10-Q/A 1 amfnc10q063002.txt FRONTIER NATIONAL CORPORATION SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q/A [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 [ ] 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) 256-401-2041 (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 value Outstanding at August 9, 2002: 3,497,705 Form 10-Q/A FRONTIER NATIONAL CORPORATION June 30, 2002 TABLE OF CONTENTS

See notes to consolidated financial statements 2 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED Statements of Financial Condition

See notes to consolidated financial statements 2 FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Three Months and Six Months Ended June 30, 2002 and 2001 (Unaudited)

See notes to consolidated financial statements 3 FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three Months and Six Months Ended June 30, 2002 and 2001 (Unaudited)

See notes to consolidated financial statements 4 FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2002 and 2001 (Unaudited)

See notes to consolidated financial statements 5 FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Six Months Ended June 30, 2002 (Unaudited)

See notes to consolidated financial statements 6 FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002 (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 Acquisition Corporation, Frontier National Bank, Sylacauga, Alabama, Frontier National Bank, Lanett, Alabama (subsequently referred to as Frontier National Bank, LaGrange, Georgia - See Note I), Frontier Finance Company, Inc., Frontier Financial Services, Inc. and Frontier Reinsurance, 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, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. The consolidated statement of financial condition at December 31, 2001, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto for Frontier National Corporation and subsidiaries for the year ended December 31, 2001, included in Form 10-K filed in March 2002. Note B - Income Taxes The effective tax rates of approximately 24 percent and 21 percent for the six months ended June 30, 2002 and 2001, respectively, are less than the statutory rate principally because of the effect of tax-exempt interest income and the benefit from filing a consolidated tax return, which allows the consolidated entity to take advantage of the net loss incurred at the Holding Company. Note C - Securities The Company applies the accounting and reporting requirements of Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. 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). 7 Note C - Securities - Continued At June 30, 2002, the Company had net unrealized gains of $744,180 in available-for-sale securities that are reflected in the presented assets and resulted in an increase in shareholders' equity of $446,508, net of deferred tax. There were no trading securities. The net increase in shareholders' equity as a result of the SFAS No. 115 adjustment from December 31, 2001 to June 30, 2002 was $273,201. See also Note D - Shareholders' Equity. Note D - Shareholders' Equity During the first six months of 2002, cash dividends of $647,043 were charged against equity. Equity was increased by $273,201 for the increase in net unrealized gains on securities. Treasury stock was reissued, increasing shareholders' equity $14,091. See also Note E - Treasury Stock. Common stock was issued, pursuant to the exercise of stock options, increasing equity $28,875 and net income of $613,026 was also added, thereby, resulting in an overall net increase in shareholders equity totaling $282,150. Note E - Treasury Stock During the first six months of 2002, 1,281 shares of common stock held in treasury at cost were reissued and accounted for on a first-in-first-out method. The treasury stock balance represents 63,492 shares at June 30, 2002, and 64,773 shares at December 31, 2001. Note F - Segment Reporting All of the Company's segment information is presented by line of business. Each line of business is a distinct unit that offers products and services unique to its operations and customers. The Company's reportable operating segments are commercial banking and insurance services. The segment results include certain overhead allocations and intercompany transactions. [The remainder of this page intentionally left blank] 8 Note F - Segment Reporting - Continued The following tables reflect the approximate amounts of revenue, expense and assets for the Company's segments as of and for the six-month and quarterly periods ended June 30, 2002 and 2001.

9 Note G - Stock Options The Company has issued incentive stock options to certain key employees of which 232,000 are outstanding at June 30, 2002, at exercise prices ranging from $6.66 to $13.00 (the fair market values on the grant dates). These options vest over a five-year time period at 20% on each anniversary of the grant date and expire ten years from the grant date. The Company has also issued nonqualified stock options primarily to directors of the Company of which 50,000 are outstanding at June 30, 2002, at exercise prices ranging from $9.375 to $13.00 (the fair market values on the grant dates). These options are fully exercisable and expire on the one-year anniversary date of the director's termination of service to the Board, if applicable, or ten years from the grant date, whichever is earlier. Note H - Subsequent Events On July 16, 2002, the Board declared a dividend of $0.0925 payable to stockholders of record as of July 16, 2002, and to be paid on September 25, 2002. On July 9, 2002, 55,700 shares of the outstanding 232,000 incentive stock options at June 30, 2002 were exercised at prices ranging from $6.66 to $9.375 per share. Equity was increased by $372,862 as a result of this transaction. Note I - Business Combination Frontier National Bank, Lanett, Alabama, a wholly owned banking subsidiary of Frontier National Corporation, received approval from the Comptroller of the Currency to relocate its main office from 1011 North Lanier Avenue, Lanett, Alabama to 401 Vernon Street, LaGrange, Georgia. Frontier National Bank, Sylacauga, Alabama, a wholly owned banking subsidiary of Frontier National Corporation, received approval from the Comptroller of the Currency to purchase certain assets and assume certain liabilities of Frontier National Bank, LaGrange, Georgia (formerly, Frontier National Bank, Lanett, Alabama) and to establish a branch at 1011 North Lanier Avenue, Lanett, Alabama. The above transactions are the first phase of Frontier National Corporation's plans to merge its banking subsidiaries into one which is expected to occur prior to year end. These transactions did not have an impact on the Company's consolidated statement of financial condition. The initial transactions occurred on August 5, and July 12, 2002, respectively. 10 Note J - Effect of FASB 142, Goodwill and Other Intangible Assets In June 2001 the FASB issued Statement No. 142, Goodwill and Other Intangible Assets. The statement requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead an entity must perform an assessment of whether these assets are impaired as of the date of adoption and test for impairment at least annually in accordance with the provisions of the statement. The statement also requires that intangible assets with determinable lives be amortized. The Company adopted Statement No. 142 on January 1, 2002. The initial assessment of the Company's intangible assets as of January 1, 2002, indicated that no impairment of values existed at that date. Acquired goodwill and other intangible assets at June 30, 2002 are detailed as follows:

Aggregate amortization expense for the period ended June 30, 2002 was $10,471. Aggregate amortization expense estimated for the years ended December 31, 2002 through 2006 is: $18,699, $16,323, $16,323, $16,323 and $16,323, respectively. The following table presents net income and earnings per share as reported and adjusted to exclude tax effected amortization of goodwill that is no longer being amortized.

11 Note K - Recently Passed Legislation On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Act"), which immediately impacts Securities and Exchange Commission registrants, public accounting firms, lawyers and securities analysts. This legislation is the most comprehensive since the passage of the Securities Acts of 1933 and 1934. It has far reaching effects on the standards of integrity for corporate management, board of directors, and executive management. Additional disclosures, certifications and possibly procedures will be required of the Company. We do not expect any material adverse effect on the Company as a result of the passage of this legislation, however, the full scope of the Act has not been determined. The Act provides for additional regulations and requirements of publicly-traded companies which have yet to be issued. 12 FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES June 30, 2002 (Unaudited) 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, 2002, Form 10-Q/A. 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. FINANCIAL CONDITION June 30, 2002, compared to December 31, 2001 Loans Loans comprised the largest single category of the Company's earning assets on June 30, 2002. Loans, net of unearned income and allowance for loan losses, were 74.25% of total assets at June 30, 2002, and 72.29% of total assets at December 31, 2001. Total net loans were $208,365,488 at June 30, 2002, representing a $6,366,197 or 3.15% increase from the December 31, 2001, total of $201,999,391. 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 used to manage the daily cash position of the Company. Investment securities and federal funds sold decreased $8,157,098 from December 31, 2001 to June 30, 2002. Investment securities and federal funds sold at June 30, 2002, were $36,888,318 compared with $45,045,416 at December 31, 2001, reflecting an 18.11% decrease. 13 Asset Quality Between December 31, 2001 and June 30, 2002, the Company experienced an increase in nonperforming assets (defined as nonaccrual loans, loans past due 90 days or more, restructured loans, nonaccruing securities, and other real estate) from $5.664 million to $8.285 million. The ratio of loan loss allowance to total nonperforming assets decreased from .370 to .241, and the ratio of nonperforming loans to total loans decreased from .027 to .026. Deposits Total deposits were $214,122,264 at June 30, 2002, which represented a decreased $903,190 (0.42%) over total deposits of $215,025,454 at year-end 2001. Deposits are the Company's primary source of funds with which to support earning assets. Noninterest bearing deposits increased $2,417,664 or 7.75% from year-end 2001 to June 30, 2002, and interest bearing deposits decreased $3,320,854 (1.81%) from year-end 2001. Long-term Debt At June 30, 2002 and December 31, 2001, the Company had notes payable totaling $33,592,000. Maturities of long-term debt for the years ending December 31 are as follows:

Shareholders' Equity Company shareholders' equity increased $282,150 from December 31, 2001 to June 30, 2002, due to net income of $613,026, the declaration of cash dividends of $647,043, the increase of unrealized gains on securities available-for-sale totaling $273,201, net of deferred tax, and the reissuance of treasury stock of $14,091, and the issuance of common stock of $28,875. Liquidity Management Liquidity is defined as the ability of a company to convert assets into cash or cash equivalents without significant loss. Liquidity management involves maintaining the Bank's ability to meet the day-to-day cash flow requirements of its customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Without proper liquidity management, the Bank would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the production and growth needs of the communities it serves. 14 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 $71.0 million or 34.09% of the total loan portfolio at June 30, 2002, and there are $3.2 million or 8.67% of investment securities maturing within one year. The liability portion of the balance sheet provides liquidity through various customers' interest bearing and noninterest bearing deposit accounts. At June 30, 2002, funds were also available through the purchase of federal funds from correspondent commercial banks from available lines of up to an aggregate of $14,300,000. Each of the Company's subsidiary banks is a member of the Federal Home Loan Bank of Atlanta. Membership provides the Company with additional aggregate lines of credit up to $39,000,000 for liquidity needs. The Company has also established a line of credit under the parent company for $5,000,000 of which $1,500,000 is available. 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 place 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 $21,958,089 at June 30, 2002. Tier II capital components include supplemental capital components such as qualifying allowance for loan losses and qualifying subordinated debt. Tier I capital plus the Tier II capital components are referred to as Total Risk-Based capital and was approximately $23,959,229 at June 30, 2002. 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. 15 RESULTS OF OPERATIONS Six months and three months ended June 30, 2002 and 2001 Summary Net earnings of the Company for the six months ended June 30, 2002, were $613,026 compared to $1,009,485 for the same period in 2001, representing a 39.27% decrease. This decrease was due to a $1,315,419 or 28.07% increase in noninterest expense over the same period in 2001. Management's decision to close a non-profitable branch, coupled with the restructuring of the executive management team, resulting in one time expenses of approximately $731,000 for settlement of contractual obligations and a one time asset write down of $100,871 were the primary reasons for the increase in noninterest expense. These expenses were partially offset by an increase of $788,528 or 17.96% in net interest income and a decline in taxes compared to the same period in 2001. The results for the quarter ended June 30, 2002, bear a strong resemblance to those results reported for the six months ended June 30, 2002. All ratios and trends are quite similar, with the exception of net income, noninterest expense and provision for taxes with the reasons for the variances noted above. 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, 2002, decreased $220,887 or 2.47% from the same period in 2001. Interest income on loans increased $ 252,699 or 3.40% while investment income decreased by $473,586 or 31.80%. The decrease in investment income is a direct result of a decrease of approximately $11 million in the combined average balances of the investment portfolio, interest-bearing deposits, and federal funds sold from the same period of 2001. Interest expense for the six months ended June 30, 2002, decreased $1,009,415 or 22.24% over the corresponding period of 2001. As a result of these factors, net interest income increased $788,528 or 17.96% in the six months ended June 30, 2002, compared to the same period of 2001. Net interest income increased $483,100 during the quarter ended June 30, 2002, as compared to the same period in 2001. A decrease of $657,828 in deposit interest expense, a direct result of lower interest rates from the same period in 2001, is the primary reason for the decline in net interest income for the quarter. 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 $ 13,248 for the six months ended June 30, 2002, compared to $58,184 for the same period of 2001. Charge-offs exceeded recoveries by $108,003 for the six months ended June 30, 2002. The allowance for loan losses as a percent of outstanding loans, net of unearned income, was 0.95% at June 30, 2002, compared to 1.03% at year-end 2001. 16 The provision for loan losses was $13,248 for the three months ended June 30, 2002, compared to $7,477 for the same period in 2001. Noninterest Income Noninterest income for the six months ended June 30, 2002, was $1,638,224 compared to $1,634,370 for the same period of 2001. This 0.24% increase was primarily due to other operations income or $319,887 in the first six months of 2002 as compared to $268,749 in the same period of 2001. Other significant components of noninterest income are as follows: customer service fees increased $14,375, insurance commissions increased $22,281 or 3.33% and gains on the sale of securities decreased $83,940. Noninterest income decreased by $20,332 or 2.52% for the quarter ended June 30, 2002, compared to the same period in 2001. The decline in noninterest income can be attributed to a $30,349 insurance claim received in the second quarter of 2001 for the reimbursement of legal fees paid in 2000. Noninterest Expenses Noninterest expenses for the six months ended June 30, 2002, were $1,315,419, reflecting a 28.07% increase over the same period of 2001. The primary components of noninterest expenses are salaries and employee benefits, which increased to $3,282,079 for the six months ended June 30, 2002, 33.88% higher than in the same period of 2001. Occupancy costs increased $168,410 and other operating expenses increased $316,397. Noninterest expenses rose $1,136,686 or 48.33 % for the three months ended June 30, 2002, compared to the same period in 2001. The escalation in expenses is attributable in a large part to the one time asset write down of $100,871, from the closing of a nonprofitable branch, and the additional salary expenses, resulting from contractual obligations. Income Taxes The Company attempts to maximize its net income through active tax planning. The provision for income taxes of $189,085 for the six months ended June 30, 2002, decreased $81,642, compared to the same period of 2001, due to the $396,459 decline in net income. Taxes as a percent of earnings increased from 21.15% to 23.57%. The increase in the company's effective tax rate is due to a decrease of $236,532 or 49.15% in nontaxable security income compare to the same period of 2001. The effective tax rate of approximately 24% is less than the statutory rate principally because of the effect of tax-exempt interest income. Recently Issued Accounting Standards In September 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125. While SFAS No. 140 carries over most of the provisions of SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, it provides new standards for reporting financial assets transferred as collateral and new standards for the derecognition of financial assets, in particular transactions involving the use of special purpose entities. SFAS No. 140 also prescribes additional disclosures for collateral 17 transactions and for securitization transactions accounted for as sales. The new collateral standards and disclosure requirements are effective for fiscal years ending after December 15, 2000, while the new standards for the derecognition of financial assets are effective for transfers made after March 31, 2001. The adoption of this statement did not have a material effect on the Company's consolidated financial statements. In June 2001, the FASB issued SFAS No. 141, Business Combinations. This statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, Business Combinations, and SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations in the scope of this statement are to be accounted for using one method, the purchase method. Prior to the issuance of this statement, subject to certain criteria, business combinations were accounted for using one of two methods, the pooling-of-interests method or the purchase method. The two methods produced dramatically different financial statement results. The single-method approach used in this statement reflects the conclusion that virtually all business combinations are acquisitions and, thus, all business combinations should be accounted for in the same way that other asset acquisitions are accounted for based on the values exchanged. Expanded and revised guidance is provided related to the allocation of the purchase price to goodwill and other intangibles arising from the business combination. The provisions of this statement apply to all business combinations initiated after June 30, 2002. The adoption of this statement is not expected to have a material effect on the Company's consolidated financial statements. Also in June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It also provides new standards for how these intangible assets should be accounted for after they have been initially recognized in the financial statements. The major changes required by this Statement relate to the discontinuance of the accounting practice of amortizing or expensing intangibles ratably over a prescribed time period. The new guidance requires that goodwill and certain other intangibles be tested for impairment at least annually by comparing the fair values of those assets with their recorded amounts. Additional disclosure requirements are also provided. The provisions of this statement are required to be applied starting with fiscal years beginning after December 15, 2001. The adoption of this statement is not expected to have a material effect on the Company's consolidated financial statements. For the current impact of this statement see Note J to the consolidated financial statements. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of this statement is not expected to have a material effect on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of 18 Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that opinion). This statement also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The major changes resulting from this statement relate to the establishment of a single method for the recognition of impairment losses on long-lived assets to be held and used whether from discontinuance of a business segment or otherwise. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2001. The adoption of this statement is not expected to have a material effect on the Company's consolidated financial statements. In December 2001, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others. This statement reconciles and conforms the accounting and financial reporting provisions for similar transactions as applied to different entities within the financial services industry. It eliminates differences in disclosure practices where not warranted and should provide greater consistency in reporting by entities in the financial services industry. This statement is effective for annual and interim financial statements issued for fiscal years beginning after December 15, 2001. The adoption of SOP 01-6 is not expected to have a material effect on the Company's consolidated financial statements. In December 2001, the Auditing Standards Board issued SAS No. 95, Generally Accepted Auditing Standards. This statement supersedes Generally Accepted Auditing Standards of SAS No. 1 and generally provides additional guidance to the independent auditor in the conduct of an audit engagement, primarily by addressing authoritative and nonauthoritative publications for audit consideration and guidance. This SAS is effective for audits of financial statements for periods beginning on or after December 15, 2001. In January 2002, the Auditing Standards Board issued SAS No. 96, Audit Documentation. This statement supersedes SAS No. 41, Working Papers and amends SAS No. 47, Audit Risk and Materiality in Conducting an Audit, SAS No. 56, Analytical Procedures and SAS No. 59, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern. This statement provides revised guidance to the independent auditor as to the type, purpose and requirements of audit documentation. This SAS is effective for audits of financial statements for periods beginning on or after May 15, 2002. The impact of SAS No. 95 and SAS No. 96 on the audit of the Company's consolidated financial statements resulting from the issuance of these auditing standards is not expected to be material. Recently Passed Legislation On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Act"), which immediately impacts Securities and Exchange Commission registrants, public accounting firms, lawyers and securities analysts. This legislation is the most comprehensive since the passage of the Securities Acts of 1933 and 1934. It has far reaching effects on the standards of integrity for corporate management, board of directors, and executive management. Additional disclosures, certifications and possibly procedures will be required of the Company. We do not expect any material adverse effect on the Company as a result of the passage of this legislation, however, the full scope of the Act has not been determined. The Act provides for additional regulations and requirements of publicly-traded companies which have yet to be issued. 19 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. The Bank's primary risk is interest rate risk. The primary objective of Asset/Liability Management at the Bank 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 three years. The Bank's Asset/Liability Management policy requires cumulative gap (the difference between rate sensitive asset and rate sensitive liabilities) to total asset to stay within a +/-20%. At June 30, 2002, the Bank's cumulative gap is within this range through a five-year time frame with the one-year cumulative gap at -14.16%, the two-year at -11.97% and the three-year at -4.59%. The Bank has not experienced a high level of volatility in its net interest margin 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 as immediately repricing. 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. The Bank 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 The Bank'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. 20 PART 2. OTHER INFORMATION Item 1. Legal Proceedings The Company and its subsidiaries are defendants in legal proceedings arising in the ordinary course of business. In the opinion of management, based on review and consultation with legal counsel, the outcome of any litigation presently pending is not anticipated to have a material adverse effect on the Company's consolidated financial condition or results of operations. Item 4. Submission of Matters to a Vote of Security Holders On May 21, 2002, 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) Jerry L. Fielding, (e) Charles M. Reeves, Jr., (f) Steven E. Sprayberry, (g) Raymond C. Styres, (h) Steven R. Townson, (i) Barry D. Vaughn, (j) 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 & Morgan, P.C. as the Company's auditors for the 2002 fiscal year. The number of votes for each of the above is summarized in the table below.

21 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 11 - Statement Re: Computation of Earnings per Share (b) Reports on Form 8-K On June 12, 2002, Frontier filed a Form 8-K with the Securities and Exchange Commission disclosing the resignation, and related financial information, of Harry I. Brown, Jr. from his position as Chairman of the Board of Directors of Frontier National Corporation. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRONTIER NATIONAL CORPORATION By: /s/ Steven R. Townson August 21, 2002 --------------------------- --------------------- Steven R. Townson Chief Executive Officer, President and Chief Financial Officer 23 Exhibit 11 FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE The following tabulation presents the calculation of basic and diluted earnings per common share for the three-month and six-month periods ended June 30, 2002 and 2001.

FRONTIER NATIONAL CORP 10-Q/A