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 December 31, 2002
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.
- --------------------------------------------------------------------------------
(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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of February 7, 2003: 1,246,108
Page 1 of 14 pages
page 1
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----------------------------------------------------------------------
Item 1 Consolidated Statements of Financial Condition at
December 31, 2002 and June 30, 2002 3
Consolidated Statements of Earnings for the three
months and six months ended December 31, 2002 and 2001 4
Consolidated Statements of Cash Flows for the six
months ended December 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 12
Item 4 Controls and Procedures 12
PART II. OTHER INFORMATION
-----------------
Item 1 Legal Proceedings 13
Item 2 Changes in Securities and Use of Proceeds 13
Item 3 Defaults upon Senior Securities 13
Item 4 Submission of Matters to a
Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
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page 2
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except per share data)
December 31, June 30,
2002 2002
ASSETS
Cash and due from banks $ 601 $ 638
Interest-bearing deposits in other financial institutions 7,519 4,174
--------- ---------
Cash and cash equivalents 8,120 4,812
Certificates of deposit in other financial institutions 3,100 100
Loans receivable - net 122,913 131,180
Property acquired in settlement of loans-net -- 311
Office premises and equipment - at depreciated cost 1,401 1,372
Federal Home Loan Bank stock - at cost 2,771 2,708
Accrued interest receivable on loans 311 389
Accrued interest receivable on investments and
interest-bearing deposits 4 --
Prepaid expenses and other assets 56 85
--------- ---------
Total assets $ 138,676 $ 140,957
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 75,736 $ 75,896
Advances from the Federal Home Loan Bank 43,707 44,982
Advances by borrowers for taxes and insurance 38 329
Accrued interest payable 49 55
Accrued federal income taxes 24 13
Deferred federal income taxes 222 217
Other liabilities 815 1,400
--------- ---------
Total liabilities 120,591 122,892
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 18,626 18,606
Less 426,335 shares of treasury stock-at cost (6,434) (6,434)
--------- ---------
Total shareholders' equity 18,085 18,065
--------- ---------
Total liabilities and shareholders' equity $ 138,676 $ 140,957
========= =========
Book value per share $ 14.51 $ 14.50
========= =========
page 3
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Six months ended Three months ended
December 31, December 31,
2002 2001 2002 2001
Interest income
Loans $4,383 $5,056 $2,135 $2,497
Investment securities 5 48 5 19
Interest-bearing deposits and other 109 144 56 58
------ ------ ------ ------
Total interest income 4,497 5,248 2,196 2,574
Interest expense
Deposits 1,252 1,904 611 918
Borrowings 1,365 1,431 677 710
------ ------ ------ ------
Total interest expense 2,617 3,335 1,288 1,628
------ ------ ------ ------
Net interest income 1,880 1,913 908 946
Provision for losses on loans -- 1 -- --
------ ------ ------ ------
Net interest income after provision for
losses on loans 1,880 1,912 908 946
Other operating income 44 31 24 13
General, administrative and other expense
Employee compensation and benefits 472 504 225 246
Occupancy and equipment 87 85 45 44
Federal deposit insurance premiums 7 8 3 4
Franchise and other taxes 56 41 30 27
Data processing 58 61 28 30
Other operating 155 155 83 77
------ ------ ------ ------
Total general, administrative
and other expense 835 854 414 428
------ ------ ------ ------
Earnings before income taxes 1,089 1,089 518 531
Federal income taxes
Current 366 323 163 151
Deferred 5 44 11 25
------ ------ ------ ------
Total federal income taxes 371 367 174 176
------ ------ ------ ------
NET EARNINGS $ 718 $ 722 $ 344 $ 355
====== ====== ====== ======
Basic Earnings Per Share $ 0.58 $ 0.58 $ 0.28 $ 0.28
====== ====== ====== ======
Diluted Earnings Per Share $ 0.56 $ 0.57 $ 0.27 $ 0.28
====== ====== ====== ======
page 4
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended December 31,
(In thousands)
2002 2001
Cash flows from operating activities:
Net earnings for the period $ 718 $ 722
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 -- (4)
Amortization of deferred loan origination fees (53) (40)
Depreciation and amortization 38 40
Provision for losses on loans -- 1
Federal Home Loan Bank stock dividends (63) (81)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 74 44
Prepaid expenses and other assets 29 40
Accrued interest payable (6) 32
Other liabilities (585) (26)
Federal income taxes
Current 11 (7)
Deferred 5 44
-------- --------
Net cash provided by operating activities 168 765
Cash flows provided by (used in) investing activities:
Purchase of investment securities (3,000) --
Proceeds from maturity of investment securities -- 1,000
Loan principal repayments 20,693 16,383
Loan disbursements (12,373) (16,435)
Proceeds from sale of real estate acquired through foreclosure 311 --
Purchase of office premises and equipment (67) (30)
-------- --------
Net cash provided by investing activities 5,564 918
Cash flows provided by (used in) financing activities:
Net decrease in deposit accounts (160) (2,403)
Repayment of Federal Home Loan Bank advances (1,275) (1,361)
Advances by borrowers for taxes and insurance (291) (303)
Dividends paid on common stock (698) (699)
-------- --------
Net cash used in financing activities (2,424) (4,766)
-------- --------
Net increase (decrease) in cash and cash equivalents 3,308 (3,083)
Cash and cash equivalents at beginning of period 4,812 6,717
-------- --------
Cash and cash equivalents at end of period $ 8,120 $ 3,634
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 360 $ 330
======== ========
Interest on deposits and borrowings $ 2,623 $ 3,303
======== ========
page 5
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED DECEMBER 31, 2002 AND 2001
(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 and six month periods ended December 31, 2002 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-K for the year ended June 30, 2002.
(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 for each of the six and three month
periods ended December 31, 2002, and 2001.
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 1,284,976 and 1,283,672
for the six and three month periods ended December 31, 2002, respectively.
Incremental shares related to the assumed exercise of stock options included in
the calculation of diluted earnings per share totaled 38,868 and 37,564 for the
six and three month periods ended December 31, 2002, respectively.
Weighted-average common shares deemed outstanding for purposes of computing
diluted earnings per share totaled 1,276,657 and 1,276,721 for the six and three
month periods ended December 31, 2001, respectively. Incremental shares related
to the assumed exercise of stock options included in the calculation of diluted
earnings per share totaled 30,549 and 30,613 for the six and three month periods
ended December 31, 2001, respectively. The Company has 181,859 stock options
outstanding of which 177,112 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 June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146 "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 provides
financial accounting and reporting guidance for costs associated with exit or
disposal activities, including one-time termination benefits, contract
termination costs other than for a capital lease, and costs to consolidate
facilities or relocate employees. SFAS No. 146 is effective for exit or disposal
activities initiated after December 31, 2002.
SFAS No. 146 is not expected to have a material effect on the Company's
financial position or results of operations.
page 6
In October 2002, the FASB issued SFAS No. 147, "Accounting for Certain
Financial Institutions: An Amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9," which removes acquisitions of financial institutions from
the scope of SFAS No. 72, "Accounting for Certain Acquisitions of Banking and
Thrift Institutions," except for transactions between mutual enterprises.
Accordingly, the excess of the fair value of liabilities assumed over the fair
value of tangible and intangible assets acquired in a business combination
should be recognized and accounted for as goodwill in accordance with SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets."
SFAS No. 147 also requires that the acquisition of a less-than-whole
financial institution, such as a branch, be accounted for as a business
combination if the transferred assets and activities constitute a business.
Otherwise, the acquisition should be accounted for as the acquisition of net
assets.
SFAS No. 147 also amends the scope of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," to include long-term customer
relationship assets of financial institutions (including mutual enterprises)
such as depositor- and borrower-relationship intangible assets and credit
cardholder intangible assets.
The provisions of SFAS No. 147 related to unidentifiable intangible assets
and the acquisition of a less-than-whole financial institution are effective for
acquisitions for which the date of acquisition is on or after October 1, 2002.
The provisions related to impairment of long-term customer relationship assets
are effective October 1, 2002. Transition provisions for previously recognized
unidentifiable intangible assets are effective on October 1, 2002, with earlier
application permitted.
SFAS No. 147 is not expected to have a material effect on the Company's
financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS No. 148, which amends FASB No. 123
"Accounting for Stock-Based Compensation," provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. The transition guidance and annual disclosure provisions of SFAS
No. 148 are effective for fiscal years ending after December 15, 2002, while the
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002.
SFAS No. 148 is not expected to have a material effect on the Company's
financial condition 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 local
and national economy, as well as changes in the general level of interest rates.
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 DECEMBER 31, 2002 AND JUNE 30, 2002
ASSETS: The Company's total assets were $138.7 million at December 31,
2002, a decrease of $2.3 million or 1.6% from $141.0 million at June 30, 2002.
The decrease in total assets was primarily attributable to a decrease in the
Company's net loans receivable, which decreased $8.3 million or 6.3% to $122.9
million at December 31, 2002, partially offset by an increase of $3.3 million or
68.7% in cash and cash equivalents.
LIABILITIES: The Company's total liabilities decreased by $2.3 million or
1.9% from $122.9 million at June 30, 2002 to $120.6 million at December 31,
2002. The decrease in total liabilities was attributable to decreases in FHLB
advances and other liabilities. FHLB advances decreased $1.3 million or 2.8% to
$43.7 million at December 31, 2002. Other liabilities decreased $585,000 or
41.8% to $815,000 at December 31, 2002, as liabilities associated with the
Company's deferred compensation program were reduced during the period.
SHAREHOLDERS' EQUITY: Shareholders' equity remained constant at $18.1
million at December 31, 2002 and June 30, 2002. The Company's book value per
share was $14.51 at December 31, 2002, compared to $14.50 at June 30, 2002.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2002
AND DECEMBER 31, 2001
NET EARNINGS: The Company's net earnings decreased $4,000 or 0.6% from
$722,000 for the six month period ended December 31, 2001, to $718,000 for the
six month period ended December 31, 2002. The decrease in net earnings was
primarily attributable to a decrease in net interest income of $33,000. The
Company's basic earnings per share remained unchanged at $0.58 per share for the
six month periods ended December 31, 2002 and 2001. The Company's diluted
earnings per share decreased $0.01 per share or 1.8% from $0.57 for the six
month period ended December 31, 2001 to $0.56 for the six month period ended
December 31, 2002.
NET INTEREST INCOME: Net interest income after provision for loan losses
decreased $32,000 or 1.7% and was $1.9 million for the six month periods ended
December 31, 2002 and 2001. 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 total interest income than the decrease
in interest expense.
INTEREST INCOME: Interest income decreased $751,000 or 14.3% to $4.5
million for the six month period ended December 31, 2002. The decrease was
related primarily to a decrease in interest income from loans, which decreased
$673,000 or 13.3%, to $4.4 million for the six month period ended December 31,
2002. Also contributing to the decrease in interest income were decreases in
interest income from investment securities and interest income from
interest-bearing deposits and other. Interest income from investment securities
decreased $43,000 or 89.6% from $48,000 for the six month period ended December
31, 2001 to $5,000 for the period just ended. Interest income from
interest-bearing deposits and other decreased $35,000 or 24.3% from $144,000 for
the six month period ended December 31, 2001 to $109,000 for the current period.
page 8
The decrease in yield on the Company's loan portfolio was related primarily
to a decrease in the average balance of the portfolio, although a decrease in
the average rate earned on the portfolio also had a negative impact on the
overall yield. The average balance of the loan portfolio decreased $10.4 million
or 7.6% to $127.3 million for the six month period ended December 31, 2002,
compared to the prior year period, while the average rate earned on the loan
portfolio decreased 46 basis points to 6.89% for the most recent six month
period. The decrease in the average balance of the Company's loan portfolio was
chiefly a result of repayments associated with borrowers refinancing to lower
rates with other lenders. Demand for the Bank's primary product, the adjustable
rate mortgage, declines somewhat in periods of falling or low prevailing
interest rates. Still, Management believes the origination of this loan provides
the best blend of yield and interest rate risk protection and will continue to
emphasize its origination.
INTEREST EXPENSE: Interest expense decreased $718,000 or 21.5% to $2.6
million for the six month period ended December 31, 2002. This decrease was
primarily due to a decrease in interest expense on deposits, which decreased
$652,000 or 34.2% to $1.3 million for the six month period ended December 31,
2002. The decrease in interest expense on deposits was primarily attributable to
a 131 basis point decrease in the rate paid on deposits to 3.33% for the six
month period ended December 31, 2002, although a $6.8 million or 8.3% decrease
in the average balance of deposits outstanding from period to period also
contributed. The average balance of deposits outstanding for the six month
period ended December 31, 2002, was $75.3 million, compared to $82.1 million for
the six month period ended December 31, 2001. Interest expense on FHLB advances
decreased $66,000 or 4.6% to $1.4 million for the six month period ended
December 31, 2002, compared to the same period in 2001. The decrease in interest
expense on FHLB advances was primarily attributable to a decrease of $2.1
million or 4.5% in the average balance outstanding. The average balance of FHLB
advances outstanding for the six month period ended December 31, 2002 was $44.4
million compared to $46.5 million for the six month period ended December 31,
2001. In general, rates paid on FHLB advances are greater than rates paid on
deposits and do not re-price as quickly. Management believes that, when compared
to other sources of funds, FHLB advances offer plans and terms that can be more
easily matched to characteristics of the Company's interest-earning assets. This
strategy may be altered as market conditions affect the terms, rates, and
availability of retail deposits.
It is difficult to predict what interest rates will do in the near future.
If interest rates continue to decline, the cost of the Company's deposits will
probably continue to decrease. However, Management cannot predict whether the
cost of liabilities will decrease as fast as the yield generated by the loan and
investment portfolio. If 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.
PROVISION FOR LOSSES ON LOANS: There was no provision for losses on loans
for the six month period ended December 31, 2002 and a $1,000 provision for the
six month period ended December 31, 2001. The allowance for loan losses was
$82,000 and $102,000 at December 31, 2002 and 2001, respectively. As a
percentage of non-performing assets, the allowance for losses on loans increased
from 12.7% at December 31, 2001 to 20.9% at December 31, 2002. This increase was
caused by a decrease in the balance of non-performing assets from period to
period (see "Non-Performing Assets"). Management believed, based on its analysis
of the risk profile of the Company's assets, that the allowance for losses on
loans was adequate at December 31, 2002. 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. Overall, management considers
the fact that the vast majority of loans in the Company's portfolio are secured
by one- to four-family residential real estate, which heretofore has resulted in
minimal losses on loans. However, there can be no assurance that the allowance
will be adequate to cover losses on non-performing assets in the future.
OTHER OPERATING INCOME: Other operating income increased $13,000 or 41.9%
from $31,000 for the six month period ended December 31, 2001 to $44,000 for the
six month period ended December 31, 2002. The increase in other operating income
was primarily attributable to gain on the sale of property acquired in
settlement of loans. Other operating income is not a significant component of
the Company's statement of earnings.
page 9
GENERAL, ADMINISTRATIVE, AND OTHER EXPENSES: General, administrative, and
other expense decreased $19,000 or 2.2% from $854,000 for the six month period
ended December 31, 2001 to $835,000 for the six month period ended December 31,
2002. The decrease was due primarily to a $32,000 or 6.3% decrease in employee
compensation and benefits, which resulted mostly from decreased costs associated
with the Company's deferred compensation program. Although the deferred
compensation plan has some features that cause compensation expense to increase
with the Company's stock price, the Company has taken steps to greatly reduce
the expense in the future and to reduce the effects that increasing stock prices
can have on the expense associated with this plan. Management expects that the
Company will incur increased employee compensation and benefit costs associated
with the Bank's defined benefit pension plan. For many years the Company has
benefited from an excess of plan assets (and investment performance thereon)
over calculated required contributions, which made additional contributions
unnecessary. Management estimates that the additional expense will be
approximately $21,000 for the fiscal year ending June 30, 2003.
INCOME TAX: The Company's provision for federal income taxes increased from
$367,000 for the six month period ended December 31, 2001 to $371,000 for the
six month period ended December 31, 2002. The Company's effective tax rate was
34.1% and 33.7% for the six month periods ended December 31, 2002 and 2001,
respectively.
NON-PERFORMING ASSETS: At December 31, 2002, the Bank had approximately
$393,000 (0.3% of net loans) in loans 90 days or more past due but still
accruing, as compared to $797,000 at December 31, 2001. Also, the Bank had
approximately $269,000 in loans listed as special mention and $355,000 in loans
internally classified as Substandard. No loans were classified as Doubtful or
Loss. All assets listed as non-performing are one- to four-family mortgage loans
with loan-to-value ratios (based on the original appraisal and current principal
balance) of less than 80%. Non-performing assets are considered by the Bank to
still be accruing 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 initiated foreclosure proceedings on
some of the loans included in non-performing assets. With others, management is
attempting to encourage the borrower to remedy the delinquency, although
foreclosure remains an option. 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. 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. At December 31,
2002, the Company had recorded dividends payable of $349,000 for the payment of
a dividend on January 15, 2003.
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 three
month period ended December 31, 2002, the Company did not repurchase any shares
of its stock, due largely to an increase in the market price of the Company's
shares. On August 15, 2002, the Company announced a new repurchase program
whereby it would seek to purchase up to 62,000 shares of its outstanding common
stock. The program is dependent upon market conditions and there is no guarantee
as to the exact number of shares to be repurchased by the Company. The Company's
Board and Management continue to believe in the potential positive effects of a
repurchase strategy and will continue to evaluate market conditions along with
other possible uses of capital in determining the authorization of future
repurchase programs.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2002
AND DECEMBER 31, 2001
NET EARNINGS: The Company's net earnings decreased $11,000 or 3.1% from
$355,000 for the three month period ended December 31, 2001, to $344,000 for the
three month period ended December 31, 2002. The decrease in net earnings was
primarily attributable to a decrease in net interest income of $38,000. The
Company's basic earnings per share remained unchanged at $0.28 per share for the
three month periods ended December 31, 2002 and 2001. The Company's diluted
earnings per share decreased $0.01 per share or 3.6% from $0.28 for the three
month period ended December 31, 2001 to $0.27 for the three month period ended
December 31, 2002.
page 10
NET INTEREST INCOME: Net interest income after provision for loan losses
decreased $38,000 or 4.0% from $946,000 for the three month period ended
December 31, 2001 to $908,000 for the three month period ended December 31,
2002. 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 total interest income than the decrease in interest expense.
INTEREST INCOME: Interest income decreased $378,000 or 14.7% to $2.2
million for the three month period ended December 31, 2002. The decrease was
related primarily to a decrease in interest income from loans, which decreased
$362,000 or 14.5%, to $2.1 million for the three month period ended December 31,
2002. Also contributing to the decrease in interest income was a decrease in
interest income from investment securities. Interest income from investment
securities decreased $14,000 or 73.7% from $19,000 for the three month period
ended December 31, 2001 to $5,000 for the period just ended.
The decrease in income on the Company's loan portfolio was related
primarily to a decrease in the average balance of the portfolio although a
decrease in the average rate earned on the portfolio also had a negative impact
on the overall yield. The average balance of the loan portfolio decreased $12.8
million or 9.3% to $125.2 million for the three month period ended December 31,
2002, compared to the prior year period, while the average rate earned on the
loan portfolio decreased 41 basis points to 6.82% for the most recent quarter
ended. The decrease in the average balance of the Company's loan portfolio was
chiefly a result of repayments associated with borrowers refinancing to lower
rates with other lenders. Demand for the Bank's primary product, the adjustable
rate mortgage, declines somewhat in periods of falling or low prevailing
interest rates. Still, Management believes the origination of this loan provides
the best blend of yield and interest rate risk protection and will continue to
emphasize its origination.
INTEREST EXPENSE: Interest expense decreased $340,000 or 20.9% to $1.3
million for the three month period ended December 31, 2002. This decrease was
primarily due to a decrease in interest expense on deposits, which decreased
$307,000 or 33.4% to $611,000 for the three month period ended December 31,
2002. The decrease in interest expense on deposits was primarily attributable to
a 124 basis point decrease in the rate paid on deposits to 3.25% for the three
month period ended December 31, 2002, although the $6.5 million or 7.9% decrease
in the average balance of deposits outstanding from period to period also
contributed. The average balance of deposits outstanding for the three month
period ended December 31, 2002, was $75.3 million, compared to $81.8 million for
the three month period ended December 31, 2001. Interest expense on FHLB
advances decreased $33,000 or 4.6% to $677,000 for the three month period ended
December 31, 2002, compared to the same period in 2001. The decrease in interest
expense on FHLB advances was primarily attributable to a decrease of $2.1
million or 4.5% in the average balance outstanding. The average balance of FHLB
advances outstanding for the three month period ended December 31, 2002 was
$44.1 million compared to $46.2 million for the three month period ended
December 31, 2001. In general, rates paid on FHLB advances are greater than
rates paid on deposits and do not re-price as quickly. Management believes that,
when compared to other sources of funds, FHLB advances offer plans and terms
that can be more easily matched to characteristics of the Company's
interest-earning assets. This strategy may be altered as market conditions
affect the terms, rates, and availability of retail deposits.
OTHER OPERATING INCOME: Other operating income increased $11,000 or 84.6%
from $13,000 for the three month period ended December 31, 2001 to $24,000 for
the three month period ended December 31, 2002. The increase in other operating
income was primarily attributable to gain on the sale of property acquired in
settlement of loans. 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 decreased $14,000 or 3.3% from $428,000 for the three month period
ended December 31, 2001 to $414,000 for the three month period ended December
31, 2002. The decrease was due primarily to a $21,000 or 8.5% decrease in
employee compensation and benefits, which resulted mostly from decreased costs
associated with the Company's deferred compensation program. Although the
deferred compensation plan has some features that cause compensation expense to
increase with the Company's stock price, the Company has taken steps to greatly
reduce the expense in the future and to reduce the effects that increasing stock
prices can have on the expense associated with this plan.
INCOME TAX: The Company's provision for federal income taxes decreased from
$176,000 for the three month period ended December 31, 2001 to $174,000 for the
three month period ended December 31, 2002. The decrease was a result of the
decrease in the Company's pretax earnings. The Company's effective tax rate was
33.6% and 33.1% for the three month periods ended December 31, 2002 and 2001,
respectively.
page 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information as of December 31, 2002, concerning the Company's exposure to
market risk, which has remained relatively unchanged from June 30, 2002, is
incorporated by reference under Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk," in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's disclosure controls and procedures (as such term is
defined in Rule 13a-14 (c) under the Exchange Act) as of a date within 90 days
of the date of filing of this Form 10-Q. Based upon such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that such controls and procedures are effective to ensure that the information
required to be disclosed by the Company in the reports it files under the
Exchange Act is gathered, analyzed and disclosed with adequate timeliness.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of the evaluation described above.
page 12
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
(a) The registrant held its Annual Meeting of Stockholders on November 12,
2002.
(b) Not applicable.
(c) The only matter to be voted upon at the Annual Meeting was the
election of three individuals as directors.
Nominee Votes For Votes Withheld
------- --------- --------------
David G. Eddins 1,085,828 1,973
William C. Jennings 1,076,525 11,276
C. Michael Davenport 1,083,077 4,724
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits: Exhibit 99-Certification of Chief Executive Officer and Chief
Financial Officer pursuant to section 906 of the Sarbanes-Oxley
Act of 2002
Reports on Form 8-K: None
page 13
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: February 7, 2003
/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 14
Certification
I, Don Jennings, President and Chief Executive Officer of Frankfort First
Bancorp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Frankfort First
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board or directors (or persons fulfilling the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: 2/7/03
/s/ Don Jennings
-----------------------------------------
Don Jennings
President and Chief Executive Officer
page 15
CERTIFICATION
I, R. Clay Hulette, Vice President and Chief Financial Officer of Frankfort
First Bancorp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Frankfort First
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
d) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
e) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
f) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board or directors (or persons fulfilling the equivalent
functions):
c) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
d) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: 2/7/03
/s/ R. Clay Hulette
------------------------------------------
R. Clay Hulette
Vice President and Chief Financial Officer
page 16