UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- - EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
__ 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.
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(Exact name of registrant as specified in its charter)
Delaware 61-1271129
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
216 West Main Street, Frankfort, Kentucky 40602
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(Address of principal executive offices) (Zip Code)
(502) 223-1638
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of November 9, 2001: 1,246,108
Page 1 of 13 pages
Page 1
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
--------------------------------------------------------------
Item 1 Consolidated Statements of Financial Condition at
September 30, 2001 and June 30, 2001 3
Consolidated Statements of Earnings for the three
months ended September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows for the three
months ended September 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8
PART II. OTHER INFORMATION
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Item 1 Legal Proceedings 12
Item 2 Changes in Securities and Use of Proceeds 12
Item 3 Defaults upon Senior Securities 12
Item 4 Submission of Matters to a
Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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page 2
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except per share data)
September 30, June 30,
2001 2001
(Audited)
ASSETS
Cash and due from banks $ 614 $ 740
Interest-bearing deposits in other financial institutions 4,776 5,977
-------------- ------------
Cash and cash equivalents 5,390 6,717
Certificates of deposit in other financial institutions 100 100
Investment securities held to maturity - at amortized cost,
approximate fair market value of $1,012 and $2,013 as of
September 30, 2001 and June 30, 2001 $ 997 $ 1,995
Loans receivable - net 138,672 136,435
Office premises and equipment - at depreciated cost 1,405 1,421
Federal Home Loan Bank stock - at cost 2,611 2,566
Accrued interest receivable on loans 466 433
Accrued interest receivable on investments and
interest-bearing deposits 10 42
Prepaid expenses and other assets 70 79
Prepaid federal income taxes -- 68
-------------- ------------
Total assets $ 149,721 $ 149,856
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 82,993 $ 82,829
Advances from the Federal Home Loan Bank 46,521 47,128
Advances by borrowers for taxes and insurance 477 344
Accrued interest payable 71 54
Accrued federal income taxes 104 --
Deferred federal income taxes 112 93
Other liabilities 1,291 1,274
-------------- ------------
Total liabilities
131,569 131,722
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 5,876 5,876
Retained earnings - restricted 18,693 18,675
Less 426,335 shares of treasury stock-at cost (6,434) (6,434)
-------------- ------------
Total shareholders' equity 18,152 18,134
-------------- ------------
Total liabilities and shareholders' equity $ 149,721 $ 149,856
============== ============
Book value per share $ 14.57 $ 14.55
============== ============
page 3
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Three months ended
September 30,
2001 2000
Interest income
Loans $ 2,559 $ 2,594
Investment securities 29 33
Interest-bearing deposits and other 86 57
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Total interest income 2,674 2,684
Interest expense
Deposits 986 1,014
Borrowings 721 668
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Total interest expense 1,707 1,682
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Net interest income 967 1,002
Provision for losses on loans 1 --
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Net interest income after provision for
losses on loans 966 1,002
Other operating income 18 14
General, administrative and other expense
Employee compensation and benefits 258 237
Occupancy and equipment 41 37
Federal deposit insurance premiums 4 4
Franchise and other taxes 14 28
Data processing 31 32
Other operating 78 84
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Total general, administrative
and other expense 426 422
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Earnings before income taxes 558 594
Federal income taxes
Current 172 176
Deferred 19 26
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Total federal income taxes 191 202
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NET EARNINGS $ 367 $ 392
======== ========
Basic Earnings Per Share $ 0.30 $ 0.30
======== ========
Diluted Earnings Per Share $ 0.29 $ 0.30
======== ========
page 4
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended September 30,
(In thousands)
2001 2000
Cash flows from operating activities:
Net earnings for the period $ 367 $ 392
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 (2) (4)
Amortization of deferred loan origination (fees) costs (15) 13
Depreciation and amortization 20 19
Provision for losses on loans 1 --
Federal Home Loan Bank stock dividends (45) (44)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (1) 14
Prepaid expenses and other assets 9 16
Accrued interest payable 17 (10)
Other liabilities 17 28
Federal income taxes
Current 172 161
Deferred 19 26
-------------- -----------
Net cash provided by operating activities 559 611
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities 1,000 --
Loan principal repayments 5,969 4,920
Loan disbursements (8,192) (5,582)
Purchase of office premises and equipment (4) (3)
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Net cash used in investing activities (1,227) (665)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts 164 (1,678)
Proceeds from Federal Home Loan Bank advances -- 8,900
Repayment of Federal Home Loan Bank advances (607) (5,263)
Proceeds from other borrowed money -- 145
Repayment of other borrowed money -- (438)
Advances by borrowers for taxes and insurance 133 130
Dividends paid on common stock (349) (328)
Acquisition of treasury stock -- (759)
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Net cash provided by (used in) financing activities (659) 709
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Net increase (decrease) in cash and cash equivalents (1,327) 655
Cash and cash equivalents at beginning of period 6,717 978
-------------- -----------
Cash and cash equivalents at end of period 5,390 $ 1,633
============== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ -- $ 15
============== ===========
Interest on deposits and borrowings $ 1,690 $ 1,692
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page 5
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-Q and therefore do not include all
disclosures necessary for a complete presentation of the statements of financial
condition, statements of earnings, 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 three month period ended September 30, 2001 are not necessarily
indicative of the results which may be expected for the entire 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-K for the year ended June 30, 2001.
(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 1,246,108 and 1,306,423 for the three month
periods ended September 30, 2001, and 2000, 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 1,286,343 and 1,306,423
for the three month periods ended September 30, 2001 and 2000, respectively.
Incremental shares related to the assumed exercise of stock options included in
the calculation of diluted earnings per share totaled 40,235 for the three month
period ended September 30, 2001. For the three month period ended September 30,
2000, there were no incremental shares related to the assumed exercise of stock
options due to the non-dilutive nature of the options during that period. The
Company has 239,492 stock options outstanding of which 234,745 have an exercise
price of $13.80 per share and 4,747 have an exercise price of $14.91 per share.
(4) EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
which revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but carries over most of the provisions of SFAS No. 125 without reconsideration.
SFAS No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The Statement is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. Management adopted SFAS No. 140 effective April 1,
2001, as required, without material impact on the Company's financial
statements.
page 6
In June 2001, the FASB issued SFAS No. 141 "Business Combinations," which
requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method. The pooling-of-interests method of
accounting is prohibited except for combinations initiated before June 30, 2001.
The remaining provisions of SFAS No. 141 relating to business combinations
accounted for by the purchase method, including identification of intangible
assets, accounting for negative goodwill, financial statement presentation and
disclosure, are effective for combinations completed after June 30, 2001.
Management adopted SFAS No. 141 effective July 1, 2001, as required, without
material effect on the Company's financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Intangible
Assets," which prescribes accounting for all purchased goodwill and intangible
assets. Pursuant to SFAS No. 142, acquired goodwill is not amortized, but is
tested for impairment at the reporting unit level annually and whenever an
impairment indicator arises. All goodwill should be assigned to reporting units
that are expected to benefit from the goodwill. Goodwill impairment should be
tested with a two-step approach. First, the fair value of the reporting unit
should be compared to its carrying value, including goodwill. If the reporting
unit's carrying value exceeds its fair value, then any goodwill impairment
should be measured as the excess of the goodwill's carrying value over its
implied fair value. The implied fair value of goodwill should be calculated in
the same manner as goodwill is calculated for a business combination, using the
reporting unit's fair value as the "purchase price." Therefore, the goodwill's
implied fair value will be the excess of the "purchase price" over the amounts
allocated to assets, including unrecognized intangible assets, and liabilities
of the reporting unit. Goodwill impairment losses should be reported in the
income statement as a separate line item within operations, except for such
losses included in the calculation of a gain or loss from discontinued
operations.
An acquired intangible asset, other than goodwill, should be amortized over
its useful economic life. The useful life of an intangible asset is indefinite
if it extends beyond the foreseeable horizon. If an asset's life is indefinite,
the asset should not be amortized until the life is determined to be finite.
Intangible assets being amortized should be tested for impairment in accordance
with SFAS No. 121. Intangible assets not being amortized should be tested for
impairment annually and whenever there are indicators of impairment, by
comparing the asset's fair value to its carrying amount.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001. Early adoption is permitted for companies with fiscal years beginning
after March 15, 2001, but only if the first quarter financial statements have
not previously been issued. SFAS No. 142 is not expected to have a material
effect on the Company's financial position or results of operations.
page 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Company's operations, and the
Company's actual results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or contribute
to such differences are discussed herein but also include changes in the economy
and interest rates in the nation and the Company's market area generally.
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 invests in loans secured by non-owner occupied one- to four-family
residential properties and some churches located in the Bank's primary market
area. The Bank also maintains an investment portfolio which may include FHLB
stock, FHLB certificates of deposit, U.S. Government Agency-issued bonds, and
other investments.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2001 AND JUNE 30, 2001
ASSETS: The Company's total assets were $149.7 million at September 30,
2001, a decrease of $135,000 or 0.1% from June 30, 2001. The decrease in total
assets is primarily attributable to a decrease in the Company's cash and cash
equivalents, which decreased $1.3 million or 19.8% to $5.4 million at September
30, 2001. Also decreasing was investment securities held to maturity, which
decreased from $2.0 million at June 30, 2001, to $997,000 at September 30, 2001,
a decrease of $998,000 or 50.0%. Loans receivable increased by $2.2 million, or
1.6%, during the three month period, as loans disbursed of $8.2 million exceeded
principal repayments of $6.0 million.
LIABILITIES: The Company's total liabilities stayed relatively stable
during the period, decreasing only $153,000 or 0.1% to $131.6 million at
September 30, 2001. The decrease in total liabilities is primarily attributable
to a decrease in Advances from the Federal Home Loan Bank ("Advances"). Advances
decreased $607,000 or 1.3% from $47.1 million at June 30, 2001 to $46.5 million
at September 30, 2001. Deposits increased from $82.8 million at June 30, 2001 to
$83.0 million at September 30, 2001, an increase of $164,000 or 0.2%.
SHAREHOLDERS' EQUITY: Shareholders' equity increased $18,000 or 0.1% to
$18.2 million at September 30, 2001. This increase is a result of the Company's
net earnings of $367,000 less the Company's dividends declared during the period
of $349,000. The Company's book value per share was $14.57 at September 30,
2001, compared to $14.55 at June 30, 2001.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2001, AND SEPTEMBER 30, 2000
NET EARNINGS: The Company's net earnings decreased $25,000 or 6.4% from
$392,000 for the three month period ended September 30, 2000, to $367,000 for
the three month period ended September 30, 2001. The decrease in net earnings is
primarily attributable to a decrease in net interest income of $35,000. The
Company's basic earnings per share remained unchanged at $0.30 per share for the
three month periods ended September 30, 2001 and 2000. The Company's diluted
earnings per share declined $0.01 or 3.3% from $0.30 per share for the three
month period ended September 30, 2000 to $0.29 per share for the three month
period ended September 30, 2001. The decrease in the diluted earnings per share
was primarily due to dilutive effects caused by increases in the value of the
Company's outstanding stock options, which has increased due to an increase in
the Company's average common stock price.
NET INTEREST INCOME: Net interest income decreased $35,000 or 3.5% from
$1.0 million for the three month period ended September 30, 2000 to $967,000 for
the three month period ended September 30, 2001. The decrease was primarily due
to an increase in total interest expense.
page 8
INTEREST INCOME: Interest income decreased $10,000 or 0.4% to $2.7 million
for the three month period ended September 30, 2001. This was primarily
attributable to the decrease in interest income from loans which decreased by
$35,000 or 1.3%, which is chiefly the result of lower interest rates earned on
these loans caused by refinancings and downward adjustments in adjustable rate
mortgages. Management expects this trend to continue and perhaps accelerate in
response to general downward movements in interest rate markets. Management also
states that it is possible that the level of loans receivable-net could decline
as a result of borrowers choosing long-term, fixed-rate mortgages offered by
other lenders over the Bank's primary offering of adjustable-rate mortgages. As
a portfolio lender, the Bank is reluctant to offer long-term, fixed-rate
mortgages when those rates are at historically low levels and for the same
reason borrowers may be more likely to eagerly pursue such mortgages. This could
likewise have a negative impact on earnings. Interest income from
interest-bearing deposits and other increased during the period by $29,000 or
50.9%. This was the result of increased levels of interest-bearing deposits in
other financial institutions generated primarily by an increase in deposits and
a decrease in investment securities.
INTEREST EXPENSE: Interest expense increased $25,000 or 1.5% to $1.7
million for the three month period ended September 30, 2001. This increase was
primarily due to an increase in interest expense on borrowings which increased
$53,000 or 7.9% to $721,000 for the three month period ended September 30, 2001.
The increase is primarily a result of an increase in the average amount of
Advances outstanding rather than an increase in the average interest rate paid
on those borrowings. The average balance of Advances outstanding increased $3.4
million or 7.8% from $43.5 million for the three month period ended September
30, 2000, to $46.9 million for the three month period ended September 30, 2001.
Interest expense on deposits decreased $28,000 or 2.8% to $986,000 for the three
month period ended September 30, 2001, compared to the same period in 2000,
despite an increase in the average level of deposits. Generally, rates paid on
deposits have been decreasing in the current quarter and management expects that
trend to continue. Management cannot predict whether the rates paid on deposits
will decrease at a rate faster than the rates earned on loans; therefore, it is
possible that earnings could be negatively impacted by the current and future
interest rate environment. Conversely, the rates paid for advances are generally
fixed and will not decline. They offer protection in times of increasing
interest rates, but could hamper earnings in times such as these where rates
have significantly decreased.
PROVISION FOR LOSSES ON LOANS: The provision for losses on loans was $1,000
for the three month period ended September 30, 2001, compared to no provision
for the three month period from the prior year. This represents an increase of
$1,000 or 100.0%. Management believed, on the basis of its analysis of the risk
profile of the Company's assets, that the allowance for loan losses, which was
$102,000 and $101,000 at September 30, 2001 and 2000, respectively, was
appropriate. In determining the appropriate provision, management considers a
number of factors, including specific loans in the Company's portfolio, real
estate market trends in the Company's market area, economic conditions, interest
rates, and other conditions that may affect a borrower's ability to comply with
repayment terms. There can be no assurance that the allowance will be adequate
to cover losses on nonperforming assets in the future.
OTHER OPERATING INCOME: Other operating income increased $4,000 or 28.6%
from $14,000 for the three month period ended September 30, 2000 to $18,000 for
the three month period ended September 30, 2001. Other operating income is not a
significant component of the Company's statement of earnings.
GENERAL, ADMINISTRATIVE, AND OTHER EXPENSES: General, administrative, and
other expense increased $4,000 or 0.9% from $422,000 for the three month period
ended September 30, 2000 to $426,000 for the three month period ended September
30, 2001. The increase was due primarily to a $21,000 or 8.9% increase in
employee compensation and benefits, which resulted mostly from increased costs
associated with the Company's deferred compensation program. The deferred
compensation plan has some features that cause compensation expense to increase
with the Company's stock price. Partially offsetting the increase in employee
compensation and benefits was a $14,000 or 50.0% decrease in franchise and other
taxes. The decrease in franchise and other taxes resulted from utilizing state
income tax prior year net operating losses. Lower levels of state income tax
expense are not expected to reoccur.
INCOME TAX: The Company's provision for federal income taxes decreased from
$202,000 for the three month period ended September 30, 2000 to $191,000 for the
three month period ended September 30, 2001. The decrease was a result of the
decrease in the Company's pretax earnings. The Company's effective tax rate was
34.2% and 34.0% for the three month periods ended September 30, 2001 and 2000,
respectively.
page 9
NON-PERFORMING ASSETS: At September 30, 2001, the Bank had approximately
$912,000 in loans 90 days or more past due but still accruing. These delinquent
loans represent 0.7% of the Bank's net loans. The Bank had $246,000 in loans
listed as special mention in addition to $875,000 in loans internally classified
as Substandard. No loans were classified as Doubtful or Loss. The Bank has not
charged off any loans during the period.
DIVIDENDS: On September 14, 2001, the Company announced a dividend policy
whereby it will pay a quarterly cash dividend of $0.28 per share, per quarter,
payable on the 15th day of the month following the end of each quarter, to
shareholders of record as of the last business day of each quarter. This
represented an increase of $0.02 or 7.7% from the previous quarterly dividend of
$0.26 per share, which was established on September 13, 2000. The Board of
Directors determined that the payment of a dividend was appropriate in light of
the Company's capital position and financial condition. Although the Board of
Directors has adopted this policy, the future payment of dividends is dependent
upon the Company's financial condition, earnings, equity structure, capital
needs, regulatory requirements, and economic conditions. The Company last paid a
dividend on July 13, 2001. At September 30, 2001, the Company had recorded
dividends payable of $349,000 for the payment of a dividend on October 15, 2001.
STOCK REPURCHASES: On September 13, 2000, the Company announced a plan to
purchase up to 65,000 shares of the Company's common stock, which represented
approximately 5% of the outstanding common stock at that time. A total of 15,000
shares were repurchased at an average cost of $12.94 per share during the
program, which expired in June of 2001. On November 7, 2001, the Company
announced that the Board of Directors had authorized a new program for the
purchase of up to 62,000 of the remaining outstanding shares of common stock.
Management believes that the repurchase program should be completed within nine
months of commencement. The Board of Directors considers the Company's common
stock to be an attractive investment, and believes that repurchase programs may
improve liquidity in the market for the common stock and may result in increased
per share earnings and, depending on price, book value per share. The Board will
continue to consider stock repurchases and in the future may enact similar
programs depending on market conditions, interest rates, and the availability of
funds.
page 10
PART II.
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN 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 AND REPORTS ON FORM 8-K
Exhibits: None
Reports on Form 8-K: None
page 11
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Frankfort First Bancorp, Inc.
Date: November 9, 2001
/S/ Don D. Jennings
-------------------------------------
. Don D. Jennings
President
/S/ R. Clay Hulette
--------------------------------------
R. Clay Hulette
Vice President and Treasurer
(Principal Financial and Accounting
Officer)
page 12