<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number: 000-24853
FRONTIER NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Alabama 72-1355228
(State of Incorporation) (IRS Employer Identification No.)
43 N. Broadway
Sylacauga, AL 35150
(Address of Principal Executive Office)
334-644-5419
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A, Common Stock, $.001 par Outstanding at July 31, 2000: 3,415,502
<PAGE>
FRONTIER NATIONAL CORPORATION
June 30, 2000 Form 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
Part 1. Financial Information
Item 1. Financial Statements (Unaudited)
<S> <C> <C>
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Consolidated Statement of Shareholders' Equity 7
Notes to Consolidated Financial Statements 8 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Part 2. Other Information
Item 1. Legal Proceedings 16 - 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 2000
(Unaudited) December 31, 1999
---------------- -----------------
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS $ 9,413,305 $ 6,902,010
INTEREST BEARING DEPOSITS WITH OTHER BANKS 276,562 102,066
FEDERAL FUNDS SOLD - 6,640,000
SECURITIES AVAILABLE FOR SALE 44,923,697 50,357,787
LOANS, NET OF UNEARNED INCOME 158,948,938 139,706,383
ALLOWANCE FOR LOAN LOSSES (1,809,712) (1,849,356)
PREMISES AND EQUIPMENT, NET 7,886,851 6,806,237
ACCRUED INTEREST RECEIVABLE 1,797,669 1,651,255
CASH SURRENDER VALUE ON LIFE INSURANCE 5,193,528 5,073,986
INTANGIBLE ASSETS, NET 1,430,568 1,497,013
FORECLOSED REAL ESTATE 333,421 305,965
OTHER ASSETS 2,652,247 2,021,807
---------------- -----------------
TOTAL ASSETS $231,047,074 $219,215,153
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
NON-INTEREST BEARING DEPOSITS $ 25,548,292 $ 24,512,607
INTEREST BEARING DEPOSITS 151,944,150 147,914,373
---------------- -----------------
TOTAL DEPOSITS 177,492,442 172,426,980
---------------- -----------------
FEDERAL FUNDS PURCHASED 3,240,000 -
DIVIDENDS PAYABLE 435,795 438,697
ACCRUED INTEREST PAYABLE 1,061,114 925,364
LONG-TERM DEBT 25,442,000 24,042,000
OTHER LIABILITIES 2,417,930 1,190,927
---------------- -----------------
TOTAL LIABILITIES 210,089,281 199,023,968
---------------- -----------------
SHAREHOLDERS' EQUITY
COMMON STOCK ($.001 PAR VALUE; 10,000,000 SHARES
AUTHORIZED, 3,497,497 ISSUED OF WHICH 3,415,502 ARE
OUTSTANDING AT JUNE 30, 2000; $.001 PAR VALUE,
10,000,000 SHARES AUTHORIZED, 3,497,497 ISSUED OF WHICH
3,414,357 WERE OUTSTANDING AT DECEMBER 31, 1999) 3,498 3,498
CAPITAL SURPLUS 14,257,593 14,263,104
RETAINED EARNINGS 9,344,559 8,774,744
TREASURY STOCK, AT COST (81,995 SHARES AT JUNE 30,
2000 AND 83,140 SHARES AT DECEMBER 31, 1999) (1,145,440) (1,170,483)
ACCUMULATED COMPREHENSIVE INCOME (LOSS): NET UNREALIZED
HOLDING GAINS ON SECURITIES AVAILABLE FOR SALE,
NET OF DEFERRED INCOME TAX (1,502,417) (1,679,678)
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 20,957,793 20,191,185
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $231,047,074 $219,215,153
================ =================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
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FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- ------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---------- ---------- ---------- ----------
INTEREST INCOME
INTEREST AND FEES ON LOANS $3,712,083 $3,146,782 $7,290,985 $6,397,540
INTEREST AND DIVIDENDS ON SECURITIES
TAXABLE SECURITIES 438,255 532,741 908,053 996,953
NONTAXABLE SECURITIES 298,496 265,830 626,964 523,855
INTEREST EARNED ON DEPOSITS
WITH OTHER BANKS 4,010 12,368 14,472 30,216
INTEREST EARNED ON FEDERAL FUNDS SOLD 32,713 220,553 104,105 432,790
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 4,485,557 4,178,274 8,944,579 8,381,354
INTEREST EXPENSE
INTEREST ON DEPOSITS 1,700,475 1,574,858 3,352,310 3,172,311
INTEREST ON BORROWED FUNDS 408,512 304,052 769,624 597,533
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 2,108,987 1,878,910 4,121,934 3,769,844
NET INTEREST INCOME 2,376,570 2,299,364 4,822,645 4,611,510
PROVISION FOR LOAN LOSSES (29,996) (184,474) (226,763) (378,779)
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,346,574 2,114,890 4,595,882 4,232,731
NONINTEREST INCOME
SERVICE CHARGES ON DEPOSIT ACCOUNTS 445,160 372,777 760,351 721,964
COMMISSION INCOME 380,594 303,926 739,447 588,431
OTHER OPERATING INCOME 88,558 118,063 246,542 234,129
SECURITIES GAINS 2,914 18 2,914 18
---------- ---------- ---------- ----------
TOTAL NONINTEREST INCOME 917,226 794,784 1,749,254 1,544,542
NONINTEREST EXPENSE
SALARIES AND EMPLOYEE BENEFITS 1,122,496 1,061,111 2,229,920 2,143,875
NET OCCUPANCY EXPENSE 401,106 326,980 772,894 661,170
OTHER OPERATING EXPENSES 662,841 733,909 1,310,386 1,405,284
---------- ---------- ---------- ----------
TOTAL NONINTEREST EXPENSES 2,186,443 2,122,000 4,313,200 4,210,329
INCOME BEFORE INCOME TAXES 1,077,357 787,674 2,031,936 1,566,944
PROVISION FOR INCOME TAXES (320,184) (174,906) (590,742) (375,740)
---------- ---------- ---------- ----------
NET INCOME $ 757,173 $ 612,768 $1,441,194 $1,191,204
========== ========== ========== ==========
BASIC EARNINGS PER COMMON SHARE $ 0.22 $ 0.18 $ 0.42 $ 0.34
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 3,416,224 3,468,368 3,415,985 3,470,786
EARNINGS PER COMMON SHARE ASSUMING DILUTION $ 0.22 $ 0.17 $ 0.41 $ 0.34
WEIGHTED AVERAGE SHARES
OUTSTANDING ASSUMING DILUTION 3,484,789 3,513,429 3,485,960 3,515,847
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
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FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- -------------------------
2000 1999 2000 1999
-------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
NET INCOME $757,173 $ 612,768 $1,441,194 $ 1,191,204
OTHER COMPREHENSIVE, NET OF TAX:
UNREALIZED GAINS (LOSSES) ON SECURITIES:
UNREALIZED HOLDING GAINS (LOSSES) ARISING
DURING THE PERIOD (96,822) (1,523,174) 282,000 (1,604,089)
LESS: RECLASSIFICATION ADJUSTMENTS FOR (GAINS)
LOSSES INCLUDED IN NET INCOME (2,914) (18) (2,914) (18)
-------- ----------- ---------- -----------
NET UNREALIZED GAINS (LOSSES) (99,736) (1,523,192) 279,086 (1,604,107)
INCOME TAX RELATED TO ITEMS OF OTHER
COMPREHENSIVE INCOME (LOSS) 37,984 581,778 (101,825) 614,465
-------- ----------- ---------- -----------
OTHER COMPREHENSIVE INCOME (LOSS) (61,752) (941,414) 177,261 (989,642)
-------- ----------- ---------- -----------
COMPREHENSIVE INCOME (LOSS) $695,421 $ (328,646) $1,618,455 $ 201,562
======== =========== ========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,199,329 $ 2,361,666
INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE 5,978,499 6,387,930
PURCHASES OF SECURITIES AVAILABLE FOR SALE (250,000) (12,244,861)
NET (INCREASE) DECREASE IN LOANS TO CUSTOMERS (19,635,919) 5,304,875
PURCHASES OF PREMISES AND EQUIPMENT (1,430,090) (719,085)
PROCEEDS FROM SALES OF FIXED ASSETS 29,208 130,363
PROCEEDS FROM SALE OF FORECLOSED REAL ESTATE 90,903 -
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (15,217,399) (1,140,778)
------------ ------------
FINANCING ACTIVITIES:
NET INCREASE (DECREASE) IN DEPOSITS 5,065,462 (1,662,635)
NET INCREASE IN FEDERAL FUNDS PURCHASED 3,240,000 -
NET INCREASE IN SHORT-TERM BORROWINGS 213,148 335,936
DIVIDENDS PAID (874,281) (875,384)
PROCEEDS FROM SALE OF TREASURY STOCK 58,032 -
TREASURY STOCK PURCHASED (38,500) (457,250)
PROCEEDS FROM NOTES PAYABLE, NET 1,400,000 3,500,000
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,063,861 840,667
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,954,209) 2,061,555
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,644,076 14,836,223
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,689,867 $ 16,897,778
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000.
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON CAPITAL RETAINED TREASURY COMPREHENSIVE
STOCK SURPLUS EARNINGS STOCK INCOME (LOSS) TOTAL
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1999 $3,498 $14,263,104 $8,774,744 $(1,170,483) $(1,679,678) $20,191,185
CASH DIVIDENDS -
COMMON - - (871,379) - - (871,379)
PURCHASE OF TREASURY STOCK - - - (38,500) - (38,500)
REISSUANCE OF TREASURY STOCK - (5,511) - 63,543 - 58,032
NET CHANGE IN
UNREALIZED GAINS (LOSSES)
ON SECURITIES - - - - 177,261 177,261
NET INCOME - JUNE 30, 2000 - - 1,441,194 - - 1,441,194
-----------------------------------------------------------------------------------
BALANCE AT
JUNE 30, 2000 $3,498 $14,257,593 $9,344,559 $(1,145,440) $(1,502,417) $20,957,793
===================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE> 7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES
JUNE 30, 2000
(UNAUDITED)
NOTE A - Basis of Presentation
The consolidated financial statements include the accounts of Frontier National
Corporation (the "Company") and its wholly-owned subsidiaries, Frontier National
Bank, Lanett, Alabama, Frontier National Bank, Sylacauga, Alabama, Frontier
Financial Services, Inc., and The Frontier Agency, Inc., collectively, the Bank.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended June 30, 2000,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto for Frontier National Corporation and
subsidiaries for the year ended December 31, 1999, included in Form 10-K filed
in March 2000.
NOTE B - Income Taxes
The effective tax rates of approximately 29 percent and 24 percent for the six
months ended June 30, 2000 and 1999, respectively, are less than the statutory
rate principally because of the effect of tax-exempt interest income.
NOTE C - Securities
The Company applies the accounting and reporting requirements of Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities ("SFAS115"). This pronouncement requires that all
investments in debt securities be classified as either "held-to-maturity"
securities, which are reported at amortized cost; trading securities, which are
reported at fair value, with unrealized gains and losses included in earnings;
or "available-for-sale" securities, which are reported at fair value, with
unrealized gains and losses excluded from earnings and reported in a separate
component of shareholders' equity (net of deferred tax effect).
At June 30, 2000, the Company had net unrealized losses of $2,429,317 in
available-for-sale securities that are reflected in the presented assets and
resulted in a decrease in shareholders' equity of $1,502,417, net of deferred
tax asset. There were no trading securities.
8
<PAGE>
The net increase in shareholders' equity as a result of the SFAS 115 adjustment
from December 31, 1999 to June 30, 2000 was $177,261. See also Note D -
Shareholders' Equity.
NOTE D - Shareholders' Equity
During the first six months of 2000, cash dividends of $871,379 were charged
against equity. Equity was increased by $177,261 for the decrease in net
unrealized losses on securities. Treasury stock was purchased during the first
quarter decreasing shareholders' equity $38,500. Treasury stock was also
reissued increasing shareholders' equity $58,032. See also Note E - Stock Split
and Note F - Treasury Stock.
NOTE E - Stock Split
In April 1999, the Company's Board of Directors declared a 3-for-2 stock split
effective May 20, 1999. All earnings per share calculations have been
retroactively adjusted as if the stock split had occurred at the beginning of
each period presented.
NOTE F - Treasury Stock
During the first six months of 2000, 3,000 shares of common stock were acquired
and placed in treasury at cost and 4,145 were reissued and accounted for on a
first-in-first-out method. The treasury stock balance represents 83,140 shares
at December 31, 1999 and 81,995 shares at June 30, 2000, respectively.
NOTE G - Segment Reporting
All of the Company's offices offer similar products and services, are located in
the same geographic region, and serve the same customer segments of the market.
As a result, management considers all units as one operating segment and
therefore feels that the basic financial statements and related footnotes
provide details related to segment reporting.
NOTE H - Forward-Looking Statements
Certain statements in this report are forward-looking in nature and relate to
trends and events that may affect the Company's future financial position and
operating results. Such statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The terms
"expect," "anticipate," "intend," and "project" and similar words or expressions
are intended to identify forward-looking statements. These statements speak
only as of the date of this report. The statements are based on current
expectations, are inherently uncertain, are subject to risks, and should be
viewed with caution. Actual results and experience may differ materially from
the forward-looking statements as a result of many factors, including changes in
economic conditions in the markets served by the Company, increasing competition
and other unanticipated events and conditions. It is not possible to foresee or
identify all such factors. The Company makes no commitment to update any
forward-looking statements or to disclose any facts, events, or circumstances
after the date hereof that may affect the accuracy of any forward-looking
statement.
9
<PAGE>
NOTE I - Stock Options
Officers of the company hold a total of 188,000 incentive stock options of which
53,000 are outstanding at an exercise price of $10.125 (the fair market value on
the grant date) and 135,000 are outstanding at an exercise price of $6.67 (the
fair market value on the grant date). These options vest over a five-year time
period at 20% on each anniversary of the grant date and expire ten years from
the grant date.
Directors of the Company hold a total of 23,500 nonqualified stock options at an
exercise price of $10.125 (the fair market value on the grant date). These
options are immediately exercisable and expire on the one-year anniversary date
of the director's termination of service to the Board.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion is intended to assist an understanding of the Company and its
Subsidiaries' financial condition and results of operations. Unless the context
otherwise indicates, "the Company" shall include the Company and its
Subsidiaries. This analysis should be read in conjunction with the consolidated
financial statements and related notes appearing in Item 1 of the June 30, 2000
Form 10-Q.
FINANCIAL CONDITION
June 30, 2000 compared to December 31, 1999
Loans
Loans comprised the largest single category of the Company's earning assets on
June 30, 2000. Loans, net of unearned income and reserve for loan losses, were
68.02% of total assets at June 30, 2000 and 62.89% of total assets at December
31, 1999. Total net loans were $157,139,226 at June 30, 2000, representing a
13.99% increase from the December 31, 1999 total of $137,857,027. This increase
is the result of loan growth since December 31, 1999.
Investment Securities and Other Earning Assets
The investment securities portfolio is used to make various term investments, to
provide a source of liquidity and to serve as collateral to secure certain
government deposits. Federal funds sold are a tool in managing the daily cash
position of the Company. Investment securities and federal funds sold decreased
$12,074,090 from December 31, 1999 to June 30, 2000. Investment securities and
federal funds sold at June 30, 2000 were $44,923,697 compared with $56,997,787
at December 31, 1999, reflecting a 21.18% decrease.
Asset Quality
Between December 31, 1999 and June 30, 2000, the Company experienced a decrease
in nonperforming assets (defined as nonaccrual loans, loans past due 90 days or
more, restructured loans, nonaccruing securities, and other real estate) from
$1.894 million to $1.730 million. The ratio of loan loss allowance to total
nonperforming assets increased from .98 to 1.05, the ratio of nonperforming
loans to total loans decreased from .011 to .009. All of these ratios are
favorable as compared to industry averages, and management is aware of no
factors that would suggest that they are prone to erosion in future periods.
Deposits
Total deposits of $177,492,442 at June 30, 2000 increased $5,065,462 (2.94%)
over total deposits of $172,426,980 at year-end 1999. Deposits are the
Company's primary source of funds with which to support its earning assets.
Non-interest bearing deposits increased $1,035,685 or 4.23% from year-end 1999
to June 30, 2000, and interest bearing deposits increased $4,029,777 (2.72%)
from year-end 1999.
11
<PAGE>
Long-term Debt
At June 30, 2000 and December 31, 1999, the Company had notes payable totaling
$25,442,000, and $24,042,000, respectively.
Maturities of long-term debt for the years ending December 31 are as follows:
2000 $ -
2001 350,000
2002 -
2003 -
2004 5,500,000
Thereafter 19,592,000
-----------
Total $25,442,000
===========
Shareholders' Equity
Company shareholders' equity increased $766,608 from December 31, 1999 to June
30, 2000, due to net income of $1,441,194, the declaration of cash dividends of
$871,379, the decrease of unrealized losses on securities available-for-sale
totaling $177,261 net of deferred tax asset, the purchase of treasury stock of
$38,500 and the reissuance of treasury stock of $58,032.
Liquidity Management
Liquidity is defined as the ability of a company to convert assets into cash or
cash equivalents without significant loss. Liquidity management involves
maintaining the Banks' ability to meet the day-to-day cash flow requirements of
its customers, whether they are depositors wishing to withdraw funds or
borrowers requiring funds to meet their credit needs. Without proper liquidity
management, the Bank would not be able to perform the primary function of a
financial intermediary and would, therefore, not be able to meet the production
and growth needs of the communities it serves.
The primary function of asset and liability management is not only to assure
adequate liquidity in order for the Bank to meet the needs of its customer base,
but to maintain an appropriate balance between interest-sensitive assets and
interest-sensitive liabilities so that the Bank can also meet the investment
requirements of its shareholders. Daily monitoring of the sources and uses of
funds is necessary to maintain an acceptable cash position that meets both
requirements. In the banking environment, both assets and liabilities are
considered sources of liquidity funding and both are, therefore, monitored on a
daily basis.
The asset portion of the balance sheet provides liquidity primarily through loan
principal repayments and sales of investment and trading account securities.
Loans that mature in one year or less equaled approximately $60.488 million or
38.05% of the total loan portfolio at June 30, 2000 and there are no investment
securities maturing within one year. Other sources of liquidity include short-
term investments such as federal funds sold.
12
<PAGE>
The liability portion of the balance sheet provides liquidity through various
customers' interest bearing and non-interest bearing deposit accounts. At June
30, 2000, funds were also available through the purchase of federal funds from
correspondent commercial banks from available lines of up to an aggregate of
$14,000,000. Each of the Company's subsidiary banks is a member of the Federal
Home Loan Bank of Atlanta. Membership provides the Company with additional
lines of credit for liquidity needs. The Company has also established a line of
credit under the parent company for $5,000,000.
Capital Resources
A strong capital position is vital to the continued profitability of the Company
because it promotes depositor and investor confidence and provides a solid
foundation for future growth of the organization. The Company has provided the
majority of its capital requirements through the retention of earnings.
Bank regulatory authorities are placing increased emphasis on the maintenance of
adequate capital. In 1990, new risk-based capital requirements became
effective. The guidelines take into consideration risk factors, as defined by
regulators, associated with various categories of assets, both on and off the
balance sheet. Under the guidelines, capital strength is measured in two tiers
which are used in conjunction with risk-adjusted assets to determine the risk-
based capital ratios. The Company's Tier I capital, which consists of common
equity less goodwill, amounted to approximately $21,030,000 at June 30, 2000.
Tier II capital components include supplemental capital components such as
qualifying allowance for loan losses and qualifying subordinated debt. Tier I
capital plus the Tier II capital components are referred to as Total Risk-Based
capital and was approximately $22,839,000 at June 30, 2000.
The Company's current capital positions exceed the regulatory guidelines.
Management has reviewed and will continue to monitor the Company's asset mix and
product pricing, and the loan loss allowance, which are the areas determined to
be most affected by these requirements.
RESULTS OF OPERATIONS
Six months ended June 30, 2000 and 1999
Summary
Net earnings of the Company for the six months ended June 30, 2000 were
$1,441,194 compared to $1,191,204 for the same period in 1999, representing an
20.99% increase. This increase was due to a 8.58% increase in net interest
income after provision for loan losses primarily a result of loan growth coupled
with decreases in loan loss provisions, an increase in noninterest income of
13.25% primarily from nonbank subsidiaries, and expense control that held
noninterest expenses to an increase of only 2.44%.
Net Interest Income
Net interest income, the difference between interest earned on assets and the
cost of interest-bearing liabilities, is the largest component of the Company's
net income. Revenue from earning assets of the Company during the six months
ended June 30, 2000 increased $563,225 (6.72%) from the same period in 1999.
This increase was due to higher average outstanding balances of earning assets
and increased rates earned on those assets. Interest expense for the six months
13
<PAGE>
ended June 30, 2000 increased $352,090 or 9.34% over the corresponding period of
1999. As a result of these factors, net interest income increased $211,135 or
4.58% in the six months ended June 30, 2000, compared to the same period of
1999.
Provision for Loan Losses
The provision for loan losses represents the charge against current earnings
necessary to maintain the reserve for loan losses at a level which management
considers appropriate. This level is determined based upon the Company's
historical charge-offs, management's assessment of current economic conditions,
the composition of the loan portfolio and the levels of nonaccruing and past due
loans. The provision for loan losses was $226,763 for the six months ended June
30, 2000 compared to $378,779 for the same period of 1999. Charge-offs exceeded
recoveries by $266,407 for the six months ended June 30, 2000. The reserve for
loan losses as a percent of outstanding loans, net of unearned income, was 1.14%
at June 30, 2000 compared to 1.32% at year-end 1999.
Noninterest Income
Noninterest income for the six months ended June 30, 2000 was $1,749,254
compared to $1,544,542 for the same period of 1999. This 13.25% increase was
primarily due to insurance commissions of $739,447 in the first six months of
2000 as compared to $588,431 in the same period of 1999. Significant components
of noninterest income are as follows: Service charges on deposits increased
$38,387 (5.32%), insurance commissions increased $151,016, and other operating
income increased $12,413.
Noninterest Expenses
Noninterest expenses for the six months ended June 30, 2000 were $4,313,200
reflecting a 2.44% increase over the same period of 1999. The primary
components of noninterest expenses are salaries and employee benefits, which
increased to $2,229,920 for the six months ended June 30, 2000, 4.01% higher
than in the same period of 1999. Occupancy costs increased $111,724 and other
operating expenses decreased $94,898.
Income Taxes
The Company attempts to maximize its net income through active tax planning.
The provision for income taxes of $590,742 for the six months ended June 30,
2000 increased $215,002 compared to the same period of 1999, due to increased
earnings. Taxes as a percent of earnings increased from 23.98% to 29.07%. The
effective tax rate of approximately 29.07% is less than the statutory rate
principally because of the effect of tax-exempt interest income.
Year 2000 Issues
The Year 2000 issue was the result of shortcomings in many electronic data
processing systems and other electronic equipment that could have adversely
affected the Company's operations as early as fiscal year 1999.
14
<PAGE>
The Company completed an inventory of computer systems and other electronic
equipment that could have been affected by the Year 2000 issue and that were
necessary to conducting the Company's operations. Based on this inventory, the
Company upgraded or replaced various software and hardware items and then tested
and validated them for Year 2000 compliance.
Expenses for Year 2000 issues in 1999 were negligible and the Company's
management does not believe that any Year 2000 issues will affect the financial
condition or results of operations in 2000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk arising from adverse changes in the fair value of
financial instruments due to a change in interest rates, exchange rates and
equity prices. Frontiers' primary risk is interest rate risk.
The primary objective of Asset/Liability Management at Frontier is to manage
interest rate risk and achieve reasonable stability in net interest income
throughout interest rate cycles. This is achieved by maintaining the proper
balance of rate sensitive earning assets and rate sensitive liabilities. The
relationship of rate sensitive earning assets to rate sensitive liabilities is
the principal factor in projecting the effect that fluctuating interest rates
will have on future net interest income. Rate sensitive earning assets and
interest-bearing liabilities are those that can be repriced to current market
rates within a relatively short time period. Management monitors the rate
sensitivity of earning assets and interest-bearing liabilities over the entire
life of these instruments, but places particular emphasis on the first year and
through six years. Frontier's Asset/Liability Management policy requires
cumulative gap (the ratio of rate sensitive assets to rate sensitive
liabilities) to stay within a +/-20%.
Frontier has not experienced a high level of volatility in net interest income
primarily because of the relatively large base of core deposits that do not
reprice on a contractual basis. These deposit products include regular savings,
interest-bearing transaction accounts and money market savings accounts.
Balances for these accounts are reported based on historical repricing
experienced at each bank. However, the rates paid are typically not directly
related to market interest rates, since management has some discretion in
adjusting these rates as market rates change.
Frontier uses additional tools to monitor and manage interest rate sensitivity.
One of the primary tools is simulation analysis. Simulation analysis is the
primary method of estimating earnings at risk and capital at risk under varying
interest rate conditions. Simulation analysis is used to test the sensitivity
of Frontier's net interest income and stockholders' equity to both the level of
interest rates and the slope of the yield curve. Simulation analysis accounts
for the expected timing and magnitude of assets and liability cash flows, as
well as the expected timing and magnitude of deposits that do not reprice on a
contractual basis. In addition, simulation analysis includes adjustments for the
lag between movements in market interest rates on loans and interest-bearing
deposits. These adjustments are made to reflect more accurately possible future
cash flows, repricing behavior and ultimately net interest income. Although net
income is not materially impacted during simulation analysis under different
rate scenarios, Frontier is slightly asset sensitive meaning that net interest
income would increase with an increase in interest rates.
15
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PART 2. OTHER INFORMATION
Item 1. 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 First National-America's Bank, 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 sought certification as a class action.
The Company's attorneys moved to dismiss the allegations made in the
Complaint. This motion has not yet been ruled upon. Further, the Company
contended that plaintiffs' claim could not succeed since, among other
things, it is barred by the applicable provisions of the Alabama Mini-Code.
This dispute was resolved by mutual agreement and on July 6, 2000, this
action was dismissed. Therefore, this litigation is now concluded.
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 alleged that a bank, which has
subsequently been acquired by the Company, engaged in fraudulent acts
relating to customers' accounts. The Company vigorously denied any and
all liability and continues to defend this action.
This action was resolved by mutual agreement and all claims filed by the
plaintiff have been dismissed. Therefore, this dispute is now concluded.
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 alleged that Mr. Vincent was told that he had to obtain certain
insurance in order for him to obtain credit from the Bank and that Mr.
Vincent was required to pay charges in excess of those permitted by law.
The Bank has denied any wrongdoing and its attorneys are vigorously
defending this action.
The parties are engaged in discovery. The Bank's attorneys intend to file a
motion for summary judgment in the near future seeking dismissal of this
case prior to the necessity of a jury trial. It is too early to determine
any potential liability.
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4. Brenda Andrews v. Valley National Corporation a/k/a Valley National
-------------------------------------------------------------------
Bank; et al. Case No. CV 00-160, pending in the Circuit Court of Chambers
------------
County, Alabama. This action was filed on July 14, 2000. Ms. Andrews
alleges a number of claims in her Complaint, against the Company, its Chief
Executive Officer and its Chief Financial Officer, including negligent
hiring, wanton hiring, and civil conspiracy, which all essentially arise
out of her main claim, that her employment was unlawfully terminated
because of her age. Although discovery has just commenced in this action
and it is too early to state with certainty any details about its possible
outcome, the Company vigorously denies any and all wrongdoing. The Company
is vigorously defending this action and is hopeful that these claims will
soon be dismissed.
5. Cagle's Inc. v. Valley National Bank, Case No. 00-A-851-E. On June 30,
------------------------------------
2000, a complaint alleging breach of duty, negligence and gross negligence
against Frontier National Bank, Lanett, Alabama in connection with its
acceptance for deposit of five checks totaling $1,138,611 was filed in
federal court in Alabama. The plaintiff, a publicly traded poultry
processing concern, alleges that the Bank knew or should have known that
the checks were not authorized. The plaintiff seeks unspecified
compensatory and punitive damages and attorney fees, although it has
apparently recovered $800,000 to $900,000 from the Bank's depositor. The
Bank denies any liability and intends to defend against the allegations
vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
On May 15, 2000, the Company held its Annual Meeting of Shareholders. The
following items were presented to a vote of holders (the "Shareholders") of
the Company's outstanding Common Stock.
1. The Shareholders elected (a) Wesley L. Bowden, (b) Harry I. Brown, Jr., (c)
Harry I. Brown, Sr., (d) Charles M. Reeves, Jr., (e) Steven E. Sprayberry
(f) Raymond C. Styres, (g) Steven R. Townson, (h) Christopher N. Zodrow to
the Company's Board of Directors to serve as directors for the ensuing year
and until successors are appointed or elected.
2. The shareholders appointed Schauer, Taylor, Cox & Vise, P.C. as the
Company's auditors for the 2000 fiscal year.
The number of votes for each of the above is summarized in the table below.
<TABLE>
<CAPTION>
Item Submitted to Shareholders For Against Abstain Total
--------------------------------------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C>
(1)(a)Election of Wesley L. Bowden 2,987,705 9,000 0 2,996,705
(1)(b)Election of Harry I. Brown, Jr. 2,987,705 9,000 0 2,996,705
(1)(c)Election of Harry I. Brown, Sr. 2,987,705 9,000 0 2,996,705
(1)(d)Election of Charles M. Reeves, Jr. 2,987,705 9,000 0 2,996,705
(1)(e)Election of Steven E. Sprayberry 2,987,705 9,000 0 2,996,705
(1)(f)Election of Raymond C. Styres 2,987,705 9,000 0 2,996,705
(1)(g)Election of Steven R. Townson 2,987,705 9,000 0 2,996,705
(1)(h)Election of Christopher N. Zodrow 2,987,705 9,000 0 2,996,705
(2)Appointment of Schauer, Taylor,
Cox & Vise, P.C. as auditors 2,995,745 0 960 2,996,705
</TABLE>
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Statement RE: Computation of Earnings per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 30, 2000, one report was filed for Frontier
National Corporation on Form 8-K announcing the March 31, 2000 earnings
of the corporation and the declaration of a cash dividend on April 17,
2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRONTIER NATIONAL CORPORATION
August 11, 2000 By: /s/ STEVEN R. TOWNSON
---------------------------------
Steven R. Townson
President, Chief Executive Officer and
Chief Financial Officer
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