10-K 1 d10k.txt FORM 10-K FOR FISCAL YEAR ENDED 12/31/2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-K ------------ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2001 Commission File No. 000-24853 FRONTIER NATIONAL CORPORATION ----------------------------- (Exact name of registrant as specified in its charter) Alabama 72-1355228 ------------- ------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 43 North Broadway Sylacauga, Alabama 35150 --------------------------------------- (Address of principal executive offices) (256) 249-0341 --------------------------------------- (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 --------------------- ----------------------- None None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.001 Par Value ------------------------------- (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 19, 2002 the aggregate market value of voting stock held by non-affiliates was $19,453,056. Indicate the number of shares outstanding of the registrant's class of common stock, as of the latest practicable date. Class Outstanding at March 19, 2002 ---------------------------------------- ---------------------------------- Common Stock, $.001 Par Value 3,437,724 Documents Incorporated by Reference Part of 10-K in which incorporated ----------------------------------------- ---------------------------------- Proxy Statement for 2002 annual meeting Part III FRONTIER NATIONAL CORPORATION 2001 Form 10-K Annual Report TABLE OF CONTENTS

1 PART I ITEM 1 - BUSINESS Frontier National Corporation, an Alabama corporation ("Frontier" or the "Company") was organized as a bank holding company under the Federal Bank Holding Company Act of 1956, as amended in 1981 (the "BHCA"), and the bank holding company laws of Alabama in 1997. Frontier provides, through its commercial bank subsidiaries described below, hereinafter referred to as "Banks", banking services to individuals and businesses in Central Alabama and West Central Georgia. Frontier's executive offices are located at 43 North Broadway, Sylacauga, Alabama 35150. As a registered bank holding company, Frontier and its subsidiaries are subject to applicable provisions of the National Bank Act, the BHCA and the Alabama Interstate and International Banking Act, as well as to the supervision by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency ("OCC"), the Federal Deposit Insurance Corporation ("FDIC") and the State of Alabama Insurance Department. Frontier's primary business as a holding company is to manage the business and affairs of the Banks. The banks provide a broad range of retail and commercial banking services to its customers, including checking, savings, negotiable order of withdrawal ("NOW") and money market accounts and time deposits of various types; loans for business, real estate, personal uses, home improvement and automobiles, credit cards; letters of credit; discount brokerage services, individual retirement accounts ("IRA's"); safe deposit box rentals; bank money orders; and electronic funds transfer services, including wire transfer and automated teller machines. Frontier has decentralized certain facets of its management responsibilities; it maintains efficient centralized operating systems. As a result, corporate policy, strategy and certain administrative policies are established by Frontier's board of directors, while community-specific marketing decisions are made primarily by each bank to allow it to respond to needs and demands of the their own markets. Data processing functions are centralized in Frontier National Bank's data processing division located in Sylacauga, Alabama. This allows the Banks to focus on providing personalized services and products to their customers to meet the needs and demands of the communities they serve. Through its financial services subsidiaries, the Company is able to offer its customers credit life, accident and health insurance products and act as agent for larger carriers of other types of insurance. As a bank holding company, Frontier performs audit function, human resources, other common functions, and provides certain management services for its subsidiaries. BUSINESS COMBINATIONS The growth of the Company and its desire to be competitive in offering diverse services and convenient locations has resulted in the merger and acquisition of other businesses and financial institutions over the past years. The following is a description of the acquisitions during the previous five years. In December 1997, Frontier Finance Company, Inc. purchased the loans receivable and furniture and fixtures of Hometown Financial Services, Inc. for $1,560,257 representing their fair values at the date of acquisition. In August 1998, Valley National Corporation ("VNC") and subsidiary, Valley National Bank, Lanett, Alabama merged with and into the Company through exchange of stock. Additional shares of 2 1,817,910 were issued to facilitate the transaction. The fair value of the transaction was $8.6 million, resulting in a one-time charge against earnings of approximately $80,000. In November 1998, Frontier Financial Services, Inc. purchased two insurance agencies, Brown Insurance Agency and Wright-Sprayberry, Inc. The acquisition of Brown Insurance Agency was accounted for as an asset purchase of $344,175, whereas, the acquisition of Wright-Sprayberry Inc. was effected through the issuance of 49,337 shares of Company stock valued at approximately $987,000. In April 1999, Frontier Financial Services, Inc. purchased the assets of Lawrence-Jones Insurance and Real Estate Agency, Inc. at a fair value of $136,700. In August 2001, Frontier National Bank, Sylacauga purchased selected assets and liabilities of First Bank of Childersburg. The fair value of the assets acquired was $33,310,000. The purchase price was in the form of 58,667 shares of Series A preferred stock of the Company with a stated minimum value of $704,000 and the assumption of liabilities. Allocated goodwill resulting from the transaction was $704,000. All of the above transactions, with the exception of the Wright-Sprayberry, Inc. acquisition, were accounted for under the purchase method of accounting, whereby the financial operations of each acquired entity have not been reflected in the Company's financial statements prior to the date of acquisition. The Wright-Sprayberry, Inc. acquisition was accounted for by the pooling-of-interests method of accounting. The results of operations of Wright-Sprayberry, Inc. prior to the acquisition have also not been included since the effect was not material. EMPLOYEES As of December 31, 2001, Frontier and its subsidiaries employed approximately 153 individuals of which approximately 139 were full-time employees. A collective bargaining unit does not represent the employees. Frontier believes its relationship with its employees to be good. SUBSIDIARIES The following is a list of direct and indirect subsidiaries of Frontier:

Both Banks offer traditional loan and deposit services discussed further in the Annual Report on Form 10-K, the finance company offers sub prime lending, and the financial services company offers insurance and discount brokerage products. The reinsurance company underwrites insurance subject to maximum risk limits and the acquisition company was formed to acquire and provide collection and management services for certain problem loans. The Banks maintain correspondent relationships with 3 other commercial banks and the Federal Home Loan Bank of Atlanta. The principal correspondent banks are National Bank of Commerce in Birmingham, Alabama and the Bankers Bank of Atlanta, Georgia. MARKET AREA AND COMPETITION Frontier's primary market are located in East Central Alabama and West Central Georgia. The Company's lead bank is located in downtown Sylacauga, Alabama, with branches located in Childersburg, Vincent and Chelsea, Alabama. The Lanett Bank has branches in Lanett, Valley and Auburn, Alabama. The two banks operate a total of eight facilities located in these cities. Frontier National Bank in Lanett has gained regulatory approved to relocate the main office to LaGrange, Ga. Upon the completion of this relocation, future plans include expansion along the west side of Interstate 85 to Atlanta and north along the Interstate 75 corridor in and around the suburbs of Atlanta, Ga. The Company's banking facilities are located in communities whose economies are based primarily on manufacturing and light industry. Textiles, telecommunications and real estate development are among the leading manufacturing industries in Frontier's market areas. The banking industry in Alabama and Georgia markets are highly competitive. Intense market demands, economic pressures, volatile interest rates and customer awareness have forced banks to diversify their services and become more cost effective; both Banks face strong competition in attracting deposits and making loans. Competition for loans comes from other financial intermediaries within the market area and have caused the Banks to compete for loan originations through the interest rates and loan fees they charge and the efficiency and quality of services they provide. Competition is affected by the general availability of funds to lend, local economic conditions, current interest rate levels and other factors that are not predictable such as event risk. Management expects that competition will become more intense in the future due to the change in Federal and State laws and regulations and the addition of other non-banking competitors entering our market. 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 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 BHCA and of the other acts described herein is qualified in its entirety by express reference to each of the particular acts. 4 Bank Holding Company Act of 1956. Frontier is a bank holding company within the meaning of the BHCA, 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 BHCA. The Board may also make examinations of Frontier and its subsidiaries. The BHCA 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 BHCA 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 BHCA 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 prohibiting interstate branching within that state. Alabama did not adopt legislation to "opt out" of the interstate branching provisions. Frontier National Bank, Lanett and Frontier National Bank, 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 5 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. ("FDICIA") Both 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 and regulations limit the amount of dividends that can be paid by both 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 Federal Reserve Board ("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 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 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 6 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. [sec][sec] 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 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. 7 ITEM 1 - STATISTICAL DISCLOSURE Page(s) ------- Loan Portfolio.......................................................... 14 Selected Loan Maturity and Interest Rate Sensitivity.................... 15 Securities Portfolio.................................................... 16 Securities Portfolio Maturity Schedule.................................. 16 Maturities of Large Time Deposits....................................... 18 Maturities of Long-Term Debt............................................ 19 Return on Equity and Assets............................................. 19 Capital Adequacy Ratios................................................. 20 Interest Rate Sensitivity Analysis...................................... 22 Consolidated Average Balances, Interest Income/Expense and Yields/Rates........................................................ 25 Rate/Volume Variance Analysis........................................... 26 Summary of Loan Loss Experience......................................... 28 Allocation of Loan Loss Reserve......................................... 28 Nonperforming Assets.................................................... 29 Noninterest Income...................................................... 30 Noninterest Expenses.................................................... 31 8 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 North Broadway, Sylacauga, Alabama. The Banks own various offices and facilities in Alabama. Frontier National Bank, Lanett, Alabama, formerly known as Valley National Bank, operates in one location in Lanett, Alabama, two in Valley, Alabama and a branch in Auburn, Alabama; Frontier National Bank, Sylacauga, Alabama formerly known as First National Bank in Sylacauga, operates three locations in Sylacauga, Alabama, two of which are banking facilities, one an insurance office, a branch in Childersburg, Alabama, a branch in Vincent, Alabama, a branch in Chelsea, Alabama, and an insurance office in Ashland, Alabama. Additionally, the bank has a sub-prime lending facility in Gadsden, Alabama. The Banks own ten of these locations and lease the other three from other entities. Frontier National Bank, Sylacauga has purchased land in Chelsea, Alabama and Frontier National Bank, Lanett has purchased land in LaGrange, Georgia. All land purchases are for the purpose of building a facility at each location. Frontier National Bank, Sylacauga also provides data processing for itself and all other subsidiaries of the corporation and maintains an office in Sylacauga, Alabama. Frontier maintains a corporate office condo in Sylacauga, Alabama. The facility in LaGrange is scheduled for completion by mid-summer 2002. The new facility for the Chelsea Branch is scheduled for completion by mid-fall of 2002. All properties are owned by Frontier or the Banks and are unencumbered. OFFICES USED BY -------------------------------------------------------------------------------- 110 West Spring St., Sylacauga, Alabama Frontier National Corporation 16712 Highway 280, Chelsea, Alabama Frontier National Bank, Sylacauga 47 North Main St., Vincent, Alabama Frontier National Bank, Sylacauga 120 8th Ave. SW, Childersburg, Alabama Frontier National Bank, Sylacauga, Frontier Financial Services, Inc. 135 James Payton Blvd., Sylacauga, Alabama Frontier National Bank, Sylacauga 43 North Broadway, Sylacauga, Alabama Frontier National Bank, Sylacauga Frontier National Corporation, Frontier Financial Services, Inc. 1678 South College St., Auburn, Alabama Frontier National Bank, Lanett, Frontier Financial Services, Inc. 752 Narrows Point Cir., Chelsea, Alabama Future Facility, Frontier National Bank, Sylacauga Frontier National Corporation, Frontier Financial Services, Inc. 3501 20th Ave., Valley, Alabama Frontier National Bank, Lanett 3216 20th Ave., Valley, Alabama Frontier National Bank, Lanett 1011 North Lanier Ave., Lanett, Alabama Frontier National Bank, Lanett 401 Vernon St., LaGrange, Georgia Future Facility, Frontier National Bank, Lanett, 106 North Broadway, Sylacauga, Alabama Frontier Financial Services, Inc. 9 First Street North, Ashland, Alabama Frontier Financial Services, Inc. 137 James Payton Blvd., Sylacauga, Alabama Frontier National Bank, Sylacauga 3032 East Meigan Blvd., Gadsden, Alabama Frontier Finance Company, Inc. 9 ITEM 3 - LEGAL PROCEEDINGS The Company and its subsidiaries are defendants in legal proceedings arising in the ordinary course of business. Some of these proceedings which relate to lending, collections, servicing, investment, insurance and other activities seek substantial sums as damages. 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 statements or results of operations. 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 2001. [The remainder of this page intentionally left blank] 10 PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Class A Common Stock, $.001 par value per share (the "Common Stock") is traded on the NASD Over-the-Counter Bulletin Board under the symbol "FIEC." Trading of the Common Stock commenced in October 1998. The Common Stock has traded at prices between $9.25 and $13.63 per share during 2001. 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. The prices reflect inter-dealer prices without retail markup, markdown, or commission and may not represent actual transactions. High Low Dividend ---------- ---------- --------- 2001: First Quarter.................... $ 13.63 $ 12.25 $ 0.2400 Second Quarter................... 13.00 11.25 0.1275 Third Quarter.................... 12.20 9.50 0.1275 Fourth Quarter................... 12.10 9.25 0.0925 2000: First Quarter.................... $ 14.50 $ 10.00 $ 0.1275 Second Quarter................... 13.00 10.00 0.1275 Third Quarter.................... 13.00 9.00 0.1275 Fourth Quarter................... 12.88 9.00 0.1275 As of March 19, 2002, the Common Stock was held by approximately 296 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 $.59 per share in 2001 and $.51 per share in 2000. 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 Banks, is subject to certain restrictions on the payment of dividends. See "Note 20 - 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 2001. 11 ITEM 6 - SELECTED FINANCIAL DATA The following table presents on a historical basis selected financial data and ratios for the Company.

12 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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 2001 was $2,175,910, an 18.0% decrease from 2000 net income. Net income for 2000 was $2,653,085, a 6.9% increase from 1999 net income. Net income for 1999 was $2,482,940, a 120.15% increase from 1998 net income. Net income per common share for 2001 was $0.64, a decrease of 17.9% over 2000. Net income per common share for 2000 was $0.78, an increase of 8.3% over 1999. Net income per common share for 1999 was 84.62% higher than in 1998. The decrease in net income from 2000 to 2001 is due to increased interest expense on interest bearing liabilities coupled with rising salary and benefits expense and other operating expense partially offset by a decline in taxes. The increase in interest expense is a direct result from an increase of approximately $30 million or 19.50% in interest-bearing deposits and approximately $8 million or 32% in borrowing from the Federal Home Loan Bank over 2000. Of the increase in interest-bearing deposits, $26.2 million resulted from the branch acquisition and $3.8 million from growth. The increase in net income from 1999 to 2000 is due to increased loan interest income coupled with a reduction in the annual loan loss provision. 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 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 and Georgia 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 2001 was approximately $222,291,000, representing an increase of approximately $14,666,000 or 7.0% over 2000. The rise can be attributed to the acquisition of approximately $31 million of earning assets from First Bank of Childersburg in August of 2001. Average earning assets for the year-end 2000 was approximately $208,326,000, representing an increase of approximately $9,200,000 or 4.62% over 1999. The rise can be attributed to the steadily increasing loan portfolio. 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 August 1998 business combination between the Company and VNC of Lanett, Alabama. 13 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.

LOAN PORTFOLIO The Company's average loans increased approximately $16,151,000 or 10.3% from 2000 to 2001. The Company's average loans increased approximately $22,291,000 or 16.58% from 1999 to 2000. Average loans for 1999 were $134,416,000, an increase of 25.16% over $107,393,000 in average loans for 1998. Loan growth for 2001 was funded through the acquisition of deposits from First Bank of Childersburg and additional borrowing from the Federal Home Loan Bank. Loan growth for 2000 was funded through a mixture of borrowed funds and customer deposits. Loan growth for 1999 was funded through customer deposits. The Loan Portfolio table presents the classifications of loans by major category at December 31, 2001, and for each of the preceding four years. Loan Portfolio

14 The following table sets forth maturities of selected categories of the loan portfolio and the related sensitivity to interest rate changes. Selected Loan Maturity and Interest Rate Sensitivity

SECURITIES PORTFOLIO The Company's securities portfolio decreased by 19.0% or $8,497,808 from 2000 to 2001 and decreased by 11.27% or $5,674,563 from 1999 to 2000 to reposition the Company's interest sensitivity risk and aid in the funding of loan demand. 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 2001, the unrealized net gains in the "Available-for-sale" portfolio amounted to $261,410. At year-end 2000, unrealized net gains in the "Available-for-sale" portfolio amounted to $123,587. At year-end 1999, unrealized net losses in the "Available-for-sale" portfolio amounted to $2,708,403. 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 $173,000 of unrealized gain was included in shareholders' equity related to the available-for-sale securities as of December 31, 2001. At year-end 2001, obligations of the United States Government or its agencies, obligations of states and political subdivisions, and mortgage-backed securities represented approximately 85.86% of the total securities portfolio. 15 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

Security Portfolio Maturity Schedule

There were no securities held by the Company of which the aggregate value on December 31, 2001 and 2000 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.) 16 DEPOSITS AND BORROWED FUNDS The Company's average deposits rose approximately $15,973,000 or 9.1% from 2000 to 2001. Average deposits rose approximately $3,371,000 or 1.95% from 1999 to 2000. Average deposits rose approximately $44,977,000 or 35.21% from 1998 to 1999. Total deposits increased $37,055,000 or 20.8% from year-end 2000 to year-end 2001. From year-end 1999 to year-end 2000 total deposits increased $5,543,000 or 3.21%. From year-end 1998 to year-end 1999, total deposits decreased $948,000 or 0.55%. From 2000 to 2001, interest-bearing transaction deposits increased approximately $4,686,000 or 15.5%, savings deposits increased approximately $10,339,000 or 47.0%, other time deposits of less than $100,000 increased approximately $8,644,000 or 12.8%, and time deposits of $100,000 or more increased approximately $6,274,000 or 18.4%. From 1999 to 2000, interest-bearing transaction deposits increased approximately $749,000 or 2.54%, savings deposits decreased approximately $2,578,000 or 10.44%, other time deposits of less than $100,000 decreased approximately $202,000 or 0.30%, and time deposits of $100,000 or more increased approximately $7,961,000 or 30.42%. 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%. The following table sets forth the Company's deposit structure at December 31, in each of the last three years.

17 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:

At December 31, 2001, time deposits greater than $100,000 aggregated approximately $40,404,000. The following table indicates, as of December 31, 2001, 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.............................. $ 17,134 Over three through six months..................... 16,296 Over six through twelve months.................... 6,334 Over twelve months................................ 640 ------------- Total........................................ $ 40,404 ============= Borrowed funds consist primarily of long-term debt. The Subsidiary Banks had $14,100,000 in available lines to purchase Federal Funds, on an unsecured basis, from commercial banks. At December 31, 2001, the Subsidiary Banks had $500,000 advanced against these lines. The Subsidiary Banks were approved to borrow up to $56,240,800 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 $21,648,800 at year-end 2001. Funds are also available through an arrangement through the Federal Reserve Discount window. At December 31, 2001, no funds were advanced on the window. Long-term debt consisted of various commitments with scheduled maturities from one to fifteen years. 18 The following table sets forth expected debt service for the next five years based on interest rates and repayment provisions as of December 31, 2001.

CAPITAL RESOURCES Shareholders' equity increased $1,104,319 or 4.8% to $24,074,864 as of December 31, 2001. The increase in shareholders' equity was attributable to the following reasons: net change in unrealized gains or losses on available-for-sale securities; issuance of treasury stock; issuance of preferred stock in the business combination; issuance of stock under stock option agreements; and net income minus cash dividends paid. Shareholders' equity increased $2,779,360 or 13.77% to $22,970,545 as of December 31, 2000, and shareholders' equity decreased $2,297,053 or 10.21% to $20,191,185 as of December 31, 1999, compared with $22,488,238 at the end of 1998. During 2001, the Company issued 58,667 shares of preferred stock, issued 5,000 shares of common stock and reissued 10,771 shares of treasury stock; during 2000, the Company purchased 3,000 shares of treasury stock and reissued 10,596 shares of treasury stock; and during 1999, the Company purchased 64,499 shares of treasury stock and reissued 5,359 shares of treasury stock. 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. The table below summarizes these and other key ratios for the Company for each of the last three years.

19 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 table below illustrates the Company's regulatory capital ratios under federal guidelines at December 31, 2001, 2000 and 1999: Capital Adequacy Ratios

On December 31, 2001, 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. 20 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 $13,600,000 of federal funds available, a $56,240,800 line of credit from The Federal Home Loan Bank of which $21,648,800 was available and unused, and a line of credit at a correspondent bank of which $1,500,000 was available and unused. 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 remainder of this page intentionally left blank] 21 The following table shows interest sensitivity gaps for different intervals as of December 31, 2001. Interest Rate Sensitivity Analysis

/(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 are assumed to be subject to movement into other deposit instruments in equal amounts during the 0-30 day period, 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 $18 million. For the first 365 days, interest-bearing liabilities exceed earning assets by approximately $72 million. During this one-year time frame, 83.4% of all interest-bearing liabilities will reprice compared to 46.2% of all interest-earning assets. Changes in the mix of 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 22 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 decreased $307,000 or 3.1% to $9,716,000 from 2000 to 2001. The decrease in net interest income from 2000 to 2001 is attributable to the following reasons; an increase in interest expense; an approximately $9 million or 36.51% decrease in the average volume on tax exempt securities. The decrease in volume resulted in a decrease of $522,000 or 29.47% in tax exempt interest income. The increase in interest expense and the decrease in interest income on tax exempt securities were partially offset by an increase in loan interest income. Net interest income increased $222,000 or 2.27% to $10,023,000 from 1999 to 2000 and increased $1,761,000 or 21.90% to $9,801,000 from 1998 to 1999. The increase in the net interest income from 1999 to 2000 and 1998 to 1999 is primarily due to increases in total loans. Interest income was $18,711,000 in 2001, which represented an increase of $100,000 or 0.5% over 2000. Interest income was $18,611,000 in 2000, which represented an increase of $1,343,000 or 7.78% over 1999 and $17,268,000 in 1999, which represented an increase of $2,934,000 or 20.46% over 1998. During 2001, loan interest income was $15,501,000 an increase of $572,000 or 3.8% from 2000. During 2000, loan interest income was $14,929,000 an increase of $2,098,000 or 16.35% from 1999. In 1999, loan interest income increased $1,418,000 to $12,831,000 from $11,413,000 in 1998. Securities interest income decreased $592,000 or 16.9% from 2000 to 2001 and ended the year at $2,917,000. Securities interest income decreased $226,000 or 6.05% from 1999 to 2000 and ended the year at $3,509,000. Interest income on securities increased $1,309,000 or 53.96% from 1998 to 1999. The changes in securities income were attributable to the average amounts of securities owned in each year. The average yields did not change significantly from year to year. Total interest expense increased by $407,000 or 4.7% in 2001 from 2000 and increased by $1,121,000 or 15.0% in 2000 from 1999. The interest expense increase from 1999 to 2000 was due equally to increased volume and an approximate 50 basis point increase in average rates paid on total interest-bearing liabilities, while the increase from 2000 to 2001 was attributable to an increase of approximately $21.7 million in the average volume of interest-bearing liabilities offset with an approximate 33 basis point decrease in average rates paid on total interest-bearing liabilities. Total interest expense reported at year-end 1999 was $7,467,000, an increase of $1,173,000 or 18.64% over 1998. The increase from 1998 to 1999 is primarily 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 45 basis points in 2001 from 4.81% at year-end 2000 to 4.36% at year-end 2001; the net interest margin decreased 11 basis points in 2000 from 4.92% at year-end 1999 to 4.81% at year-end 2000; and the net interest margin decreased 36 basis points in 1999 to 4.92%. The net cost of funds, defined as interest expense divided by average-earning assets, decreased 9 basis points to 4.03% at year-end 2001; increased 37 basis points to 4.12% at year-end 2000; and declined to 3.75% in 1999 from 4.14% in 1998. The yield on earning assets 23 fell 54 basis points to 8.39% at year-end 2001; rose 26 basis points to 8.93% at year-end 2000; and declined 75 basis points to 8.67% in 1999 from 9.42% in 1998. 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 2000 to 2001, the interest rate spread decreased 19 basis points to 3.87%; from 1999 to 2000, the interest rate spread decreased 19 basis points to 4.06%; and from 1998 to 1999, the interest rate spread decreased 31 basis points to 4.25%. 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] 24 Consolidated Average Balances, Interest Income/Expense and Yields/Rates Taxable Equivalent Basis

__________________________ /(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. 25 Rate/Volume Variance Analysis Taxable Equivalent Basis

/(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. 26 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 $2,095,895 for December 31, 2001 and $1,711,665 for December 31, 2000 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] 27 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, 2001. Summary of Loan Loss Experience

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

28 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 $5,664,000, $2,319,000, $1,605,000, $1,145,000 and $1,748,000 as of December 31, 2001, 2000, 1999, 1998 and 1997, respectively. The following table presents information concerning outstanding balances of nonperforming assets at December 31, 2001, 2000, 1999, 1998 and 1997. Nonperforming Assets

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. 29 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 $301,000 or 8.8% for the year ended December 31, 2001 as compared to 2000. Total noninterest income increased by $313,000 or 10.09% for the year ended December 31, 2000 as compared to 1999. During 2001, income derived from customer service fees decreased $115,000 or 8.1% to $1,301,000. During 2000, income derived from customer service fees declined $7,000 or 0.49% to $1,416,000. Nonrecurring items of noninterest income include sales of securities. Included in noninterest income are gains (losses) on sales of securities of $462,000, $(1,000), and $39,000 in 2001, 2000, and 1999. In 2001, the Company had $301,000 of income from earnings in cash surrender value of various life insurance policies compared to $285,000 for 2000 and $265,000 for 1999. The table below sets forth the Company's noninterest income for the periods indicated. Noninterest Income

NONINTEREST EXPENSES From 2000 to 2001, noninterest expense increased $910,000 or 10.2%; from 1999 to 2000, noninterest expense increased $358,000 or 41.16%. A $486,000 or 10.7% increase in salaries and benefits was noted from 2000 to 2001. A $179,000 or 4.10% increase in salaries and benefits was noted from 1999 to 2000. The rise in salaries and benefits for 2001 is a direct result of annual salary increases and staffing for three additional locations added during 2001. The increase in 1999 was mostly attributable to the merger during the third quarter of 1998, while the lesser 2000 increase can be attributed to the Company's maturing and experienced personnel. For 2001, occupancy and equipment expense was $1,533,000, an increase of $210,000 or 15.8% over 2000. In 2000, occupancy and equipment expense was $1,323,000, an increase of $10,000 or 0.8% over 1999. The increase in 2001 can be attributed primarily to an increase of $181,569 or 28.65% in depreciation expense resulting from additional property and equipment added during the year. The 2000 and 1999 expense increases were also a result of additional property and equipment being added during those years. 30 Other noninterest expenses increased at normal yet comparable rates from 1999 to 2000 and also realized slight increases due to the normal cost of operating a business. The table below sets forth the Company's noninterest expenses for the periods indicated. Noninterest Expenses

INCOME TAXES Income tax expense decreased $193,538 or 22.8%, to $655,460 for the year ended December 31, 2001, and increased $155,000 or 22.3%, to $849,000 for the year ended December 31, 2000. The effective tax rate as a percentage of pretax income was 24.2% in 2000 and 21.8% in 1999. The statutory federal rate was 34.0% during 2001, 2000, and 1999. The lower effective tax rate is primarily attributable to the Company's investment in tax-advantaged assets. There is no current or pending tax legislation of which management is aware that if passed would have any material effect on the consolidated financial statements. For further information concerning the provision for income taxes, refer to Note 15, 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. 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 31 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. At December 31, 2001, Frontier's cumulative gap is (30%) 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 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 a 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 ------------ ------------ December 31, 2001 Projected change in: Interest income.................................. (4.81)% 4.68% Interest expense................................. (2.40) 5.33 Net interest income.............................. (6.42) 4.25 SEGMENT INFORMATION 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. Note 22 to the consolidated financial statements of the Company included herein, provide financial details of the Company's segments related to the previous three years. OTHER ACCOUNTING ISSUES In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. 32 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. In June 2000, the Financial Accounting Standards Board also issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of SFAS No. 133. The adoption of SFAS No. 133, as amended by SFAS No. 138 did not have a material impact on the Company's consolidated financial statements. In May 2001, the Auditing Standards Board issued Statement on Auditing Standards ("SAS") No. 94, The Effect of Information Technology on the Auditor's Consideration of Internal Control in a Financial Statement Audit. This statement amends SAS No. 55, Consideration of Internal Control in a Financial Statement Audit, by providing additional guidance related to the understanding by the auditor of an entity's use of information technology relevant to the audit. This auditing standard is effective for audits of financial statements for periods beginning on or after June 1, 2001. The impact on the audit of the Company's consolidated financial statements resulting from the issuance of this auditing standard is not expected to be material. In June 2001, the FASB issued SFAS No. 141, Business Combinations. This statement addresses financial accounting and reporting for business combinations and supersedes ABP Opinion No. 16, Business Combinations, and SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations in the scope of SFAS No. 141 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 produce different financial statement results. The single-method approach used in SFAS No. 141 reflects the conclusion that virtually all business combinations are acquisitions and therefore should be accounted for in the same manner as other asset acquisitions based on the values exchanged. This statement provides expanded and revised guidance related to the allocation of the purchase price to goodwill and other intangibles arising from the business combination. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, which addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. SFAS No. 142 provides new standards for accounting relating to intangible assets after initial recognition in the financial statements. This statement proscribes the accounting practice of amortizing or expensing intangibles ratably over a prescribed period of time and imposes new guidance requiring that goodwill and certain other intangibles be tested for impairment at least annually by comparing fair values of those assets with their recorded amounts. Additional disclosure requirements also are provided. The provisions of SFAS No. 142 are required to be applied in fiscal years beginning after December 15, 2001. The adoption of SFAS No. 141 and SFAS No. 142 are not expected to have a material effect on the Company's 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. 33 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 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. [The remainder of this page intentionally left blank] 34 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

35 [Letterhead of Schauer, Taylor, Cox, Vise & Morgan, P.C.] 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 (an Alabama corporation) and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Frontier National Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Birmingham, Alabama January 25, 2002 Schauer, Taylor, Cox, Vise & Morgan, P.C. 36 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001 and 2000

37 CONSOLIDATED STATEMENTS OF INCOME FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES Years Ended December 31, 2001, 2000, and 1999

See notes to consolidated financial statements 38 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES Years Ended December 31, 2001, 2000, and 1999

See notes to consolidated financial statements 39 CONSOLIDATED STATEMENTS OF CASH FLOWS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES Years Ended December 31, 2001, 2000, and 1999

See notes to consolidated financial statements 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Frontier National Corporation (the "Company"), an Alabama corporation, 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 accounting principles generally accepted in the United States of America 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 and Frontier National Bank, Lanett, Alabama. The Banks operate branches in Talladega, Lee, Chambers and Shelby 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 Finance Company, Inc., a wholly-owned subsidiary of Frontier National Bank, Sylacauga, Alabama, makes small consumer loans and has offices located in Central Alabama. Frontier Acquisition Corporation, a wholly-owned subsidiary of Frontier National Corporation, was formed to provide for the orderly liquidation of problem loans originated by the Company's banking subsidiaries. Frontier Financial Services, 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 Reinsurance, Inc., a wholly-owned subsidiary of Frontier Financial Services, Inc., offers credit life and credit accident and health insurance products for sale. 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, Frontier National Bank, Lanett, Alabama, and Frontier Finance Company, Inc. (referred to herein as the "Bank's"), Frontier Acquisition Corporation, Frontier Financial Services, Inc. and Frontier Reinsurance, Inc. All significant intercompany transactions and balances have been eliminated in consolidation. 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. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral. While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 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 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. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Allowance for Possible Loan Losses ---------------------------------- A loan is considered impaired, based on current information and events, if it is probable that the Company 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. 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 Bank's 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. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 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, 2001, 2000, and 1999. 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 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. Advertising Costs ----------------- The Company's policy is to expense advertising costs as incurred. Advertising expense for the years ended December 31, 2001, 2000 and 1999 amounted to approximately $137,000, $188,000 and $191,000, respectively. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 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 available-for-sale securities, allowance for loan losses, estimated losses on foreclosed real estate and accumulated depreciation for financial and income tax reporting. 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, except Frontier Reinsurance, Inc., 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. 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. 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. 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 401(k) plan allows participants to invest in unrelated mutual funds and Company Common Stock. 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. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Intangibles ----------- Intangibles consist primarily of goodwill associated with the acquisition of banking and insurance operations. Intangibles have been amortized over periods of fifteen years using the straight-line method. As discussed later in this footnote, the adoption of new accounting standards effective January 1, 2002, mandate the discontinuance of periodic amortization and require the Company to measure the recorded goodwill and other intangibles for impairment as of January 1, 2002, and at least annually thereafter. The initial measurement has not been completed, however, no material impact to the Company's consolidated financial statements is anticipated. Off-Balance Sheet Financial Instruments --------------------------------------- In the ordinary course of business the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit, standby letters of credit and insurance benefits contracts. Such financial instruments are recorded in the financial statements when they become payable. The Company, through its subsidiary banks, has available as a source of financing a line of credit of $56,240,800 with the Federal Home Loan Bank of Atlanta of which $21,648,800 was available and unused. The Company also has available as a source of short-term financing the purchase of federal funds from other commercial banks from available lines totaling $14,100,000. In addition, the Company has available as a source of financing a line of credit of $5,000,000 with a correspondent bank of which $1,500,000 was available and unused. Segment Information ------------------- 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 banking units as an operating segment and all insurance related services as an operating segment. Details of segment information are included in Note 22 to these consolidated financial statements. Reclassifications ----------------- Certain amounts in 2000 and 1999 have been reclassified to conform with the 2001 presentation. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Recently Issued Accounting Standards ------------------------------------ In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("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. In June 2000, the Financial Accounting Standards Board also issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of SFAS No. 133. The adoption of SFAS No. 133, as amended by SFAS No. 138 did not have a material impact on the Company's consolidated financial statements. In September 2000, the FASB issued 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 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 May 2001, the Auditing Standards Board issued Statement on Auditing Standards ("SAS") No. 94, The Effect of Information Technology on the Auditor's Consideration of Internal Control in a Financial Statement Audit. This statement amends SAS No. 55, Consideration of Internal Control in a Financial Statement Audit, by providing additional guidance related to the understanding by the auditor of an entity's use of information technology relevant to the audit. This auditing standard is effective for audits of financial statements for periods beginning on or after June 1, 2001. The impact on the audit of the Company's consolidated financial statements resulting from the issuance of this auditing standard is not expected to be material. In June 2001, the FASB issued SFAS No. 141, Business Combinations. This statement addresses financial accounting and reporting for business combinations and supersedes ABP Opinion No. 16, Business Combinations, and SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations in the scope of SFAS No. 141 are to be accounted for using one method, the 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 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 produce different financial statement results. The single-method approach used in SFAS No. 141 reflects the conclusion that virtually all business combinations are acquisitions and therefore should be accounted for in the same manner as other asset acquisitions based on the values exchanged. This statement provides expanded and revised guidance related to the allocation of the purchase price to goodwill and other intangibles arising from the business combination. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, which addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. SFAS No. 142 provides new standards for accounting relating to intangible assets after initial recognition in the financial statements. This statement proscribes the accounting practice of amortizing or expensing intangibles ratably over a prescribed period of time and imposes new guidance requiring that goodwill and certain other intangibles be tested for impairment at least annually by comparing fair values of those assets with their recorded amounts. Additional disclosure requirements also are provided. The provisions of SFAS No. 142 are required to be applied in fiscal years beginning after December 15, 2001. The adoption of SFAS No. 141 and SFAS No. 142 are not expected to have a material effect on the Company's 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 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. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 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. Earnings Per Common Share ------------------------- Basic earnings per common share are computed by dividing earnings available to stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common stock had been converted to common stock, as prescribed by SFAS No. 128, Earnings per Share. All per share amounts included in these financial statements have been retroactively adjusted to reflect the effects of the 3-for-2 stock split which occurred during 1999. The following reconciles the weighted average number of shares outstanding: Years Ended December 31, ----------------------------------------- 2001 2000 1999 ----------- ----------- --------- Weighted average of common shares outstanding................ 3,426,362 3,417,783 3,450,628 Effect of dilutive options.......... 88,252 70,194 34,714 ----------- ----------- --------- Weighted average of common shares outstanding effected for dilution... 3,514,614 3,487,977 3,485,342 =========== =========== ========= 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED In May 1999, the Company issued a 3-for-2 stock split. All per share amounts included in these financial statements have been retroactively adjusted to give effect to the stock split. Comprehensive Income -------------------- Comprehensive income is the total of net income and all other non-owner changes in equity. Items that are to be recognized under accounting standards as components of comprehensive income are displayed in statements of shareholders' equity. In the calculation of comprehensive income, certain reclassification adjustments are made to avoid double counting items that are displayed as part of net income for a period that also had been displayed as part of other comprehensive income in that period or earlier periods. The disclosure of the reclassification amounts and other details of other comprehensive income are as follows:

[The remainder of this page intentionally left blank] 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Statements of Cash Flows ------------------------ The Company includes cash, due from banks and short-term investments as cash equivalents in preparing the consolidated statements of cash flows. The following is supplemental disclosure to the statements of cash flows for the three years ended December 31, 2001.

NOTE 2 - BUSINESS COMBINATIONS On April 30, 1999, Frontier Financial Services, Inc. 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. On August 10, 2001, the Company purchased selected assets and liabilities of First Bank of Childersburg's offices located in Childersburg, Chelsea, and Vincent, Alabama (located in Talladega and Shelby counties). The purchase price was in the form of 58,667 shares of Series A preferred stock of the Company with a stated minimum value of $704,000 and the assumption of certain assets and liabilities representing substantially all the operations of the related branches, including the property and equipment. This transaction added approximately $34 million in assets, including approximately $16 million in loans, and approximately $33 million in deposits. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 2 - BUSINESS COMBINATIONS - CONTINUED During the latter part of 2001 and early 2002, the Company made application and received regulatory approval to merge substantially all of the Alabama operations of Frontier National Bank, Lanett, Alabama into Frontier National Bank, Sylacauga, Alabama and to relocate the main office location of Frontier National Bank, Lanett, Alabama to Georgia. 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 was approximately $1,401,000 and $1,105,000 at December 31, 2001 and 2000, 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, 2001 and 2000 were as follows:

52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 4 - SECURITIES - CONTINUED The contractual maturities of securities available-for-sale at December 31, 2001, 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.

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: 2001 2000 1999 ----------- ---------- ---------- Realized gains................. $ 478,844 $ 76,484 $ 54,018 Realized (losses).............. (17,212) (77,626) (14,995) 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 $1,802,100 and $1,452,100 at December 31, 2001 and 2000, respectively. Securities pledged to secure public funds on deposit and for other purposes as required by law amounted to approximately $22,755,000 and $26,658,000 at December 31, 2001 and 2000, respectively. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 5 - LOANS The Company grants loans to customers primarily in Talladega, Lee, Chambers and Shelby counties of East Central Alabama. The major classifications of loans as of December 31, 2001 and 2000 are as follows:

Information about impaired loans as of and for the years ended December 31 is as follows:

Total nonaccrual loans at December 31, 2001 and 2000 consisted of approximately $5,315,000 and $1,728,000, respectively. For the years ended December 31, 2001 and 2000, 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 $360,000 and $140,000, respectively. The Banks have no commitments to loan additional funds to the borrowers of non-accrual loans. 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 6 - ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for years ended December 31 are as follows:

NOTE 7 - PREMISES AND EQUIPMENT Components of premises and equipment included in the consolidated statements of financial condition at December 31 are as follows: 2001 2000 ------------ ------------ Land and improvements.................... $ 2,914,545 $ 1,905,650 Buildings and improvements............... 7,372,759 5,906,481 Furniture and equipment.................. 7,245,838 6,335,815 Automobiles.............................. 330,582 226,304 Construction in progress................. 38,318 58,295 ------------ ------------ 17,902,042 14,432,545 Accumulated depreciation................. (6,781,955) (5,974,338) ------------ ------------ Premises and equipment, net........... $ 11,120,087 $ 8,458,207 ============ ============ The provision for depreciation charged to occupancy and equipment expense for the years ended December 31, 2001, 2000, and 1999 was $816,197, $633,854, and $554,339, respectively. NOTE 8 - DEPOSITS The aggregate amounts of time deposits of $100,000 or more, including certificates of deposit of $100,000 or more at December 31, 2001 and 2000 were $40,404,000 and $34,130,041. Time deposits of less than $100,000 totaled $75,992,542 and $67,348,223 at December 31, 2001 and 2000, respectively. 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 8 - DEPOSITS - CONTINUED Demand deposits reclassified as loan balances as of December 31, 2001 and 2000 amounted to $259,126 and $88,542, respectively. The maturities of time certificates of deposit and other time deposits issued by the Subsidiary Banks at December 31, 2001, is as follows: Years Ending December 31, ------------------------- 2002................................... $ 97,082,138 2003................................... 13,406,033 2004................................... 3,246,841 2005................................... 1,937,376 2006................................... 724,154 -------------- Total............................... $ 116,396,542 ============== NOTE 9 - SHORT-TERM BORROWINGS Short-term borrowings at December 31, 2001 and 2000 consisted of the following: 2001 2000 ----------- ----------- Securities sold under agreements to repurchase....... $ -- $ 1,900,000 Short-term note payable............................. 3,500,000 -- Term federal funds purchased........................ 500,000 2,000,000 Treasury, tax & loan................................ 418,266 61,078 ----------- ----------- $ 4,418,266 $ 3,961,078 =========== =========== Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. Information concerning securities sold under agreements to repurchase is summarized as follows: 2000 ----------- Average balance during the year.................................. $ 560,929 Average interest rate during the year............................ 6.32% Maximum month-end balance during the year........................ $ 2,000,000 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 9 - SHORT-TERM BORROWINGS - CONTINUED U.S. Government and agency securities underlying the agreements at year end: 2000 ----------- Carrying value........................................ $ 1,989,375 Estimated fair value.................................. 1,989,375 NOTE 10 - LONG-TERM DEBT Long-term debt consisted of the following as of December 31, 2001 and 2000: 2001 2000 ------------ --------------- Federal Home Loan Bank (FHLB) advances.......... $ 33,592,000 $ 25,442,000 ============ =============== The FHLB advances bear interest at rates ranging from 4.38% to 7.67%. The advances are payable at various maturities through April 2014. The notes are secured by all 1 - 4 family residential mortgages held by the Banks. Terms of the notes provide for significant penalties in the event of early repayment. Maturities of long-term debt following December 31, 2001, are as follows: Years Ending December 31, ------------------------- 2002...................................... $ -- 2003...................................... 2,500,000 2004...................................... 500,000 2005...................................... 2,500,000 2006...................................... -- Thereafter................................ 28,092,000 ---------------- Total.................................. $ 33,592,000 ================ NOTE 11 - SHAREHOLDERS EQUITY At December 31, 2001 and 2000 Shareholders' Equity of the Company consisted of the following: Common Stock: At December 31, 2001 10,000,000 shares authorized, 3,502,497 ------------ shares issued and 3,437,724 outstanding with a par value of $0.001 per share. At December 31, 2000 10,000,000 shares authorized, 3,497,497 shares issued and 3,421,953 outstanding with a par value of $0.001 per share. Voting rights equal to one vote per share. 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 11 - SHAREHOLDERS EQUITY - CONTINUED Preferred Stock: At December 31, 2001, 200,000 shares authorized, 58,667 shares -------------- issued and outstanding with a par value of $0.001 per share and a stated value of $12.00 per share, nonvoting. Paid-in Capital: Represents the funds received in excess of par value upon the --------------- issuance of stock, net of issuance costs and the related effects of stock dividends and business combinations. Retained Earnings: Represents the accumulated net earnings of the ------------------ Company as reduced by dividends paid to shareholders, merger expenses and retirement of treasury stock. Accumulated Other 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. Treasury Stock: Represents 64,773 and 75,544 shares of common stock at -------------- December 31, 2001 and 2000, respectively, at cost. Stock Split: 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. Other: On January 14, 2002, the Company's Board of Directors declared a dividend ----- of $.0925 per share payable to stockholders of record as of January 14, 2002, and to be paid on March 27, 2002. NOTE 12 - 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, 2001. As of December 31, 2001, the most recent notification from the applicable regulatory agencies categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To remain 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. 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 12 - REGULATORY CAPITAL MATTERS - CONTINUED The Company's and Subsidiary Banks' actual capital amounts and ratios are also presented in the table.

59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 13 - STOCK OPTION PLANS The Company has adopted its 1999 Statutory-Nonstatutory Stock Option Plan under which it has granted statutory and nonstatutory stock options to certain directors and key employees. The options granted provide for these directors and key employees to purchase shares of the Company's $0.001 par value common stock at the market value at the dates of grant. The options granted may be exercised within ten years from the dates of grant. The following sets forth certain information regarding stock options for the years ended December 31, 2001, 2000, and 1999. Stock options have been adjusted to reflect the effects of the 3-for-2 stock split in 1999. Fixed Options -------------

60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 13 - STOCK OPTION PLANS - CONTINUED Of the 290,000 outstanding options at December 31, 2001, 204,400 were exercisable with the remaining 85,600 having remaining vesting periods of up to 8 years. Total unexercised options of 290,000 have a weighted average contractual life of 7.70 years and a weighted average exercise price of $8.47. At December 31, 2001, the shares under option include nonqualified options of 53,000 issued primarily to Company directors and incentive stock options of 237,000 issued to certain key employees of the Company. If the Company had elected to recognize compensation cost for options granted in 2001, 2000, and 1999, based on the fair value of the options as permitted by SFAS No. 123, net income and earnings per share would have reduced to the pro forma amounts indicated below:

All 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 88,252, 70,194, and 34,714 greater than that used to calculate basic earnings per share for 2001, 2000, and 1999, respectively. There was a $.02, $.02 and $.01 dilutive effect on earnings per share for the years ended December 31, 2001, 2000 and 1999, respectively. The Company's options outstanding have a weighted average contractual life of 7.74 years. The fair value of each grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 13 - STOCK OPTION PLANS - CONTINUED The effects of applying SFAS No. 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. NOTE 14 - OTHER OPERATING EXPENSES The major components of other operating expenses included in noninterest expenses at December 31, 2001, 2000, and 1999 are as follows:

NOTE 15 - INCOME TAXES Federal and state income taxes receivable (payable) as of December 31, 2001 and 2000, included in other assets and other liabilities, respectively, were as follows:

62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 15 - INCOME TAXES - CONTINUED The components of the deferred income tax asset included in other assets as of December 31, 2001 and 2000 are as follows:

The tax effects of each type of income and expense item that gave rise to deferred taxes are:

The components of income tax expense (benefit) for the years ended December 31, 2001, 2000, and 1999 were as follows:

63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 15 - INCOME TAXES - CONTINUED Tax effects of securities transactions resulted in a increase in income taxes for December 31, 2001, of $184,653. Tax effects of securities transactions resulted in a decrease in income taxes for December 31, 2000, of $457 and resulted in an increase in income taxes for December 31, 1999, of $15,609. 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, 2001, 2000, and 1999:

NOTE 16 - 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. The 401(k) plan allows participants to invest in unrelated mutual funds and Company Common Stock. Total retirement expense under this plan included in salary and benefits for the years ended December 31, 2001, 2000, and 1999 was $129,456, $107,637, and $157,076, 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 $643,394 and $506,858 at December 31, 2001 and 2000, 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. (Reduced amounts are payable if employment terminates prior to age 65). The expense of the plans was $129,644, $67,922, and $146,897 in 2001, 2000, and 1999, respectively. 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 17 - 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, 2001 and 2000, is approximately as follows:

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. Insurance contracts underwritten represent potential claims against the Company's subsidiary, Frontier Reinsurance, Inc. The Company's risk exposure is limited to its investment in this subsidiary. At December 31, 2001 this amount was $252,810. NOTE 18 - CONCENTRATIONS OF CREDIT All of the Company's 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. Investments in state and municipal securities also involve governmental entities within the Company's market area. 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. 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 18 - CONCENTRATIONS OF CREDIT - CONTINUED The Company maintains its cash accounts at various commercial banks in Alabama, Georgia and Tennessee. The total cash balances in commercial banks are insured by the FDIC up to $100,000. Total uninsured balances held at other commercial banks amounted to $708,381 and $73,284 at December 31, 2001 and 2000, respectively. NOTE 19 - LEASES The Company leased office space and equipment under various operating leases during 2001, 2000, and 1999. The leases provide for renewal options and generally require the Company to pay maintenance, insurance and property taxes. For the years ended December 31, 2001, 2000, and 1999, rental expense for such leases was $88,333, $104,238, and $127,228, respectively. Future minimum lease payments under noncancellable operating leases at December 31, 2001, are as follows:

NOTE 20 - 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. Currently, the regulators have granted permission to the subsidiary banks to declare dividends to the Company in amounts at the discretion of the board of directors of each bank, so long as all capital ratios remain in the well-capitalized category. Under this modified restriction, the subsidiary banks could declare aggregate dividends of approximately $1,871,000 as of December 31, 2001, and still remain well-capitalized in all capital ratios. 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 21 - RELATED PARTY TRANSACTIONS Loans: Certain directors, executive officers and principal shareholders ----- including their immediate families and associates were loan customers of the Banks during 2001 and 2000. 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, 2001 and 2000, amounted to approximately $6,514,810 and $7,659,806, respectively. Activity during 2001 and 2000 in loans to related parties is as follows:

Deposits: Total deposits held from related parties at December 31, 2001 and -------- 2000 amounted to approximately $5,197,000 and $8,533,000, respectively. [The remainder of this page intentionally left blank] 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 22 - SEGMENT INFORMATION 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 following table reflects the approximate amounts of revenue, expense and assets for the Company's segments as of and for the years ended December 31, 2001, 2000 and 1999.

68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 23 - LITIGATION While the Company and its subsidiaries are party to various legal proceedings arising from the ordinary course of business, management believes after consultation with legal counsel that there are no proceedings threatened or pending against the Company that will, individually or in the aggregate, have a material adverse effect on the business or financial condition of the Company. NOTE 24 - 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. Securities: For securities available-for-sale and securities held-to-maturity, fair values are based on quoted market prices or dealer quotes. 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, Letters of Credit, Insurance Contracts Underwritten and Financial Guarantees Written: The fair value of commitments, letters of credit, insurance contracts underwritten and financial guarantees is estimated to be approximately the same as the notional amount of the related commitment. 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 24 - FAIR VALUES OF FINANCIAL INSTRUMENTS - CONTINUED The estimated fair values of the Company's financial instruments as of December 31, 2001 and 2000 are as follows:

[The remainder of this page intentionally left blank] 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 25 - CONDENSED PARENT COMPANY INFORMATION STATEMENTS OF FINANCIAL CONDITION

71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 25 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED STATEMENTS OF INCOME

72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 25 - CONDENSED PARENT COMPANY INFORMATION - CONTINUED STATEMENTS OF CASH FLOWS

73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 26 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Selected quarterly results of operations for the four quarters ended December 31 are as follows:

74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FRONTIER NATIONAL CORPORATION AND SUBSIDIARIES December 31, 2001, 2000, and 1999 NOTE 26 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) - (CONTINUED) Selected quarterly results of operations for the four quarters ended December 31 are as follows:

[The remainder of this page intentionally left blank] 75 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. 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 section entitled "Certain Relationships, Related Transactions" in the Proxy Statement for the Annual Meeting of Shareholders which is to be filed with the Securities and Exchange Commission. 76 ITEM 14 - EXHIBITS AND REPORTS ON FORM 8-K (a) Index of documents filed as part of this report: Frontier National Corporation and Subsidiaries Financial Statements

(b) Reports on Form 8-K On October 9, 2001, Frontier filed a Form 8-K with the Securities and Exchange Commission disclosing the declaration of a dividend by its board of directors. On October 11, 2001, Frontier filed an Amendment to the Form 8-K with the Securities and Exchange Commission clarifying the amount of the dividend to be paid. (c) Exhibits Page ---- 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 (incorporated by reference to Exhibit 2.3 of the Company's annual report on Form 10-K filed on March 30, 2000) 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). 77 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 (incorporated by reference to Exhibit 10.3 of the Company's annual report on Form 10-K filed March 30, 2000). 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 (incorporated by reference to Exhibit 10.4 of the Company's annual report on Form 10-K filed March 30, 2000). 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 (incorporated by reference to Exhibit 10.5 of the Company's annual report on Form 10-K filed March 30, 2000) 11 Statement of computation of earnings per common share............................................ 79 12 Statement of computation of ratios............................................................... 80 21 Subsidiaries of the Registrant................................................................... 81 24 Power of Attorney (contained on signature page of this report)................................... 82

Certain exhibits have been omitted because they are not applicable. 78 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, 2001, 2000, and 1999.

[The remainder of this page intentionally left blank] 79 EXHIBIT 12 - STATEMENTS RE: COMPUTATION OF RATIOS Frontier National Corporation Computation of Ratio of Earnings to Fixed Charges

[The remainder of this page intentionally left blank] 80 EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT

Subsidiaries - Indirect/wholly-owned by Frontier National Bank, Sylacauga ------------------------------------------------------------------------- Frontier Finance Company, Inc. Alabama Frontier Financial Services, Inc. Alabama Frontier Reinsurance, Inc. Arizona

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 26, 2002 By: /s/Harry I. Brown, Jr. ------------------------------ Harry I. Brown, Jr. Chairman of the Board Date: March 26, 2002 By: /s/Steven R. Townson ------------------------------ Steven R. Townson Vice Chairman of the Board, President, Chief Executive Officer 81 EXHIBIT 24 - POWER OF ATTORNEY POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Harry I. Brown, Jr. and Steven R. Townson, 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.

FRONTIER NATIONAL CORP 10-K