482,940 $ 1,127,816 $ 1,351,806
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains (losses) arising
during the period..................................... (3,473,010) 386,865 199,139
Reclassification adjustments for
gains included in net income.......................... (39,023) (60,172) (8,075)
---------------- --------------- ---------------
Net unrealized gains (losses)........................... (3,512,033) 326,693 191,064
Income tax related to items of other
comprehensive income.................................. 1,301,941 (89,596) (73,559)
---------------- --------------- ---------------
Other comprehensive income (loss)............................ (2,210,092) 237,097 117,505
---------------- --------------- ---------------
COMPREHENSIVE INCOME......................................... $ 272,848 $ 1,364,913 $ 1,469,311
================ =============== ===============
</TABLE>
See notes to consolidated financial statements.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Frontier National Corporation (the "Company") and its subsidiaries operate
predominantly in the domestic commercial banking industry in East Central
Alabama. The accounting and reporting policies of the Company conform to
generally accepted accounting principles and to general practice within the
banking industry. The following summarizes the most significant of these
policies. The Company has two bank subsidiaries; Frontier National Bank,
Sylacauga, Alabama (formerly known as First National-America's Bank) and
Frontier National Bank, Lanett, Alabama (formerly known as Valley National
Bank). The Banks operate branches in Talladega and Chambers counties, Alabama.
Their primary source of revenue is providing loans to customers, who are
predominately small and middle-market businesses and middle-income individuals.
Frontier Financial Services Corporation, a wholly-owned subsidiary of Frontier
National Bank, Sylacauga, Alabama, makes small consumer loans and has four
offices located in north and central Alabama. The Frontier Agency, Inc., a
wholly-owned subsidiary of Frontier National Bank, Sylacauga, Alabama, sells and
services insurance products aimed at individuals and small to medium sized
businesses at two offices located in Central Alabama. Frontier National
Corporation is the surviving parent company following the business combination
of August 31, 1998 (see note 2).
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
Frontier National Corporation and its wholly-owned subsidiaries: Frontier
National Bank, Sylacauga, Alabama (formerly known as First National-America's
Bank), Frontier National Bank, Lanett, Alabama (formerly known as Valley
National Bank), and Frontier Financial Services Corporation (referred to herein
as the "Bank's"), and The Frontier Agency, Inc. All significant intercompany
transactions and balances have been eliminated in consolidation.
Consolidated Statements of Comprehensive Income
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
REPORTING COMPREHENSIVE INCOME, on December 31, 1998. This statement establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The statement
requires that an enterprise classify items of other comprehensive income by
their nature in the financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional paid
in capital in the equity section of a statement of financial condition.
Comprehensive income is generally defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Securities
Securities are classified as either held-to-maturity, available-for-sale, or
trading.
Held-to-maturity securities are securities for which management has the ability
and intent to hold on a long-term basis or until maturity. These securities are
carried at amortized cost, adjusted for amortization of premiums, and accretion
of discount to the earlier of the maturity or call date.
Securities available-for-sale represent those securities intended to be held for
an indefinite period of time, including securities that management intends to
use as part of its asset/liability strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk, the need to increase
regulatory capital, or other similar factors. Securities available-for-sale are
recorded at market value with unrealized gains and losses net of any tax effect,
added or deducted directly from shareholders' equity.
Securities carried in trading accounts are carried at market value with
unrealized gains and losses reflected in income.
Realized and unrealized gains and losses are based on the specific
identification method.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary result in write-downs
of the individual securities to their fair value. The related write-downs are
included in earnings as realized losses.
The Company and its subsidiaries have no trading securities or held-to-maturity
securities.
Loans
Loans are stated at unpaid principal balances, less the allowance for loan
losses, net deferred loan fees and unearned discounts.
Unearned discounts on installment loans are recognized as income over the term
of the loans using a method that approximates the interest method.
Loan origination and commitment fees, as well as certain origination costs, when
material, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method.
Allowance for Possible Loan Losses
A loan is considered impaired, based on current information and events, if it is
probable that the Banks will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Uncollateralized loans are measured for impairment based on the
present value of expected future cash flows discounted at the historical
effective interest rate, while all collateral-dependent loans are measured for
impairment based on the fair value of the collateral. Smaller balance
homogeneous loans, which consist of residential mortgages and consumer loans,
are evaluated collectively and reserves are established based on historical loss
experience.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. Increases and decreases in the allowance
due to changes in the measurement of the impaired loans are included in the
provision for loan losses. Loans continue to be classified as impaired unless
they are brought fully current and the collection of scheduled interest and
principal is considered probable. When a loan or portion of a loan is determined
to be uncollectable, the portion deemed uncollectable is charged against the
allowance and subsequent recoveries, if any, are credited to the allowance.
Management's periodic evaluation of the adequacy of the allowance is based on
the Banks' past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrowers' ability to repay, estimated
value of any underlying collateral, and an analysis of current economic
conditions. While management believes that it has established the allowance in
accordance with generally accepted accounting principles and has taken into
account the views of its regulators and the current economic environment; there
can be no assurance that in the future the Banks' regulators or its economic
environment will not require further increases in the allowance.
Income Recognition On Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well collateralized and in the process
of collection. If a loan or a portion of a loan is classified as doubtful or is
partially charged off, the loan is generally classified as nonaccrual. Loans
that are on a current payment status or past due less than 90 days may also be
classified as nonaccrual if repayment in full of principal and/or interest is in
doubt.
Loans may be returned to accrual status when all principal and interest amounts
contractually due are reasonably assured of repayment within an acceptable
period of time, and there is a sustained period of repayment performance by the
borrower, in accordance with the contractual terms of interest and principal.
While a loan is classified as nonaccrual and the future collectability of the
recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding, except in the case of
loans with scheduled amortizations where the payment is generally applied to the
oldest payment due. When the future collectability of the recorded loan balance
is expected, interest income may be recognized on a cash basis. In the case
where a nonaccrual loan has been partially charged off, recognition of interest
on a cash basis is limited to that which would have been recognized on the
recorded loan balance at the contractual interest rate. Receipts in excess of
that amount are recorded as recoveries to the allowance for loan losses until
prior charge offs have been fully recovered. Interest income recognized on a
cash basis was immaterial for the years ended December 31, 1999, 1998 and 1997.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Expenditures for additions and major improvements that significantly extend the
useful lives of the assets are capitalized. Expenditures for repairs and
maintenance are charged to expense as incurred. The carrying values of assets
traded in are used to adjust the carrying values of the new assets acquired by
trade. Assets which are disposed of are removed from the accounts and the
resulting gains or losses are recorded in operations.
Depreciation is provided generally by accelerated and straight-line methods
based on the estimated useful lives of the respective assets.
Foreclosed Real Estate
Foreclosed real estate includes both formally foreclosed property and
in-substance foreclosed property. In-substance foreclosed properties are those
properties for which the institution has taken physical possession, regardless
of whether formal foreclosure proceedings have taken place.
At the time of foreclosure, foreclosed real estate is recorded at the lower of
the carrying amount or fair value less cost to sell, which becomes the
property's new basis. Any write-downs based on the asset's fair value at date of
acquisition are charged to the allowance for loan losses. After foreclosure,
these assets are carried at the lower of their new cost basis or fair value less
cost to sell.
Costs incurred in maintaining foreclosed real estate and subsequent adjustments
to the carrying amount of the property are included in income (loss) on
foreclosed real estate.
Income Taxes
Income taxes are provided for the tax effects of the transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of the allowance for loan
losses and accumulated depreciation. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or
settled. Deferred tax assets and liabilities are reflected at income tax rates
applicable to the period in which the deferred tax assets or liabilities are
expected to be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for
income taxes.
The Company and its subsidiaries file a consolidated federal income tax return.
The subsidiaries provide for income taxes on a separate return basis and remit
to the Company amounts determined to be currently payable.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Earnings Per Common Share
The Company adopted SFAS No. 128, EARNINGS PER SHARE, on December 31, 1997. This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. This statement replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. All earnings per share data reflect the presentation required under
SFAS No. 128.
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average of common shares outstanding........... 3,450,628 2,861,619 2,104,092
Effect of dilutive options.............................. 34,714 21,246 --
------------ ------------ ------------
Weighted average of common shares outstanding effected
for dilution.......................................... 3,485,342 2,882,865 2,104,092
============ ============ ============
</TABLE>
In May 1999, the Company issued a 3-for-2 stock split. In September 1998, the
Company issued a 6.8 percent stock dividend resulting in the issuance of 216,917
(adjusted for the 3-for-2 stock split in 1999) shares of common stock. Also, in
conjunction with the business combination with Valley National Bank, the Company
issued 1,817,910 (adjusted for the 3-for-2 stock split in 1999) shares to the
existing shareholders of the Company which has been accounted for as a 13-to-1
stock split. All per share amounts included in these financial statements have
been retroactively adjusted to give effect to the stock dividend and stock
splits.
Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION; which defines a fair value based method of accounting for an
employee stock option plan. This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans and stock-based
non-employee compensation. These transactions must be accounted for based on the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured. Under the fair value
based method, compensation is measured at the grant date based on the value of
the award and is recognized over the service period, which is usually the
vesting period. However, SFAS No. 123 allows an entity to continue to measure
compensation costs for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No, 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. The Company has elected to follow APB No. 25 in accounting for its
stock option plans. The adoption of this statement did not have a material
effect on the Company's consolidated financial statements.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Retirement Plans
The Company and its subsidiaries have a qualified 401(k) profit-sharing plan
covering substantially all of their employees. Eligible participating employees
may elect to contribute tax-deferred contributions. Company contributions
include matching and discretionary annual amounts as determined by the board of
directors.
The Company and its subsidiaries also have provided deferred compensation and
salary continuation plans for certain directors and key employees. These plans
are generally funded through life insurance contracts owned by the Company.
Company contributions to these retirement plans are included in salaries and
benefits.
Off-Balance Sheet Financial Instruments
In the ordinary course of business the Banks have entered into off-balance sheet
financial instruments consisting of commitments to extend credit, commitments
under credit card arrangements, commercial letters of credit and standby letters
of credit. Such financial instruments are recorded in the financial statements
when they become payable.
The Banks have available as a source of financing a line of credit of
$41,584,782 with the Federal Home Loan Bank of Atlanta of which $17,542,782 was
available and unused.
The Banks also have available as a source of short-term financing the purchase
of federal funds from other commercial banks from available lines totaling
$14,000,000.
Cash Flow Information
The Company considers all cash and amounts due from depository institutions and
federal funds sold to be cash equivalents for purposes of the statements of cash
flows.
Reclassifications
Certain amounts in 1998 and 1997 have been reclassified to conform with the 1999
presentation.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. The
provisions of this statement establishes standards for the way that public
business enterprises report information about operating segments in annual and
interim financial reports issued to shareholders. This statement also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This statement
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
requires the reporting of financial and descriptive information about an
enterprise's reportable operating segments. This statement is effective for
financial statements for periods beginning after December 15, 1997. All of the
Bank's offices offer similar products and services, are located in the same
geographic region, and serve the same customer segments of the market. As a
result, management considers all units as one operating segment and therefore
feels that the basic financial statements and related footnotes provide details
related to segment reporting.
Effective for years ending after December 15, 1997, SFAS No. 132, EMPLOYERS'
DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS, was issued by FASB
which standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefits obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain other
disclosures previously required. The adoption of this statement did not have a
material effect on the Company's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board also issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial condition and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative is to be determined based upon the intended use of the derivative.
For certain hedge designations (cash flow and foreign currency exposure) the
derivative's gain or loss is reported as a component of other comprehensive
income. Other designations require the gain or loss to be recognized in earnings
in the period of change. This statement, amended as to effective date by SFAS
No. 137, is effective for financial statements for periods beginning after June
15, 2000. Management does not believe that the adoption of SFAS No. 133 will
have a material impact on the Company's consolidated financial statements.
NOTE 2 - BUSINESS COMBINATIONS
On December 26, 1997, Frontier Financial Services, Inc. purchased the assets of
Hometown Financial Services, Inc. for $1,560,257. The assets purchased consisted
of loans receivable of $1,541,724 and furniture and fixtures of $18,533.
On August 31, 1998, Valley National Corporation and subsidiary ("VNC") of
Lanett, Alabama merged with and into First National Sylacauga Corporation
("FNSC") and subsidiary of Sylacauga, Alabama. The merger was accounted for as a
reverse acquisition of VNC by FNSC under the purchase method of accounting due
to FNSC shareholders representing a majority of ownership subsequent to the
merger. The financial statements reflect the ongoing operations of FNSC combined
with the accounts of VNC as of the merger date and thereafter. Upon the
consummation of the merger, the surviving parent company changed its name to
Frontier National Corporation ("FNC"). Operating results and balance sheet
information prior to the merger reflect only the balances of FNSC.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 2 - BUSINESS COMBINATIONS - CONTINUED
The following is summary operating information for FNC showing the effect of the
business combination between FNSC and VNC described in the preceding paragraph
for the years ended December 31, 1998, and 1997.
<TABLE>
<CAPTION>
As Effect of (Pro Forma)
Reported Purchase Results
---------------- --------------- ----------------
<S> <C> <C> <C>
As of December 31, 1998:
Interest income........................................... $ 13,882,764 $ 3,701,200 $ 17,583,964
Interest expense.......................................... 6,294,206 1,811,561 8,105,767
Net interest income....................................... 7,588,558 1,889,639 9,478,197
Provision for loan losses................................. 1,412,295 82,124 1,494,419
Noninterest income........................................ 2,283,909 464,367 2,748,276
Noninterest expense....................................... 7,066,497 1,566,199 8,632,696
Provision for income taxes................................ 265,859 195,719 461,578
Net income................................................ 1,127,816 509,964 1,637,780
As of December 31, 1997:
Interest income........................................... $ 11,085,218 $ 5,260,573 $ 16,345,791
Interest expense.......................................... 4,694,793 2,373,850 7,068,643
Net interest income....................................... 6,390,425 2,886,723 9,277,148
Provision for loan losses................................. 662,155 89,751 751,906
Noninterest income........................................ 1,221,474 602,215 1,823,689
Noninterest expense....................................... 5,035,880 2,303,125 7,339,005
Provision for income taxes................................ 562,058 294,181 856,239
Net income................................................ 1,351,806 801,881 2,153,687
</TABLE>
On November 23, 1998, the Frontier Agency Inc., a subsidiary of First
National-America's Bank, purchased two insurance agencies. Brown Insurance
Agency located in Sylacauga, Alabama was purchased with cash and accounted for
by the purchase method of accounting. Wright-Sprayberry, Inc. also located in
Sylacauga, Alabama was purchased with 74,006 (adjusted for the 3-for-2 stock
split in 1999) 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.
On April 30, 1999, The Frontier Agency, Inc., a subsidiary of Frontier National
Bank in Sylacauga, entered into an asset purchase agreement with the
Lawrence-Jones Insurance and Real Estate Agency, Inc., whereas assets valuing
$136,700 were purchased with cash. The proforma effects upon the current and
prior years' operations has not been shown due to immateriality.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Subsidiary Banks are required to maintain reserve balances in cash or on
deposit with the Federal Reserve Bank, based on a percentage of deposits. The
average amount of those reserve balances required were approximately $1,235,000
and $1,223,000 at December 31, 1999 and 1998, respectively.
NOTE 4 - SECURITIES
The carrying amounts of securities as shown in the consolidated statements of
financial condition and their approximate fair values at December 31, 1999 and
1998 were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
DECEMBER 31, 1999:
U.S. GOVERNMENT AND AGENCY
SECURITIES $ 7,007,087 $ -- $ 284,375 $ 6,722,712
STATE AND POLITICAL
SUBDIVISIONS 27,794,375 172,991 1,655,578 26,311,788
CORPORATE DEBT SECURITIES 5,851,449 -- 300,299 5,551,150
MORTGAGE-BACKED
SECURITIES 10,994,979 -- 641,142 10,353,837
EQUITY SECURITIES 1,418,300 -- -- 1,418,300
----------- ----------- ----------- -----------
$53,066,190 $ 172,991 $ 2,881,394 $50,357,787
=========== =========== =========== ===========
December 31, 1998:
U.S. Government and agency
securities $ 7,042,868 $ 84,723 $ -- $ 7,127,591
State and political
subdivisions 21,581,093 622,805 10,664 22,193,234
Mortgage-backed
securities 20,546,871 176,152 69,386 20,653,637
Equity securities 1,906,420 -- -- 1,906,420
----------- ----------- ----------- -----------
$51,077,252 $ 883,680 $ 80,050 $51,880,882
=========== =========== =========== ===========
</TABLE>
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 4 - SECURITIES - CONTINUED
The contractual maturities of securities available-for-sale at December 31, 1999
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Amortized Fair
Cost Value
Due in one year or less.............. $ 755,294 $ 759,216
Due from one year to five years...... 7,037,086 6,837,328
Due from five years to ten years..... 9,866,040 9,601,818
Due after ten years.................. 33,989,470 31,741,125
Equity securities.................... 1,418,300 1,418,300
------------------ ----------------
Totals........................... $ 53,066,190 $ 50,357,787
================== ================
Mortgage backed securities have been included in the maturity tables based upon
the guaranteed payoff date of each security.
Gross realized gains and losses from the sale or maturity of securities
available-for-sale for the years ended December 31 are as follows:
1999 1998 1997
---- ---- ----
Realized gains $ 54,018 $ 64,792 $ 32,487
Realized (losses) (14,995) (4,620) (24,412)
Equity securities include a restricted investment in Federal Home Loan Bank
stock which must be maintained to secure the available lines of credit. The
amount of investment in this stock amounted to $1,202,100 and $1,688,600 at
December 31, 1999 and 1998, respectively.
Securities pledged to secure public funds on deposit and for other purposes as
required by law amounted to approximately $30,999,000 and $30,298,000 at
December 31, 1999 and 1998, respectively.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 5 - LOANS
The Banks grant loans to customers primarily in Talladega and Chambers County of
East Central Alabama.
The major classification of loans as of December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Commercial, financial and agricultural.. $ 27,615,809 $ 25,353,317
Real estate - construction.............. 7,307,339 2,384,790
Real estate - mortgage.................. 81,991,257 82,745,788
Consumer................................ 23,107,565 26,432,529
Other................................... 1,959,060 466,858
----------------- ----------------
141,981,030 137,383,282
Unearned income......................... 2,274,647 1,180,881
Allowance for loan losses............... 1,849,356 1,831,241
----------------- ----------------
Net loans............................... $ 137,857,027 $ 134,371,160
================= ================
</TABLE>
Certain directors, executive officers and principal shareholders including their
immediate families and associates were loan customers of the Banks during 1999
and 1998. Such loans are made in the ordinary course of business at normal
credit terms, including interest rates and collateral and do not represent more
than a normal risk of collection. Total loans to these persons at December 31,
1999 and 1998, amounted to approximately $3,321,001 and $3,278,615,
respectively. Activity during 1999 and 1998 in loans to related parties is as
follows:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Balance at Beginning of Year..............$ 3,278,615 $ 1,873,546
New loans.............................. 5,340,367 465,960
Addition due to acquisition............ -- 1,823,730
Change in related parties.............. 324,569 --
Repayments............................. (5,622,550) (884,621)
----------------- ----------------
Balance at End of Year....................$ 3,321,001 $ 3,278,615
================= ================
</TABLE>
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 5 - LOANS - CONTINUED
Information about impaired loans as of and for the years ended December 31 is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
Loans receivable for which there is a related
allowance for credit losses determined in
accordance with FASB Statement No. 114,
as amended................................................ $ 561,106 $ 310,137 $ 316,258
Other impaired loans......................................... 268,309 263,734 240,605
---------------- --------------- ----------------
Total impaired loans.................................... $ 829,415 $ 573,871 $ 556,863
================ =============== ================
Average monthly balance of impaired loans (based
on month-end balances).................................... $ 736,604 $ 746,908 $ 815,230
Related allowance for credit losses.......................... 256,937 133,702 34,334
Interest income recognized on impaired loans................. 37,682 29,248 77,139
</TABLE>
Total nonaccural loans at December 31, 1999 and 1998 consisted of approximately
$873,000 and $515,000, respectively. For the years ended December 31, 1999 and
1998, the difference between gross interest income that would have been recorded
in such period if the nonaccruing loans had been current in accordance with
their original terms and the amount of interest income on those loans that was
included in such period's net income was approximately $55,000 and $43,000,
respectively.
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
Balance at beginning of year................................. $ 1,831,241 $ 1,120,012 $ 924,441
Charge-offs............................................... (972,950) (1,504,836) (765,461)
Recoveries................................................ 493,677 339,348 298,877
---------------- --------------- ----------------
Net charge-offs......................................... (479,273) (1,165,488) (466,584)
Provision for loan loss................................... 497,388 1,412,295 662,155
Addition due to acquisitions.............................. -- 464,422 --
---------------- --------------- ----------------
Balance at end of year....................................... $ 1,849,356 $ 1,831,241 $ 1,120,012
================ =============== ================
</TABLE>
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 7 - PREMISES AND EQUIPMENT
Components of premises and equipment included in the consolidated statements of
financial condition at December 31 are as follows:
1999 1998
--------------- ------------------
Land and improvements............. $ 1,449,941 $ 979,929
Buildings and improvements........ 4,745,736 4,441,125
Furniture and equipment........... 5,598,845 5,041,547
Automobiles....................... 167,057 44,489
Construction in progress.......... 207,916 --
----------------- -----------------
12,169,495 10,507,090
Less: Accumulated depreciation.... 5,363,258 4,866,208
----------------- -----------------
Premises and equipment, net..... $ 6,806,237 $ 5,640,882
================= =================
The provision for depreciation charged to occupancy and equipment expense for
the years ended December 31, 1999, 1998 and 1997 was $554,339, $440,404, and
$514,321, respectively.
NOTE 8 - DEPOSITS
The major classifications of deposits as of December 31, 1999 and 1998 were as
follows:
1999 1998
----------------- -----------------
Noninterest-bearing demand.........$ 24,512,607 $ 26,793,363
NOW accounts....................... 29,503,717 31,335,143
Savings............................ 24,692,450 26,098,626
Time............................... 67,549,655 66,401,413
Certificates of deposit of $100,000
or more.......................... 19,577,551 16,155,669
Time deposit open accounts......... 6,591,000 6,591,000
----------------- -----------------
Totals...........................$ 172,426,980 $ 173,375,214
================= =================
The aggregate amounts of time deposits of $100,000 or more, including
certificates of deposit of $100,000 or more at December 31, 1999 and 1998 were
$26,168,551 and $22,746,669.
Total deposits to related parties at December 31, 1999 and 1998 amounted to
approximately $6,269,000 and $5,483,000, respectively.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 8 - DEPOSITS - CONTINUED
The maturities of time certificates of deposit and other time deposits issued by
the Subsidiary Banks at December 31, 1999 is as follows:
Years Ending December 31,
2000...................... $ 74,855,410
2001...................... 13,890,495
2002...................... 3,288,829
2003...................... 1,261,952
2004...................... 421,520
--------------
Total.................. $ 93,718,206
==============
NOTE 9 - LONG-TERM DEBT
Long-term debt consisted of the following as of December 31, 1999 and 1998:
1999 1998
-------------- --------------
SouthTrust Bank................$ -- $ 15,384
Federal Home Loan Bank (FHLB).. 24,042,000 18,542,000
-------------- --------------
Total.....................$ 24,042,000 $ 18,557,384
============== ==============
The FHLB advances bear interest at rates ranging from 4.65% to 7.67%. The
advances are payable at various maturities through April 2014. The note is
secured by all 1 - 4 family residential mortgages held by the Subsidiary Banks.
Terms of the note provide for significant penalties in the event of early
repayment.
The SouthTrust Bank note bore interest at 7.75%. On February 12, 1999 the loan
was paid off.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 9 - LONG-TERM DEBT - CONTINUED
Maturities of long-term debt following December 31, 1999 are as follows:
Years Ending December 31,
2000...................... $ 1,100,000
2001...................... 350,000
2002...................... --
2003...................... 2,500,000
2004...................... 5,500,000
Thereafter................ 14,592,000
--------------
Total.................. $ 24,042,000
==============
NOTE 10 - SHAREHOLDERS EQUITY
At December 31, 1999 and 1998 Shareholders' Equity of the Company consisted of
the following:
Common Stock: At December 31, 1999 10,000,000 shares authorized, 3,497,497
shares issued and 3,414,357 outstanding with a par value of $0.001 per share. At
December 31, 1998 10,000,000 shares authorized, 2,331,683 shares issued and
2,315,683 outstanding with a par value of $0.001 per share. The 1998 shares
reflect the amounts before adjustment for the 1999 stock split.
Capital Surplus: Represents the funds received in excess of par value upon the
issuance of stock, net of issuance costs and the related effects of the stock
dividend and business combination.
Retained Earnings: Represents the accumulated net earnings of the Company as
reduced by dividends paid to shareholders, merger expenses and retirement of
treasury stock.
Treasury Stock: Represents 83,140 and 16,000 shares of common stock at December
31, 1999 and 1998, respectively, at cost. The 1998 shares reflect the amounts
before adjustment for the 1999 stock split.
Stock Dividend: In September 1998, the Company issued a stock dividend resulting
in the issuance of 216,917 (adjusted for the 1999 3-for-2 stock split) shares of
common stock. In conjunction with the business combination, the par value of the
stock was reduced from $10 per share to $0.001 per share. All per share amounts
included in these financial statements have been adjusted to give retroactive
effect to the stock dividend.
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 10 - SHAREHOLDERS EQUITY - CONTINUED
Accumulated Comprehensive Income: Represents the change in equity during each
period from the effects of unrealized holding gains and losses on securities
available-for-sale, net of tax.
Stock Splits: In May, 1999, the Company issued a 3-for-2 stock split resulting
in the issuance of an additional 1,165,814 shares of common stock.
Additional shares of 1,817,910 (adjusted for the 3-for-2 stock split in 1999)
were issued in 1998 to the Company's shareholders resulting from the business
combination with Valley National Bank as described in note 2 to the consolidated
financial statements. These additional shares resulted from the effects of a
13-to-1 split of Company shares to facilitate the transaction. All per share
amounts included in these financial statements have been adjusted to give
retroactive effect to both stock splits.
NOTE 11 - REGULATORY CAPITAL MATTERS
The Company and its subsidiary Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and its subsidiary Banks must meet specific capital guidelines that
involve quantitative measures of the Company and its subsidiary banks' assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Subsidiary Banks' capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary banks to maintain minimum amounts and
ratios (set forth in the table below) of Total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes the Company and its
subsidiary banks meet all capital adequacy requirements to which they are
subject as of December 31, 1999.
As of December 31, 1999, the most recent notification from the appropriate
regulatory agencies categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the Banks' category.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 11 - REGULATORY CAPITAL MATTERS - CONTINUED
The Company's and Subsidiary Banks' actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
------------------ ----------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
AS OF DECEMBER 31, 1999:
TOTAL CAPITAL
CONSOLIDATED................ $ 22,224 14.57% $ 12,206 8.00% $ 15,257 10.00%
FRONTIER NATIONAL
BANK, SYLACAUGA........... 12,991 13.16 7,899 8.00 9,874 10.00
FRONTIER NATIONAL
BANK, LANETT.............. 7,277 13.79 4,193 8.00 5,241 10.00
TIER 1 CAPITAL
CONSOLIDATED................ 20,375 13.35 6,103 4.00 9,154 6.00
FRONTIER NATIONAL
BANK, SYLACAUGA........... 11,756 11.91 3,950 4.00 5,924 6.00
FRONTIER NATIONAL
BANK, LANETT.............. 6,672 12.73 2,096 4.00 3,144 6.00
TIER 1 LEVERAGE
CONSOLIDATED................ 20,375 9.31 8,800 4.00 11,000 5.00
FRONTIER NATIONAL
BANK, SYLACAUGA........... 11,756 8.56 5,492 4.00 6,866 5.00
FRONTIER NATIONAL
BANK, LANETT.............. 6,672 8.32 3,208 4.00 4,011 5.00
As of December 31, 1998:
Total Capital
Consolidated................ $ 22,145 15.26% $ 11,608 8.00% $ 14,511 10.00%
Frontier National
Bank, Sylacauga........... 12,917 13.43 7,691 8.00 9,614 10.00
Frontier National
Bank, Lanett.............. 7,296 14.93 3,910 8.00 4,888 10.00
Tier 1 Capital
Consolidated................ 20,331 14.01 5,804 4.00 8,706 6.00
Frontier National
Bank, Sylacauga........... 11,715 12.18 3,846 4.00 5,769 6.00
Frontier National
Bank, Lanett.............. 6,772 13.86 1,955 4.00 2,933 6.00
Tier 1 Leverage
Consolidated................ 20,331 9.26 8,778 4.00 10,972 5.00
Frontier National
Bank, Sylacauga........... 11,715 8.23 5,697 4.00 7,121 5.00
Frontier National
Bank, Lanett.............. 6,772 8.76 3,091 4.00 3,863 5.00
</TABLE>
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 12 - STOCK OPTION PLANS
On August 24, 1998, the Company issued a total of 150,000 options (split
adjusted) to purchase its common shares to its chief executive officer and its
president. Each received 75,000 options. Each of the stock option agreements
contain an option price of $6.67 per share (split adjusted), the market value of
the shares at the time of issuance.
The following sets forth certain information regarding stock options for the
year ended December 31, 1999 and 1998. Stock options have been adjusted to
reflect the effects of the 3 for 2 split in 1999.
<TABLE>
<CAPTION>
Fixed Options
1999 1998
----------------------------- ----------------------------
WEIGHTED Weighted
AVERAGE Average
EXERCISE Exercise
SHARES PRICE Shares Price
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year...... 135,000 $ 6.67 -- $ 0.00
Granted............................... -- 0.00 150,000 6.67
Exercised............................. -- 0.00 (15,000) 6.67
Forfeited............................. -- 0.00 -- 0.00
------------- ---------- ------------- ----------
Outstanding at end of year............ 135,000 $ 6.67 135,000 $ 6.67
============= ========== ============= ==========
Exercisable at end of year............ 135,000 $ 6.67 135,000 $ 6.67
============= ========== ============= ==========
Expiration Options
Number Date Exercisable
------ ---- -----------
Options with Exercise Price of $6.67................ 135,000 8-24-07 135,000
</TABLE>
In October 1995, the FASB issued Financial Accounting Standards No. 123,
ACCOUNTING AND DISCLOSURE OF STOCK-BASED COMPENSATION ("SFAS 123"). SFAS 123 is
effective for years beginning after December 15, 1995, and allows for the option
of continuing to follow Accounting Principles Board Opinion No. 25, Accounting
for Stocks Issued to Employees, and the related Interpretations. The Company has
elected to apply APB Opinion No. 25 in accounting for its incentive stock
options; accordingly, no compensation cost has been recognized by the Company.
The Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below had compensation cost for the Company's stock
option plan been determined based on the fair value method at the grant date for
options under the plan.
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 12 - STOCK OPTION PLANS - CONTINUED
1999 1998
--------------- ----------------
Net Income
As reported........................ $ 2,482,940 $ 1,127,816
Pro forma.......................... 2,482,940 1,083,861
Basic Earnings Per Share
As reported........................ $ .72 $ .39
Pro forma.......................... .72 .38
Diluted Earnings Per Share
As reported........................ $ .71 $ .39
Pro forma.......................... .71 .38
These options are assumed to be exercised in the calculation of diluted average
common shares outstanding, causing the equivalent number of shares outstanding
on a diluted basis to be 34,714 and 21,246 greater than that used to calculate
basic earnings per share for 1999 and 1998, respectively. There was a $.01
dilutive effect on earnings per share for the year ended December 31, 1999.
The Company's options outstanding have a weighted average contractual life of
ten years. The weighted average fair value of options granted in 1998 was $.73.
The fair value of each grant is estimated using a fair value method with the
following assumptions used for grants in 1998: expected option life of 10 years;
no expected volatility; expected dividend yield of 3.68%; and a risk free
interest rate of 6.00%.
The effects of applying FAS 123 for providing proforma disclosures are not
likely to be representative of the effects on reported earnings for future
years, nor are the dividend estimates representative of commitments on the part
of the Company's Board.
[The remainder of this page intentionally left blank]
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 13 - OTHER OPERATING EXPENSES
Other operating expenses consist of the following for the years ended December
31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- ----------------
<S> <C> <C> <C>
Professional fees................... $ 595,904 $ 403,631 $ 117,728
Director and committee fees......... 295,086 168,700 59,450
Stationery and supplies............. 257,336 205,761 191,068
Advertising......................... 190,693 189,369 145,955
Insurance........................... 178,976 87,149 66,884
Postage............................. 148,622 147,875 112,558
Regulatory fees and assessments..... 99,075 101,665 54,208
Other............................... 927,218 784,480 629,782
--------------- --------------- ----------------
Total other operating expenses... $ 2,692,910 $ 2,088,630 $ 1,377,633
=============== =============== ================
</TABLE>
NOTE 14 - INCOME TAXES
The components of income tax expense for the years ended December 31, 1999,
1998, and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- ----------------
<S> <C> <C> <C>
Current
Federal...............................$ 660,553 $ 355,337 $ 599,645
State................................. 77,129 35,430 72,043
Deferred
Federal............................... (75,000) (93,534) (121,846)
State................................. 31,000 (31,374) 12,216
--------------- --------------- ----------------
$ 693,682 $ 265,859 $ 562,058
=============== =============== ================
</TABLE>
Tax effects of securities transactions resulted in an increase in income taxes
for December 31, 1999, 1998, and 1997 of $15,609, $24,069, and $3,230,
respectively.
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 14 - INCOME TAXES - CONTINUED
The principal reasons for the difference in the effective tax rate and the
federal statutory rate are as follows for the years ended December 31, 1999,
1998, and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate............................... 34.0% 34.0% 34.0%
Effect on rate of:
Tax-exempt securities....................................... (12.1) (18.3) (5.8)
Tax-exempt loan income...................................... (0.9) (2.8) (0.9)
Interest expense disallowed................................. 1.5 2.8 1.8
Insurance cash surrender value increase..................... (2.8) (3.4) 0.0
Goodwill amortization....................................... 1.0 2.3 1.7
State income tax, net of federal tax benefit ............... 2.6 (0.6) 3.8
Other ...................................................... (1.5) 5.1 (5.2)
---------- ----------- ---------
Effective income tax rate....................................... 21.8 % 19.1% 29.4%
=========== =========== =========
</TABLE>
Federal and state income taxes receivable (payable) as of December 31, 1999 and
1998 included in other assets and other liabilities, respectively, were as
follows:
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Current
Federal...................................................................... $ (316,047) $ 125,215
State........................................................................ (117,328) (71,644)
</TABLE>
The components of the deferred income tax asset included in other assets as of
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Deferred tax asset:
Federal...................................................................... $ 1,746,286 $ 638,091
State........................................................................ 210,973 107,201
--------------- ----------------
Total deferred income tax asset............................................ 1,957,259 745,292
Deferred tax liability:
Federal...................................................................... (419,429) (580,307)
State........................................................................ (75,105) (48,201)
---------------- ----------------
Total deferred income tax liability........................................ (494,534) (628,508)
---------------- ----------------
Net deferred tax asset.......................................................... $ 1,462,725 $ 116,784
=============== ================
</TABLE>
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 14 - INCOME TAXES - CONTINUED
The tax effects of each type of income and expense item that gave rise to
deferred taxes are:
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Alternative minimum tax credit carryover..................................... $ 241,171 $ 126,847
Net unrealized (gains) losses on securities available-for-sale............... 1,028,725 (273,216)
Depreciation................................................................. (493,318) (321,339)
Allowance for loan losses.................................................... 514,552 487,107
Deferred compensation........................................................ 172,811 113,813
Other........................................................................ (1,216) (16,428)
--------------- ----------------
Net deferred tax asset....................................................... $ 1,462,725 $ 116,784
=============== ================
</TABLE>
NOTE 15 - RETIREMENT PLANS
The Company and its subsidiaries have established a 401(k) profit-sharing plan
covering substantially all employees, subject to eligibility requirements.
Employees may defer a percentage of their compensation, subject to maximum
limitations, with matching employer contributions subject to limitations. The
Company and its subsidiaries may also make discretionary contributions on an
annual basis. Total retirement expense under this plan included in salary and
benefits for the years ended December 31, 1999, 1999 and 1998 was $157,076,
$83,499, and $103,936, respectively.
The Company and its subsidiaries have also entered into a deferred compensation
agreement with a director and salary continuation plans with certain executive
officers to provide for continued compensation upon retirement. The present
value of the estimated liability under the plans is being accrued over the
expected remaining years of service.
The present value of both plan's accrued benefits amounted to $432,026 and
$278,826 at December 31, 1999 and 1998, respectively. The plans are financed
through life insurance policies owned by the Subsidiary Banks and provide
monthly income to the covered individuals if they remain in service until age 65
by the Subsidiary Banks. (Reduced amounts are payable if employment terminates
prior to age 65). The expense of the plans was $146,897, $134,524, and $100,788
in1999, 1998, and 1997, respectively.
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 16 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company offers a variety of financial
products to its customers to aid them in meeting their requirements for
liquidity, credit enhancement, and interest rate protection. Generally accepted
accounting principles recognize these transactions as contingent liabilities
and, accordingly, they are not reflected in the accompanying financial
statements.
A summary of the Company's commitments and contingent liabilities at December
31, 1999 and 1998, is approximately as follows:
<TABLE>
<CAPTION>
Contract or
Notional Amount
------------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Commitments to extend credit............................................... $ 8,447,000 $ 7,246,000
Credit card commitments.................................................... 1,777,000 1,691,000
Standby letters of credit.................................................. 265,000 --
--------------- ---------------
Totals................................................................... $ 10,489,000 $ 8,937,000
=============== ===============
</TABLE>
Commitments to extend credit, credit card arrangements, commercial letters of
credit, and standby letters of credit all include exposure to some credit loss
in the event of nonperformance of the customer. The Company's credit policies
and procedures for credit commitments and financial guarantees are the same as
those for extension of credit that are recorded on the statement of financial
condition. Because these instruments have fixed maturity dates, and because many
of them expire without being drawn upon, they do not generally present any
significant liquidity risk to the Company.
Management conducts regular reviews of these instruments on an individual
customer basis, and the results are considered in assessing the adequacy of the
Company's allowance for loan losses. Management does not anticipate any material
losses as a result of these commitments.
NOTE 17 - CONCENTRATIONS OF CREDIT
All of the Banks' loans, commitments and standby letters of credit have been
granted to customers in the Company's market area. Substantially all such
customers are depositors of the Banks. The concentrations of credit by type of
loan are set forth in note 5. The commitments to extend credit relate primarily
to unused commercial lines of credit. Commercial and standby letters of credit
were granted primarily to commercial borrowers.
The Company maintains its cash accounts at various commercial banks in Alabama,
Georgia and Tennessee. The total cash balances are insured by the FDIC up to
$100,000. There were no uninsured balances held at other commercial banks at
December 31, 1999 and 1998.
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 18 - LEASES
The Company leased office space and equipment under various operating leases
during 1999 and 1998. The leases provide for renewal options and generally
require the Company to pay maintenance, insurance and property taxes. For the
years ended December 31, 1999, 1998, and 1997, rental expense for such leases
was $127,228, $94,334, and $65,904, respectively.
Future minimum lease payments under noncancellable operating leases at December
31, 1999 are as follows:
Years Ending December 31,
2000......................................... $ 51,288
2001......................................... 35,566
2002......................................... 9,375
--------------
Total minimum lease payments................. $ 96,229
==============
NOTE 19 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
The Banks are subject to dividend restrictions set forth by their regulators.
Under such restrictions, the Banks may not, without the prior approval of their
regulators declare dividends in excess of the sum of the current year's earnings
plus the retained net earnings from the preceding two years. In January 1998,
First National-America's Bank requested permission from the Office of the
Comptroller of Currency ("OCC") to pay a special dividend of $2,300,000 to First
National Sylacauga Corporation (former name of parent company) in order to pay
off a note payable to National Bank of Commerce. First National-America's Bank
received permission from the OCC on February 9, 1998, to pay the special
dividend and First National Sylacauga Corporation then paid in full the notes
payable to NBC.
For the year ending December 31, 2000, the Subsidiary Banks can declare
dividends of $699,665 without additional approval of regulatory authorities plus
an additional amount equal to its net profits for 2000.
NOTE 20 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND SHORT-TERM INVESTMENTS: For those short-term instruments, the carrying
amount is a reasonable estimate of fair value.
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 20 - FAIR VALUES OF FINANCIAL INSTRUMENTS - CONTINUED
SECURITIES: For securities available-for-sale and securities held-to-maturity,
fair values are based on quoted market prices or dealer quotes. For other
securities, fair value equals quoted market price, if available. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
LOANS: For certain homogeneous categories of loans, such as some residential
mortgages, credit card receivables, and other consumer loans, fair value is
estimated using the quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics. The fair value of other types
of loans is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
ACCRUED INTEREST RECEIVABLE: The carrying amount of accrued interest receivable
approximates its fair value.
DEPOSITS: The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
ACCRUED INTEREST PAYABLE: The carrying amount of accrued interest payable
approximates its fair value.
SHORT-TERM BORROWINGS: The carrying amounts of short-term borrowings approximate
their fair values.
LONG-TERM DEBT: Rates currently available to the Bank for debt with similar
terms and remaining maturities are used to estimate fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL
GUARANTEES WRITTEN: The fair value of commitments, letters of credit, and
financial guarantees is estimated to be approximately the same as the notional
amount of the related commitment.
[The remainder of this page intentionally left blank]
64
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 20 - FAIR VALUES OF FINANCIAL INSTRUMENTS - CONTINUED
The estimated fair values of the Company's financial instruments as of December
31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------------- ---------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
--------------- ---------------- --------------- ----------------
(IN THOUSANDS) (in thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and short-term investments.......... $ 13,644 $ 13,644 $ 14,836 $ 14,836
Securities............................... 50,358 50,358 51,881 51,881
Loans.................................... 139,706 138,688 136,202 136,065
Accrued interest receivable.............. 1,651 1,651 1,499 1,499
--------------- ---------------- --------------- ----------------
TOTAL FINANCIAL ASSETS................. $ 205,359 $ 204,341 $ 204,418 $ 204,281
=============== ================ =============== ================
FINANCIAL LIABILITIES
Deposits................................. $ 172,427 $ 164,332 $ 173,375 $ 170,421
Long-term debt........................... 24,042 23,992 18,557 17,717
Accrued interest payable................. 925 925 885 885
--------------- ---------------- --------------- ----------------
TOTAL FINANCIAL LIABILITIES............ $ 197,394 $ 189,249 $ 192,817 $ 189,023
=============== ================ =============== ================
UNRECOGNIZED FINANCIAL INSTRUMENTS
Commitments to extend credit............. $ 10,224 $ 10,224 $ 8,937 $ 8,937
Standby letters of credit................ 265 265 -- --
--------------- ---------------- --------------- ----------------
TOTAL UNRECOGNIZED FINANCIAL
INSTRUMENTS......................... $ 10,489 $ 10,489 $ 8,937 $ 8,937
=============== ================ =============== ================
</TABLE>
NOTE 21 - YEAR 2000 ISSUES
The year 2000 issue is the result of shortcomings in many electronic data
processing systems and other electronic equipment that may adversely affect the
Company's operations as early as fiscal year 1999.
The Company has completed an inventory of computer systems and other electronic
equipment that may be affected by the year 2000 issue and that are necessary to
conducting the Company's operations. Based on this inventory, the Company
upgraded or replaced various software and hardware items. Testing and validation
of the system for the year 2000 compliance has been performed.
The Company's management does not believe the effects of year 2000 will have any
material impact on the Company's consolidated financial position or results of
operation.
65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 22 - CONDENSED PARENT COMPANY INFORMATION
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and due from banks................................................. $ 1,454,701 $ 144,525
Investment in subsidiaries (equity method) -
eliminated upon consolidation......................................... 18,244,088 20,409,325
Dividends receivable from subsidiaries.................................. -- 2,000,000
Premises and equipment, net............................................. 1,201,076 1,076,771
Other assets............................................................ 163,085 323,411
------------------ -----------------
TOTAL ASSETS........................................................ $ 21,062,950 $ 23,954,032
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Due to subsidiaries..................................................... $ 4,062 $ 1,014,431
Dividends payable to shareholders....................................... 438,697 431,746
Other liabilities....................................................... 429,006 19,617
------------------ -----------------
TOTAL LIABILITIES................................................... 871,765 1,465,794
TOTAL SHAREHOLDERS' EQUITY.......................................... 20,191,185 22,488,238
------------------ -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................... $ 21,062,950 $ 23,954,032
================== =================
</TABLE>
66
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 22 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1999 1998 1997
--------------- --------------- ----------------
<S> <C> <C> <C>
INCOME
From subsidiaries - eliminated upon consolidation
Dividends............................................. $ 3,044,239 $ 4,822,910 $ 1,460,000
Interest.............................................. 45 32,742 9,631
Data processing fees.................................. 451,000 -- --
Commissions............................................. -- 37,163 63,176
Gain on sale of securities.............................. 5,421 -- --
Other income............................................ 7,525 11 215
--------------- --------------- ----------------
TOTAL INTEREST INCOME............................... 3,508,230 4,892,826 1,533,022
--------------- --------------- ----------------
EXPENSE
Salaries and employee benefits.......................... 566,195 537,235 101,793
Occupancy and equipment expense......................... 327,630 92,599 --
Interest................................................ -- 23,922 186,391
Other expenses.......................................... 611,114 307,972 25,858
--------------- --------------- ----------------
1,504,939 961,728 314,042
--------------- --------------- ----------------
Income before income taxes and equity in
undistributed earnings of subsidiaries.................. 2,003,291 3,931,098 1,218,980
Income tax benefit......................................... 434,793 190,500 76,854
--------------- --------------- ----------------
Income before equity in undistributed
earnings of subsidiaries................................ 2,438,084 4,121,598 1,295,834
Equity in undistributed earnings of subsidiaries........... (44,856) (2,993,782) 55,972
--------------- --------------- ----------------
NET INCOME.......................................... $ 2,482,940 $ 1,127,816 $ 1,351,806
=============== =============== ================
</TABLE>
67
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 22 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1999 1998 1997
--------------- --------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $ 2,482,940 $ 1,127,816 $ 1,351,806
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of subsidiaries........ (44,856) 2,993,782 (55,972)
Provision for depreciation and amortization........... 123,919 91,687 14,981
Deferred tax benefit.................................. (48,000) -- --
(Increase) decrease in dividends receivable........... 2,000,000 (1,200,000) (560,000)
Increase (decrease) in due to subsidiaries............ (1,010,369) 1,014,431 --
Investment gains...................................... (5,421) -- --
Increase (decrease) in dividends payable.............. 6,951 229,756 (240)
Other................................................. 614,096 (262,089) (56,641)
--------------- --------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........... 4,119,260 3,995,383 693,934
--------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale............... -- (5,000) --
Sale of securities available-for-sale................... 9,041 -- --
Cash received (paid) in acquisitions, net............... -- 686,472 --
Capital expenditures.................................... (248,224) (1,116,028) --
--------------- --------------- ----------------
NET CASH PROVIDED BY INVESTING ACTIVITIES........... (239,183) (434,556) --
--------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt............................. -- (2,250,000) (250,000)
Proceeds from sale of treasury stock.................... 79,711 -- --
Purchases of treasury stock............................. (884,637) (368,000) (15,000)
Issuance of common stock................................ -- 150,000 --
Cash dividends.......................................... (1,764,975) (1,227,822) (505,095)
--------------- --------------- ----------------
NET CASH USED IN FINANCING ACTIVITIES............... (2,569,901) (3,695,822) (770,095)
--------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents....... 1,310,176 (134,995) (76,161)
Cash and due from banks at beginning of year............... 144,525 279,520 355,681
--------------- --------------- ----------------
CASH AND DUE FROM BANKS AT END OF YEAR..................... $ 1,454,701 $ 144,525 $ 279,520
=============== =============== ================
CASH PAID DURING THE YEAR FOR:
Interest................................................ $ -- $ 67,691 $ 190,474
=============== =============== ================
</TABLE>
68
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
NOTE 23 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Selected quarterly results of operations for the four quarters ended December 31
are as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------------- ------------- ------------- ------------- ----------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
1999:
TOTAL INTEREST INCOME.............. $ 4,203 $ 4,178 $ 4,048 $ 4,886 $ 17,315
TOTAL INTEREST EXPENSE............. 1,891 1,879 1,810 2,566 8,146
PROVISION FOR LOAN LOSSES.......... 194 184 104 15 497
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES....... 2,118 2,115 2,134 2,305 8,672
INVESTMENT SECURITIES
GAINS (LOSSES).................. -- -- 39 -- 39
TOTAL NONINTEREST INCOME........... 750 795 729 789 3,063
TOTAL NONINTEREST EXPENSE.......... 2,088 2,122 2,131 2,256 8,597
INCOME TAX EXPENSE................. 201 175 260 58 694
NET INCOME......................... 579 613 511 780 2,483
PER COMMON SHARE:
BASIC EARNINGS.................. .17 .18 .15 .22 .72
DILUTED EARNINGS................ .16 .18 .15 .22 .71
1998:
Total interest income.............. $ 3,066 $ 3,050 $ 3,343 $ 4,423 $ 13,882
Total interest expense............. 1,315 1,369 1,580 2,030 6,294
Provision for loan losses.......... 192 405 194 621 1,412
Net interest income after
provision for loan losses....... 1,559 1,276 1,569 1,772 6,176
Investment securities
gains (losses).................. -- 60 -- -- 60
Total noninterest income........... 332 488 518 886 2,224
Total noninterest expense.......... 1,647 1,321 1,627 2,471 7,066
Income tax expense................. 30 95 141 -- 266
Net income......................... 214 408 319 187 1,128
Per Common Share:
Basic earnings.................. .07 .13 .08 .11 .39
Diluted earnings................ .07 .13 .08 .11 .39
</TABLE>
69
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated by reference from the
sections entitled "Election of Directors" and "Executive Compensation" in the
Proxy Statement for the Annual Meeting of Shareholders which is to be filed with
the Securities and Exchange Commission. Additional information is as follows:
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers (as
defined in regulations promulgated by the SEC thereunder) and directors, and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file reports of ownership and changes in ownership with
the SEC. Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on a review of copies of such reports of ownership
furnished to the Company, or written representations that no forms were
necessary, the Company believes that during the past fiscal year all filing
requirements applicable to its officers, directors and greater than ten percent
beneficial owners were complied with except that Charles M. Reeves filed one
report late reflecting one transaction and Raymond C. Styres filed two reports
late reflecting two transactions.
ITEM 11 - EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the
section entitled "Executive Compensation" in the Proxy Statement for the Annual
Meeting of Shareholders which is to be filed with the Securities and Exchange
Commission.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference from the
sections entitled "Outstanding Voting Securities and Principal Shareholders" and
"Election of Directors" in the Proxy Statement for the Annual Meeting of
Shareholders which is to be filed with the Securities and Exchange Commission
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the
sections entitled "Certain Relationships, Related Transactions, and Legal
Proceedings" in the Proxy Statement for the Annual Meeting of Shareholders which
is to be filed with the Securities and Exchange Commission.
70
<PAGE>
ITEM 14 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Index of documents filed as part of this report:
<TABLE>
<CAPTION>
Frontier National Corporation and Subsidiaries
Financial Statements
Page
----
<S> <C>
Independent Auditors' Report.................................................................. 33
Consolidated Statements of Financial Condition as of December 31, 1999 and 1998............... 34
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998, and 1997........................................................... 35
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998, and 1997........................................................... 36
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998, and 1997........................................................... 37-38
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1999, 1998, and 1997........................................................... 39
Notes to Consolidated Financial Statements - December 31, 1999, 1998, and 1997................ 40
Quarterly Results (Unaudited)................................................................. 69
(b) Reports on Form 8-K
During the quarter ended December 31, 1998, Frontier National
Corporation filed no reports on Form 8-K:
(c) Exhibits
<CAPTION>
Page
----
<S> <C> <C>
2.1 Merger agreement and Plan of merger between the Valley National Corporation and First
National Sylacauga Corporation dated February 24, 1998 (incorporated by reference to
Exhibit 2 of the Company's Registration Statement on Form S-4, Registration No.
333-52465)...............................................................................
2.2 Merger agreement dated November 23, 1998 between Frontier National Corporation and
The Frontier Agency, Inc. and Wright-Sprayberry, Inc., Cornelia Leigh A. Wright,
Carol H. Sprayberry, Sam H. Wright and Steven E. Sprayberry (incorporated by
reference to Exhibit 2.2 of the Company's annual report on Form 10-K filed on April
15, 1999)................................................................................
2.3 Asset purchase agreement by and among the Frontier Agency, Inc. and Lawrence-Jones
Insurance and Real Estate Agency, Inc., William P. Jones, Jr. and Betty Lawrence
Jones dated April 30, 1999...............................................................
3.1 Articles of Incorporation of Frontier National Corporation (incorporated by reference
to Exhibit 3.1 of the Company's Registration Statement on Form S-4, Registration No.
333-52465 filed with the Commission).....................................................
3.2 Articles and Certificate of Merger of Domestic Corporation into Valley National
Corporation (Name changed to Frontier National Corporation), dated August 21, 1998
(incorporated by reference to Exhibit 3 of the Company's Registration Statement on
Form 8A, Registration No. 000-24853).....................................................
71
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FRONTIER NATIONAL CORPORATION
Date: March 28, 2000 By: /s/ Harry I. Brown, Jr.
--------------------------------- -------------------------------
Harry I. Brown, Jr.
Chairman
Date: March 28, 2000 By: /s/ Steven R. Townson
--------------------------------- -------------------------------
Steven R. Townson
Vice Chairman of the Board,
President,
Chief Executive Officer, and
Chief Financial Officer
Date: March 28, 2000 By: /s/ Kerri C. Newton
----------------------------------- -------------------------------
Kerri C. Newton
Senior Vice President and
Secretary
<PAGE>
3.3 Bylaws of Frontier National Corporation (incorporated by reference to Exhibit 3.2 of
the Company's Registration Statement on Form S-4, Registration No. 333-52465)............
4 Form of Common Stock Certificates (incorporated by reference to Exhibit 4 of the
Company's Registration Statement on Form 8A, Registration No. 000-24853).................
10.1 Employment Agreement with Harry I. Brown, Jr. dated August 24, 1998 (incorporated by
reference to Exhibit 10.1 of the Company's annual report on Form 10-K filed on April
15, 1999)................................................................................
10.2 Employment Agreement with Steven R. Townson dated August 24, 1998 (incorporated by
reference to Exhibit 10.1 of the Company's annual report on Form 10-K filed on April
15, 1999)................................................................................
10.3 Incentive Stock Option Agreement between Frontier National Corporation and Steven R.
Townson signed on December 20, 1999, effective August 24, 1998, to replace original
signed on August 24, 1998................................................................
10.4 Incentive Stock Option Agreement between Frontier National Corporation and Harry I.
Brown, Jr. dated August 24, 1998, signed on December 20, 1999, effective August 24,
1998, to replace original signed on August 24, 1998......................................
10.5 Nonqualified Stock Option Agreement between Frontier National Corporation and Harry
I. Brown, Jr. dated August 24, 1998, signed on December 20, 1999, effective August
24, 1998, to replace original signed on August 24, 1998..................................
10.6 Employment Agreement with Ben B. McMillan dated March 8, 1999............................
10.7 Employment Agreement with J. Jefferson Torbert dated March 1, 1999.......................
11 Statement of computation of earnings per common share.................................... 73
12 Statement of computation of ratios....................................................... 74
16 Letter regarding change in certifying accountant (incorporated by reference to
Exhibit 16 of the Company's annual report on Form 10-K filed April 15, 1999).............
21 Subsidiaries of the Registrant........................................................... 75
24 Power of Attorney (contained on signature page of this report)........................... 76
27.1 Financial Data Schedule
</TABLE>
Certain financial statement schedules and exhibits have been omitted because
they are not applicable.
72
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
EXHIBITS TO
ANNUAL REPORT ON FORM 10-K
Year Ended December 31, 1999
----------------------
Frontier National Corporation
43 North Broadway
Sylacauga, Alabama 35150
---------------------
EXHIBIT 2.3
ASSET PURCHASE AGREEMENT
BY AND AMONG
THE FRONTIER AGENCY, INC.
LAWRENCE-JONES INSURANCE AND
REAL ESTATE AGENCY, INC.
WILLIAM P. JONES, JR. AND
BETTY LAWRENCE JONES
DATED
APRIL 30, 1999
---------------------
<PAGE>
ASSET PURCHASE AGREEMENT
BY AND AMONG
THE FRONTIER AGENCY, INC.
LAWRENCE-JONES INSURANCE AND REAL ESTATE AGENCY, INC.
WILLIAM P. JONES, JR.
AND
BETTY LAWRENCE JONES
APRIL 30, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. Definitions..............................................................................................1
2. Basic Transaction........................................................................................5
(a) Purchase and Sale of Assets...............................................................5
(b) Assumption of Liabilities.................................................................5
(c) Payment of the Purchase Price.............................................................5
(d) The Closing...............................................................................5
(e) Deliveries at Closing.....................................................................5
(f) Allocation................................................................................6
(g) Effective Date............................................................................6
(h) Proration.................................................................................6
(i) Taxes and Expenses........................................................................6
3. Representations and Warranties of the Seller and Shareholders............................................6
(a) Organization of the Seller................................................................7
(b) Authorization of Transaction..............................................................7
(c) Noncontravention..........................................................................7
(d) Brokers' Fees.............................................................................7
(e) Title to Assets...........................................................................7
(f) Financial Statements......................................................................8
(g) Undisclosed Liabilities...................................................................8
(h) Legal Compliance..........................................................................8
(i) Tax Matters...............................................................................8
(j) Real Property.............................................................................8
(k) Tangible Assets...........................................................................9
(l) Litigation................................................................................9
(m) LABOR.....................................................................................9
(n) Environmental Compliance.................................................................10
(o) OSHA Compliance..........................................................................11
(p) Employee Benefit Plans...................................................................11
(q) Intellectual Property....................................................................12
(r) Disclosure...............................................................................12
4. Representations and Warranties of the Buyer.............................................................12
(a) Organization of the Buyer................................................................12
(b) Authorization of Transaction.............................................................12
(c) Noncontravention.........................................................................12
(d) Brokers' Fees............................................................................13
5. Deliveries at Closing...................................................................................13
(a) Documents to be Delivered by Buyer.......................................................13
(b) Documents to be Delivered by Seller......................................................13
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
6. Remedies for Breaches of this Agreement.................................................................14
(a) Survival of Representation and Warranties................................................14
(b) Indemnification Provisions...............................................................14
7. Conditions to Obligation to Close.......................................................................14
(a) Conditions to the Obligation to Buyer....................................................14
(b) Conditions to the Obligation of the Seller...............................................16
8. Miscellaneous...........................................................................................16
(a) No Third-Party Beneficiaries.............................................................16
(b) Entire Agreement.........................................................................16
(c) Succession and Assignment................................................................16
(d) Counterparts.............................................................................16
(e) Headings.................................................................................17
(f) NOTICES..................................................................................17
(g) Governing Law and Jurisdiction...........................................................17
(h) Amendments and Waivers...................................................................18
(i) Severability.............................................................................18
(j) Expenses.................................................................................18
(k) Construction.............................................................................18
(l) Incorporation of Exhibits and Schedules..................................................18
SCHEDULE 1(a)Real Property..........................................................................Schedule 1(a)-1
SCHEDULE 1(c)Inventory..............................................................................Schedule 1(c)-1
SCHEDULE 1(d)Contracts and Agreements ..............................................................Schedule 1(d)-1
SCHEDULE 1(e)Excluded Assets .......................................................................Schedule 1(e)-1
EXHIBIT 2(f)Purchase Price Allocation Agreement......................................................Exhibit 2(f)-1
EXHIBIT 5(a)(ii)Form Of Employment Agreement For Bill Jones......................................Exhibit 5(a)(ii)-1
EXHIBIT 5(a)(ii)Form Of Employment Agreement For Betty Lawrence Jones............................Exhibit 5(a)(ii)-1
EXHIBIT 5(a)(iv)Assignment Agreement.............................................................Exhibit 5(a)(iv)-1
EXHIBIT 5(b)(i)Bill of Sale and Assignment........................................................Exhibit 5(b)(i)-1
EXHIBIT 5(b)(ii)General Warranty Deed............................................................Exhibit 5(b)(ii)-1
</TABLE>
ii
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is entered into on April 30, 1999 (this
"Agreement"), by and among THE FRONTIER AGENCY, INC., an Alabama corporation
(the "BUYER"), on the one hand, and LAWRENCE-JONES INSURANCE AND REAL ESTATE
AGENCY, INC., an Alabama corporation (the "SELLER"), WILLIAM P. JONES, JR. and
BETTY LAWRENCE JONES, residents of the State of Alabama (collectively the
"SHAREHOLDERS"), on the other hand. The Buyer, the Seller, and the Shareholders
are referred to collectively herein as the "PARTIES."
W I T N E S S E T H:
WHEREAS, the Seller owns and operates an insurance agency business (the
"Insurance Business") located at 33044 U.S. Highway 280, Childersburg, Alabama
35044 (the "Real Estate") and desires to sell the Real Estate and certain of the
assets of the Insurance Business;
WHEREAS, the Shareholders own, in the aggregate, one hundred percent
(100%) of the issued and outstanding stock of the Seller; and
WHEREAS, the Buyer desires to purchase the Real Estate and certain of
the assets of the Insurance Business on the terms and subject to the conditions
hereinafter stated;
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and promises herein contained, and for the other
good and valuable consideration, the parties hereto agree as follows:
1. DEFINITIONS.
"ACQUIRED ASSETS" means all of the Seller's right, title, and interest
in and to the following assets of the Seller owned as of the Closing Date:
1. any and all real property, leaseholds and subleaseholds
therein, improvements, fixtures, and fittings thereon, and
easements, rights-of-way, and other appurtenances and
hereditaments thereto (such as appurtenant rights in and to
public streets), including the assets described on SCHEDULE
1(a) attached hereto (the "Real Property");
2. fixtures and similar property and capital assets owned by
Seller and attached to any real property described in
paragraph 1(a) above;
3. current and usable inventory of supplies, drugs, janitorial
and office supplies and other disposables and consumables on
hand at or under order by Seller on the Closing Date (as
defined in the Agreement), including, but not limited to, the
inventory listed and identified in SCHEDULE 1(c), which are
used in connection with the Insurance Business;
4. seller's rights, benefits and interests under all the
contracts and agreements, written or oral, relating to the
Insurance Business, including, without limitation, those
listed and identified on SCHEDULE 1(d);
5. prepaid expenses of Seller;
1
<PAGE>
6. books, records, ledgers, documents, correspondence,
advertising and promotional materials, files, and other
writings used in connection with the operations of the
Insurance Business;
7. data processing programs, software programs, computer
print-outs, information contained in data bases and hardware,
and related items used in the conduct of the Insurance
Business, including accounting, invoices, auditing, and data
processing bases and programs;
8. intangible assets, goodwill, going concern value, corporate
and assumed names (although Seller shall be allowed to use the
name "Lawrence-Jones Real Estate and Appraisals, Inc.) and
trade names, service marks and service names, and applications
therefor, and all intellectual property (and goodwill
associated therewith), and licenses and sublicenses granted
and obtained with respect thereto, and rights thereunder, used
in connection with the operation of the Insurance Business;
9. franchises, approvals, permits, licenses, orders,
registrations, certificates, variances, and similar rights
obtained from governments and governmental agencies;
10. rights, claims and causes of action held by Seller which have
accrued as a result of the operation of the Insurance
Business; and
11. all of the other assets, real, personal or mixed, tangible or
intangible, used by Seller in connection with the operations
of the Insurance Business, including, without limitation, any
furniture, office equipment, file cabinets, phone systems,or
other similar personal property items not permanently affixed
to the realty.
The term "Acquired Assets" shall not include any specific item included within
the definition of Excluded Assets below.
"ADVERSE CONSEQUENCES" means all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid
in settlement, Liabilities, obligations, Taxes, liens, losses, expenses, and
fees, including court costs and attorneys' fees and expenses.
"ASSUMED LIABILITIES" means only the following listed Liabilities:
None
"AFFILIATE" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"BASIS" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction that forms or could form the basis for
any specified consequence.
"BUYER" has the meaning set forth in the preface above.
2
<PAGE>
"CLOSING" has the meaning set forth in Section 2(d) below.
"CLOSING DATE" has the meaning set forth in Section 2(d) below.
"CODE" means the Internal Revenue Code of 1986, as amended.
"DISCLOSURE SCHEDULE" has the meaning set forth in Section 3 below.
"ENVIRONMENTAL LAWS" means all federal, state, and local laws, rules,
regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and
charges thereunder and other governmental requirements relating to pollution,
control of chemicals, storage and handling of petroleum products, management of
waste, discharges of materials into the environment, health, safety, natural
resources, and the environment, including laws relating to emissions,
discharges, releases, or threatened releases of pollutants, contaminants, or
chemical, industrial, hazardous, or toxic materials or wastes into ambient air,
surface water, ground water, or lands or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport, or
handling of pollutants, contaminants, or chemical, industrial, hazardous, or
toxic materials or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EXCLUDED ASSETS" means
(a) Any and all claims by Seller with respect to transactions
prior to the date of this Agreement, including, without limitation, tax refunds.
(b) All assets, real, personal or mixed, tangible or intangible,
used by Seller in connection with the operations of the Real Estate Business,
including, without limitation, furniture, office equipment, file cabinets, phone
systems, automobiles, and other items listed in SCHEDULE 1(E).
(c) All vehicles (and debt and insurance associated therewith); and
(d) bank accounts, petty cash box, and the escrow account.
"FINANCIAL STATEMENTS" has the meaning set forth in Section 3(f) below.
"HAZARDOUS MATERIALS" has the meaning set forth in Section 3(n) below.
"KNOWLEDGE" means actual or imputed knowledge after reasonable
investigation.
"LIABILITY" means any liability, whether known or unknown, asserted or
unasserted, absolute or contingent, accrued or unaccrued, liquidated or
unliquidated, and due or to become due, of any nature whatsoever, including any
liability for Taxes.
"LIEN" means any (a) mechanics, materialmen or similar lien relating to
repairs or improvements to real or personal property, (b) lien for Taxes, (c)
lien securing rental payments under any lease agreement, or (d) other lien
arising in the Ordinary Course of Business and not incurred in connection with
the borrowing of money.
"ORDINARY COURSE OF BUSINESS" means the ordinary course of business
consistent with past custom and practice.
3
<PAGE>
"PARTIES" has the meaning set forth in the preface above.
"PERSON" means an individual, a partnership, a limited liability
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, or a governmental entity (or any
department, agency, or political subdivision thereof).
"PURCHASE PRICE" has the meaning set forth in Section 2(a) below.
"REAL ESTATE BUSINESS" means real estate sales and appraisal business
conducted by Seller.
"REAL PROPERTY" has the meaning set forth in the definition of Acquired
Assets above.
"SECURITY INTEREST" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, including all security interests arising
under Article 9 of the Uniform Commercial Code, but excluding (a) mechanic's,
materialmen's, and similar liens, (b) liens for Taxes not yet due and payable or
for Taxes that the taxpayer is contesting in good faith through appropriate
proceedings, (c) liens securing rental payments under capital lease arrangements
that are not financing leases, and (d) other liens arising in the Ordinary
Course of Business and not incurred in connection with the borrowing of money.
"SELLER" has the meaning set forth in the preface above.
"SHAREHOLDERS" has the meaning set forth in the preface above.
"SURVEY" has the meaning set forth in Section 7(a)(v) below.
"TAX" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code Sec. 59A),
customs duties, capital stock, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not.
"TAX RETURN" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"TITLE POLICY", "TITLE COMPANY," and "TITLE BINDER" have the meanings
set forth in Section 7(a)(v) below.
2. BASIC TRANSACTION.
a. PURCHASE AND SALE OF ASSETS. On and subject to the terms and
conditions of this Agreement, at the Closing, the Buyer agrees
to purchase from the Seller, and the Seller agrees to sell,
transfer, convey, and deliver to the Buyer, all of the
Acquired Assets for a price equal to the Purchase Price, to be
paid as set forth in Section 2(c). The "PURCHASE PRICE" will
be (1) One Hundred Thirty- Six Thousand Seven Hundred Dollars
($136,700) for the Real Estate, less a mortgage debt on the
Real Estate, which the Buyer will pay from the proceeds of the
Purchase Price, plus (2) the Buyer's promise to employ
Shareholders on the terms and conditions set forth in the Form
of Employment Agreement, as attached hereto as Exhibit
4
<PAGE>
5(a)(ii).
b. ASSUMPTION OF LIABILITIES. The Buyer will not assume or have
any responsibility or Liability either expressly or impliedly,
with respect to any obligation or Liability of the Seller of
any kind or nature.
c. PAYMENT OF THE PURCHASE PRICE. The Buyer shall pay or satisfy
the Purchase Price to the Seller by delivering an official
bank check at the Closing.
d. THE CLOSING. The closing of the transactions contemplated by
this Agreement (the "CLOSING") shall take place at the offices
of Ogletree and Livingston, 29 West Third Street, Sylacauga,
Alabama, commencing at 2:00 p.m. local time on April 30, 1999;
provided, however, that the Closing Date shall be no later
than May 31, 1999. Time is of the essence for this Agreement.
e. DELIVERIES AT CLOSING. At the Closing, (i) the Buyer will
deliver to the Seller the various certificates, instruments,
and documents referred to in Section 5(a) below; (ii) the
Seller will deliver to the Buyer the various certificates,
instruments, and documents referred to in Section 5(b) below.
f. ALLOCATION. The Parties agree to allocate the Purchase Price
(and all other capitalizable costs) among the Acquired Assets
for all purposes (including financial accounting and tax
purposes) in accordance with the Purchase Price Allocation
Agreement attached hereto as EXHIBIT 2(F).
g. EFFECTIVE DATE. The Parties agree that if the transactions
contemplated by this Agreement close in accordance with the
terms of this Agreement, the effective time and date of this
Agreement shall be, for all purposes, 12:01 a.m. on the day
after the Closing Date (the "Effective Date").
h. PRORATION. The following prorations among the parties shall be
made as of the Closing, with the Seller liable to the extent
such items relate to any time period up to the Effective Date
and the Buyer liable to the extent such items relate to
periods on and after the Effective Date. To the extent
possible, the net amount of all such prorations will be
settled and paid at the Closing.
1. Any ad valorem taxes, including, without limitation, personal
property taxes and assessments, and other taxes, if any, on or
with respect to the Acquired Assets.
2. Rents, additional rents, Taxes and other items payable by the
Seller under any lease, license, permit, contract or any other
agreement or arrangement to be assigned to or assumed by the
Buyer.
3. The amount of rents, taxes, and charges for sewer, water,
fuel, telephone, electricity, and other utilities; provided,
that if practicable, a meter reading shall be taken on the
Effective Date and the respective obligations of the parties
determined in accordance with such readings.
5
<PAGE>
If the actual expense of any of the above items for the billing period
in which the Effective Date falls is not known at the Closing, the proration
shall be made based on the expense incurred in the previous billing cycle, for
expenses billed less often than quarterly, and on the average expense incurred
in the preceding three (3) billing periods, for expenses billed quarterly or
more often.
i. TAXES AND EXPENSES. The Buyer shall be responsible
for any business, occupation, withholding or similar
tax or taxes of any kind (excluding income, employee,
or property taxes) related to the Seller's business
for any period prior to the Effective Date. All
applicable sales, use and tangible taxes, documentary
stamp taxes, filing and recording costs and other
transfer taxes, costs and fees relating to the
transfer of title to the Acquired Assets, and the
consummation of the transactions described herein,
shall be paid by the Buyer.
3. REPRESENTATIONS AND WARRANTIES OF THE SELLER AND SHAREHOLDERS.
The Seller and the Shareholders, jointly and severally,
represent and warrant to the Buyer that the statements
contained in this Section 3 are correct and complete as of the
date of this Agreement and will be correct and complete as of
the Effective Date, except as set forth in the disclosure
schedule accompanying this Agreement and initialed by the
Parties (the "DISCLOSURE SCHEDULE"). The Disclosure Schedule
will be arranged in paragraphs corresponding to the lettered
and numbered paragraphs contained in this Section 3.
a. ORGANIZATION OF THE SELLER. The Seller is a
corporation duly organized, validly existing, and in
good standing under the laws of the State of Alabama
and has the corporate power and licenses to own its
properties and carry on its business as now
conducted. The Seller is duly qualified to carry on
its business as a foreign corporation in each
jurisdiction where the nature of its business or the
location of its asset makes such qualification
necessary.
b. AUTHORIZATION OF TRANSACTION. The Seller has full
power and authority (including full corporate power
and authority) to execute and deliver this Agreement
and to perform its obligations hereunder. Without
limiting the generality of the foregoing, the board
of directors of the Seller and the Shareholders have
duly authorized the execution, delivery, and
performance of this Agreement by the Seller. This
Agreement constitutes the valid and legally binding
obligation of the Seller and the Shareholders,
enforceable in accordance with its terms and
conditions.
c. NONCONTRAVENTION. Neither the execution and the
delivery of this Agreement, nor the consummation of
the transactions contemplated hereby will (i) violate
any constitution, statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge,
or other restriction of any government, governmental
agency, or court to which the Seller is subject or
any provision of the charter or bylaws of the Seller
or (ii) conflict with, result in a breach of,
constitute a default under, result in the
acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require
any notice or consent under any agreement, contract,
lease, license, instrument, or other arrangement to
which the Seller is a party or by which it is bound
or to which any of its assets is subject or result in
the imposition of any Security Interest upon any of
its assets. The Seller does
6
<PAGE>
not need to give any notice to, make any filing with,
or obtain any authorization, consent, or approval of
any government or governmental agency in order for
the Parties to consummate the transactions
contemplated by this Agreement.
d. BROKERS' FEES. The Seller has not engaged and has no
Liability or obligation to pay any fees or
commissions to any broker, finder, or agent with
respect to the transactions contemplated by this
Agreement nor will any Acquired Assets become subject
to any Lien, charge or encumbrance of any nature in
favor of any broker, finder, or other agent with
respect to the transactions contemplated hereby.
William P. Jones, Jr., and Betty Lawrence Jones are
both licensed real estate agents acting in their
individual capacities.
e. TITLE TO ASSETS. Except as set forth in Section 3(e)
of the Disclosure Schedule, the Seller has good,
insurable, marketable, and indefeasible fee simple
title and record to, or a valid leasehold interest
in, the Acquired Assets, free and clear of any
Security Interest or Lien or any restriction on
transfer.
f. FINANCIAL STATEMENTS. The financial statements
(collectively the "FINANCIAL STATEMENTS") which have
been made available to the Buyer for inspection have
been prepared on a consistent basis throughout the
periods covered thereby, present fairly the financial
condition of the Seller as of such dates and the
results of operations of the Seller for such periods,
are correct and complete, and are consistent with the
books and records of the Seller (which books and
records are correct and complete).
g. UNDISCLOSED LIABILITIES. The Seller does not have any
Liability, and there is no Basis for any present or
future action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand
against it giving rise to any Liability, except for
(i) Liabilities described and set forth on Section
2(g) of the Disclosure Schedule, (ii) Liabilities set
forth on the December 31, 1998, balance sheet
contained in the Financial Statements and (iii)
Liabilities which have arisen after the date of the
Financial Statements in the Ordinary Course of
Business (none of which results from, arises out of,
relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort,
infringement, or violation of law) and do not exceed,
in the aggregate, $10,000.
h. LEGAL COMPLIANCE. The Seller and its predecessors and
Affiliates have complied with all applicable laws
(including rules, regulations, codes, plans,
injunctions, judgments, orders, decrees, rulings, and
charges thereunder) of federal, state, local, and
foreign governments (and all agencies thereof), and
no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, demand, or notice has been
filed or commenced against any of them alleging any
failure so to comply.
7
<PAGE>
i. TAX MATTERS.
4. The Seller has filed all Tax Returns that it was
required to file. All such Tax Returns were correct
and complete in all respects. All Taxes owed by the
Seller (whether or not shown on any Tax Return) have
been paid. The Seller is not currently the
beneficiary of any extension of time within which to
file any Tax Return. No claim has ever been made by
an authority in a jurisdiction where the Seller does
not file Tax Returns that it is or may be subject to
taxation by that jurisdiction. There are no Liens on
any of the assets of the Seller that arose in
connection with any failure (or alleged failure) to
pay any Tax.
5. The Seller has withheld and paid all Taxes required
to have been withheld and paid in connection with
salaries, wages or other amounts paid or owing to any
employee, independent contractor, creditor,
stockholder, or other third party.
6. The Seller has not waived any statute of limitations
in respect of Taxes or agreed to any extension of
time with respect to a Tax assessment or deficiency.
j. REAL PROPERTY. SCHEDULE 1(a) lists and describes
briefly all Real Property owned by the Seller. There
is no Real Property leased or subleased by the
Seller. With respect to all Real Property owned
listed on SCHEDULE 1(a):
7. There are no adverse or other parties in possession
of the Real Property or of any part thereof except
Seller. No party has been granted any license, lease
or other right relating to the use or possession of
the Real Property, that has not been disclosed to
Buyer.
8. All improvements on the Real Property (the
"Improvements") are, to the best of Seller's
knowledge, structurally sound, are in good repair or
condition, except for damage to the storage room due
to a burglary, normal wear and tear excepted, and are
free of any material defects. The Improvements, all
heating, electrical, plumbing and drainage at, or
servicing, the Real Property and all facilities and
equipment relating thereto are, to the best of
Seller's knowledge, and as of the Closing will be, in
good condition and working order and adequate in
quantity and quality for the normal operation of the
Real Property (based on its past usage). No part of
the Real Property has been destroyed or damaged by
fire or other casualty. There are no unsatisfied
requests for repairs, restorations or alterations
with regard to the Real Property from any person,
entity or authority, including but not limited to any
lender, insurance provider or governmental authority.
9. No work has been performed or is in progress on the
Real Property, and no materials will have been
delivered to the Real Property that might provide the
basis for a mechanic's, materialman's or other lien
against the Real Property or any portion thereof, or
amounts due for such work and material shall have
paid or discharged to Buyer's satisfaction as of
Closing.
10. There are no known defects, damage, or any dangerous,
improper, or unsatisfactory conditions existing in or
with respect to the Real Property.
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k. TANGIBLE ASSETS. The Seller owns or leases all land,
buildings, machinery, equipment, and other tangible
assets necessary for the conduct of the Insurance
Businesses as presently conducted. Each Acquired
Asset is free from defects (patent and latent), has
been maintained in accordance with normal industry
practice, is in good operating condition and repair
(subject to normal wear and tear), and is suitable
for the purposes for which it presently is used.
l. LITIGATION. Section 3(l) of the Disclosure Schedule
sets forth each instance in which the Seller (i) is
subject to any outstanding injunction, judgment,
order, decree, ruling, or charge or (ii) is a party
or is threatened to be made a party to any action,
suit, proceeding, hearing, or investigation of, in,
or before any court or quasi-judicial or
administrative agency of any federal, state, local,
or foreign jurisdiction or before any arbitrator.
None of the actions, suits, proceedings, hearings,
and investigations set forth in Section 3(l) of the
Disclosure Schedule could result in any material
adverse change in the operations, results of
operations, or future prospects the business assets
to be operated by the Buyer after the Closing.
m. LABOR. Except as set forth in 3(m) of the Disclosure
Schedule, the Seller is in compliance in all material
respects with all applicable laws respecting
employment and employment practices, terms and
conditions of employment and wages and hours, and is
not engaged in any unfair labor practice; the Seller
is not a party to any collective bargaining or labor
agreement or arrangement; no application for
certification as a collective bargaining unit with
respect to the Seller is pending or anticipated;
there is no unfair labor practice complaint pending
or, to the best knowledge of the Seller, threatened
against the Seller before the National Labor
Relations Board; there are no strikes, work
stoppages, grievance proceedings or other
controversies pending, or, to the knowledge of the
Seller, threatened or reasonably anticipated between
the Seller and any union or any current or former
employees of the Seller, or involving any material
suppliers.
n. ENVIRONMENTAL COMPLIANCE.
i. Except as set forth in Section 3(n) of the
Disclosure Schedule, Seller is in material
compliance with all applicable Environmental
Laws, the Seller has not authorized or conducted
nor has Knowledge of the generation,
transportation, storage, presence, use,
treatment, disposal, release, or other handling
of any hazardous substance, hazardous waste,
hazardous material, hazardous constituent, toxic
substance, pollutant, contaminant, asbestos,
radon, polychlorinated biphenyls ("PCBs"),
petroleum product or waste (including crude oil
or any fraction thereof), natural gas, liquefied
gas, synthetic gas or other material defined,
regulated controlled or potentially subject to
any remediation requirement under any
Environmental Law (collectively "THE HAZARDOUS
MATERIALS"), on, in, under or affecting the
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Acquired Assets or any Real Property.
11 The Seller has, and is in compliance with, all
licenses, permits, registrations, and government
authorizations necessary to operate under all
applicable Environmental Laws. Section 3(n) of the
Disclosure Schedule lists all such licenses, permits,
registrations and government authorizations required
by any Environment Law.
12 Except as disclosed in Section 3(n) of the Disclosure
Schedule, the Seller has not received any written or
oral notice from any governmental agency or entity or
any other Person and there is no pending or
threatened claim, litigation or any administrative
agency proceeding that: (a) alleges a violation of
any Environmental Law(s) by the Seller or, with
respect to the Acquired Assets or Real Property, (b)
alleges that the Seller is a liable party or
potentially responsible party under the Comprehensive
Environmental Response, Compensation and Liability
Ac, 42 U.S.C. ss. 9601, et seq., or any state
superfund law, (c) has resulted or could result in
the attachment of an environmental lien on any of the
Acquired Assets or Real Property, or (d) alleges that
the Seller is liable for any contamination of the
environment, contamination of the Real Property,
damage to natural resources, property damage, or
personal injury based on its activities or the
activities of any predecessor or third parties
involving Hazardous Materials, whether arising under
the Environmental Laws, common law principles, or
other legal standards.
13. Due to the age of the buildings being purchased by
the Buyer, the parties acknowledge that there is a
high probability of lead based paint being present on
the walls, and Seller's representations made herein
are subject to Buyer accepting the property with that
condition known and releasing Seller from any and all
liability or exposure problem or damage that the
Buyer or its employees may incur as a result of the
presence of any lead based paint.
o. OSHA COMPLIANCE.
i. Except as set forth in Section 3(o) of the
Disclosure Schedule, Seller is currently in
material compliance with all applicable federal,
state, and local laws, rules, regulations,
codes, plans, injunctions, judgments, orders
decrees, rulings, and charges thereunder and
other governmental requirements relating to
occupational health and safety applicable to the
business of the Seller, including but not
limited to the Occupational Safety and Health
Act of 1970, as amended, and the rules and
regulations promulgated thereunder
(collectively, the "OSHA LAWS").
14. The Seller has, and is in compliance with, all
licenses, permits, registrations, and government
authorizations necessary to operate the business
currently conducted by Seller under all applicable
OSHA Laws. Section 3(o) of the Disclosure Schedule
lists all such licenses, permits, registrations and
authorizations required to be maintained by Seller by
applicable OSHA laws.
15. Except as disclosed in Section 3(o) of the Disclosure
Schedule, the Seller
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has not received any written or oral notice from any
governmental agency or entity or any other Person and
there is no pending or threatened claim, litigation
or any administrative agency proceeding that alleges
a violation of any OSHA Law(s) by the Seller or, with
respect to the Acquired Assets or business of the
Seller.
p. EMPLOYEE BENEFIT PLANS. The Seller does not
maintain any bonus, deferred compensation,
pension, retirement, stock option, stock
appreciation, restricted stock, profit sharing,
severance, medical or life insurance, employee
stock ownership or stock purchase plans or other
"employee pension benefit plan", as defined in
Section 3(2) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or
other "employee welfare benefit plan", as
defined in Section 3(1) of ERISA (collectively
the "Seller Plans"). The Seller is not required
to contribute to, and during the five-year
period ending on the Effective Date will not
have been required to contribute to, any
"multi-employer plan" as such term is defined in
Section 4001(a)(3) of ERISA covering the Seller
employees, and the Seller will not be subject to
any withdrawal liability (whether partial or
complete) within the contemplation of Section
4001 et seq. of ERISA as a result of the
transactions contemplated by this Agreement. The
Seller has never contributed to, withdrawn from,
or had any employee covered by a multi-employer
plan. The Seller has complied in all material
respects with the requirements of the
Consolidated Omnibus Budget Reconciliation Act,
as it relates to employee benefits provided to
the Seller's employees. Each welfare plan
(including any such welfare plan covering former
employees of the Seller) may be amended or
terminated without restriction by Buyer on or at
any time after the Effective Date.
q. INTELLECTUAL PROPERTY. Section 3(q) of the
Disclosure Schedule lists all letters patent,
patent applications, service marks, trade names,
trademarks, trademark registrations and
applications, copyrights and copyright
applications and registrations both domestic and
foreign, presently owned, possessed or used by
the Seller in connection with its business (all
of the foregoing, together with all inventions,
technology, processes, designs, know-how, and
formula material to the conduct of the Seller's
business are hereinafter collectively referred
to as the "Intellectual Property"). Except as
disclosed in Section 3(q) of the Disclosure
Schedule, the Seller owns the entire right,
title and interest in and to the Intellectual
Property; all registrations, applications for
registration and assignments of registrations of
any Intellectual Property has been properly
registered in the name of the Seller; the Seller
is not obligated or under any liability to make
any payment, by way of royalties, fees, or
otherwise, to any owner or licensee of, or other
claimant to, the Intellectual Property; the
Seller has the right to bring action for the
infringement of such Intellectual Property; and
no officer or director of the Seller has any
knowledge, or has received any notice to the
effect, that any product the Seller manufactures
or sells or that any service the Seller renders,
or that the marketing or use by the Seller or
another of any such product or service, may or
is claimed to infringe any Intellectual Property
or legally protectable right of another.
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<PAGE>
r. DISCLOSURE. The representations and warranties
contained in this Section 3 do not contain any
untrue statement of a fact or omit to state any
fact necessary in order to make the statements
and information contained in this Section 3 not
misleading.
4. REPRESENTATIONS AND WARRANTIES OF THE BUYER. The
Buyer represents and warrants to the Seller and
Shareholders that the statements contained in
this Section 4 are correct and complete as of
the date of this Agreement and will be correct
and complete as of the Closing Date.
a. ORGANIZATION OF THE BUYER. The Buyer is a
corporation duly organized, validly existing,
and in good standing under the laws of the State
of Alabama.
b. AUTHORIZATION OF TRANSACTION. The Buyer has full
power and authority (including full corporate
power and authority) to execute and deliver this
Agreement and to perform its obligations
hereunder. This Agreement constitutes the valid
and legally binding obligation of the Buyer,
enforceable in accordance with its terms and
conditions, subject to applicable bankruptcy,
moratorium, insolvency and other laws affecting
the rights of creditors and general equity
principles.
c. NONCONTRAVENTION. Neither the execution and the
delivery of this Agreement, nor the consummation
of the transactions contemplated hereby will (i)
violate any constitution, statute, regulation,
rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any
government, governmental agency, or court to
which the Buyer is subject or any provision of
its charter or bylaws or (ii) conflict with,
result in a breach of, constitute a default
under, result in the acceleration of, create in
any party the right to accelerate, terminate,
modify, or cancel, or require any notice under
any agreement, contract, lease, license,
instrument, or other arrangement to which the
Buyer is a party or by which it is bound or to
which any of its assets is subject. The Buyer is
not required to give any notice to, make any
filing with, or obtain any authorization,
consent, or approval of any government or
governmental agency in order for to consummate
the transactions contemplated by this Agreement.
d. BROKERS' FEES. The Buyer has no Liability or
obligation to pay any fee or commission to any
broker, finder or agent with respect to the
transactions contemplated by this Agreement for
which the Seller could become liable or
obligated.
4. DELIVERIES AT CLOSING
a. DOCUMENTS TO BE DELIVERED BY BUYER. At the
Closing, Buyer shall deliver the following
instruments and documents to Seller or other
appropriate party:
16. a cashier's check in the amount set forth in Section
2(a) payable to the Seller;
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<PAGE>
17. the Form of Employment Agreement of each of the
Shareholders, as attached hereto as EXHIBIT 5(a)(ii);
18. the Purchase Price Allocation Agreement in
substantially the form attached hereto as EXHIBIT
2(f);
19. the Assignment Agreement in substantially the form
attached hereto as EXHIBIT 5(a)(iv); and
20. such other documents as Seller may reasonably request
to effect the transactions contemplated by this
Agreement.
b. DOCUMENTS TO BE DELIVERED BY SELLER. At the
Closing, the Seller shall deliver the following
instruments and documents to the Buyer:
21. a Bill of Sale and Assignment in substantially the
form attached hereto as EXHIBIT 5(b)(i);
22. a general warranty deed regarding the Real Property
in the form attached as EXHIBIT 5(b)(ii) and a
certificate complying with Section 1445(b)(2) of the
Internal Revenue Code of 1986;
23. the Title Policy regarding the Real Property to be
issued pursuant to the Title Binder or an amended
Title Binder initiated by the Title Company, which
deletes all requirements and all exceptions and which
is down-dated to the Closing Date at the expense of
the Buyer;
24. a withdrawal, amendment, and/or termination of the
Seller's corporate name and any fictitious name
registration therefor (although Seller shall be
allowed to use the name "Lawrence-Jones Real Estate
and Appraisals, Inc.");
25. the Purchase Price Allocation Agreement in
substantially the form attached hereto as EXHIBIT
2(f);
26. a Certificate of Good Standing for the Seller from
the Alabama Department of Revenue dated not more than
ten (10) days prior to the Closing;
27. resolutions of the Seller's board of directors and
shareholders, in a form satisfactory to the Buyer's
counsel, authorizing the execution and performance of
the Agreement and all other actions to be taken by
the Seller hereunder;
28. all consents and estoppel certificates necessary
regarding the transaction contemplated hereby;
29. the Form of Employment Agreement of each of the
Shareholders, as attached hereto as EXHIBIT 5(a)(ii);
and
30. such other documents as the Buyer may reasonably
request to effect the transactions contemplated by
this Agreement.
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<PAGE>
5. REMEDIES FOR BREACHES OF THIS AGREEMENT.
a. SURVIVAL OF REPRESENTATION AND WARRANTIES. All
of the representations and warranties of the
Parties contained in this Agreement shall
survive the Closing hereunder (even if the
damaged Party knew or had reason to know of any
misrepresentation or breach of warranty at the
time of Closing) and continue in full force and
effect forever thereafter (subject to any
applicable statutes of limitations).
b. INDEMNIFICATION PROVISIONS. The parties shall
have any and all statutory, equitable, or common
law remedy for a breach of a representation,
warranty, or covenant. Additionally, if the
Buyer is due any indemnification from the Seller
or Shareholders pursuant to the terms of this
Agreement, the Parties acknowledge and agree
that the Buyer shall be entitled to offset the
amount of such amounts from any payments due to
the Seller under the Employment Agreements.
6. CONDITIONS TO OBLIGATION TO CLOSE.
a. CONDITIONS TO THE OBLIGATION TO BUYER. The
obligation of the Buyer to consummate the
transactions to be performed by it in connection
with the Closing is subject to satisfaction of
the following conditions:
31. The representations and warranties set forth in
Section 3 above shall be true and correct in all
material respects at and as of the Effective Date;
32. The Seller shall have performed and complied with all
of its covenants hereunder in all material respects
through the Effective Date;
33. There shall not be any injunction, judgment, order,
decree, ruling or charge in effect preventing
consummation of any of the transactions contemplated
by this Agreement;
34. Prior to the Effective Date, there shall not have
been any material adverse change in the Acquired
Assets of the Seller; the business or condition,
financial or otherwise, of the Seller; the results of
operations or prospects of the Seller as a result of
any event or occurrence or including, but not limited
to, any legislative or regulatory change, revocation
of any license or right to do business, fire,
explosion, accident, casualty, labor trouble, flood,
drought, riot, storm, condemnation, act of God or
other public force or otherwise;
35. Within thirty (30) days following the execution of
this Agreement, the Seller shall have obtained a
commitment to issue an ALTA owners title insurance
policy with respect to the Real Property (the "Title
Binder") through a nationally recognized title
company (the "Title Company"). If the Title Binder
discloses any defect in title, then Buyer shall give
Seller written notice thereof within ten (10) days
following the receipt by Buyer of the Title Binder,
whichever shall last occur. Seller shall then have
ten (10) days in which to remove such defect(s) or to
provide assurances to Buyer that such defect(s) will
be removed prior to or at the Closing, and, if Seller
does not do so, this Agreement shall, at the option
of Buyer, terminate.
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<PAGE>
36. The Buyer shall have received all authorizations,
consents and approvals of governments and government
agencies;
37. All actions to be taken by the Seller in connection
with consummation of the transactions contemplated
hereby and all certificates, instruments and other
documents required to effect the transactions
contemplated hereby will be satisfactory in form and
substance to the Buyer; and
38. Buyer shall have received (at Buyer's sole cost and
expense) a Phase I Environmental Assessment
indicating that the Property poses no potential for
liability under any applicable environmental law.
The Buyer may waive in writing any condition specified in this Section
7(a).
b. CONDITIONS TO THE OBLIGATION OF THE SELLER. The
obligation of the Seller to consummate the
transactions to be performed by it in connection
with the Closing is subject to satisfaction of
the following conditions:
39. The representations and warranties set forth in
Section 4 above shall be true and correct in all
material respects at and as of the Effective Date;
40. The Buyer shall have performed and complied with all
of its covenants hereunder in all material respects
through the Effective Date;
41. There shall not be any injunction, judgment, order,
decree, ruling or charge in effect preventing
consummation of any of the transactions contemplated
by this Agreement; and
42. All actions to be taken by the Buyer in connection
with consummation of the transactions contemplated
hereby and all certificates, instruments and other
documents required to effect the transactions
contemplated hereby will be reasonably satisfactory
in form and substance to the Seller.
The Seller may waive any condition specified in this Section 7(b) if it
executes a writing so stating at or prior to the Closing.
7. MISCELLANEOUS.
a. NO THIRD-PARTY BENEFICIARIES. This Agreement
shall not confer any rights or remedies upon any
Person other than the Parties and their
respective successors and permitted assigns.
b. ENTIRE AGREEMENT. This Agreement (including the
documents referred to herein) constitutes the
entire agreement between the Parties and
supersedes any prior understandings, agreements,
or representations by or between the Parties,
written or oral, to the extent they related in
any way to the subject matter hereof.
c. SUCCESSION AND ASSIGNMENT. This Agreement shall
be binding upon
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<PAGE>
and inure to the benefit of the
Parties named herein and their respective
successors and permitted assigns. No Party may
assign either this Agreement or any of its
rights, interests, or obligations hereunder
without the prior written approval of the other
Party; provided, however, that the Buyer may (i)
assign any or all of its rights and interests
hereunder to one or more of its Affiliates and
(ii) designate one or more of its Affiliates to
perform its obligations hereunder (in any or all
of which cases the Buyer nonetheless shall
remain responsible for the performance of all of
its obligations hereunder).
d. COUNTERPARTS. This Agreement may be executed in
one or more counterparts, each of which shall be
deemed an original but all of which together
will constitute one and the same instrument.
e. HEADINGS. The section headings contained in this
Agreement are inserted for convenience only and
shall not affect in any way the meaning or
interpretation of this Agreement.
f. NOTICES. All notices, requests, demands, claims,
and other communications hereunder will be in
writing. Any notice, request, demand, claim, or
other communication hereunder shall be deemed
duly given if it is sent by personal hand
delivery, overnight delivery by nationally
recognized carriers, or confirmed facsimile or
other electronic transmission, and addressed to
the intended recipient as set forth below:
If to the Seller: If to the Buyer:
Lawrence-Jones Insurance and The Frontier Agency, Inc.
Real Estate Agency, Inc. Steven E. Sprayberry, President
William P. Jones, Jr., President 201 8th Avenue S.W.
33044 U.S. Highway 280 Childersburg, Alabama 35044
Childersburg, Alabama 35044 Phone: (256) 249-0302
Telecopier: (256) 249-7888
Internet: [email protected]
Copy to: Copy to:
Tom R. Ogletree, Esq. Steven J. Eisen, Esq.
Ogletree and Livingston Baker, Donelson, Bearman &
P.O. Box 329 Caldwell
Old City Hall Building Suite 1700, 511 Union Street
Sylacauge, Alabama 35150 Nashville, Tennessee 37219
Telephone: (256) 245-6313 Telephone: (615) 726-5600
Telecopier: (256) 245-3264 Telecopier: (615) 726-0464
Internet: [email protected]
Any Party may change the address to which notices, requests, demands, claims,
and other communications hereunder are to be delivered by giving the other Party
notice in the manner herein set forth.
g. GOVERNING LAW AND JURISDICTION. This Agreement shall
be
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<PAGE>
governed by and construed in accordance with the
domestic laws of the State of Alabama without giving
effect to any choice or conflict of law provision or
rule (whether of the State of Alabama or any other
jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of
Alabama. Each of the Parties hereby agrees to submit
to the personal jurisdiction of the state and federal
courts for the State of Alabama for any and all
proceedings, claims or controversies which arise as a
result of this Agreement.
h. AMENDMENTS AND WAIVERS. No amendment of any provision
of this Agreement shall be valid unless the same
shall be in writing and signed by the Buyer and the
Seller. The Seller may consent to any such amendment
at any time prior to the Closing with the prior
authorization of its board of directors. No waiver by
any Party of any default, misrepresentation, or
breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any
prior or subsequent default, misrepresentation, or
breach of warranty or covenant hereunder or affect in
any way any rights arising by virtue of any prior or
subsequent such occurrence.
i. SEVERABILITY. Any term or provision of this Agreement
that is invalid or unenforceable in any situation in
any jurisdiction shall not affect the validity or
enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the
offending term or provision in any other situation or
in any other jurisdiction.
j. EXPENSES. The Parties will bear their own costs and
expenses (including legal fees and expenses) incurred
in connection with this Agreement and the
transactions contemplated hereby.
k. CONSTRUCTION. The Parties have participated jointly
in the negotiation and drafting of this Agreement. In
the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be
construed as if drafted jointly by the Parties and no
presumption or burden of proof shall arise favoring
or disfavoring any Party by virtue of the authorship
of any of the provisions of this Agreement. Any
reference to any federal, state, local, or foreign
statute or law shall be deemed also to refer to all
rules and regulations promulgated thereunder, unless
the context requires otherwise. The word "including"
shall mean including without limitation. The Parties
intend that each representation, warranty, and
covenant contained herein shall have independent
significance. If any Party has breached any
representation, warranty, or covenant contained
herein in any respect, the fact that there exists
another representation, warranty, or covenant
relating to the same subject matter (regardless of
the relative levels of specificity) which the Party
has not breached shall not detract from or mitigate
the fact that the Party is in breach of the first
representation, warranty, or covenant.
l. INCORPORATION OF EXHIBITS AND SCHEDULES. The Exhibits
and Schedules identified in this Agreement are
incorporated herein by reference and made a part
hereof.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first above written.
BUYER:
The Frontier Agency, Inc.
By:
----------------------------------------------
Steven E. Sprayberry, President
SELLER:
Lawrence-Jones Insurance
and Real Estate Agency, Inc.
By:
----------------------------------------------
William P. Jones, Jr., President
SHAREHOLDERS:
----------------------------------------------
William P. Jones, Jr.
----------------------------------------------
Betty Lawrence Jones
18
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EXHIBIT 10.3
STOCK OPTION AGREEMENT BETWEEN
FRONTIER NATIONAL CORPORATION AND
STEVEN R. TOWNSON
SIGNED ON DECEMBER 20, 1999
EFFECTIVE AUGUST 24, 1998
---------------------
<PAGE>
APPENDIX A
INCENTIVE STOCK OPTION AGREEMENT
THIS INCENTIVE STOCK OPTION AGREEMENT (this "Agreement") is made as of
the 20TH day of DECEMBER 1999 effective as of AUGUST 24, 1998 (the "Date of
Grant"), by and between Frontier National Corporation, an Alabama corporation
("Corporation"), and STEVEN R. TOWNSON ("Participant"). [NOTE: PARTICIPANT MUST
BE AN EMPLOYEE OF CORPORATION TO BE ELIGIBLE TO RECEIVE AN ISO]
WHEREAS, Corporation has adopted its 1999 Statutory-Nonstatutory Stock
Option Plan (the "Plan"); and
WHEREAS, the committee chosen by Corporation to administer the Plan
(the "Committee") has determined that Participant is eligible to receive an
option to purchase shares of common stock of Corporation ("Stock") under an
incentive stock option and has determined that it is in the best interest of
Corporation to grant the stock option documented herein to Participant.
NOW, THEREFORE, in consideration of the foregoing, of the mutual
promises hereinafter set forth and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto do
hereby agree as follows:
I. Grant of Option. Corporation hereby grants to Participant the right
to purchase FIFTY THOUSAND (50,000) shares of Stock (the "Option Shares") at a
price of $10.00 per Option Share (the "Option Price"), in accordance with the
terms of this Agreement and the Plan (the "Option"). The Committee, exercising
good faith, has determined that the Option Price is equal to at least one
hundred percent (100%) of the fair market value of a share of Stock on the Date
of Grant. [NOTE: IF PARTICIPANT AND HIS OR HER FAMILY HOLD MORE THAN 10% OF THE
TOTAL COMBINED VOTING POWER OF ALL CLASSES OF STOCK, THEN THE OPTION PRICE MUST
NOT BE LESS THAN 110% OF THE FAIR MARKET VALUE OF THE OPTION SHARES ON THE DATE
OF GRANT. ALSO TOTAL FAIR MARKET VALUE OF ALL OPTIONS GRANTED TO PARTICIPANT
ELIGIBLE TO BE EXERCISED IN ANY ONE YEAR SHOULD NOT EXCEED $100,000.] The Option
is intended by the parties hereto to be, and shall be treated as, an incentive
stock option (as such term is defined under section 422 of the Internal Revenue
Code of 1986 (the "Code")).
II. Termination of Option.
(i) Termination Date. The Option and all rights hereunder with
respect thereto, to the extent such rights shall not have been previously
exercised or otherwise terminated, shall terminate and become null and void on
AUGUST 24, 2008 at 5:00 P.M. (the "Termination Date"). [NOTE: IF THE PARTICIPANT
AND HIS FAMILY OWN LESS THAN 10% OF THE TOTAL COMBINED VOTING POWER THEN THE
TERMINATION DATE MUST NOT BE LATER THAN 10 YEARS FROM THE DATE OF GRANT. IF THE
PARTICIPANT AND HIS FAMILY OWN 10% OR MORE THEN THE TERMINATION DATE MUST NOT BE
LATER THAN 5 YEARS FROM THE DATE OF GRANT.]
(ii) Termination of Participant's Employment. In the event of
the termination of Participant's employment by Corporation for any reason other
than Participant's death or disability, the Option, to the extent not previously
exercised, shall terminate and become void on the date occurring three months
after Participant ceases to be an employee of Corporation. Provided, however,
notwithstanding any other provisions set forth herein or in the Plan, if
Participant shall commit any act of malfeasance affecting Corporation or any
affiliated corporation or is convicted of a felony or engages in
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<PAGE>
conduct that would warrant Participant's discharge for cause as such is
determined by the Committee in its sole discretion, any unexercised portion of
the Option shall immediately terminate and become void. A transfer of
Participant's employment between Corporation and any subsidiary of Corporation
shall not be deemed to be a termination of Participant's employment.
(iii) Death or Disability. Upon termination of Participant's
employment by reason of Participant's death, the Option may be exercised, to the
extent not previously exercised, by Participant's estate or any distributee of
the Option under Participant's will or the applicable laws of descent and
distribution until the Termination Date. Upon termination of Participant's
employment by reason of disability (within the meaning of Section 22(e)(3) of
the Code), the Option may be exercised, to the extent not previously exercised,
until the earlier of the Termination Date or the date occurring one year from
the date of termination of Participant's employment.
III. Installment Exercise. Subject to such further limitations as are
provided herein, the Option shall become vested and exercisable in five (5)
installments, Participant having the right hereunder to purchase from
Corporation the following number of Option Shares upon exercise of the Option,
on and after the following dates, in cumulative fashion:
(i) on and after the first anniversary of the Date of Grant,
up to twenty percent (20%) (ignoring fractional shares) of the total
number of Option Shares;
(ii) on and after the second anniversary of the Date of Grant,
up to an additional twenty percent (20%) (ignoring fractional shares)
of the total number of Option Shares; and
(iii) on and after the third anniversary of the Date of Grant,
up to an additional twenty percent (20%) (ignoring fractional shares)
of the total number of Option Shares; and
(iv) on and after the fourth anniversary of the Date of Grant,
up to an additional twenty percent (20%) (ignoring fractional shares)
of the total number of Option Shares; and
e. on and after the fifth anniversary of the Date of Grant,
the remaining Option Shares.
IV. Exercise of Option. The Option, or any portion of the Option
eligible to be exercised by the Participant and not previously exercised, may be
exercised at any time or times prior to the termination of the Option pursuant
to the provisions hereof. The Option may be exercised only if compliance with
all Federal and state securities laws can be effected and only by (i)
Participant's completion, execution and delivery to Corporation of a notice of
exercise and "investment letter" in the form attached hereto as Exhibit A, and
(ii) Participant's payment to Corporation of an amount equal to the sum of the
amount obtained by multiplying the Option Price by the number of Option Shares
being purchased plus any withholding tax required by law as determined by
Corporation. Payment shall be made by check payable to Corporation or such other
medium of payment as the Committee shall approve. Upon the exercise of the
Option by Participant, or as soon thereafter as is practicable, Corporation
shall issue and deliver to Participant a certificate or certificates evidencing
such number of Option Shares as Participant has so elected to purchase. Such
certificate or certificates shall be registered in the name of Participant and
shall bear any legend required by any Federal or state securities law or
agreement as Corporation shall determine. [NOTE: IN ORDER TO RECEIVE TREATMENT
AS AN INCENTIVE STOCK OPTION, PARTICIPANT MUST NOT DISPOSE OF ANY SHARE OBTAINED
BY THE EXERCISE OF THE OPTION IF SUCH DISPOSITION
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OCCURS WITHIN 2 YEARS OF THE DATE OF GRANT OF THE OPTION OR WITHIN 1 YEAR AFTER
THE EXERCISE OF THE OPTION]
V. Transferability of Option. The Option may not be transferred,
assigned, pledged or hypothecated (whether by operation of law or otherwise),
except that the Option may be transferred upon the death of Participant as
provided by Participant's Will or the applicable laws of descent and
distribution. The Option shall not be subject to execution, attachment or
similar process. Any attempted assignment, transfer, pledge, hypothecation or
other disposition of the Option, or levy of attachment or similar process upon
the Option not specifically permitted herein shall be null and void and without
effect. Any permitted transferee will be entitled to all of the rights of
Participant with respect to the assigned portion of the Option, and such portion
of the Option will continue to be subject to all of the then existing terms,
conditions and restrictions applicable to the Option, as set forth herein and in
the Plan.
VI. Adjustments. In the event of the declaration of any stock dividend
on the Stock or in the event of any reorganization, merger, consolidation,
acquisition, separation, recapitalization, split-up, combination or exchange of
shares of Stock, or like adjustment, the number of shares of Stock and the class
of shares of Stock available pursuant to the Option, and the Option Price, shall
be adjusted proportionately as determined by the Committee, whose determination
shall be conclusive. Notwithstanding the foregoing, in the event of such a
reorganization, merger, consolidation, acquisition, separation,
recapitalization, split-up, combination or exchange of shares of stock, or like
adjustment which results in substantially all the shares of the Stock of
Corporation being exchanged for, or converted into cash or other property, the
Committee or Corporation shall have the right to terminate the Option as of the
date of the exchange or conversion in which case the Option shall convert into
the right to receive such cash or property net of the Option Price of the
Options.
VII. Termination, Suspension or Amendment of Option. The Committee or
Corporation may, at any time, terminate, suspend or amend the Plan or this
Agreement.
VIII. Postponement of Exercise. The Committee or Corporation may
postpone any exercise of the Option for such time as it may deem necessary in
order to permit Corporation (i) to effect, amend or maintain any necessary
registration of the Plan or the shares of Stock issuable upon the exercise of
the Option under the Securities Act of 1933, as amended (the "Act"), or the
securities laws of any applicable jurisdiction, (ii) to permit any action to be
taken in order to (A) list such shares of Stock on a stock exchange if shares of
Stock are then listed on such exchange or (B) comply with restrictions or
regulations incident to the maintenance of a public market for its shares of
Stock, including any rules or regulations of any stock exchange on which the
shares of Stock are listed, or (iii) to determine that such shares of Stock and
the Plan are exempt from such registration or that no action of the kind
referred to in (ii)(B) above needs to be taken; and Corporation shall not be
obligated by virtue of any terms and conditions of this Agreement or any
provision of the Plan to recognize the exercise of the Option or to sell or
issue shares of Stock in violation of the Act or any state's securities laws.
Any such postponement shall not extend the terms of the Option and neither
Corporation nor its directors or officers or the Committee shall have any
obligation or liability to Participant or to any other person with respect to
any shares of Stock as to which the Option shall lapse because of such
postponement.
IX. Participant's Rights. The granting of the Option shall impose no
obligation upon Participant to exercise such Option. Participant shall have no
equity interest in Corporation, nor shall Participant have any voting, dividend,
liquidation or dissolution rights with respect to any capital stock of
Corporation solely by reason of having the Option or having executed this
Agreement. Upon the issuance and delivery of a certificate for Option Shares
after exercise of the Option, Participant shall have the
3
<PAGE>
rights of a stockholder with respect to such Option Shares and to receive all
dividends or other distributions paid or made with respect thereto. Nothing in
this Agreement or the Plan shall confer upon Participant the right to continue
in the employ of Corporation or affect any right which Corporation may have to
terminate such employment at any time.
X. Elimination of Fractional Shares. If this Agreement requires a
computation of the number of shares of Stock subject to the Option, and the
number so computed is not a whole number of shares of Stock, such number of
shares of Stock shall be rounded down to the next whole number.
XI. Shareholders' Agreement. Participant agrees to execute any
Shareholders' Agreement which all other shareholders of Corporation are subject
prior to delivery of any Stock upon the exercise of the Option. All Stock
delivered to Participant pursuant to the exercise of the Option shall be subject
to any Shareholders' Agreement previously entered into by Participant relating
to the Stock.
XII. Incorporation of Plan by Reference. The Option is granted pursuant
to the terms of the Plan, a copy of which is attached hereto as Exhibit "B" and
the terms of which are incorporated herein by reference. The Option shall in all
respects be interpreted in accordance with the Plan. The Committee shall
interpret and construe the Plan and this Agreement, and its interpretations and
determinations shall be conclusive and binding on the parties hereto and any
other person claiming an interest hereunder, with respect to any issue arising
hereunder or thereunder. The provisions of the Plan shall control in the event
of any inconsistencies between this Agreement and the Plan.
XIII. Entire Agreement. This Agreement sets forth all of the promises,
agreements, conditions, understandings, warranties and representations between
the parties hereto with respect to the Option and the Shares. This Agreement is
an integration of any and all prior agreements or understandings, oral or
written, with respect to the Option and the Shares.
XIV. Notices. Any and all notices provided for herein shall be
sufficient if in writing, and sent by hand delivery or by certified or
registered mail (return receipt requested and first class postage prepaid), in
the case of Corporation, to its principal office, and, in the case of
Participant, to Participant's address as shown on Corporation's records.
XV. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Alabama.
XVI. Modifications. Except as otherwise provided herein, no change or
modification of this Agreement shall be valid unless the same is in writing and
signed by the parties hereto.
XVII. Successors. This Agreement shall be binding on all permitted
successors and assigns of Participant including any estate, executors or
administrators, trustees, or personal or legal representatives, and, in any such
event all references herein to Participant shall, to the extent applicable, be
deemed to refer to and include such estate, executors or administrators,
trustees or personal or legal representatives, as the case may be.
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<PAGE>
IN WITNESS WHEREOF, Corporation and Participant have executed this
Agreement as of the day and year first above written.
FRONTIER NATIONAL CORPORATION
By: /s/ Raymond C. Styres
----------------------------------
Title: Chairman, Compensation Committee
PARTICIPANT:
/s/ Steven R. Townson
--------------------------------------
Signature of Participant
Steven R. Townson
--------------------------------------
Printed Name of Participant
5
---------------------
EXHIBIT 10.4
INCENTIVE STOCK OPTION AGREEMENT BETWEEN
FRONTIER NATIONAL CORPORATION AND
HARRY I. BROWN, JR.
SIGNED ON DECEMBER 20, 1999
EFFECTIVE AUGUST 24, 1998
---------------------
<PAGE>
APPENDIX A
INCENTIVE STOCK OPTION AGREEMENT
THIS INCENTIVE STOCK OPTION AGREEMENT (this "Agreement") is made as of
the 20TH day of DECEMBER 1999 effective as of AUGUST 24, 1998 (the "Date of
Grant"), by and between Frontier National Corporation, an Alabama corporation
("Corporation"), and HARRY I. BROWN, JR. ("Participant"). [NOTE: PARTICIPANT
MUST BE AN EMPLOYEE OF CORPORATION TO BE ELIGIBLE TO RECEIVE AN ISO]
WHEREAS, Corporation has adopted its 1999 Statutory-Nonstatutory Stock
Option Plan (the "Plan"); and
WHEREAS, the committee chosen by Corporation to administer the Plan
(the "Committee") has determined that Participant is eligible to receive an
option to purchase shares of common stock of Corporation ("Stock") under an
incentive stock option and has determined that it is in the best interest of
Corporation to grant the stock option documented herein to Participant.
NOW, THEREFORE, in consideration of the foregoing, of the mutual
promises hereinafter set forth and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto do
hereby agree as follows:
I. Grant of Option. Corporation hereby grants to Participant the right
to purchase FORTY THOUSAND (40,000) shares of Stock (the "Option Shares") at a
price of $10.00 per Option Share (the "Option Price"), in accordance with the
terms of this Agreement and the Plan (the "Option"). The Committee, exercising
good faith, has determined that the Option Price is equal to at least one
hundred percent (100%) of the fair market value of a share of Stock on the Date
of Grant. [NOTE: IF PARTICIPANT AND HIS OR HER FAMILY HOLD MORE THAN 10% OF THE
TOTAL COMBINED VOTING POWER OF ALL CLASSES OF STOCK, THEN THE OPTION PRICE MUST
NOT BE LESS THAN 110% OF THE FAIR MARKET VALUE OF THE OPTION SHARES ON THE DATE
OF GRANT. ALSO TOTAL FAIR MARKET VALUE OF ALL OPTIONS GRANTED TO PARTICIPANT
ELIGIBLE TO BE EXERCISED IN ANY ONE YEAR SHOULD NOT EXCEED $100,000.] The Option
is intended by the parties hereto to be, and shall be treated as, an incentive
stock option (as such term is defined under section 422 of the Internal Revenue
Code of 1986 (the "Code")).
II. Termination of Option.
(i) Termination Date. The Option and all rights hereunder with
respect thereto, to the extent such rights shall not have been previously
exercised or otherwise terminated, shall terminate and become null and void on
AUGUST 24, 2008 at 5:00 P.M. (the "Termination Date"). [NOTE: IF THE PARTICIPANT
AND HIS FAMILY OWN LESS THAN 10% OF THE TOTAL COMBINED VOTING POWER THEN THE
TERMINATION DATE MUST NOT BE LATER THAN 10 YEARS FROM THE DATE OF GRANT. IF THE
PARTICIPANT AND HIS FAMILY OWN 10% OR MORE THEN THE TERMINATION DATE MUST NOT BE
LATER THAN 5 YEARS FROM THE DATE OF GRANT.]
(ii) Termination of Participant's Employment. In the event of
the termination of Participant's employment by Corporation for any reason other
than Participant's death or disability, the Option, to the extent not previously
exercised, shall terminate and become void on the date occurring three months
after Participant ceases to be an employee of Corporation. Provided, however,
notwithstanding any other provisions set forth herein or in the Plan, if
Participant shall commit any act of malfeasance affecting Corporation or any
affiliated corporation or is convicted of a felony or engages in
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<PAGE>
conduct that would warrant Participant's discharge for cause as such is
determined by the Committee in its sole discretion, any unexercised portion of
the Option shall immediately terminate and become void. A transfer of
Participant's employment between Corporation and any subsidiary of Corporation
shall not be deemed to be a termination of Participant's employment.
(iii) Death or Disability. Upon termination of Participant's
employment by reason of Participant's death, the Option may be exercised, to the
extent not previously exercised, by Participant's estate or any distributee of
the Option under Participant's will or the applicable laws of descent and
distribution until the Termination Date. Upon termination of Participant's
employment by reason of disability (within the meaning of Section 22(e)(3) of
the Code), the Option may be exercised, to the extent not previously exercised,
until the earlier of the Termination Date or the date occurring one year from
the date of termination of Participant's employment.
III. Installment Exercise. Subject to such further limitations as are
provided herein, the Option shall become vested and exercisable in five (5)
installments, Participant having the right hereunder to purchase from
Corporation the following number of Option Shares upon exercise of the Option,
on and after the following dates, in cumulative fashion:
(i) on and after the first anniversary of the Date of Grant,
up to twenty percent (20%) (ignoring fractional shares) of the total
number of Option Shares;
(ii) on and after the second anniversary of the Date of Grant,
up to an additional twenty percent (20%) (ignoring fractional shares)
of the total number of Option Shares; and
(iii) on and after the third anniversary of the Date of Grant,
up to an additional twenty percent (20%) (ignoring fractional shares)
of the total number of Option Shares; and
(iv) on and after the fourth anniversary of the Date of Grant,
up to an additional twenty percent (20%) (ignoring fractional shares)
of the total number of Option Shares; and
e. on and after the fifth anniversary of the Date of Grant,
the remaining Option Shares.
IV. Exercise of Option. The Option, or any portion of the Option
eligible to be exercised by the Participant and not previously exercised, may be
exercised at any time or times prior to the termination of the Option pursuant
to the provisions hereof. The Option may be exercised only if compliance with
all Federal and state securities laws can be effected and only by (i)
Participant's completion, execution and delivery to Corporation of a notice of
exercise and "investment letter" in the form attached hereto as Exhibit A, and
(ii) Participant's payment to Corporation of an amount equal to the sum of the
amount obtained by multiplying the Option Price by the number of Option Shares
being purchased plus any withholding tax required by law as determined by
Corporation. Payment shall be made by check payable to Corporation or such other
medium of payment as the Committee shall approve. Upon the exercise of the
Option by Participant, or as soon thereafter as is practicable, Corporation
shall issue and deliver to Participant a certificate or certificates evidencing
such number of Option Shares as Participant has so elected to purchase. Such
certificate or certificates shall be registered in the name of Participant and
shall bear any legend required by any Federal or state securities law or
agreement as Corporation shall determine. [NOTE: IN ORDER TO RECEIVE TREATMENT
AS AN INCENTIVE STOCK OPTION, PARTICIPANT MUST NOT DISPOSE OF ANY SHARE OBTAINED
BY THE EXERCISE OF THE OPTION IF SUCH DISPOSITION
2
<PAGE>
OCCURS WITHIN 2 YEARS OF THE DATE OF GRANT OF THE OPTION OR WITHIN 1 YEAR AFTER
THE EXERCISE OF THE OPTION]
V. Transferability of Option. The Option may not be transferred,
assigned, pledged or hypothecated (whether by operation of law or otherwise),
except that the Option may be transferred upon the death of Participant as
provided by Participant's Will or the applicable laws of descent and
distribution. The Option shall not be subject to execution, attachment or
similar process. Any attempted assignment, transfer, pledge, hypothecation or
other disposition of the Option, or levy of attachment or similar process upon
the Option not specifically permitted herein shall be null and void and without
effect. Any permitted transferee will be entitled to all of the rights of
Participant with respect to the assigned portion of the Option, and such portion
of the Option will continue to be subject to all of the then existing terms,
conditions and restrictions applicable to the Option, as set forth herein and in
the Plan.
VI. Adjustments. In the event of the declaration of any stock dividend
on the Stock or in the event of any reorganization, merger, consolidation,
acquisition, separation, recapitalization, split-up, combination or exchange of
shares of Stock, or like adjustment, the number of shares of Stock and the class
of shares of Stock available pursuant to the Option, and the Option Price, shall
be adjusted proportionately as determined by the Committee, whose determination
shall be conclusive. Notwithstanding the foregoing, in the event of such a
reorganization, merger, consolidation, acquisition, separation,
recapitalization, split-up, combination or exchange of shares of stock, or like
adjustment which results in substantially all the shares of the Stock of
Corporation being exchanged for, or converted into cash or other property, the
Committee or Corporation shall have the right to terminate the Option as of the
date of the exchange or conversion in which case the Option shall convert into
the right to receive such cash or property net of the Option Price of the
Options.
VII. Termination, Suspension or Amendment of Option. The Committee or
Corporation may, at any time, terminate, suspend or amend the Plan or this
Agreement.
VIII. Postponement of Exercise. The Committee or Corporation may
postpone any exercise of the Option for such time as it may deem necessary in
order to permit Corporation (i) to effect, amend or maintain any necessary
registration of the Plan or the shares of Stock issuable upon the exercise of
the Option under the Securities Act of 1933, as amended (the "Act"), or the
securities laws of any applicable jurisdiction, (ii) to permit any action to be
taken in order to (A) list such shares of Stock on a stock exchange if shares of
Stock are then listed on such exchange or (B) comply with restrictions or
regulations incident to the maintenance of a public market for its shares of
Stock, including any rules or regulations of any stock exchange on which the
shares of Stock are listed, or (iii) to determine that such shares of Stock and
the Plan are exempt from such registration or that no action of the kind
referred to in (ii)(B) above needs to be taken; and Corporation shall not be
obligated by virtue of any terms and conditions of this Agreement or any
provision of the Plan to recognize the exercise of the Option or to sell or
issue shares of Stock in violation of the Act or any state's securities laws.
Any such postponement shall not extend the terms of the Option and neither
Corporation nor its directors or officers or the Committee shall have any
obligation or liability to Participant or to any other person with respect to
any shares of Stock as to which the Option shall lapse because of such
postponement.
IX. Participant's Rights. The granting of the Option shall impose no
obligation upon Participant to exercise such Option. Participant shall have no
equity interest in Corporation, nor shall Participant have any voting, dividend,
liquidation or dissolution rights with respect to any capital stock of
Corporation solely by reason of having the Option or having executed this
Agreement. Upon the issuance and delivery of a certificate for Option Shares
after exercise of the Option, Participant shall have the
3
<PAGE>
rights of a stockholder with respect to such Option Shares and to receive all
dividends or other distributions paid or made with respect thereto. Nothing in
this Agreement or the Plan shall confer upon Participant the right to continue
in the employ of Corporation or affect any right which Corporation may have to
terminate such employment at any time.
X. Elimination of Fractional Shares. If this Agreement requires a
computation of the number of shares of Stock subject to the Option, and the
number so computed is not a whole number of shares of Stock, such number of
shares of Stock shall be rounded down to the next whole number.
XI. Shareholders' Agreement. Participant agrees to execute any
Shareholders' Agreement which all other shareholders of Corporation are subject
prior to delivery of any Stock upon the exercise of the Option. All Stock
delivered to Participant pursuant to the exercise of the Option shall be subject
to any Shareholders' Agreement previously entered into by Participant relating
to the Stock.
XII. Incorporation of Plan by Reference. The Option is granted pursuant
to the terms of the Plan, a copy of which is attached hereto as Exhibit "B" and
the terms of which are incorporated herein by reference. The Option shall in all
respects be interpreted in accordance with the Plan. The Committee shall
interpret and construe the Plan and this Agreement, and its interpretations and
determinations shall be conclusive and binding on the parties hereto and any
other person claiming an interest hereunder, with respect to any issue arising
hereunder or thereunder. The provisions of the Plan shall control in the event
of any inconsistencies between this Agreement and the Plan.
XIII. Entire Agreement. This Agreement sets forth all of the promises,
agreements, conditions, understandings, warranties and representations between
the parties hereto with respect to the Option and the Shares. This Agreement is
an integration of any and all prior agreements or understandings, oral or
written, with respect to the Option and the Shares.
XIV. Notices. Any and all notices provided for herein shall be
sufficient if in writing, and sent by hand delivery or by certified or
registered mail (return receipt requested and first class postage prepaid), in
the case of Corporation, to its principal office, and, in the case of
Participant, to Participant's address as shown on Corporation's records.
XV. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Alabama.
XVI. Modifications. Except as otherwise provided herein, no change or
modification of this Agreement shall be valid unless the same is in writing and
signed by the parties hereto.
XVII. Successors. This Agreement shall be binding on all permitted
successors and assigns of Participant including any estate, executors or
administrators, trustees, or personal or legal representatives, and, in any such
event all references herein to Participant shall, to the extent applicable, be
deemed to refer to and include such estate, executors or administrators,
trustees or personal or legal representatives, as the case may be.
4
<PAGE>
IN WITNESS WHEREOF, Corporation and Participant have executed this
Agreement as of the day and year first above written.
FRONTIER NATIONAL CORPORATION
By: /s/ Raymond C. Styres
----------------------------------
Title: Chairman, Compensation Committee
----------------------------------
PARTICIPANT:
/s/ Harry I. Brown, Jr.
--------------------------------------
Signature of Participant
Harry I. Brown, Jr.
--------------------------------------
Printed Name of Participant
5
---------------------
EXHIBIT 10.5
NONQUALIFIED STOCK OPTION AGREEMENT BETWEEN
FRONTIER NATIONAL CORPORATION AND
HARRY I. BROWN, JR.
SIGNED ON DECEMBER 20, 1999
EFFECTIVE AUGUST 24, 1998
---------------------
<PAGE>
APPENDIX B
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS NON-QUALIFIED STOCK OPTION AGREEMENT (this "Agreement") is made as
of the 20TH day of DECEMBER 1999 effective AUGUST 24, 1998 (the "Date of
Grant"), by and between Frontier National Corporation, an Alabama corporation
("Corporation"), and HARRY I. BROWN, JR. ("Participant").
WHEREAS, Corporation has adopted its 1999 Statutory-Nonstatutory Stock
Option Plan (the "Plan"); and
WHEREAS, the committee chosen by Corporation to administer the Plan
(the "Committee") has determined that Participant is eligible to receive an
option to purchase shares of common stock, $5.00 par value, of Corporation
("Stock") under a non-qualified stock option and has determined that it is in
the best interest of Corporation to grant the stock option documented herein to
Participant.
NOW, THEREFORE, in consideration of the foregoing, of the mutual
promises hereinafter set forth and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto do
hereby agree as follows:
XVIII. Grant of Option. Corporation hereby grants to Participant the
right to purchase TEN THOUSAND (10,000) shares of Stock (the "Option Shares") at
a price of TEN DOLLARS ($10.00) per Option Share (the "Option Price"), in
accordance with the terms of this Agreement and the Plan (the "Option"). The
Committee, exercising good faith, has determined that the Option Price is equal
to at least one hundred percent (100%) of the fair market value of a share of
Stock on the date hereof. The Option is not intended by the parties hereto to
be, and shall not be treated as, an incentive stock option (as such term is
defined under section 422 of the Internal Revenue Code of 1986 (the "Code")).
XIX. Termination of Option.
(i) Termination Date. The Option and all rights hereunder with
respect thereto, to the extent such rights shall not have been previously
exercised or otherwise terminated, shall terminate and become null and void on
AUGUST 24, 2008 at 5:00 P.M. (the "Termination Date").
(ii) Death or Disability. Upon Participant's death or
disability (within the meaning of Section 22(e)(3) of the Code), the Option may
be exercised, to the extent not previously exercised, by Participant's legal
representative, the legatees of the Option under Participant's Will or the
distributees of the Option under the applicable laws of descent and distribution
until the Termination Date, but only to the extent that the Option would
otherwise have been exercisable by Participant.
(iii) Termination of Participant's Service to Corporation. The
termination of Participant's service as an employee, director or advisory
director of Corporation shall have no effect on the Option, provided, however,
notwithstanding any other provisions set forth herein or in the Plan, if
Participant shall commit any act of malfeasance or wrongdoing affecting
Corporation or any affiliated corporation as determined by the Committee in its
sole discretion, any unexercised portion of the Option shall immediately
terminate and become void.
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<PAGE>
XX. Installment Exercise. Subject to such further limitations as are
provided herein, the Option shall become fully vested and exercisable, in whole
or in part, upon this Agreement being duly executed by the Corporation and
Participant.
XXI. Exercise of Option. The Option, or any portion of the Option
eligible to be exercised by the Participant and not previously exercised, may be
exercised at any time or times prior to the termination of the Option pursuant
to the provisions hereof. The Option may be exercised only if compliance with
all Federal and state securities laws can be effected and only by (i)
Participant's completion, execution and delivery to Corporation of a notice of
exercise and "investment letter" in the form attached hereto as Exhibit A, and
(ii) Participant's payment to Corporation of an amount equal to the sum of the
amount obtained by multiplying the Option Price by the number of Option Shares
being purchased plus any withholding tax required by law as determined by
Corporation. Payment shall be made by check payable to Corporation or such other
medium of payment as the Committee shall approve. Upon the exercise of the
Option by Participant, or as soon thereafter as is practicable, Corporation
shall issue and deliver to Participant a certificate or certificates evidencing
such number of Option Shares as Participant has so elected to purchase. Such
certificate or certificates shall be registered in the name of Participant and
shall bear any legend required by any Federal or state securities law or
agreement as Corporation shall determine.
XXII. Transferability of Option. The Option may not be transferred,
assigned, pledged or hypothecated (whether by operation of law or otherwise),
except that the Option may be transferred upon the death of Participant as
provided by Participant's Will or the applicable laws of descent or
distribution. The Option shall not be subject to execution, attachment or
similar process. Any attempted assignment, transfer, pledge, hypothecation or
other disposition of the Option, or levy of attachment or similar process upon
the Option not specifically permitted herein shall be null and void and without
effect. Notwithstanding the provisions of this Section, Participant, at any time
prior to his death, may assign all or any portion of the Option to (i) his
spouse or lineal descendant, (ii) the trustee of a trust for the primary benefit
of his spouse and lineal descendant, (iii) a partnership of which his spouse and
lineal descendants are the only partners, or (iv) a tax exempt organization as
described in Section 501(c)(3) of the Code. Any such assignment will be
permitted only if (i) Participant does not receive any consideration therefore,
and (ii) the assignment is permitted by the Plan. Any such assignment shall be
evidenced by an appropriate written document executed by Participant, and a copy
thereof shall be delivered to Corporation prior to the effective date of the
assignment. Any permitted transferee will be entitled to all of the rights of
Participant with respect to the assigned portion of the Option, and such portion
of the Option will continue to be subject to all of the then existing terms,
conditions and restrictions applicable to the Option, as set forth herein and in
the Plan.
XXIII. Adjustments. In the event of the declaration of any stock
dividend on the Stock or in the event of any reorganization, merger,
consolidation, acquisition, separation, recapitalization, split-up, combination
or exchange of shares of Stock, or like adjustment, the number of shares of
Stock and the class of shares of Stock available pursuant to the Option, and the
Option Price, shall be adjusted proportionately as determined by the Committee,
whose determination shall be conclusive. Notwithstanding the foregoing, in the
event of such a reorganization, merger, consolidation, acquisition, separation,
recapitalization, split-up, combination or exchange of shares of stock, or like
adjustment which results in substantially all the shares of the Stock of
Corporation being exchanged for, or converted into cash or other property, the
Committee or Corporation shall have the right to terminate the Option as of the
date of the exchange or conversion in which case the Option shall convert into
the right to receive such cash or property net of the Option Price of the
Options.
2
<PAGE>
XXIV. Termination, Suspension or Amendment of Option. The Committee or
Corporation may at any time terminate, suspend or amend the Plan or this
Agreement.
XXV. Postponement of Exercise. The Committee or Corporation may
postpone any exercise of the Option for such time as it may deem necessary in
order to permit Corporation (i) to effect, amend or maintain any necessary
registration of the Plan or the shares of Stock issuable upon the exercise of
the Option under the Securities Act of 1933, as amended (the "Act"), or the
securities laws of any applicable jurisdiction, (ii) to permit any action to be
taken in order to (A) list such shares of Stock on a stock exchange if shares of
Stock are then listed on such exchange or (B) comply with restrictions or
regulations incident to the maintenance of a public market for its shares of
Stock, including any rules or regulations of any stock exchange on which the
shares of Stock are listed, or (iii) to determine that such shares of Stock and
the Plan are exempt from such registration or that no action of the kind
referred to in (ii)(B) above needs to be taken; and Corporation shall not be
obligated by virtue of any terms and conditions of this Agreement or any
provision of the Plan to recognize the exercise of the Option or to sell or
issue shares of Stock in violation of the Act or any state's securities laws.
Any such postponement shall not extend the terms of the Option and neither
Corporation nor its directors or officers or the Committee shall have any
obligation or liability to Participant or to any other person with respect to
any shares of Stock as to which the Option shall lapse because of such
postponement.
XXVI. Participant's Rights. The granting of the Option shall impose no
obligation upon Participant to exercise such Option. Participant shall have no
equity interest in Corporation, nor shall Participant have any voting, dividend,
liquidation or dissolution rights with respect to any capital stock of
Corporation solely by reason of having the Option or having executed this
Agreement. Upon the issuance and delivery of a certificate for Option Shares
after exercise of the Option, Participant shall have the rights of a stockholder
with respect to such Option Shares and to receive all dividends or other
distributions paid or made with respect thereto. Nothing in this Agreement or
the Plan shall confer upon Participant the right to continue as a member of the
Board of Directors of Corporation or affect any right which Corporation may have
to remove such Participant as a director of Corporation.
XXVII. Elimination of Fractional Shares. If this Agreement requires a
computation of the number of shares of Stock subject to the Option, and the
number so computed is not a whole number of shares of Stock, such number of
shares of Stock shall be rounded down to the next whole number.
XXVIII. Shareholders' Agreement. Participant agrees to execute any
Shareholders' Agreement which all other shareholders of Corporation are subject
prior to delivery of any Stock upon the exercise of the Option. All Stock
delivered to Participant pursuant to the exercise of the Option shall be subject
to any Shareholders' Agreement previously entered into by Participant relating
to the Stock.
XXIX. Incorporation of Plan by Reference. The Option is granted
pursuant to the terms of the Plan, a copy of which is attached hereto as Exhibit
"B" and the terms of which are incorporated herein by reference. The Option
shall in all respects be interpreted in accordance with the Plan. The Committee
shall interpret and construe the Plan and this Agreement, and its
interpretations and determinations shall be conclusive and binding on the
parties hereto and any other person claiming an interest hereunder, with respect
to any issue arising hereunder or thereunder. The provisions of the Plan shall
control in the event of any inconsistencies between this Agreement and the Plan.
XXX. Entire Agreement. This Agreement sets forth all of the promises,
agreements, conditions, understandings, warranties and representations between
the parties hereto with respect to the Option and
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the Shares. This Agreement is an integration of any and all prior agreements or
understandings, oral or written, with respect to the Option and the Shares.
XXXI. Notices. Any and all notices provided for herein shall be
sufficient if in writing, and sent by hand delivery or by certified or
registered mail (return receipt requested and first class postage prepaid), in
the case of Corporation, to its principal office, and, in the case of
Participant, to Participant's address as shown on Corporation's records.
XXXII. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Alabama.
XXXIII. Modifications. Except as otherwise provided in Section 5, 6 and
7 herein, no change or modification of this Agreement shall be valid unless the
same is in writing and signed by the parties hereto.
XXXIV. Successors. This Agreement shall be binding on all permitted
successors and assigns of Participant including any estate, executors or
administrators, trustees, or personal or legal representatives, and, in such
event all references herein to Participant shall, to the extent applicable, be
deemed to refer to and include such estate, executors or administrators,
trustees or personal or legal representatives, as the case may be.
IN WITNESS WHEREOF, Corporation and Participant have executed this
Agreement as of the day and year first above written.
FRONTIER NATIONAL CORPORATION
By: /s/ Raymond C. Styres
-------------------------------------
Title: Chairman, Compensation Committee
PARTICIPANT:
/s/ Harry I. Brown, Jr.
-----------------------
Signature of Participant
Harry I. Brown, Jr.
-------------------
Printed Name of Participant
4
---------------------
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
WITH BENJAMIN BROXSON MCMILLAN
---------------------
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT dated March 8, 1999, between First National-America's Bank
(the "Employer"), and Benjamin Broxson McMillan (the "Employee"). For and in
consideration of $100, the employment provisions described below, and good and
valuable other consideration, the parties agree as follows:
1. Employment. The Employer employs the Employee and the Employee
accepts employment upon the terms and conditions of this Agreement.
2. Term. The term of this Agreement shall begin on March 8, 1999 and
shall terminate on the same date in 2001. The term automatically shall extend
for additional periods of one (1) year at the end of each term unless written
notice has been given by either party to terminate within 30 days prior to the
end of the current term.
3. Compensation. As compensation for the services to be rendered by
Employee during the period of his employment hereunder, and upon the condition
that Employee shall fully and faithfully keep and perform all of the terms and
conditions hereof, Employer shall pay Employee a salary of $65,000 ("Base
Salary") per year, less income tax withholdings and other normal employee
deductions, provided, that the rate of such Base Salary shall be reviewed by the
Board of Directors not less often than annually. Such Base Salary, or increased
rate of salary, if any, as the case may be, may be further increased (but not
decreased) from time to time in such amounts as the Board of Directors in its
discretion may decide. Such Base Salary shall be payable in accordance with the
customary payroll practices of Employer, but in no event less frequently than
monthly. This Agreement shall not be deemed terminated if the Board of Directors
or stockholders of Employer shall determine to increase the compensation of
Employee for any period of time.
4. Duties. The Employee is engaged as Executive Vice President of the
Employer. The precise services of the Employee may be extended or curtailed by
the Employer from time to time. If the Employee is elected or appointed a
director or an officer of the Employer, the Employee will serve in such capacity
or capacities without further compensation; but nothing shall be construed as
requiring the election or appointment of the Employee as such director or
officer.
5. Extent of Services. The Employee shall devote his entire time,
attention and energies to the Employer's business and shall not during the term
of this Agreement be engaged in any other business activity, whether or not such
business activity is pursued for gain, profit, or other pecuniary advantage.
However, the Employee may invest his assets in such form or manner as will not
require his services in the operation of the affairs of the companies in which
such investments are made.
6. Working Facilities. The Employee shall have a private office and
such other facilities and services as are suitable to his position and
appropriate for the performance of his duties.
7. Disclosure of Information. The Employee acknowledges that the list
of the Employer's customers as it may exist from time to time is a valuable,
special, and unique asset of the Employer's business. The Employee will not,
during or after the term of his employment, disclose the list of the Employer's
customers or any part thereof to any person, firm, corporation, association, or
other entity for any reason or purpose whatsoever. In the event of a breach or
threatened breach by the Employee of the provisions of this paragraph, the
Employer shall be entitled to an injunction restraining the Employee from
disclosing, in whole or in part, the list of the Employer's customers, or from
rendering any services to any person, firm, corporation, association, or other
entity to whom such list, in whole or in part, has
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been disclosed or is threatened to be disclosed. Nothing herein shall be
construed as prohibiting the Employer from pursuing any other remedies available
to the Employer for such breach or threatened breach, including the recovery of
damages from the Employee.
8. Expenses. The Employee may incur reasonable expenses for promoting
the Employer's business, including expenses for entertainment, travel, and
similar items. The Employer will reimburse the Employee for all such expenses
upon the Employee's periodic presentation of an itemized account of such
expenditures. In addition, Employee shall have a $550 per month automobile
allowance.
9. Vacations. The Employee shall be entitled each calendar year to a
vacation of three (3) weeks, during which time his compensation shall be paid in
full.
10. Force Majeure and Disability. If Employer is unable to conduct its
business, or a substantial portion thereof, by virtue of governmental regulation
or order, or by strike, war, fire, earthquake, hurricane, or similar acts of
god, or other calamity (declared or undeclared), or because of other similar or
dissimilar cause beyond control of Employer (all of which events are hereinafter
sometimes referred to as "Force Majeure"), or in the event Employee suffers a
disability which prevents him from performing his services hereunder (herein
called a "Disability"), Employer shall, in the event the Force Majeure and/or
Disability continue for at least eight aggregate weeks during any four-month
period, have the right to suspend the operation of this Agreement for the
duration of said Force Majeure and/or Disability (except for any benefits
payable to Employee under such benefit plans generally available to all
executive employees), and Employer shall, at its option, have the right to add a
period equal to such suspension to the Term hereof.
11. Termination With Cause. With cause, the Employer may terminate this
Agreement at any time upon written notice to the Employee. In such event, the
Employee, if requested by the Employer, shall continue to render his services,
and shall be paid his regular compensation up to the date of termination. As
used in Section, termination for "cause" shall be deemed to have occurred if
Employee has breached this Agreement and the Employer gives notice in writing,
delivered to the Employee and providing ten (10) calendar days, from the date of
delivery of the notice, within which the Employee has the opportunity to cure,
if possible, the breach. In addition, cause for termination shall exist if
Employee engages in any of the following conduct while an employee of the
Employer: (1) willful and knowing dishonesty in communication of any kind on any
material subject for any purpose either to the Employer or to any person or
entity for or on behalf of the Employer; (2) obtaining from any person or
entity, other than from the Employer, anything of value in return for or because
of rendering service or advice which, under the circumstances, might reasonably
be construed as part of the duties expected of an employee of the Employer; (3)
use of more than an insubstantial and quantitatively small amount of time during
normal business hours of the Employer for activities not calculated and
reasonably designed to produce profit for the Employer; (4) theft, embezzlement,
false entries on records, misapplication of funds or property, misappropriation
of any asset, any conduct resulting in conversion of any kind, or any actual or
constructive fraud; (5) at any time during or after employment at the Employer,
imparting confidential information, whether proprietary or non-proprietary, to
any person other than (i) an authorized employee of the Employer; or (ii) as
required by law, or (iii) as part of a privileged communication to an attorney;
(6) gross neglect of duty, including, but not limited to, failure or refusal to
attend to the duties of employment at the Employer; (7) participating in any
conduct involving moral turpitude or which results in public disgrace including,
but not limited to, conduct for which there is probable cause to believe that,
if criminally prosecuted, such conduct would be adjudged felonious; (8)
counseling, advising, assisting, procuring or aiding any employee of the
Employer in any above-recited conflict of interest; (9) knowing, believing or
having reason to know or believe that an employee of the Employer has, is, or is
about to engage in any above-recited conflict of interest and not revealing said
knowledge or belief and the reason
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for it to the Employer; (10) receiving, during the term of this Agreement,
compensation, income, anything of value, or a future interest in or future
entitlement to compensation, income or a thing of value, from any person or
entity who or which is engaged in the same or substantially the same business as
the Employer in the same product, service or geographical market, except stock
dividends and/or capital gains from passive investments in financial
institutions by Employee made in the ordinary course of business and as part of
Employee's investment portfolio. However, cause shall not be deemed to exist
merely because of a difference of opinion between Employee and the Employer, or
any employees, directors or officers of either, as to philosophy of management
or other personal beliefs.
12. Termination upon Sale of Business. Notwithstanding anything to the
contrary, the Employer may terminate this Agreement upon ten (10) days' notice
to the Employee upon the happening of any of the following events:
(a) the sale by the Employer of substantially all of its
assets to a single purchaser or to a group of associated purchasers;
(b) the sale, exchange, or other disposition, in one
transaction, of at least two-thirds (2/3) of the outstanding corporate shares of
the Employer;
(c) a decision by the Employer to terminate its business and
liquidate its assets; or
(d) the merger or consolidation of the Employer in a
transaction in which the shareholders of the Employer receive less than fifty
percent (50%) of the outstanding voting shares of the new or continuing
corporation.
In order to protect Employee against the possible consequences of such
termination and thereby to induce Employee to continue to serve as an employee
of Employer, Employer agrees that if (a) this Agreement is terminated as stated
in this Section; or (b) one of the actions stated in this Section occurs and
Employee leaves the employment of Employer or the resulting entity for whatever
reason (other than discharge for cause) within six (6) months after such
occurrence:
(a) Employee shall be entitled to receive within ten (10)
business days of Employee leaving such employment of lump-sum payment in cash in
the amount of one year's Base Salary.
(b) To the extent Employee is eligible, he shall continue to
be covered by all noncash benefit plans of Employer except for the retirement
plans or retirement programs in which Employee participates or any successor
plans or programs in effect on the date of such acquisition of control, for one
year thereafter; provided, however, that if during such time period Employee
should enter into the employment of a competitor of Employer, his participation
in such noncash benefit plans would cease. In the event Employee is ineligible
under the terms of such plans to continue to be so covered, Employer shall
provide substantially equivalent coverage through other sources.
(c) In addition to the benefits to which Employee is entitled
under the retirement plans or programs in which Employee participates or any
successor plans or programs in effect on the date of termination of his
employment hereunder, Employee shall be paid in one sum in cash at his normal
retirement age (or earlier retirement age should he so elect) as defined in the
retirement plans or programs in which Employee participates or any successor
plans or programs in effect on the date of such acquisition of control, an
amount, as an additional retirement benefit, equal to the actuarial equivalent
of the additional amount that he would have earned under such retirement plans
or programs had he accumulated four additional years of continuous service
(after any termination pursuant to
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this Section 1) under such retirement plans or programs both for purposes of
determining eligibility for a benefit and for purposes of calculating the amount
of such benefit.
Employee's benefits hereunder shall be considered severance pay in
consideration of his past service, and pay in consideration of his continued
service from the date hereof and his entitlement thereto shall not be governed
by any duty to mitigate his damages by seeking further employment nor offset by
any compensation which he may receive from future employment.
13. Death During Employment. If the Employee dies during the term of
employment, the Employer shall pay to the estate of the Employee the
compensation which would otherwise be payable to the Employee up to the end of
the month in which his death occurs.
14. Competition During and After Term. Employee agrees that during the
Term hereof, and for a period of one (1) year after the expiration of the Term,
he will not, either separately, jointly, or in association with others, directly
or indirectly, as an agent, employee, owner, partner, stockholder, or otherwise,
allow his name to be used by, or establish, engage in, or become interested in
any business, trade or occupation similar to the business being conducted by
Employer, in any county in any of the States of the United States in which
Employer's business is then being conducted or in any contiguous county, as long
as Employer, or any person, firm, or corporation deriving title to the goodwill
of, or shares from it, carries on a like business therein. Employer and Employee
acknowledge that during the Term of Employee's employment, Employee will acquire
special knowledge and/or skill that he can effectively utilize in competition
with Employer. Furthermore, although not a term or condition of this Agreement,
Employer and Employee acknowledge that, as of the date hereof, it is reasonably
contemplated that Employee's services will be utilized by Employer in executive,
managerial, and/or supervisory capacities throughout the areas in which Employer
conducts its business, and in the general operation of Employer's business
wherever it is being conducted, throughout the United States.
Employee agrees that the remedy at law for any breach by him of the
covenants contained herein will be inadequate, and that in the event of a
violation of the covenants contained herein, in addition to any and all legal
and equitable remedies which may be available, the said covenants may be
enforced by an injunction in a suit in equity, without the necessity of proving
actual damage, and that a temporary injunction may be granted immediately upon
the commencement of any such suit, and without notice. The parties hereto intend
that the covenants contained in this Section shall be deemed to be a series of
separate covenants, one for each county of each state where Employer does
business. If, in any judicial proceeding, a court shall refuse to enforce any or
all of the separate covenants deemed included in such action, then such
unenforceable covenants shall be deemed eliminated from the provisions hereof
for the purposes of such proceeding to the extent necessary to permit the
remaining separate covenants to be enforced in such proceeding. Furthermore, if
in any judicial proceeding a court shall refuse to enforce any covenant by
reason of the duration or extent thereof, such covenant shall be construed to
have only the maximum duration or extent permitted by law.
15. Notices. Any notice required or desired to be given under this
Agreement shall be deemed given if in writing sent by certified mail to his
residence, in the case of the Employee, or to its principal office, in the case
of the Employer.
16. Waiver of Breach. The waiver by the Employer of a breach of any
provision of this Agreement by the Employee shall not operate or be construed as
a waiver of any subsequent breach by the Employee. No waiver shall be valid
unless in writing and signed by an authorized officer of the Employer.
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<PAGE>
17. Assignment. The Employee acknowledges that the services to be
rendered by him are unique and personal. Accordingly, the Employee may not
assign any of his rights or delegate any of his duties or obligations under this
Agreement. The rights and obligations of the Employer under this Agreement shall
inure to the benefit of and shall be binding upon the successors and assigns of
the Employer.
18. Entire Agreement. This Agreement contains the entire understanding
of the parties. It may not be changed orally but only by an agreement in writing
signed by the party against whom enforcement of any waiver, change,
modification, extension, or discharge is sought.
19. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Alabama.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
EMPLOYER:
FIRST NATIONAL-AMERICA'S BANK
By: /s/ Steven R. Townson
------------------------------------------
Title: President and Chief Executive Officer
------------------------------------------
EMPLOYEE:
/s/ Benjamin Broxson McMillan
------------------------------------------
Benjamin Broxson McMillan
5
---------------------
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
WITH JAMES JEFFERSON TORBERT
---------------------
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT dated March 1, 1999, between Valley National Bank (the
"Employer"), and James Jefferson Torbert (the "Employee"). For and in
consideration of $100, the employment provisions described below, and good and
valuable other consideration, the parties agree as follows:
1. Employment. The Employer employs the Employee and the Employee
accepts employment upon the terms and conditions of this Agreement.
2. Term. The term of this Agreement shall begin on March 1, 1999 and
shall terminate on the same date in 2001. The term automatically shall extend
for additional periods of one (1) year at the end of each term unless written
notice has been given by either party to terminate within 30 days prior to the
end of the current term.
3. Compensation. As compensation for the services to be rendered by
Employee during the period of his employment hereunder, and upon the condition
that Employee shall fully and faithfully keep and perform all of the terms and
conditions hereof, Employer shall pay Employee a salary of $65,000 ("Base
Salary") per year, less income tax withholdings and other normal employee
deductions, provided, that the rate of such Base Salary shall be reviewed by the
Board of Directors not less often than annually. Such Base Salary, or increased
rate of salary, if any, as the case may be, may be further increased (but not
decreased) from time to time in such amounts as the Board of Directors in its
discretion may decide. Such Base Salary shall be payable in accordance with the
customary payroll practices of Employer, but in no event less frequently than
monthly. This Agreement shall not be deemed terminated if the Board of Directors
or stockholders of Employer shall determine to increase the compensation of
Employee for any period of time.
4. Duties. The Employee is engaged as Executive Vice President of the
Employer. The precise services of the Employee may be extended or curtailed by
the Employer from time to time. If the Employee is elected or appointed a
director or an officer of the Employer, the Employee will serve in such capacity
or capacities without further compensation; but nothing shall be construed as
requiring the election or appointment of the Employee as such director or
officer.
5. Extent of Services. The Employee shall devote his entire time,
attention and energies to the Employer's business and shall not during the term
of this Agreement be engaged in any other business activity, whether or not such
business activity is pursued for gain, profit, or other pecuniary advantage.
However, the Employee may invest his assets in such form or manner as will not
require his services in the operation of the affairs of the companies in which
such investments are made.
6. Working Facilities. The Employee shall have a private office and
such other facilities and services as are suitable to his position and
appropriate for the performance of his duties.
7. Disclosure of Information. The Employee acknowledges that the list
of the Employer's customers as it may exist from time to time is a valuable,
special, and unique asset of the Employer's business. The Employee will not,
during or after the term of his employment, disclose the list of the Employer's
customers or any part thereof to any person, firm, corporation, association, or
other entity for any reason or purpose whatsoever. In the event of a breach or
threatened breach by the Employee of the provisions of this paragraph, the
Employer shall be entitled to an injunction restraining the Employee from
disclosing, in whole or in part, the list of the Employer's customers, or from
rendering any services to any person, firm, corporation, association, or other
entity to whom such list, in whole or in part, has been disclosed or is
threatened to be disclosed. Nothing herein shall be construed as prohibiting the
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Employer from pursuing any other remedies available to the Employer for such
breach or threatened breach, including the recovery of damages from the
Employee.
8. Expenses. The Employee may incur reasonable expenses for promoting
the Employer's business, including expenses for entertainment, travel, and
similar items. The Employer will reimburse the Employee for all such expenses
upon the Employee's periodic presentation of an itemized account of such
expenditures. In addition, Employee shall have a $550 per month automobile
allowance.
9. Vacations. The Employee shall be entitled each calendar year to a
vacation of three (3) weeks, during which time his compensation shall be paid in
full.
10. Force Majeure and Disability. If Employer is unable to conduct its
business, or a substantial portion thereof, by virtue of governmental regulation
or order, or by strike, war, fire, earthquake, hurricane, or similar acts of
god, or other calamity (declared or undeclared), or because of other similar or
dissimilar cause beyond control of Employer (all of which events are hereinafter
sometimes referred to as "Force Majeure"), or in the event Employee suffers a
disability which prevents him from performing his services hereunder (herein
called a "Disability"), Employer shall, in the event the Force Majeure and/or
Disability continue for at least eight aggregate weeks during any four-month
period, have the right to suspend the operation of this Agreement for the
duration of said Force Majeure and/or Disability (except for any benefits
payable to Employee under such benefit plans generally available to all
executive employees), and Employer shall, at its option, have the right to add a
period equal to such suspension to the Term hereof.
11. Termination With Cause. With cause, the Employer may terminate this
Agreement at any time upon written notice to the Employee. In such event, the
Employee, if requested by the Employer, shall continue to render his services,
and shall be paid his regular compensation up to the date of termination. As
used in Section, termination for "cause" shall be deemed to have occurred if
Employee has breached this Agreement and the Employer gives notice in writing,
delivered to the Employee and providing ten (10) calendar days, from the date of
delivery of the notice, within which the Employee has the opportunity to cure,
if possible, the breach. In addition, cause for termination shall exist if
Employee engages in any of the following conduct while an employee of the
Employer: (1) willful and knowing dishonesty in communication of any kind on any
material subject for any purpose either to the Employer or to any person or
entity for or on behalf of the Employer; (2) obtaining from any person or
entity, other than from the Employer, anything of value in return for or because
of rendering service or advice which, under the circumstances, might reasonably
be construed as part of the duties expected of an employee of the Employer; (3)
use of more than an insubstantial and quantitatively small amount of time during
normal business hours of the Employer for activities not calculated and
reasonably designed to produce profit for the Employer; (4) theft, embezzlement,
false entries on records, misapplication of funds or property, misappropriation
of any asset, any conduct resulting in conversion of any kind, or any actual or
constructive fraud; (5) at any time during or after employment at the Employer,
imparting confidential information, whether proprietary or non-proprietary, to
any person other than (i) an authorized employee of the Employer; or (ii) as
required by law, or (iii) as part of a privileged communication to an attorney;
(6) gross neglect of duty, including, but not limited to, failure or refusal to
attend to the duties of employment at the Employer; (7) participating in any
conduct involving moral turpitude or which results in public disgrace including,
but not limited to, conduct for which there is probable cause to believe that,
if criminally prosecuted, such conduct would be adjudged felonious; (8)
counseling, advising, assisting, procuring or aiding any employee of the
Employer in any above-recited conflict of interest; (9) knowing, believing or
having reason to know or believe that an employee of the Employer has, is, or is
about to engage in any above-recited conflict of interest and not revealing said
knowledge or belief and the reason for it to the Employer; (10) receiving,
during the term of this Agreement, compensation, income, anything of value, or a
future interest in or future entitlement to compensation, income or a thing of
value, from
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any person or entity who or which is engaged in the same or substantially the
same business as the Employer in the same product, service or geographical
market, except stock dividends and/or capital gains from passive investments in
financial institutions by Employee made in the ordinary course of business and
as part of Employee's investment portfolio. However, cause shall not be deemed
to exist merely because of a difference of opinion between Employee and the
Employer, or any employees, directors or officers of either, as to philosophy of
management or other personal beliefs.
12. Termination upon Sale of Business. Notwithstanding anything to the
contrary, the Employer may terminate this Agreement upon ten (10) days' notice
to the Employee upon the happening of any of the following events:
(a) the sale by the Employer of substantially all of its
assets to a single purchaser or to a group of associated purchasers;
(b) the sale, exchange, or other disposition, in one
transaction, of at least two-thirds (2/3) of the outstanding corporate
shares of the Employer;
(c) a decision by the Employer to terminate its business and
liquidate its assets; or
(d) the merger or consolidation of the Employer in a
transaction in which the shareholders of the Employer receive less than
fifty percent (50%) of the outstanding voting shares of the new or
continuing corporation.
In order to protect Employee against the possible consequences of such
termination and thereby to induce Employee to continue to serve as an employee
of Employer, Employer agrees that if (a) this Agreement is terminated as stated
in this Section; or (b) one of the actions stated in this Section occurs and
Employee leaves the employment of Employer or the resulting entity for whatever
reason (other than discharge for cause) within six (6) months after such
occurrence:
(a) Employee shall be entitled to receive within ten (10)
business days of Employee leaving such employment of lump-sum payment
in cash in the amount of one year's Base Salary.
(b) To the extent Employee is eligible, he shall continue to
be covered by all noncash benefit plans of Employer except for the
retirement plans or retirement programs in which Employee participates
or any successor plans or programs in effect on the date of such
acquisition of control, for one year thereafter; provided, however,
that if during such time period Employee should enter into the
employment of a competitor of Employer, his participation in such
noncash benefit plans would cease. In the event Employee is ineligible
under the terms of such plans to continue to be so covered, Employer
shall provide substantially equivalent coverage through other sources.
(c) In addition to the benefits to which Employee is entitled
under the retirement plans or programs in which Employee participates
or any successor plans or programs in effect on the date of termination
of his employment hereunder, Employee shall be paid in one sum in cash
at his normal retirement age (or earlier retirement age should he so
elect) as defined in the retirement plans or programs in which Employee
participates or any successor plans or programs in effect on the date
of such acquisition of control, an amount, as an additional retirement
benefit, equal to the actuarial equivalent of the additional amount
that he would have earned under such retirement plans or programs had
he accumulated four additional years of continuous service (after any
termination pursuant to this Section 1) under such retirement plans or
programs both
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for purposes of determining eligibility for a benefit and for purposes
of calculating the amount of such benefit.
Employee's benefits hereunder shall be considered severance pay in
consideration of his past service, and pay in consideration of his continued
service from the date hereof and his entitlement thereto shall not be governed
by any duty to mitigate his damages by seeking further employment nor offset by
any compensation which he may receive from future employment.
13. Death During Employment. If the Employee dies during the term of
employment, the Employer shall pay to the estate of the Employee the
compensation which would otherwise be payable to the Employee up to the end of
the month in which his death occurs.
14. Competition During and After Term. Employee agrees that during the
Term hereof, and for a period of one (1) year after the expiration of the Term,
he will not, either separately, jointly, or in association with others, directly
or indirectly, as an agent, employee, owner, partner, stockholder, or otherwise,
allow his name to be used by, or establish, engage in, or become interested in
any business, trade or occupation similar to the business being conducted by
Employer, in any county in any of the States of the United States in which
Employer's business is then being conducted or in any contiguous county, as long
as Employer, or any person, firm, or corporation deriving title to the goodwill
of, or shares from it, carries on a like business therein. Employer and Employee
acknowledge that during the Term of Employee's employment, Employee will acquire
special knowledge and/or skill that he can effectively utilize in competition
with Employer. Furthermore, although not a term or condition of this Agreement,
Employer and Employee acknowledge that, as of the date hereof, it is reasonably
contemplated that Employee's services will be utilized by Employer in executive,
managerial, and/or supervisory capacities throughout the areas in which Employer
conducts its business, and in the general operation of Employer's business
wherever it is being conducted, throughout the United States.
Employee agrees that the remedy at law for any breach by him of the
covenants contained herein will be inadequate, and that in the event of a
violation of the covenants contained herein, in addition to any and all legal
and equitable remedies which may be available, the said covenants may be
enforced by an injunction in a suit in equity, without the necessity of proving
actual damage, and that a temporary injunction may be granted immediately upon
the commencement of any such suit, and without notice. The parties hereto intend
that the covenants contained in this Section shall be deemed to be a series of
separate covenants, one for each county of each state where Employer does
business. If, in any judicial proceeding, a court shall refuse to enforce any or
all of the separate covenants deemed included in such action, then such
unenforceable covenants shall be deemed eliminated from the provisions hereof
for the purposes of such proceeding to the extent necessary to permit the
remaining separate covenants to be enforced in such proceeding. Furthermore, if
in any judicial proceeding a court shall refuse to enforce any covenant by
reason of the duration or extent thereof, such covenant shall be construed to
have only the maximum duration or extent permitted by law.
15. Notices. Any notice required or desired to be given under this
Agreement shall be deemed given if in writing sent by certified mail to his
residence, in the case of the Employee, or to its principal office, in the case
of the Employer.
16. Waiver of Breach. The waiver by the Employer of a breach of any
provision of this Agreement by the Employee shall not operate or be construed as
a waiver of any subsequent breach by the Employee. No waiver shall be valid
unless in writing and signed by an authorized officer of the Employer.
4
<PAGE>
17. Assignment. The Employee acknowledges that the services to be
rendered by him are unique and personal. Accordingly, the Employee may not
assign any of his rights or delegate any of his duties or obligations under this
Agreement. The rights and obligations of the Employer under this Agreement shall
inure to the benefit of and shall be binding upon the successors and assigns of
the Employer.
18. Entire Agreement. This Agreement contains the entire understanding
of the parties. It may not be changed orally but only by an agreement in writing
signed by the party against whom enforcement of any waiver, change,
modification, extension, or discharge is sought.
19. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Alabama.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
EMPLOYER:
VALLEY NATIONAL BANK
By: /s/ Steven R. Townson
------------------------------------
Title: President and Chief Executive Officer
----------------------------------------
EMPLOYEE:
/s/James Jefferson Torbert
------------------------------------
James Jefferson Torbert
EXHIBIT 11 - STATEMENTS RE: COMPUTATION OF PER SHARE EARNINGS
Frontier National Corporation
Computation of Net Income Per Common Share
The following tabulation presents the calculation of basic and diluted earnings
per common share for the years ended December 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ---------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income................................................ $ 2,482,940 $ 1,127,816 $ 1,351,806
================ =============== ===============
Earnings on common shares................................. $ 2,482,940 $ 1,127,816 $ 1,351,806
================ =============== ===============
Weighted average common shares outstanding - basic........ 3,450,628 2,861,619 2,104,092
================ =============== ===============
Basic earnings per common share........................... $ .72 $ .39 $ .64
=============== =============== ===============
DILUTED EARNINGS PER SHARE:
Net income................................................ $ 2,482,940 $ 1,127,816 $ 1,351,806
================ =============== ===============
Weighted average common shares
outstanding............................................. 3,450,628 2,861,619 2,104,092
Net effect of the assumed exercise of stock
options - based on the treasury stock method
using average market price for the year................. 34,714 21,246 --
---------------- --------------- ---------------
Weighted average common shares outstanding -
diluted................................................. 3,485,342 2,882,865 2,104,092
================ =============== ===============
Diluted earnings per common share......................... $ .71 $ .39 $ .64
=============== =============== ===============
</TABLE>
[The remainder of this page intentionally left blank]
73
EXHIBIT 12 - STATEMENTS RE: COMPUTATION OF RATIOS
Frontier National Corporation
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1999 1998 1997
---------------- --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C>
Pretax income................................................ $ 3,177 $ 1,394 $ 1,914
Add fixed charges:
Interest on deposits...................................... 6,238 5,063 3,751
Interest on borrowings.................................... 1,908 1,231 944
Portion of rental expense representing interest expense... 38 31 22
---------------- --------------- ---------------
Total fixed charges..................................... 8,184 6,325 4,717
---------------- --------------- ---------------
Income before fixed charges.................................. $ 11,361 $ 7,719 $ 6,631
================ =============== ===============
Pretax income................................................ $ 3,177 1,394 $ 1,914
Add fixed charges (excluding interest on deposits):
Interest on borrowings.................................... 1,908 1,231 944
Portion of rental expense representing interest expense... 38 31 22
---------------- --------------- ---------------
Total fixed charges..................................... 1,946 1,262 966
---------------- --------------- ---------------
Income before fixed charges (excluding interest on
deposits)................................................. $ 5,123 $ 2,656 $ 2,880
================ =============== ===============
RATIO OF EARNINGS TO FIXED CHARGES
Including interest on deposits............................ 1.39 1.22 1.41
Excluding interest on deposits............................ 2.63 2.10 2.98
</TABLE>
74
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiaries - Direct/wholly-owned State of Incorporation
- ---------------------------------- ----------------------
<S> <C>
Frontier National Bank, Lanett Alabama
Frontier National Bank, Sylacauga Alabama
Subsidiaries - Indirect/wholly-owned by Frontier National Bank, Sylacauga
- -------------------------------------------------------------------------
The Frontier Agency, Inc. Alabama
Frontier Financial Services, Inc. Alabama
</TABLE>
75
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Harry I. Brown, Jr., Steven R. Townson and Kerri C.
Newton, and each of them, his true and lawful attorney-in-fact, as agent with
full power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacity, to sign any or all amendments to this Form 10-K
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agents in full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as they might or could be in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, and their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in capacities and on the dates indicated.
Directors Date
--------- ----
/s/ Wesley L. Bowden, Jr. March 28, 2000
- ---------------------------------------- ---------------
Wesley L. Bowden, Jr.
/s/ Harry I. Brown, Jr. March 28, 2000
- ---------------------------------------- ---------------
Harry I. Brown, Jr.
/s/ Harry I. Brown, Sr. March 28, 2000
- ---------------------------------------- ---------------
Harry I. Brown, Sr.
/s/ Charles M. Reeves March 28, 2000
- ---------------------------------------- ---------------
Charles M. Reeves
/s/ Steven E. Sprayberry March 28, 2000
- ---------------------------------------- ---------------
Steven E. Sprayberry
/s/ Raymond C. Styres March 28, 2000
- ---------------------------------------- ---------------
Raymond C. Styres
/s/ Steven R. Townson March 28, 2000
- ---------------------------------------- ---------------
Steven R. Townson
/s/ Christopher N. Zodrow March 28, 2000
- ---------------------------------------- ---------------
Christopher N. Zodrow
76
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,902,010
<INT-BEARING-DEPOSITS> 102,066
<FED-FUNDS-SOLD> 6,640,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 53,066,190
<INVESTMENTS-MARKET> 50,357,787
<LOANS> 139,706,383
<ALLOWANCE> 1,849,356
<TOTAL-ASSETS> 219,215,153
<DEPOSITS> 172,426,980
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,554,988
<LONG-TERM> 24,042,000
0
0
<COMMON> 3,498
<OTHER-SE> 20,187,687
<TOTAL-LIABILITIES-AND-EQUITY> 20,191,185
<INTEREST-LOAN> 13,463,888
<INTEREST-INVEST> 3,145,779
<INTEREST-OTHER> 705,452
<INTEREST-TOTAL> 17,315,119
<INTEREST-DEPOSIT> 6,237,639
<INTEREST-EXPENSE> 8,145,718
<INTEREST-INCOME-NET> 9,169,401
<LOAN-LOSSES> 497,388
<SECURITIES-GAINS> 39,023
<EXPENSE-OTHER> 2,692,910
<INCOME-PRETAX> 3,176,622
<INCOME-PRE-EXTRAORDINARY> 2,482,940
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,482,940
<EPS-BASIC> 0.72
<EPS-DILUTED> 0.71
<YIELD-ACTUAL> 4.93
<LOANS-NON> 873,000
<LOANS-PAST> 426,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,831,241
<CHARGE-OFFS> 972,950
<RECOVERIES> 493,677
<ALLOWANCE-CLOSE> 1,849,356
<ALLOWANCE-DOMESTIC> 1,849,356
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
