Frankfort First Bancorp (FKKY) 10QSB 2005 Q2 Quarterly report (small business)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-QSB

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended December 31, 2004
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from __________ to ___________

Commission file number:  0-26360

Frankfort First Bancorp, Inc.

(Exact name of small business issuer as specified in its charter)

Delaware	61-1271129
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
216 West Main Street, Frankfort, Kentucky	40602
(Address of principal executive offices)	(Zip Code)

(502) 223-1638

(Issuer’s telephone number, including area code)

Check whether the issuer filed all reports required to be filed by Section 13, or 15(d) of the Exchange Act during the past 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   o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of February 11, 2005: 1,273,981

CONTENTS

		PAGE
PART I.	FINANCIAL INFORMATION
Item 1	Consolidated Statements of Financial Condition at December 31, 2004 (unaudited) and June 30, 2004 (audited)	3
	Consolidated Statements of Earnings for the six and three months ended December 31, 2004 and 2003	4
	Consolidated Statements of Comprehensive Income for the six and three months ended December 31, 2004 and 2003	5
	Consolidated Statements of Cash Flows for the six months ended December 31, 2004 and 2003	6-7
	Notes to Consolidated Financial Statements	8-10
Item 2	Management’s Discussion and Analysis or Plan of Operation	11-14
Item 3	Controls and Procedures	15
PART II.	OTHER INFORMATION
Item 1	Legal Proceedings	16
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3	Defaults upon Senior Securities	16
Item 4	Submission of Matters to a Vote of Security Holders	16
Item 5.	Other Information	16
Item 6.	Exhibits	16
SIGNATURES		17

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Frankfort First Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except per share data)

	December 31, 2004			June 30, 2004
ASSETS
Cash and due from banks	$	432		$	1,122
Interest-bearing deposits in other financial institutions		293			—
Cash and cash equivalents		725			1,122
Certificates of deposit in other financial institutions		100			2,100
Mortgage-backed securities available for sale - at market		2,298			2,758
Loans receivable - net		122,149			125,262
Office premises and equipment - at depreciated cost		1,472			1,496
Federal Home Loan Bank stock - at cost		3,004			2,941
Accrued interest receivable on loans		276			303
Accrued interest receivable on investments and interest-bearing deposits		7			11
Bank-owned life insurance		2,056			2,016
Prepaid expenses and other assets		250			109
Total assets	$	132,337		$	138,118
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	71,984		$	75,025
Advances from the Federal Home Loan Bank		41,713			43,718
Advances by borrowers for taxes and insurance		—			307
Accrued interest payable		16			19
Accrued federal income taxes		248			294
Deferred federal income taxes		322			243
Other liabilities		884			998
Total liabilities		115,167			120,604
Shareholders’ equity
Preferred stock, 500,000 shares authorized, $.01 par value; no shares issued		—			—
Common stock, 3,750,000 shares authorized, $.01 par value;  1,672,443 shares issued		17			17
Additional paid-in capital		5,925			5,918
Retained earnings - restricted		17,751			18,068
Less 407,738 and 405,830 shares of treasury stock-at cost, respectively		(6,431	)		(6,350	)
Less shares acquired for stock benefit plan		(82	)		(87	)
Other comprehensive loss, unrealized losses on securities designated as available for sale - net of related tax effects		(10	)		(52	)
Total shareholders’ equity		17,170			17,514
Total liabilities and shareholders’ equity	$	132,337		$	138,118
Book value per share	$	13.58		$	13.83

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Frankfort First Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)

	Six months ended December 31,				Three months ended December 31,
	2004		2003		2004		2003
Interest income
Loans	$	3,531	$	3,753	$	1,752	$	1,864
Investment securities		55		80		26		40
Interest-bearing deposits and other		67		63		34		29
Total interest income		3,653		3,896		1,812		1,933
Interest expense
Deposits		840		993		418		478
Borrowings		1,283		1,306		636		649
Total interest expense		2,123		2,299		1,054		1,127
Net interest income		1,530		1,597		758		806
Provision for losses on loans		—		—		—		—
Net interest income after provision for losses on loans		1,530		1,597		758		806
Other operating income		89		25		37		13
General, administrative and other expense
Employee compensation and benefits		668		556		343		298
Occupancy and equipment		90		80		47		42
Franchise and other taxes		53		51		27		26
Data processing		62		56		31		28
Other operating		177		172		85		98
Total general, administrative and other expense		1,050		915		533		492
Earnings before income taxes		569		707		262		327
Federal income taxes
Current		123		231		66		95
Deferred		57		11		16		18
Total federal income taxes		180		242		82		113
NET EARNINGS	$	389	$	465	$	180	$	214
Earnings Per Share
Basic	$	0.31	$	0.37	$	0.14	$	0.17
Diluted	$	0.29	$	0.35	$	0.14	$	0.16

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Frankfort First Bancorp, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

	Six months ended December 31,						Three months ended December 31,
	2004			2003			2004			2003
Net earnings	$	389		$	465		$	180		$	214
Other comprehensive gains (losses), net of tax:
Unrealized gains (losses) on securities designated as available for sale, net of tax benefit (expense) of ($22), $16, ($2) and $3, respectively		43			(31	)		3			(5	)
Comprehensive income	$	432		$	434		$	183		$	209
Accumulated comprehensive loss	$	(10	)	$	(25	)	$	(10	)	$	(25	)

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Frankfort First Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended December 31,
(In thousands)

	2004			2003
Cash flows from operating activities:
Net earnings for the period	$	389		$	465
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Amortization of discounts and premiums on loans, investments, and mortgage-backed securities, net		9			12
Amortization of deferred loan origination fees		(2	)		(24	)
Depreciation and amortization		44			37
Provision for losses on loans		—			—
Federal Home Loan Bank stock dividends		(63	)		(57	)
Noncash compensation expense		9			8
Mortgage loans originated for sale		(1,414	)		—
Proceeds from sale of mortgage loans		2,108			—
Increase (decrease) in cash due to changes in:
Accrued interest receivable		31			(6	)
Prepaid expenses and other assets		(181	)		16
Accrued interest payable		(3	)		(5	)
Other liabilities		(114	)		43
Federal income taxes
Current		(46	)		(7	)
Deferred		79			11
Net cash provided by operating activities		846			493
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities		493			606
Maturity of certificates of deposit in other financial institutions		2,100			—
Purchase of certificate of deposit in other financial institution		(100	)		—
Loan principal repayments		12,705			15,515
Loan disbursements		(10,284	)		(18,369	)
Purchase of office premises and equipment		(20	)		(7	)
Net cash provided by (used in) investing activities		4,894			(2,255	)
Cash flows provided by (used in) financing activities:
Net decrease in deposit accounts		(3,041	)		(840	)
Proceeds from Federal Home Loan Bank advances		6,300			3,000
Repayment of Federal Home Loan Bank advances		(8,305	)		(1,081	)
Advances by borrowers for taxes and insurance		(307	)		(324	)
Dividends paid on common stock		(706	)		(703	)
Exercise of stock options-net		(78	)		—
Net cash provided by (used in) financing activities		(6,137	)		52
Net decrease in cash and cash equivalents		(397	)		(1,710	)
Cash and cash equivalents at beginning of period		1,122			2,028
Cash and cash equivalents at end of period	$	725		$	318

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Frankfort First Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the six months ended December 31,
(In thousands)

	2004		2003
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes	$	147	$	240
Interest on deposits and borrowings	$	2,126	$	2,304
Supplemental disclosure of noncash investing activities:
Origination of loans upon sale of real estate acquired through foreclosure	$	—	$	40
Unrealized gains (losses) on securities designated as available for sale, net of related tax effects	$	43	$	(31	)
Supplemental disclosure of noncash financing activities:
Dividends declared but unpaid	$	353	$	352
Issuance of shares under stock option plan in exchange for previously issued shares	$	40	$	304

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Frankfort First Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six month periods ended December 31, 2004 and 2003

(1) BASIS OF PRESENTATION

          The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-QSB and therefore do not include all disclosures necessary for a complete presentation of the statements of financial condition, statements of earnings, statements of comprehensive income and statements of cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments which are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included and all such adjustments are of a normal recurring nature. The results of operations for the six and three month periods ended December 31, 2004 are not necessarily indicative of the results which may be expected for the entire fiscal year.  These financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2004. 

(2) PRINCIPLES OF CONSOLIDATION

          The accompanying consolidated financial statements include the accounts of Frankfort First Bancorp, Inc. (the “Company”) and First Federal Savings Bank of Frankfort (the “Bank”).  All significant intercompany items have been eliminated.

(3) EARNINGS PER SHARE

          Basic earnings per share is computed based upon the weighted average common shares outstanding which totaled 1,266,530 and 1,266,447 for the six and three month periods ended December 31, 2004, respectively, and 1,256,996 and 1,259,302 for the six and three month periods ended December 31, 2003, respectively.

          Diluted earnings per share is computed taking into consideration common shares outstanding and dilutive potential common shares, i.e. the Company’s stock option plan.  Weighted-average common shares deemed outstanding for purposes of computing diluted earnings per share totaled 1,329,387 and 1,329,359 for the six and three month periods ended December 31, 2004, respectively.  Incremental shares related to the assumed exercise of stock options included in the calculation of diluted earnings per share totaled 62,857 and 62,912 for the six and three month periods ended December 31, 2004, respectively.  Weighted-average common shares deemed outstanding for purposes of computing diluted earnings per share totaled 1,311,887 and 1,314,816 for the six and three month periods ended December 31, 2003, respectively.  Incremental shares related to the assumed exercise of stock options included in the calculation of diluted earnings per share totaled 54,891 and 55,514 for the six and three month periods ended December 31, 2003, respectively.  As of December 31, 2004, the Company had 144,138 stock options outstanding of which 139,391 had an exercise price of $13.80 per share and 4,747 had an exercise price of $14.91 per share.

(4) STOCK OPTION PLAN

          The Board of Directors adopted the Frankfort First Bancorp, Inc. 1995 Stock Option and Incentive Plan (the “Plan”) which provided for the issuance of 261,085 shares of authorized, but unissued shares of common stock at fair value at the date of grant.  The Plan provides for one-fifth of the shares granted to be exercisable on each of the first five anniversaries of the date of the grant.

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          The Company accounts for the Plan in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award.  Compensation is then recognized over the service period, which is usually the vesting period.  Alternatively, SFAS No. 123 permits entities to continue to account for stock options and similar equity instruments under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”  Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net earnings and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied.

          The Company applies APB Opinion No. 25 and related Interpretations in accounting for its stock option plan.  Accordingly, no compensation cost has been recognized with respect to the Plan.  The pro forma disclosure requirements for net earnings and earnings per share are not applicable to the six and three month periods ended December 31, 2004 and 2003, as no options were granted during those periods and all options previously granted had fully vested prior to July 1, 2001. 

          A summary of the status of the Company’s stock option plan as of December 31, 2004 and June 30, 2004 and 2003, and changes during the periods ending on those dates is presented below:

	Six months ended December 31,					Year ended June 30,
	2004					2004					2003
	Shares			Weighted- average exercise price		Shares			Weighted- average exercise price		Shares		Weighted- average exercise price
Outstanding at beginning of period		147,230		$	13.84		181,859		$	13.83		181,859	$	13.83
Granted		—			—		—			—		—		—
Exercised		(3,092	)		13.80		(34,629	)		13.80		—		—
Forfeited		—			—		—			—		—		—
Outstanding at end of period		144,138		$	13.84		147,230		$	13.84		181,859	$	13.83
Options exercisable at period-end		144,138		$	13.84		147,230		$	13.84		181,859	$	13.83

The following information applies to options outstanding at December 31, 2004:

Number outstanding		144,138
Range of exercise prices	$	13.80 - $14.91
Weighted-average exercise price	$	13.84
Weighted-average remaining contractual life		1.0 year

          In December 2004, the Financial Accounting Standards Board (the “FASB”) issued a revision to Statement of Financial Accounting Standards (“SFAS”) No. 123 which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily on accounting for transactions in which an entity obtains employee services in share-based transactions.  This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, with limited exceptions.  That cost will be recognized over the period during which an employee is required to provide services in exchange for the award – the requisite service period.  No compensation cost is recognized for equity instruments for which employees do not render the requisite service.  Employee share purchase plans will not result in recognition of compensation cost if certain conditions are met.

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          Initially, the cost of employee services received in exchange for an award of liability instruments will be measured based on current fair value; the fair value of that award will be remeasured subsequently at each reporting date through the settlement date.  Changes in fair value during the requisite service period will be recognized as compensation cost over that period.  The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available.)  If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.

          Excess tax benefits, as defined by SFAS 123R will be recognized as an addition to additional paid in capital.  Cash retained as a result of those excess tax benefits will be presented in the statement of cash flows as financing cash inflows.  The write-off of deferred tax assets relating to unrealized tax benefits associated with recognized compensation cost will be recognized as income tax expense unless there are excess tax benefits from previous awards remaining in additional paid in capital to which it can be offset.

          Compensation cost is required to be recognized in the first interim or annual period that begins after December 15, 2005, or January 1, 2006 as to the Company.  Due to the pending acquisition (see “Pending Acquisition” in Management Discussion and Analysis) of the Company SFAS 123R will not have a material effect on the Company’s financial position or results of operation.

(5) CRITICAL ACCOUNTING POLICIES

          Allowance for Losses on Loans:  It is the Company’s policy to provide valuation allowances for estimated losses on loans based upon past loss experience, trends in the level of delinquent and specific problem loans, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and current economic conditions in the Company’s primary market areas.  When the collection of a loan becomes doubtful, or otherwise troubled, the Company records a loan loss provision equal to the difference between the fair value of the property securing the loan and the loan’s carrying value.  Lending areas are reviewed periodically to determine potential problems at an early date.  The allowance for loan losses is increased by charges to earnings and decreased by charge-offs (net of recoveries).

          The Company accounts for impaired loans in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” which requires that impaired loans be measured based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or, as an alternative, at the loan’s observable market price or fair value of the collateral.

          A loan is defined under SFAS No. 114 as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.  In applying the provisions of SFAS No. 114, the Company considers its investment in one-to-four family residential loans and consumer installment loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment.  With respect to the Company’s investment in multi-family and nonresidential loans, and its evaluation of impairment thereof, such loans are collateral dependent and as a result are carried as a practical expedient at the lower of cost or fair value of collateral.

          Collateral dependent loans which are more than ninety days delinquent are considered to constitute more than a minimum delay in repayment and are evaluated for impairment under SFAS No. 114 at that time.

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Item 2.  Management’s Discussion and Analysis or Plan of Operations

Note Regarding Forward-Looking Statements

          In addition to historical information contained herein, the following discussion contains statements that are forward-looking, as that term is defined by the Private Securities Litigation Act of 1995 or the Securities and Exchange Commission in its rules, regulations and releases.  The Company intends that such forward-looking statements be subject to the safe harbors created thereby.  All forward-looking statements are based on current expectation regarding important risk factors including, but not limited to, real estate values and the impact of interest rates on financing.  Accordingly, actual results may differ from those expressed in the forward-looking statements, and the making of such statements should not be regarded as a representation by the Company or any other person that results expressed therein will be achieved.

Pending Acquisition

          The Company and First Federal Savings and Loan Association of Hazard (“First Federal of Hazard”) executed a definitive agreement pursuant to which First Federal of Hazard will reorganize into a mutual holding company in order to acquire the Company for $23.50 per share of outstanding Company common stock. 

          The mutual holding company will be known as First Federal MHC (“MHC”).  The MHC will form and own approximately 55% of a new subsidiary mid-tier stock holding company to be known as Kentucky First Federal Bancorp.  Of the 45% of Kentucky First Federal Bancorp’s common stock to be issued to the public, a maximum of 45% will be issued to Frankfort First Bancorp stockholders, together with cash, to pay the merger consideration. 

          First Federal of Hazard and the Bank will remain separate banks following the merger and the reorganization but will each be a wholly owned subsidiary of Kentucky First Federal Bancorp. 

          The pending acquisition is subject to various contingencies including approval of the merger by the Company’s stockholders and is expected to close in the first quarter of 2005.

General

          The principal business of the Bank consists of accepting deposits from the general public and investing these funds in loans secured by one-to-four family owner-occupied residential properties in the Bank’s primary market area.  The Bank also originates loans secured by non-owner occupied one-to-four family residential properties, churches, professional office real estate, multi-family, home equity lines of credit, second mortgages and share loans.  The Bank also maintains an investment portfolio which may include FHLB stock, FHLB certificates of deposit, U.S. Government Agency-issued bonds, mortgage-backed securities and other investments.

Comparison of Financial Condition at December 31, 2004 and June 30, 2004

          Assets:  The Company’s total assets were $132.3 million at December 31, 2004, a decrease of $5.8 million or 4.2% from the June 30, 2004 level.  The decrease in total assets was attributable both to a decrease in the Company’s loans receivable and a decrease in certificates of deposit in other financial institutions.  Loans receivable-net decreased $3.1 million or 2.5% to $122.1 million at December 31, 2004.  The Bank has continued to develop its secondary market lending program.  During the period ended December 31, 2004, $2.1 million in loans were sold, representing 17% of the loans originated.  Management believes that such loan sales contributed to the decrease in the level of loans receivable, but that such sales were prudent in light of anticipated increases in market interest rates in the coming months.  The maturity of a $2.0 million FHLB certificate of deposit is responsible for the decrease in certificates of deposit in other financial institutions. 

          Liabilities:  The Company’s total liabilities decreased $5.4 million or 4.5% from $120.6 million at June 30, 2004 to $115.2 million at December 31, 2004.  Deposits decreased $3.0 million or 4.1% from $75.0 million at June 30, 2004 to $72.0 million at December 31, 2004.  FHLB advances decreased $2.0 million or 4.6% from $43.7 million at June 30, 2004 to $41.7 million at December 31, 2004.

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          Shareholders’ Equity:  Shareholders’ equity was $17.2 million at December 31, 2004, a decrease of $344,000 or 2.0% compared to June 30, 2004.  The decrease in shareholders’ equity per share is primarily attributable to the excess of dividends over earnings for the six month period ended December 31, 2004.  (See “Dividends”)

Comparison of Results of Operations for the Six Months Ended December 31, 2004 and 2003

          Net Earnings:  The Company’s net earnings decreased $76,000 or 16.3% to $389,000 for the six month period ended December 31, 2004 compared to 2003. The decrease in net earnings was primarily attributable to a decrease in net interest income and an increase in general, administrative and other expense.  The Company’s basic earnings per share decreased $0.06 from $0.37 per share for the six month period ended December 31, 2003 to $0.31 per share for the comparable 2004 period.  The Company’s diluted earnings per share also decreased $0.06 per share to $0.29 per share for the six month period just ended compared to $0.35 for the six month period ended December 31, 2003.

          Net Interest Income:  Net interest income was $1.5 million for the six month period ended December 31, 2004, a decrease of $67,000 or 4.2% compared to the six month period ended December 31, 2003.  While total interest income and interest expense decreased from period to period, the decrease in net interest income was primarily due to a greater decrease in interest income compared to the decrease in interest expense.

          Interest Income:  Interest income decreased $243,000 or 6.2% to $3.7 million for the six month period ended December 31, 2004.  The decrease was related primarily to a decrease in interest income from loans, which decreased $222,000 or 5.9%, to $3.5 million for the six month period recently ended.   The average yield on loans decreased from 5.99% for the six months ended December 31, 2003, to 5.71% for the six months ended December 31, 2004, a difference of 28 basis points, while the average balance of loans outstanding decreased $1.8 million or 1.4% from period to period.  Also contributing to the decrease in interest income was a decrease in interest income from investment securities, which decreased $25,000 or 31.3% from period to period.

          Interest Expense:  Interest expense decreased $176,000 or 7.7% to $2.1 million for the six month period ended December 31, 2004.  This decrease was primarily due to a reduction in interest expense on deposits, which decreased $153,000 or 15.4% to $840,000 for the six month period ended December 31, 2004.  The decline in interest expense on deposits was attributable primarily to a reduction in the average rate paid on deposits, which decreased 34 basis points to 2.29% for the six month period ended December 31, 2004.  Also contributing to the decrease in the interest expense on deposits was a decline in the average outstanding balance of deposits which decreased $2.1 million or 2.8% to $73.5 million for the six month period ended December 31, 2004, compared to the comparable 2003 period.  Interest expense on FHLB advances decreased $23,000 or 1.8% to $1.3 million for the six month period ended December 31, 2004, compared to the same period in 2003. 

          It is difficult to predict what interest rates will do in the future.  If market interest rates increase, the Company’s cost of deposits will increase as well, and may increase faster than the yield generated by the loan and investment portfolio, resulting in a reduction in net earnings. 

          General, Administrative, and Other Expenses:  General, administrative, and other expense increased $135,000 or 14.8% to $1.1 million for the six month period ended December 31, 2004.  The increase was due primarily to a $112,000 or 20.1% increase in employee compensation and benefits, largely due to lower deferred costs associated with a lower number of loans originated during the current six month period, as well as higher employee benefit costs.

          Income Tax:  The Company’s provision for federal income taxes decreased $62,000 or 25.6% to $180,000 for the six month period ended December 31, 2004.  The Company’s effective tax rate was 31.6% and 34.2% for the six month periods ended December 31, 2004 and 2003, respectively.  The reduction in effective tax rate for the current six month period is primarily attributable to the tax-exempt nature of earnings on bank-owned life insurance.

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          Non-Performing Assets:  At December 31, 2004, the Bank had approximately $381,000 (0.3% of net loans) in loans 90 days or more past due but still accruing, as compared to $1.1 million at December 31, 2003.  Also, the Bank had approximately $222,000 loans listed as special mention and $689,000 in loans internally classified as Substandard.  No loans were classified as Doubtful or Loss.  Of the assets listed as non-performing, all were single-family residential mortgage loans.  Of these loans, three loans totaling $164,000 or 43.1% of non-performing loans had loan-to-value ratios (based on either the original appraisal or a new appraisal and the current principal balance) of less than 80%.  Two loans totaling $118,000 or 31.0% of non-performing loans had an average loan-to-value ratios of 86% but are covered by private mortgage insurance.  Two loans totaling $98,000 or 25.8% of non-performing assets had a combined loan-to-value ratio of 88% and were not secured by private mortgage insurance (these loans are first and second mortgages secured by the same property).  Non-performing assets continue to accrue interest as long as the reasonably determined fair value of the collateral exceeds all principal, interest and fees required to discharge the obligation without loss.  Management has not initiated foreclosure proceedings with any loans included in non-performing assets, but rather is attempting to encourage the borrowers to remedy the delinquencies.  The Bank did not charge off any loans during the period.

          Dividends:  Under its dividend policy announced on September 14, 2001, the Company declared a dividend of $0.28 per share to shareholders of record at December 31, 2004, payable on January 14, 2005.   At December 31, 2004, the Company had recorded dividends payable of $353,000 for the payment of a dividend on January 14, 2005.  

          Stock Repurchases:  The Company has utilized stock repurchase programs to increase earnings per share, increase the Company’s return on equity, and to attempt to improve the market liquidity in the Company’s stock.  During the six month period ended December 31, 2004, the Company did not have a repurchase program in place and did not repurchase any shares of its stock.  It is not expected that the Company will engage in any stock repurchase activity pending the outcome of the proposed acquisition by First Federal Savings and Loan Association of Hazard.

          Liquidity:  The Company maintains sufficient liquid assets to meet its short-term obligations as they become due in the ordinary course of business.  In addition to its cash and cash equivalents, the Company has additional borrowing capacity with the Federal Home Loan Bank of approximately $26.7 million.  Of that additional borrowing capacity, the Company maintains a $10.0 million line of credit with the Federal Home Loan Bank of which $700,000 had been drawn at December 31, 2004. 

Comparison of Results of Operations for the Three Months Ended December 31, 2004 and 2003

          Net Earnings:  The Company’s net earnings decreased $34,000 or 15.9% to $180,000 for the three month period ended December 31, 2004 compared to 2003. The decrease in net earnings was attributable to a decrease in net interest income and an increase in general, administrative and other expense.  The Company’s basic earnings per share decreased $0.03 from $0.17 per share for the three month period ended December 31, 2003 to $0.14 per share for the comparable 2004 period.  The Company’s diluted earnings per share decreased $0.02 per share to $0.14 per share for the three month period just ended compared to $0.16 for the three month period ended December 31, 2003.

          Net Interest Income:  Net interest income was $758,000 for the three month period ended December 31, 2004, a decrease of $48,000 or 6.0% compared to $806,000 for the three month period ended December 31, 2003.  While total interest income and interest expense decreased from period to period, the decrease in net interest income was primarily due to a greater decrease in interest income compared to the decrease in interest expense.

          Interest Income:  Interest income decreased $121,000 or 6.3% to $1.8 million for the three month period ended December 31, 2004.  The decrease was related primarily to a decrease in interest income from loans, which decreased $112,000 or 6.0%, from $1.9 million for the three month period ended December 31, 2003 to $1.8 million for the three month period recently ended.   The average yield on loans decreased from 5.90% for the three months ended December 31, 2003 to 5.71% for the three months ended December 31, 2004, a difference of 19 basis points.  Also contributing to the decrease in interest income was a decrease in interest income from investment securities, which decreased $14,000 or 35.0% from period to period.

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           Interest Expense:  Interest expense decreased $73,000 or 6.5% to $1.1 million for the three month period ended December 31, 2004.  This decrease was primarily due to a reduction in interest expense on deposits, which declined $60,000 or 12.6% to $418,000 for the three month period ended December 31, 2004.  The decrease in interest expense on deposits was attributable primarily to a reduction in the average rate paid on deposits, which decreased 24 basis points to 2.29% for the three month period ended December 31, 2004.  Also contributing to the decrease in the interest expense on deposits was a decline in the average outstanding balance of deposits which decreased $2.6 million or 3.4% to $72.9 million for the period ended December 31, 2004, compared to the comparable 2003 period.  Interest expense on FHLB advances decreased $13,000 or 2.0% to $636,000 for the three month period ended December 31, 2004, compared to the same period in 2003. 

          General, Administrative, and Other Expenses:  General, administrative, and other expense increased $41,000 or 8.3% to $533,000 for the three month period ended December 31, 2004.  The increase was due primarily to a $45,000 or 15.1% increase in employee compensation and benefits, which were largely due to lower deferred costs associated with a lower number of loans originated during the current three month period, as well as higher employee benefit costs.

          Income Tax:  The Company’s provision for federal income taxes decreased $34,000 or 15.9% to $82,000 for the three month period ended December 31, 2004.  The Company’s effective tax rate was 31.3% and 34.6% for the three month periods ended December 31, 2004 and 2003, respectively.  The reduction in effective tax rate for the current three month period is primarily attributable to the tax-exempt nature of earnings on bank-owned life insurance.

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Item 3.  Controls and Procedures

          As of the end of the period covered by this report, Management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures.  Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.  It should be noted that the design of the Company’s disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no reasonable assurance that any design of disclosure controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, but the Company’s principal executive and financial officers have concluded that the Company’s disclosure controls and procedures are, in fact, effective at a reasonable assurance level.

          There have been no changes in the Company’s internal control over financial reporting (to the extent that elements of internal control over financial reporting are subsumed within disclosure controls and procedures) identified in connection with the evaluation described in the above paragraph that occurred during the Company’s last fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II.

Item 1.	Legal Proceedings
		None
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
		None
Item 3.	Defaults Upon Senior Securities
		None
Item 4.	Submission of Matters to a Vote of Security Holders
		None
Item 5.	Other Information
		None
Item 6.	Exhibits
		Exhibit 31 - Rule 13a-14 Certifications Exhibit 32 - Section 1350 Certification

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Signatures

          In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FRANKFORT FIRST BANCORP, INC.
Date: February 11, 2005
	/S/  DON D. JENNINGS
	Don D. Jennings
	President (Principal executive officer)
	/S/  R. CLAY HULETTE
	R. Clay Hulette
	Vice President and Treasurer (Principal financial and accounting officer)

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