UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
__ TRANSITION REPORT UNDER 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 Small Business Issuer 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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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all documents and reports required to be
filed by Sections 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date.
As of November 12, 2003: 1,261,522
Page 1 of 16 pages
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----------------------------------------------------------------------
Item 1 Financial Statements
Consolidated Statements of Financial Condition
at September 30, 2003 and June 30, 2003 (Audited) 3
Consolidated Statements of Earnings for the three
months ended September 30, 2003 and 2002 4
Consolidated Statements of Comprehensive Income
for the three months ended September 30, 2003 and 2002 5
Consolidated Statements of Cash Flows for the three
months ended September 30, 2003 and 2002 6
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis
or Plan of Operation 11
Item 3 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)
September 30, June 30,
2003 2003
(Audited)
ASSETS
Cash and due from banks $ 195 $ 478
Interest-bearing deposits in other financial institutions 2,060 1,550
-------------- ------------
Cash and cash equivalents
2,255 2,028
Certificates of deposit in other financial institutions 3,100 3,100
Mortgage-backed securities available for sale - at market 3,568 3,997
Loans receivable - net 125,092 124,596
Real estate acquired through foreclosure - net -- 29
Office premises and equipment - at depreciated cost 1,350 1,364
Federal Home Loan Bank stock - at cost 2,855 2,827
Accrued interest receivable on loans 299 293
Accrued interest receivable on investments and
interest-bearing deposits 29 15
Prepaid expenses and other assets 63 87
-------------- ------------
Total assets $ 138,611 $ 138,336
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 76,092 $ 75,622
Advances from the Federal Home Loan Bank 42,649 43,017
Advances by borrowers for taxes and insurance 452 324
Accrued interest payable 29 29
Accrued federal income taxes 394 261
Deferred federal income taxes 248 265
Other liabilities 870 820
-------------- ------------
Total liabilities 120,734 120,338
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 5,887 5,879
Retained earnings - restricted 18,425 18,525
Less 415,903 and 418,335 shares of treasury stock-at cost (6,338) (6,331)
Less shares acquired for stock benefit plan (95) (98)
Other comprehensive income, unrealized gains (losses) on
securities designated as available for sale
- net of related tax effects (19) 6
------------- -----------
Total shareholders' equity 17,877 17,998
------------- -----------
Total liabilities and shareholders' equity $ 138,611 $ 138,336
============= ===========
Book value per share $ 14.23 $ 14.35
============= ===========
Page 3
Frankfort First Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended September 30,
(In thousands, except per share data)
2003 2002
Interest income
Loans $ 1,889 $ 2,248
Investment securities 40 1
Interest-bearing deposits and other 34 52
----------- -----------
Total interest income
1,963 2,301
Interest expense
Deposits 515 641
Borrowings 657 688
----------- -----------
Total interest expense 1,172 1,329
----------- -----------
Net interest income 791 972
Provision for losses on loans -- --
----------- -----------
Net interest income after provision for
losses on loans 791 972
Other operating income 12 20
General, administrative and other expense
Employee compensation and benefits 258 247
Occupancy and equipment 38 43
Franchise and other taxes 25 26
Data processing 28 30
Other operating 74 75
----------- -----------
Total general, administrative
and other expense 423 421
----------- -----------
Earnings before income taxes 380 571
Federal income taxes
Current 136 204
Deferred (7) (7)
Total federal income taxes 129 197
----------- -----------
NET EARNINGS $ 251 $ 374
=========== ===========
Earnings Per Share
Basic $ 0.20 $ 0.30
=========== ===========
Diluted
$ 0.19 $ 0.29
=========== ===========
Page 4
Frankfort First Bancorp, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended September 30,
(In thousands)
2003 2002
Net earnings $ 251 $ 374
Other comprehensive income, net of tax:
Unrealized losses on securities, net of tax (25) --
----------- -----------
Comprehensive income $ 226 $ 374
=========== ===========
Page 5
Frankfort First Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended September 30,
(In thousands)
2003 2002
Cash flows from operating activities:
Net earnings for the period $ 251 $ 374
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 8 --
Amortization of deferred loan origination fees (20) (21)
Depreciation and amortization 19 19
Provision for losses on loans -- --
Federal Home Loan Bank stock dividends (28) (32)
Amortization expense of stock benefit plan 4 --
Increase (decrease) in cash due to changes in:
Accrued interest receivable (20) 24
Prepaid expenses and other assets 24 27
Accrued interest payable -- 2
Other liabilities 50 (576)
Federal income taxes
Current 133 204
Deferred (3) (7)
----------------- --------------
Net cash provided by operating activities 418 14
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities 382 --
Loan principal repayments 10,077 8,825
Loan disbursements (10,524) (6,541)
Proceeds from sale of real estate acquired through foreclosure -- 178
Purchase of office premises and equipment (5) (17)
----------------- --------------
Net cash provided by (used in) investing activities (70) 2,445
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts 470 (789)
Repayment of Federal Home Loan Bank advances (368) (480)
Advances by borrowers for taxes and insurance 128 140
Dividends paid on common stock (351) (349)
----------------- --------------
Net cash used in financing activities (121) (1,478)
----------------- --------------
Net increase in cash and cash equivalents 227 981
Cash and cash equivalents at beginning of period 2,028 4,812
----------------- --------------
Cash and cash equivalents at end of period $ 2,255 $ 5,793
================= ==============
Page 6
Frankfort First Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued) For the three months ended September 30,
(In thousands)
2003 2002
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ -- $ --
================== ===============
Interest on deposits and borrowings $ 1,172 $ 1,327
================== ===============
Supplemental disclosure of noncash investing activities:
Origination of loans upon sale of real estate acquired
through foreclosure $ 40 $ 180
================== ===============
Unrealized losses on securities designated as available
for sale, net of related tax effects $ (25) $ --
================== ===============
Supplemental disclosure of noncash financing activities:
Dividends declared but unpaid $ 351 $ 349
================== ===============
Issuance of shares under stock option plan in exchange
for previously issued shares $ 104 $ --
================== ===============
Page 7
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-QSB and therefore do not include all
disclosures necessary for a complete presentation of the statements of financial
condition, statements of earnings, 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 periods ended September 30, 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-KSB for the year ended June 30, 2003.
(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 1,254,690 and 1,246,108 for the three month
periods ended September 30, 2003, and 2002, 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 1,313,887 and 1,286,257
for the three month periods ended September 30, 2003 and 2002, respectively.
Incremental shares related to the assumed exercise of stock options included in
the calculation of diluted earnings per share totaled 59,197 and 40,149 for the
three month periods ended September 30, 2003 and 2002, respectively. As of
September 30, 2003, the Company had 174,349 stock options outstanding of which
169,602 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 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 July 1, 2003, without material effect on its financial
statements.
Page 8
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which clarifies certain
implementation issues raised by constituents and amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," to include the
conclusions reached by the FASB on certain FASB Staff Implementation Issues
that, while inconsistent with Statement 133's conclusions, were considered by
the Board to be preferable; amends SFAS No. 133's discussion of financial
guarantee contracts and the application of the shortcut method to an
interest-rate swap agreement that includes an embedded option and amends other
pronouncements. The guidance in Statement 149 is generally effective for new
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after that date. Management adopted the disclosure
provisions of SFAS No. 149 effective July 1, 2003, without material effect on
the Company's financial position and results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which changes the classification in the statement of financial position of
certain common financial instruments from either equity or mezzanine
presentation to liabilities and requires an issuer of those financial statements
to recognize changes in fair value or redemption amount, as applicable in
earnings. SFAS No. 150 requires an issuer to classify certain financial
instruments as liabilities, including mandatorily redeemable preferred and
common stocks. Management adopted the disclosure provisions of SFAS No. 150
effective July 1, 2003, without material effect on the Company's financial
position and results of operations.
(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.
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 three month
periods ended September 30, 2003 and 2002, as no options were granted during
those periods and options previously granted had fully vested prior to July 1,
2001.
Page 9
A summary of the status of the Company's stock option plan as of September
30, 2003 and June 30, 2003 and 2002, and changes during the periods ending on
those dates is presented below:
THREE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, JUNE 30,
2003 2003 2002
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of period 181,859 $13.83 181,859 $13.83 239,495 $13.82
Granted -- -- -- -- -- --
Exercised (7,510) 13.80 -- -- -- --
Forfeited -- -- -- -- (57,636) 13.80
--------- ------ ------- ------ --------- ------
Outstanding at end of period 174,349 $13.83 181,859 $13.83 181,859 $13.83
========= ====== ======= ====== ========= ======
Options exercisable at period-end 174,349 $13.83 181,859 $13.83 181,859 $13.83
========= ====== ======= ====== ========= ======
The following information applies to options outstanding at September 30, 2003:
Number outstanding 174,349
Range of exercise prices $13.80 - $14.91
Weighted-average exercise price $13.83
Weighted-average remaining contractual life 2.25 years
(6) CRITICAL ACCOUNTING POLICIES
Allowance for Losses on Loans: It is the Company's policy to provide
valuation allowances for estimated losses on loans based upon past loss
experience, trends in the level of delinquent and specific problem loans,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral and current economic conditions in
the Company's primary market areas. When the collection of a loan becomes
doubtful, or otherwise troubled, the Company records a loan loss provision equal
to the difference between the fair value of the property securing the loan and
the loan's carrying value. Lending areas are reviewed periodically to determine
potential problems at an early date. The allowance for loan losses is increased
by charges to earnings and decreased by charge-offs (net of recoveries).
The Company accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," which requires that impaired
loans be measured based upon the present value of expected future cash flows
discounted at the loan's effective interest rate or, as an alternative, at the
loan's observable market price or fair value of the collateral.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Company considers its investment in
one-to-four family residential loans and consumer installment loans to be
homogeneous and therefore excluded from separate identification for evaluation
of impairment. With respect to the Company's investment in multi-family and
nonresidential loans, and its evaluation of impairment thereof, such loans are
collateral dependent and as a result are carried as a practical expedient at the
lower of cost or fair value.
Collateral dependent loans which are more than ninety days delinquent are
considered to constitute more than a minimum delay in repayment and are
evaluated for impairment under SFAS No. 114 at that time.
Page 10
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 business of Frankfort First Bancorp (the "Company") is the operation of
First Federal Savings Bank of Frankfort (the "Bank"). 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, 2003 AND JUNE 30, 2003
ASSETS: The Company's total assets were $138.6 million at September 30,
2003, an increase of $275,000 or 0.2% from the June 30, 2003 level. The increase
in total assets was primarily attributable to an increase in the Company's net
loans receivable and cash and cash equivalents. Net loans receivable increased
$496,000 or 0.4% to $125.1 million at September 30, 2003, while cash and cash
equivalents increased $227,000 or 11.2% to $2.3 million. The increase in the
Company's net loans receivable and cash and cash equivalents was partially
offset by a decrease of $429,000 or 10.7% in mortgage-backed securities, which
totaled $3.6 million at September 30, 2003. The decrease in mortgage-backed
securities was attributable primarily to principal repayments of $382,000 during
the period, although premium amortization of $8,000 and a net unrealized loss of
$39,000 on the securities contributed to the decline.
LIABILITIES: The Company's total liabilities increased $396,000 or 0.3% to
$120.7 million at September 30, 2003, compared to June 30, 2003. The increase in
total liabilities was primarily attributable to an increase in deposits, which
increased $470,000 or 0.6% to $76.1 million at September 30, 2003. Somewhat
offsetting the increase in deposits was a decrease in FHLB advances, which
decreased $368,000 or 0.9% to $42.6 million at September 30, 2003.
SHAREHOLDERS' EQUITY: Shareholders' equity was $17.9 million at September
30, 2003, a decrease of $121,000 or 0.7% compared to June 30, 2003. The
Company's book value per share was $14.23 at September 30, 2003, compared to
$14.35 at June 30, 2003.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2003 AND SEPTEMBER 30, 2002
NET EARNINGS: The Company's net earnings decreased $123,000 or 32.9% to
$251,000 for the three month period ended September 30, 2003 compared to 2002.
The decrease in net earnings was primarily attributable to a decrease in net
interest income of $181,000. The Company's basic earnings per share decreased
$0.10 or 33.3% from $0.30 per share for the three month period ended September
30, 2002 to $0.20 per share for the 2003 period. The Company's diluted earnings
per share decreased $0.10 per share or 34.5% to $0.19 per share for the three
month period just ended compared to $0.29 for the three month period ended
September 30, 2002.
NET INTEREST INCOME: Net interest income after provision for loan losses
was $791,000 for the three month period ended September 30, 2003, a decrease of
$181,000 or 18.6% compared to $972,000 for the three month period ended
September 30, 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 interest income than the decrease in interest expense.
Page 11
INTEREST INCOME: Interest income decreased $338,000 or 14.7% to $2.0
million for the three month period ended September 30, 2003. The decrease was
related primarily to a decrease in interest income from loans, which decreased
$359,000 or 16.0%, to $1.9 million for the three month period recently ended.
Also contributing to the decrease in interest income was a decrease in interest
income from interest-bearing deposits and other, which decreased $18,000 or
34.6% from period to period. Interest income from investment securities
increased $39,000 from $1,000 for the three month period ended September 30,
2002 to $40,000 for the period just ended.
The decrease in yield on the Company's loan portfolio was related primarily
to a decrease in the average rate earned on the portfolio, although a decrease
in the average outstanding balance of the portfolio also had a negative impact
on the overall yield. The average rate earned on the loan portfolio decreased 84
basis points ("bps") to 6.08% for the three month period ended September 30,
2003, compared to the prior year period, while the average outstanding balance
of the loan portfolio decreased $5.6 million or 4.3% to $124.3 million for the
most recent three month period. The decrease in the average rate earned on the
Company's loan portfolio was chiefly a result of borrowers refinancing to lower
rates and downward adjustment of adjustable rate mortgages. 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 $157,000 or 11.8% to $1.2
million for the three month period ended September 30, 2003. This decrease was
primarily due to a decrease in interest expense on deposits, which decreased
$126,000 or 19.7% to $515,000 for the three month period ended September 30,
2003. The decrease in interest expense on deposits was attributable to a
decrease in the average rate paid on deposits, which decreased 69 bps to 2.72%
for the three month period ended September 30, 2003. The decrease was slightly
offset by an increase in the average outstanding balance of deposits of $575,000
or 0.8% to $75.8 million for the period ended September 30, 2003, compared to
the 2002 period. Interest expense on FHLB advances decreased $31,000 or 4.5% to
$657,000 for the three month period ended September 30, 2003, compared to the
same period in 2002. The decrease in interest expense on FHLB advances was
primarily attributable to a decrease in the average balance outstanding of $1.9
million or 4.3% to $42.8 million for the three month period ended September 30,
2003 compared to the three month period ended September 30, 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 three month periods ended September 30, 2003 or 2002. The allowance for
loan losses was $82,000 at September 30, 2003 and 2002, as well as June 30,
2003. As a percentage of non-performing assets, the allowance for losses on
loans decreased from 20.5% at September 30, 2002 to 9.7% at September 30, 2003.
This increase was caused chiefly by an increase 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 September 30, 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 12
OTHER OPERATING INCOME: Other operating income decreased $8,000 or 40.0%
from $20,000 for the three month period ended September 30, 2002 to $12,000 for
the three month period ended September 30, 2003. 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 $2,000 or 0.5% to $423,000 for the three month period
ended September 30, 2003. The increase was due primarily to an $11,000 or 4.5%
increase in employee compensation and benefits, which resulted mostly from
increased costs associated with the Company's defined benefit pension program.
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 expense
will be approximately $79,000 for the fiscal year ending June 30, 2004.
INCOME TAX: The Company's provision for federal income taxes decreased from
$197,000 for the three month period ended September 30, 2002 to $129,000 for the
three month period ended September 30, 2003. The Company's effective tax rate
was 33.9% and 34.5% for the three month periods ended September 30, 2003 and
2002, respectively.
NON-PERFORMING ASSETS: At September 30, 2003, the Bank had approximately
$845,000 (0.7% of net loans) in loans 90 days or more past due but still
accruing, as compared to $400,000 (including $133,000 of real estate owned) at
September 30, 2002. Also, the Bank had approximately $181,000 in loans listed as
special mention and $773,000 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 not initiated foreclosure proceedings with any loans included in
non-performing assets, but rather is attempting to encourage the borrowers to
remedy the delinquencies, although foreclosure remains an option. The Bank has
not charged off any loans during the period. While the addition of one or two
home loans can dramatically impact the percentages used to analyze changes in
the level of non-performing assets from one period to another, management does
not believe that the risk of loss is increased materially. The Bank has an
excellent history with respect to losses on non-performing assets.
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 September
30, 2003, the Company had recorded dividends payable of $351,000 for the payment
of a dividend on October 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 September 30, 2003, the Company did not have a repurchase
program in place and did not repurchase any shares of its stock. However, during
the quarter just ended 7,510 shares of stock options were exercised by the
exchange of 5,078 previously outstanding shares. 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.
CRITICAL ACCOUNTING POLICIES: See footnote 6 of the notes to consolidated
financial statements.
Page 13
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management of the Company
carried out an evaluation, under the supervision and with the participation of
the Company's principal executive officer and principal financial officer, of
the effectiveness of the Company's disclosure controls and procedures. Based on
this evaluation, the Company's principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective in ensuring that information required to be disclosed
by the Company in reports that it files or submits under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commission's rules and
forms. It should be noted that the design of the Company's disclosure controls
and procedures is based in part upon certain reasonable assumptions about the
likelihood of future events, and there can be no reasonable assurance that any
design of disclosure controls and procedures will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote,
but the Company's principal executive and financial officers have concluded that
the Company's disclosure controls and procedures are, in fact, effective at a
reasonable assurance level.
In addition, there have been no changes in the Company's internal control over
financial reporting (to the extent that elements of internal control over
financial reporting are subsumed within disclosure controls and procedures)
identified in connection with the evaluation described in the above paragraph
that occurred during the Company's last fiscal quarter, that has materially
affected, or is reasonably likely.
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
a) Exhibits:
---------
1) Exhibit 31 - Rule 13a-14 Certifications
2) Exhibit 32 - Section 1350 Certification
b) Reports on Form 8-K. On August 4, 2003, the Company
--------------------
filed a report on Form 8-K issuing a press release
announcing its unaudited financial results for the
three months and twelve months ended June 30, 2003.
The full press release dated August 4, 2003 was
attached as Exhibit 99 to that Form 8-K filing.
Page 15
SIGNATURES
Pursuant to the requirements of the Exchange Act, 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 13, 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)