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 March 31, 2003
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
--- ---
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 May 12, 2003: 1,246,108
Page 1 of 16 pages
page 1
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
---------------------------------------------------------------------
Item 1. Consolidated Statements of Financial Condition at
March 31, 2003 and June 30, 2002 3
Consolidated Statements of Earnings for the three
months and nine months ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows for the nine
months ended March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a
Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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page 2
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except per share data)
March 31, June 30,
2003 2002
ASSETS
Cash and due from banks $ 115 $ 638
Interest-bearing deposits in other financial institutions 8,975 4,174
--------- ---------
Cash and cash equivalents 9,090 4,812
Certificates of deposit in other financial institutions 3,100 100
Loans receivable - net 122,241 131,180
Property acquired in settlement of loans-net -- 311
Office premises and equipment - at depreciated cost 1,384 1,372
Federal Home Loan Bank stock - at cost 2,799 2,708
Accrued interest receivable on loans 303 389
Accrued interest receivable on investments and
interest-bearing deposits 19 --
Prepaid expenses and other assets 73 85
--------- ---------
Total assets $ 139,009 $ 140,957
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 76,230 $ 75,896
Advances from the Federal Home Loan Bank 43,299 44,982
Advances by borrowers for taxes and insurance 188 329
Accrued interest payable 38 55
Accrued federal income taxes 155 13
Deferred federal income taxes 243 217
Other liabilities 826 1,400
--------- ---------
Total liabilities 120,979 122,892
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 18,571 18,606
Less 418,335 shares of treasury stock-at cost (6,331) (6,434)
Less shares acquired for stock benefit plan (103) --
--------- ---------
Total shareholders' equity 18,030 18,065
--------- ---------
Total liabilities and shareholders' equity $ 139,009 $ 140,957
========= =========
Book value per share $ 14.47 $ 14.50
========= =========
page 3
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Nine months ended Three months ended
March 31, March 31,
2003 2002 2003 2002
Interest income
Loans $6,416 $7,421 $2,033 $2,365
Investment securities 21 54 16 7
Interest-bearing deposits and other 155 186 46 42
------ ------ ------ ------
Total interest income 6,592 7,661 2,095 2,414
Interest expense
Deposits 1,815 2,671 563 767
Borrowings 2,019 2,116 654 686
------ ------ ------ ------
Total interest expense 3,834 4,787 1,217 1,453
------ ------ ------ ------
Net interest income 2,758 2,874 878 961
Provision for losses on loans -- 1 -- --
------ ------ ------ ------
Net interest income after provision
for losses on loans 2,758 2,873 878 961
Other operating income 55 42 11 11
General, administrative and other expense
Employee compensation and benefits 716 771 244 267
Occupancy and equipment 134 131 47 45
Federal deposit insurance premiums 10 12 3 4
Franchise and other taxes 82 67 26 27
Data processing 93 91 35 30
Other operating 241 243 86 88
------ ------ ------ ------
Total general, administrative
and other expense 1,276 1,315 441 461
------ ------ ------ ------
Earnings before income taxes 1,537 1,600 448 511
Federal income taxes
Current 497 438 131 167
Deferred 26 107 21 11
------ ------ ------ ------
Total federal income taxes 523 545 152 178
------ ------ ------ ------
NET EARNINGS $1,014 $1,055 $ 296 $ 333
====== ====== ====== ======
Basic Earnings Per Share $ 0.81 $ 0.85 $ 0.23 $ 0.27
====== ====== ====== ======
Diluted Earnings Per Share $ 0.79 $ 0.83 $ 0.23 $ 0.26
====== ====== ====== ======
page 4
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended March 31,
(In thousands)
2003 2002
Cash flows from operating activities:
Net earnings for the period $ 1,014 $ 1,055
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 -- (5)
Amortization of deferred loan origination fees (95) (50)
Depreciation and amortization 59 59
Provision for losses on loans -- 1
Federal Home Loan Bank stock dividends (91) (110)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 67 70
Prepaid expenses and other assets 12 22
Accrued interest payable (17) (3)
Other liabilities (574) 22
Federal income taxes
Current 142 98
Deferred 26 107
-------- --------
Net cash provided by operating activities
543 1,266
Cash flows provided by (used in) investing activities:
Purchase of certificates of deposit in other financial
institutions (3,000) --
Proceeds from maturity of investment securities -- 2,000
Loan principal repayments 27,634 24,520
Loan disbursements (18,600) (20,847)
Proceeds from sale of real estate acquired through
foreclosure 311 --
Purchase of office premises and equipment (71) (30)
-------- --------
Net cash provided by investing activities 6,274 5,643
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts 334 (4,837)
Repayment of Federal Home Loan Bank advances (1,683) (1,845)
Advances by borrowers for taxes and insurance (141) (146)
Dividends paid on common stock (1,049) (1,047)
-------- --------
Net cash used in financing activities (2,539) (7,875)
-------- --------
Net increase (decrease) in cash and cash equivalents 4,278 (966)
Cash and cash equivalents at beginning of period 4,812 6,717
-------- --------
Cash and cash equivalents at end of period $ 9,090 $ 5,751
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 360 $ 340
======== ========
Interest on deposits and borrowings $ 3,851 $ 4,790
======== ========
page 5
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month and nine month periods ended March 31, 2003 and 2002
(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 nine month periods ended March 31, 2003 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 nine month and three
month periods ended March 31, 2003, and 2002.
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 1,284,634 and 1,283,953
for the nine and three month periods ended March 31, 2003, respectively.
Incremental shares related to the assumed exercise of stock options included in
the calculation of diluted earnings per share totaled 38,526 and 37,845 for the
nine and three month periods ended March 31, 2003, respectively.
Weighted-average common shares deemed outstanding for purposes of computing
diluted earnings per share totaled 1,278,394 and 1,281,768 for the nine and
three month periods ended March 31, 2002, respectively. Incremental shares
related to the assumed exercise of stock options included in the calculation of
diluted earnings per share totaled 32,286 and 35,660 for the nine and three
month periods ended March 31, 2002, respectively. As of March 31, 2003 the
Company had 181,859 stock options outstanding of which 177,112 had an exercise
price of $13.80 per share and 4,747 had 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 March 31, 2003.
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.
Management adopted SFAS No. 147 effective October 1, 2002, without 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.
Management adopted the disclosure provisions of SFAS No. 148 effective
January 1, 2003, without material effect on the Company's financial condition or
results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns, or both. FIN 46
also requires disclosures about variable interest entities that a company is not
required to consolidate, but in which it has a significant variable interest.
The consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
existing entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company adopted the disclosure requirements
of FIN 46 effective January 1, 2003, without material effect on its financial
statements.
(5) 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 (adjusted) shares of authorized, but unissued shares of common stock at
fair value at the date of grant. The Company had initially granted options to
purchase shares at an adjusted fair value of $13.80 per share. 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.
page 7
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 nine and three
month periods ended March 31, 2003 and 2002, as no options were granted during
those periods and 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 March 31,
2003 and June 30, 2002 and 2001, and changes during the periods ending on those
dates is presented below:
NINE MONTHS ENDED YEAR ENDED
MARCH 31, JUNE 30,
2003 2002 2001
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of period 181,859 $13.83 239,495 $13.82 239,495 $13.82
Granted -- -- -- -- -- --
Exercised -- -- -- -- -- --
Forfeited -- -- (57,636) 13.80 -- --
------- ------ ------- ------ ------- ------
Outstanding at end of period 181,859 $13.83 181,859 $13.83 239,492 $13.82
======= ====== ======= ====== ======= ======
Options exercisable at period-end 181,859 $13.83 181,859 $13.83 238,543 $13.82
======= ====== ======= ====== ======= ======
The following information applies to options outstanding at March 31, 2003:
Number outstanding 181,859
Range of exercise prices $13.80 - $14.91
Weighted-average exercise price $13.83
Weighted-average remaining contractual life 2.75 years
page 8
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 MARCH 31, 2003 AND JUNE 30, 2002
ASSETS: The Company's total assets were $139.0 million at March 31, 2003, a
decrease of $1.9 million or 1.4% from the June 30, 2002 level. The decrease in
total assets was primarily attributable to a decrease in the Company's net loans
receivable, which decreased $8.9 million or 6.8% to $122.2 million at March 31,
2003. The decrease in the Company's net loans receivable was partially offset by
an increase of $4.3 million or 88.9% in cash and cash equivalents, which totaled
$9.1 million at March 31, 2003 and a $3.0 million increase in certificates of
deposit in other financial institutions.
LIABILITIES: The Company's total liabilities decreased $1.9 million or 1.6%
to $121.0 million at March 31, 2003, compared to June 30, 2002. The decrease in
total liabilities was primarily attributable to decreases in FHLB advances and
other liabilities. FHLB advances decreased $1.7 million or 3.7% to $43.3 million
at March 31, 2003. Other liabilities decreased $574,000 or 41.0% to $826,000 at
March 31, 2003, as liabilities associated with the Company's deferred
compensation program were reduced during the period.
SHAREHOLDERS' EQUITY: Shareholders' equity was $18.0 million at March 31,
2003, a decrease of $35,000 or 0.2% compared to June 30, 2002. The Company's
book value per share was $14.47 at March 31, 2003, compared to $14.50 at June
30, 2002.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 2003 AND
MARCH 31, 2002
NET EARNINGS: The Company's net earnings decreased $41,000 or 3.9% to $1.0
million for the nine month period ended March 31, 2003. The decrease in net
earnings was primarily attributable to a decrease in net interest income after
provision for losses on loans of $115,000. The Company's basic earnings per
share decreased $0.04 or 4.7% from $0.85 per share for the nine month period
ended March 31, 2002 to $0.81 per share for the nine month period ended March
31, 2003. The Company's diluted earnings per share decreased $0.04 per share or
4.8% from $0.83 for the nine month period ended March 31, 2002 to $0.79 for the
nine month period ended March 31, 2003.
NET INTEREST INCOME: Net interest income after provision for loan losses
was $2.8 million for the nine month period ended March 31, 2003, a decrease of
$115,000 or 4.0% compared to the nine month period ended March 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.
page 9
INTEREST INCOME: Interest income decreased $1.1 million or 14.0% to $6.6
million for the nine month period ended March 31, 2003. The decrease was related
primarily to a decrease in interest income from loans, which decreased $1.0
million or 13.5%, to $6.4 million for the nine month period ended March 31,
2003. 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 $33,000 or 61.1% from $54,000 for the nine month period ended March
31, 2002 to $21,000 for the period just ended. Interest income from
interest-bearing deposits and other decreased $31,000 or 16.7% from $186,000 for
the nine month period ended March 31, 2002 to $155,000 for the current period.
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 $10.8 million
or 7.9% to $125.9 million for the nine month period ended March 31, 2003,
compared to the prior year period, while the average rate earned on the loan
portfolio decreased 44 basis points to 6.80% for the most recent nine 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 $953,000 or 19.9% to $3.8
million for the nine month period ended March 31, 2003. This decrease was
primarily due to a decrease in interest expense on deposits, which decreased
$856,000 or 32.0% to $1.8 million for the nine month period ended March 31,
2003. The decrease in interest expense on deposits was primarily attributable to
a 120 basis point decrease in the rate paid on deposits to 3.20% for the nine
month period ended March 31, 2003, although a $5.3 million or 6.6% decrease in
the average balance of deposits outstanding from period to period also
contributed. The average balance of deposits outstanding for the nine month
period ended March 31, 2003, was $75.5 million. Interest expense on FHLB
advances decreased $97,000 or 4.6% to $2.0 million for the nine month period
ended March 31, 2003, compared to the same period in 2002. 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 nine month period ended March 31, 2003 was
$44.1 million compared to $46.2 million for the nine month period ended March
31, 2002. 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 nine month period ended March 31, 2003 and a $1,000 provision for the
nine month period ended March 31, 2002. The allowance for loan losses was
$82,000 and $102,000 at March 31, 2003 and 2002, respectively. As a percentage
of non-performing assets, the allowance for losses on loans increased from 16.7%
at March 31, 2002 to 17.5% at March 31, 2003. This increase was caused chiefly
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 March 31, 2003. 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.
page 10
OTHER OPERATING INCOME: Other operating income increased $13,000 or 31.0%
from $42,000 for the nine month period ended March 31, 2002 to $55,000 for the
nine month period ended March 31, 2003. 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 $39,000 or 3.0% remaining at $1.3 million for the nine
month periods ended March 31, 2003 and 2002. The decrease was due primarily to a
$55,000 or 7.1% 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 decreased from
$545,000 for the nine month period ended March 31, 2002 to $523,000 for the nine
month period ended March 31, 2003. The Company's effective tax rate was 34.0%
and 34.1% for the nine month periods ended March 31, 2003 and 2002,
respectively.
NON-PERFORMING ASSETS: At March 31, 2003, the Bank had approximately
$468,000 (0.4% of net loans) in loans 90 days or more past due but still
accruing, as compared to $612,000 at March 31, 2002. Also, the Bank had
approximately $361,000 in loans listed as special mention and $490,000 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 March 31,
2003, the Company had recorded dividends payable of $351,000 for the payment of
a dividend on April 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 March 31, 2003, 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.
page 11
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003
AND MARCH 31, 2002
NET EARNINGS: The Company's net earnings decreased $37,000 or 11.1% from
$333,000 for the three month period ended March 31, 2002, to $296,000 for the
three month period ended March 31, 2003. The decrease in net earnings was
primarily attributable to a decrease in net interest income of $83,000. The
Company's basic earnings per share decreased $0.04 or 14.8% to $0.23 per share
for the three month period ended March 31, 2003 compared to $0.27 per share for
the three month period ended March 31, 2002. The Company's diluted earnings per
share decreased $0.03 or 11.5% from $0.26 per share for the three month period
ended March 31, 2002 to $0.23 for the three month period ended March 31, 2003.
NET INTEREST INCOME: Net interest income after provision for loan losses
decreased $83,000 or 8.6% from $961,000 for the three month period ended March
31, 2002 to $878,000 for the three month period ended March 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 total
interest income than the decrease in interest expense.
INTEREST INCOME: Interest income decreased $319,000 or 13.2% to $2.1
million for the three month period ended March 31, 2003. The decrease was
related primarily to a decrease in interest income from loans, which decreased
$332,000 or 14.0%, to $2.0 million for the three month period ended March 31,
2003. Partially offsetting the decrease in interest income from loans were
increases in interest income from investment securities and interest income from
interest-bearing deposits and other. Interest income from investment securities
increased $9,000 or 128.6% to $16,000 for the three month period just ended.
Interest income from interest-bearing deposits and other increased $4,000 or
9.5% to $46,000 for the three month period ended March 31, 2003.
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 $12.1
million or 9.0% to $122.6 million for the three month period ended March 31,
2003, compared to the prior year period, while the average rate earned on the
loan portfolio decreased 40 basis points to 6.63% 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 $236,000 or 16.2% to $1.2
million for the three month period ended March 31, 2003. This decrease was
primarily due to a decrease in interest expense on deposits, which decreased
$204,000 or 26.6% to $563,000 for the three month period ended March 31, 2003.
The decrease in interest expense on deposits was primarily attributable to a 94
basis point decrease in the average rate paid on deposits to 2.96% for the three
month period ended March 31, 2003, although the $2.7 million or 3.5% 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 March 31, 2003, was $76.0 million. Interest expense on FHLB
advances decreased $32,000 or 4.7% to $654,000 for the three month period ended
March 31, 2003, compared to the same period in 2002. The decrease in interest
expense on FHLB advances was primarily attributable to a decrease of $2.0
million or 4.4% in the average balance outstanding. The average balance of FHLB
advances outstanding for the three month period ended March 31, 2003 was $43.5
million compared to $45.5 million for the three month period ended March 31,
2002. 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 remained constant at $11,000
for the three month periods ended March 31, 2003 and 2002. Other operating
income is not a significant component of the Company's statement of earnings.
page 12
GENERAL, ADMINISTRATIVE, AND OTHER EXPENSES: General, administrative, and
other expense decreased $20,000 or 4.3% from $461,000 for the three month period
ended March 31, 2002 to $441,000 for the three month period ended March 31,
2003. The decrease was due primarily to a $23,000 or 8.6% 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
$178,000 for the three month period ended March 31, 2002 to $152,000 for the
three month period ended March 31, 2003. The decrease was a result of the
decrease in the Company's pretax earnings. The Company's effective tax rate was
33.9% and 34.8% for the three month periods ended March 31, 2003 and 2002,
respectively.
page 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information as of March 31, 2003, 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 14
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: 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 15
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: May 12, 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 16
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: May 13, 2003
/s/ Don Jennings
-------------------------------------
Don Jennings
President and Chief Executive Officer
page 17
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: May 12, 2003
/s/ R. Clay Hulette
------------------------------------------
R. Clay Hulette
Vice President and Chief Financial Officer
page 18