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, 1998
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: No. 0-26360
FRANKFORT FIRST BANCORP, INC.
_______________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 61-1271129
____________________ ______________________
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
216 West Main Street, Frankfort, Kentucky 40602
________________________________________________________________
(Address of principal executive offices) (Zip Code)
(502) 223-1638
________________________________________________________________
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
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 the number of shares outstanding of each of the
issuer's classes of common stock, as of February 8, 1999:
1,557,248
Page 1 of 14 pages
page 1
CONTENTS
PART I - FINANCIAL INFORMATION PAGE
-----------------------------------------------------
Item 1. Consolidated Statements of Financial Condition
at December 31, 1998 and June 30, 1998 3
Consolidated Statements of Earnings for the
three months ended December 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the
six months ended December 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. OTHER INFORMATION
-----------------
Item 1 Legal Proceedings 13
Item 2 Changes in Securities 13
Item 3 Defaults upon Senior Securities 13
Item 4 Submission of Matters to a Vote
Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
- ----------
page 2
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
December 31, June 30,
1998 1998
------------ ------------
ASSETS
Cash and due from banks $ 471 $ 201
Interest-bearing deposits in other financial
institutions 1,024 1,120
-------- --------
Cash and cash equivalents 1,495 1,321
Certificates of deposit in other financial
institutions 200 200
Investment securities - at amortized cost,
approximate fair market value of $1,997 and
$2,996 as of December 31, 1998 and June 30,
1998 2,000 2,996
Loans receivable - net 129,442 126,328
Office premises and equipment - at depreciated
cost 1,502 1,503
Federal Home Loan Bank stock - at cost 1,521 1,494
Accrued interest receivable on loans 323 342
Accrued interest receivable on investments
and interest-bearing deposits 37 58
Prepaid expenses and other assets 35 90
Prepaid federal income taxes 178 97
Deferred federal income taxes 79 56
-------- --------
Total assets $136,812 $134,485
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 84,140 $ 81,891
Advances from the Federal Home Loan Bank 29,318 28,260
Advances by borrowers for taxes and insurance 30 305
Accrued interest payable 69 85
Other liabilities 1,259 1,238
-------- --------
Total liabilities 114,816 111,779
Shareholders' equity
Preferred stock, 500,000 shares authorized
$.01 par value: no shares issued -- --
Common stock, 3,750,000 shares authorized,
$.01 par value; 1,672,473 shares
issued 17 17
Additional paid-in capital 5,876 5,876
Retained earnings - restricted 18,024 17,846
Less 115,225 and 53,325 shares of treasury
stock - at cost (1,921) (1,033)
-------- --------
Total shareholders' equity 21,996 22,706
-------- --------
Total liabilities and shareholders' equity $136,812 $134,485
======== ========
Book value per share $ 14.12 $ 14.02
======== ========
page 3
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
Six Months Ended Three Months Ended
December 31, December 31,
--------------------- --------------------
1998 1997 1998 1997
---------- --------- -------- --------
Interest income
Loans $4,696 $4,639 $2,344 $2,342
Investment securities 120 126 50 57
Interest-bearing deposits and
other 61 94 34 51
------ ------ ------ ------
Total interest income 4,877 4,859 2,428 2,450
Interest expense
Deposits 1,984 2,058 995 1,033
Borrowings 842 836 410 436
------ ------ ------ ------
Total interest expense 2,826 2,894 1,405 1,469
------ ------ ------ ------
Net interest income 2,051 1,965 1,023 981
Provision for losses on loans -- -- -- --
------ ------ ------ ------
Net interest income after
provision for losses on
loans 2,051 1,965 1,023 981
Other operating income 20 25 10 13
General, administrative and other
expense
Employee compensation and benefits 413 464 198 240
Occupancy and equipment 76 73 39 36
Federal deposit insurance premiums 24 27 11 13
Franchise and other taxes 63 28 31 3
Data processing 82 63 42 31
Other operating 154 188 84 94
------ ------ ------ ------
Total general, administrative
and other expense 812 843 405 417
------ ------ ------ ------
Earnings before income taxes 1,259 1,147 628 577
Federal income taxes
Current 444 303 213 196
Deferred (23) 87 (5) --
------ ------ ------ ------
Total federal income taxes 421 390 208 196
------ ------ ------ ------
NET EARNINGS $ 838 $ 757 $ 420 $ 381
====== ====== ====== ======
Earnings per share
Basic Earnings Per Share $ 0.53 $ 0.50 $ 0.27 $ 0.25
====== ====== ====== ======
Diluted Earnings Per Share $ 0.52 $ 0.47 $ 0.27 $ 0.24
====== ====== ====== ======
page 4
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended December 31,
(In thousands)
1998 1997
------------ ------------
Cash flows from operating activities:
Net earnings for the period $ 838 $ 757
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) 5
Amortization of deferred loan origination fees (24) (5)
Depreciation and amortization 36 39
Amortization of expenses related to stock
benefit plans -- 47
Federal Home Loan Bank stock dividends (27) 43
Increase (decrease) in cash due to changes in:
Accrued interest receivable 40 16
Prepaid expenses and other assets 55 65
Other liabilities 5 6
Federal income taxes
Current (81) (329)
Deferred (23) 87
------- --------
Net cash provided by operating activities 815 645
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as
held to maturity (2,000) --
Proceeds from maturity of investment securities 3,000 1,850
Purchase of Federal Home Loan Bank stock -- (27)
Loan principal repayments 19,382 12,341
Loan disbursements (22,472) (15,631)
Purchase of office premises and equipment (35) (6)
------- --------
Net cash provided by (used) in investing
activities (2,125) (1,473)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts 2,249 (2,863)
Proceeds from Federal Home Loan Bank advances 11,500 26,500
Repayment of Federal Home Loan Bank advances (10,442) (11,684)
Repayment of other borrowed money -- (11,000)
Advances by borrowers for taxes and insurance (275) (233)
Capital distributions paid on common stock (660) (618)
Acquisition of treasury stock (888) --
------- --------
Net cash provided by (used in) financing
activities 1,484 102
------- --------
Net increase (decrease) in cash and cash equivalents 174 (726)
Cash and cash equivalents at beginning of period 1,321 2,751
------- --------
Cash and cash equivalents at end of period $ 1,495 $ 2,025
======= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 525 $ 442
======= ========
Interest on deposits and borrowings $ 2,842 $ 2,911
======= ========
page 5
Frankfort First Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1998 and 1997
(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
generally accepted accounting principles. However, all
adjustments which are, in the opinion of management, necessary
for the fair presentation of the interim financial statements
have been included and all such adjustments are of a normal
recurring nature. The results of operations for the six and three
month periods ended December 31, 1998 are not necessarily
indicative of the results which may be expected for the entire
year. These financial statements should be read in conjunction
with the audited financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year
ended June 30, 1998.
(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 less shares in the ESOP that
were unallocated and not committed to be released. Weighted
average common shares deemed outstanding for purposes of
computing basic earnings per share totaled 1,589,104 and
1,565,148 for the six and three month periods ended December 31,
1998, respectively, and 1,526,155 and 1,526,664 for the six and
three month periods ended December 31, 1997, 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 1,606,759 and
1,585,170 for the six and three month periods ended December 31,
1998, respectively, and 1,603,968 and 1,607,680 for the six and
three month periods ended December 31, 1997, respectively.
(4) EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
Reporting Comprehensive Income. In June 1997, the FASB
issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. It does not require a specific format for
that financial statement but requires that an enterprise display
an amount representing total comprehensive income for the period
in that financial statement.
page 6
SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement
of financial position. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for comparative
purposes is required. Management adopted SFAS No. 130 effective
July 1, 1998, as required, without material impact on the
Company's financial statements. The Company has no items of
other comprehensive income as defined, therefore net earnings are
equal to other comprehensive income for the periods ended
December 31, 1998 and 1997.
Disclosure about Segments of an Enterprise. In June, 1997,
the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 significantly
changes the way that public business enterprises report
information about operating segments in annual financial
statements and requires that those enterprises report selected
information about reportable segments in interim financial
reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic
areas, and major customers. SFAS No. 131 uses a "management
approach" to disclose financial and descriptive information about
the way that management organizes the segments within the
enterprise for making operating decisions and assessing
performance. For many enterprises, the management approach will
likely result in more segments being reported. In addition, SFAS
No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in
annual financial statements and also requires that selected
information be reported in interim financial statements. SFAS
No. 131 is effective for fiscal years beginning after December
15, 1997. SFAS No. 131 is not expected to have a material impact
on the Company's financial statements.
Accounting for Derivative Instruments and Hedging
Activities. In June, 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities,"
which requires entities to recognize all derivatives in their
financial statements as either assets or liabilities measured at
fair value. SFAS No. 133 also specifies new methods of
accounting for hedging transactions, prescribes the items and
transactions that may be hedged, and specifies detailed criteria
to be met to qualify for hedge accounting.
The definition of a derivative financial instrument is
complex, but in general, it is an instrument with one or
more underlyings, such as an interest rate or foreign exchange
rate, that is applied to a notional amount, such as an amount of
currency, to determine the settlement amount(s). It generally
requires no significant initial investment and can be settled net
or by delivery of an asset that is readily convertible to cash.
SFAS No. 133 applies to derivatives embedded in other contracts,
unless the underlying of the embedded derivative is clearly and
closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. On adoption, entities are permitted to transfer
held-to-maturity debt securities to the available-for-sale or
trading category without calling into question their intent to
hold other debt securities to maturity in the future. SFAS No.
133 is not expected to have a material impact on the Company's
financial statements.
page 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, the
following discussion contains forward-looking statements that
involve risks and uncertainties. Economic circumstances, the
Company's operations, and the Company's actual results could
differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute
to such differences are discussed herein but also include changes
in the economy and interest rates in the nation and the Company's
market area generally.
GENERAL
The principal business of the Bank consists of accepting
deposits from the general public and investing these funds in
loans secured by one- to four-family owner-occupied residential
properties in the Bank's primary market area. The Bank also
invests in loans secured by non-owner occupied one- to four-
family residential properties and some churches located in the
Bank's primary market area. The Bank also maintains an
investment portfolio which includes FHLB stock, FHLB certificates
of deposit, U.S. Government Agency-issued bonds, and other
investments.
OTHER MATTERS -- YEAR 2000 READINESS DISCLOSURE
As with all providers of financial services, the Bank's
operations are heavily dependent on information technology
systems. The Bank is addressing the potential problems
associated with the possibility that the computers that control
or operate the Bank's information technology system and
infrastructure may not be programmed to read four-digit date
codes and, upon arrival of the year 2000, may recognize the
two-digit code "00" as the year 1900, causing systems to fail to
function or to generate erroneous data. The Bank is working with
the companies that supply or service its information technology
systems to identify and remedy any year 2000 related problems.
The Bank is particularly dependent upon The BISYS Group,
Inc., ("BISYS"), a provider of information processing systems to
banks. Through BISYS, the Bank processes all of its daily
transactions and keeps records of all loan and deposit accounts,
as well as other functions. The Bank's management has been
working closely with BISYS to monitor their efforts to renovate
their systems. In November, 1998, the Bank began a comprehensive
testing program through BISYS. During the test, the Bank is
using the same hardware and software that it will use on and
after January 1, 2000. Test data was extracted from the Bank's
data files. Testing will involve aging the test data to certain
key dates associated with the new millenium and running various
transactions against the aged data. Testing is expected to
conclude in March, 1999. Procedures are in place to notify BISYS
of any processing errors found during testing. At this point in
the testing no substantive processing difficulties have been
identified. The Bank also has procedures in place to address
short-term unavailability of the BISYS system.
The Company expects that there will be some expense incurred
as a result of preparing for the year 2000. The Bank has decided
to replace some older computer hardware which is at or near the
end of its useful life. The new equipment will be year 2000
compliant and will have sufficient capacity to run BISYS's year
2000 compliant software. Management has assessed the impact of
such cost on the Company's net earnings in future periods.
Generally, management expects that the Bank will spend
approximately $80,000 on hardware, software, the testing program,
and other year 2000 related expenses. Of this amount,
approximately $10,000 was incurred during the year ended June 30,
1998. Management expects a cost of $30,000 to $40,000 to be
incurred in the fiscal year ending June 30, 1999, with the
remainder to be incurred in subsequent fiscal years as hardware
is depreciated--at a cost of $6,000 to $10,000 per year. At the
present time, management believes that these costs are an
accurate reflection of the Bank's needs in order to establish
year 2000 readiness; however, if the Bank is ultimately required
to purchase replacement computer systems, programs, and equipment
or incur substantial unforeseen expense to make the Bank's
current systems, programs, and equipment year 2000 compliant, the
Company's net earnings and financial condition could be adversely
affected.
page 8
In addition to BISYS, the Bank is dependent on numerous
other providers of services ranging from specific bank-related
services (such as check processing and ATM operations) to general
environmental and administrative support services such as
electrical power and telephone service. The Bank has attempted
to identify such services on which it is most dependent and to
contact each provider to determine their level of year 2000
readiness. In most cases, the Bank is unable to independently
verify that such services are or will be year 2000 compliant.
The Bank may or may not have the option of switching to other
service providers. The Bank's management is working to establish
contingency plans as to how it may best respond to the inability
to utilize these services. In most cases, management
does not foresee a substantial impact on its financial condition
and future earnings. However, it is possible that
situations could occur that are beyond the Bank's control that
would have significant impact on its financial condition
and earnings--such as widespread electrical power failure.
While it is possible that the Bank could incur losses if
loan payments are delayed due to year 2000 problems affecting its
borrowers, management believes that such losses are unlikely
given the composition of the Bank's loan portfolio, which is
primarily made up of one- to four-family residential mortgages.
Likewise, it is possible that the Bank could incur losses if its
level of deposits decreased due to withdrawals from depositors in
anticipation of or in response to problems with their access to
funds from other sources, such as the delay or incapacity of
their employers' payroll processing systems.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND JUNE
30, 1998
ASSETS: The Company's total assets increased from $134.5
million at June 30, 1998 to $136.8 million at December 31, 1998,
an increase of $2.3 million or 1.7%. The increase in total
assets is primarily attributable to an increase in the Company's
net loans receivable which increased from $126.3 million at June
30, 1998 to $129.4 million at December 31, 1998, an increase of
$3.1 million or 2.5%.
LIABILITIES: The Company's total liabilities increased from
$111.8 million at June 30, 1998 to $114.8 million at December 31,
1998, an increase of $3.0 million or 2.7%. The increase in total
liabilities is primarily attributable to increases in the
Company's sources of funds, Deposits and Advances from the
Federal Home Loan Bank ("Advances"). Deposits increased from
$81.9 million at June 30, 1998 to $84.1 million at December 31,
1998, an increase of $2.2 million or 2.7%. Advances increased
from $28.3 million at June 30, 1998 to $29.3 million at December
31, 1998, an increase of $1.0 million or 3.7%.
SHAREHOLDERS' EQUITY: Shareholders' equity decreased from
$22.7 million at June 30, 1998 to $22.0 million at December 31,
1998, a decrease of $710,000 or 3.1%. This decrease is a result
of Company's net earnings of $838,000 less the Company's
dividends accrued or paid during the period of $660,000 less the
acquisition of the Company's own stock at a cost of $888,000.
The Company's book value per share was $14.12 at December 31,
1998 compared to $14.02 at June 30, 1998.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED
DECEMBER 31, 1998 AND DECEMBER 31, 1997
NET EARNINGS: The Company's net earnings increased from
$757,000 for the six months ended December 31, 1997 to $838,000
for the six months ended December 31, 1998, an increase of
$81,000 or 10.7%. This increase is primarily attributable to an
increase in net interest income of $86,000. The Company's basic
earnings per share rose from $0.50 per share for the six months
ended December 31, 1997 (adjusted for the two-for-one reverse
stock split effected on December 1, 1997) to $0.53 per share for
the six months ended December 31, 1998. The Company's
diluted earnings per share rose from $0.47 per share for the six
months ended December 31, 1997 (adjusted for the two-
for-one reverse stock split effected on December 1, 1997) to
$0.52 per share for the six months ended December 31,
1998.
page 9
NET INTEREST INCOME: Net interest income increased from
$2.0 million for the six month period ended December 31, 1997 to
$2.1 million for the six month period ended December 31, 1998,
an increase of $86,000 or 4.4%. The increase was primarily due
to a decrease in total interest expense. Although net interest
income increased in this period, Management believes that the
current low interest rate environment could have a negative
impact on net interest income in future periods. Generally, in a
declining interest rate environment some existing borrowers
choose to refinance their mortgages, interest rates on adjustable
rate loans decrease, and the coupon rate on new loans declines.
While lower interest income may be offset by lower interest
expense, it is possible that interest income could decrease
faster than interest expense. The result would be a reduction in
net interest income.
INTEREST INCOME: Interest income remained relatively
constant at $4.9 million for the six month periods ended
December 31, 1998 and 1997, increasing only $18,000 or 0.4%.
This increase was primarily due to an increase in interest income
from loans which rose from $4.6 million for the six month period
ended December 31, 1997 to $4.7 million for the six month period
ended December 31, 1998, an increase of $57,000 or 1.2%. The
primary offset against the increase in interest income from loans
was a reduction in interest income on interest-bearing deposits
which decreased from $94,000 for the six months ended December
31, 1997 to $61,000 for the six months ended December
31, 1998, a decrease of $33,000 or 35.1%.
INTEREST EXPENSE: Interest expense decreased from $2.9
million for the six month period ended December 31, 1997 to $2.8
million for the six month period ended December 31, 1998 a
decrease of $68,000 or 2.4%. This decrease was primarily due to
a decrease in interest expense on deposits which decreased from
$2.1 million for the six month period ended December 31, 1997 to
$2.0 million for the six month period ended December 31, 1998, a
decrease of $74,000 or 3.6%. Offsetting the decrease in interest
expense paid on deposits was an increase in interest expense on
borrowings which increased from $836,000 for the six months ended
December 31, 1997 to $842,000 for the six month period ended
December 31, 1998, an increase of $6,000 or 0.7%. Management
expects to continue to utilize FHLB advances where advantageous
to fund loan growth. Advances generally are a more stable source
of funds than deposits which proves helpful in managing the
Bank's assets and liabilities. Historically, the interest rates
paid on FHLB advances have generally been greater than rates paid
on deposits. However, in some instances FHLB advances carry
lower interest rates than deposit rates generally being paid in
the Bank's market area.
PROVISION FOR LOSSES ON LOANS: The provision for losses on
loans remained constant with no provision for either of the six
month periods ended December 31, 1998 or 1997. Management
believed, on the basis of its analysis of the risk profile of the
Company's assets, that it was appropriate to maintain the
allowance for loan losses at $100,000, which was reached
previously. In determining the appropriate provision, management
considers a number of factors, including specific loans in the
Company's portfolio, real estate market trends in the Company's
market area, economic conditions, interest rates, and other
conditions that may affect a borrower's ability to comply with
repayment terms. There can be no assurance that the allowance
will be adequate to cover losses on nonperforming assets in the
future.
OTHER OPERATING INCOME: Other operating income decreased
from $25,000 for the six month period ended
December 31, 1997 to $20,000 for the six month period ended
December 31, 1998. Other operating income is not a
significant component of the Company's statement of operations.
GENERAL, ADMINISTRATIVE, AND OTHER EXPENSES: General,
administrative, and other expense decreased from $843,000 for the
six month period ended December 31, 1997 to $812,000 for the six
month period ended December 31, 1998, a decrease of $31,000 or
3.7%. The decrease was due primarily to a $51,000, or 11.0%,
decrease in employee compensation and benefits and a $34,000, or
18.1%, decrease in other operating expenses, which were partially
offset by a $35,000, or 125.0%, increase in franchise taxes and a
$19,000, or 30.2%, increase in data processing expense. The
decrease in employee compensation and benefits was due to several
factors including the retirement from full-time service of two of
the Bank's officers. The decrease in other operating expense
resulted from various improvements in efficiency. The increase
in franchise tax expense resulted from a nonrecurring refund of
taxes in the 1997 period. The increase in data processing
expense was due primarily to Year 2000 preparedness (see "Other
Matters--Year 2000 Readiness Disclosure").
page 10
INCOME TAX: The Company's provision for federal income
taxes increased from $390,000 for the six month period ended
December 31, 1997 to $421,000 for the six month period ended
December 31, 1998. The increase was a result of the increase in
the Company's pretax earnings. The Company's effective tax rate
was 33.4% for the six month period ended December 31, 1998 and
34.0% for the six month period ended December 31, 1997.
NON-PERFORMING ASSETS: At December 31, 1998, the Bank had
approximately $348,000 in loans 90 days or more past due but
still accruing. These delinquent loans represent 0.3% of the
Bank's net loans. The Bank had $49,000 in loans internally
classified as Substandard and no loans classified as Doubtful, or
Loss. The Bank has not charged off any loans during the period.
DIVIDENDS: On December 9, 1998, the Company announced a
dividend policy whereby it will pay a quarterly cash dividend of
$0.22 per share, per quarter, payable on the 15th day of the
month following the end of each quarter, to shareholders of
record as of the last business day of each quarter. This
represents an increase from the previous quarterly dividend of
$0.20 per share. The Board of Directors determined that the
payment of a dividend was appropriate in light of the Company's
capital position and financial condition. Although the Board of
Directors has adopted this policy, the future payment of
dividends is dependent upon the Company's financial condition,
earnings, equity structure, capital needs, regulatory
requirements, and economic conditions. The Company last paid a
dividend on October 15, 1998. At December 31, 1998 the Company
had recorded dividends payable of $343,000 for the payment of a
dividend on January 15, 1999.
In addition to this regular dividend policy, on June 24,
1997 the Company also paid a return of capital in the amount of
$4.00 per share to shareholders of record on June 17, 1997. It
was subsequently determined that $3.60 of this $4.00 distribution
was not taxable but would reduce the shareholders' basis in the
stock. The $0.40 portion of this return of capital, as well as
all other dividends paid during calendar 1997, are treated as
ordinary dividends.
STOCK REPURCHASE: On August 12, 1998, the Company announced
a plan to purchase up to 81,000 shares of the Company's common
stock, which represented approximately 5% of the outstanding
common stock at that time. The program continues to be dependent
upon market conditions and there is no guarantee as to the exact
number of shares to be repurchased by the Company. Management
believes that the repurchase should be completed within nine
months of commencement. The Board of Directors considers the
Company's common stock to be an attractive investment, and
the repurchase program is expected to improve liquidity in the
market for the common stock and result in increased per
share earnings and book value. At February 8, 1999, 61,900
shares had been repurchased at an average price of $14.34
per share.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
DECEMBER 31, 1998 AND DECEMBER 31, 1997
NET EARNINGS: The Company's net earnings increased from
$381,000 for the three months ended December 31, 1997 to $420,000
for the three months ended December 31, 1998, an increase of
$39,000 or 10.2%. This increase is attributable to several
factors, the most prominent of which is an increase in net
interest income of $42,000. The Company's basic earnings per
share rose from $0.25 per share for the three months ended
December 31, 1997 to $0.27 per share for the three months ended
December 31, 1998. The Company's diluted earnings per share rose
from $.24 per share for the three months ended December 31, 1997
to $.27 per share for the three months ended December 31,
1998.
NET INTEREST INCOME: Net interest income increased from
$981,000 for the three month period ended December 31, 1997 to
$1.0 million for the three month period ended December 31, 1998,
an increase of $42,000 or 4.3%. This increase was primarily due
to a decrease in interest expense. Although net interest income
increased in this period, Management believes that the current
low interest rate environment could have a negative impact on net
interest income in future periods. Generally, in a declining
interest rate environment some existing borrowers choose to
refinance their mortgages, interest rates on adjustable rate
loans decrease, and the coupon rate on new loans declines.
While lower interest income may be offset by lower interest
expense, it is possible that interest income could decrease
faster than interest expense. The result would be a reduction in
net interest income.
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INTEREST INCOME: Interest income decreased from $2.5
million for the three month period ended December 31, 1997 to
$2.4 million for the three month period ended December 31, 1998,
a decrease of $22,000 or 0.9%. Contributing primarily to the
decrease in interest income was a reduction in interest income on
interest-bearing deposits which decreased from $51,000 for the
three months ended December 31, 1997 to $34,000 for the three
months ended December 31, 1998, a decrease of $17,000 or 33.3%.
INTEREST EXPENSE: Interest expense decreased from $1.5
million for the three months ended December 31, 1997 to $1.4
million for the three months ended December 31, 1998, a decrease
of $64,000 or 4.4%. Interest expense decreased on both deposits
and borrowings. Interest expense on deposits decreased from $1.0
million for the three months ended December 31, 1997 to $995,000
for the three months ended December 31, 1998, a decrease of
$38,000 or 3.7%. Interest expense on borrowings decreased from
$436,000 for the three months ended December 31, 1997 to
$410,000 for the three months ended December 31, 1998, a decrease
of $26,000 or 6.0%. Management expects to continue to utilize
FHLB advances where advantageous to fund loan growth. Advances
generally are a more stable source of funds than deposits which
proves helpful in managing the Bank's assets and liabilities.
Historically, the interest rates paid on FHLB advances have
generally been greater than rates paid on deposits. However, in
some instances FHLB advances carry lower interest rates than
deposit rates generally being paid in the Bank's market area.
PROVISION FOR LOSSES ON LOANS: The provision for losses on
loans remained constant with no provision for either of the three
month periods ended December 31, 1998 or 1997. Management
believed, on the basis of its analysis of the risk profile of the
Company's assets, that it was appropriate to maintain the
allowance for loan losses at $100,000, which was reached
previously. In determining the appropriate provision, management
considers a number of factors, including specific loans in the
Company's portfolio, real estate market trends in the Company's
market area, economic conditions, interest rates, and other
conditions that may affect a borrower's ability to comply with
repayment terms. There can be no assurance that the allowance
will be adequate to cover losses on nonperforming assets in the
future.
OTHER OPERATING INCOME: Other operating income decreased
from $13,000 for the three month period ended December 31, 1997
to $10,000 for the three month period ended December 31, 1998.
Other operating income is not a significant component of the
Company's statement of operations.
GENERAL, ADMINISTRATIVE, AND OTHER EXPENSES: General,
administrative, and other expense decreased from $417,000 for the
three month period ended December 31, 1997 to $405,000 for the
three month period ended December 31, 1998, a decrease of $12,000
or 2.9%. The decrease was caused by various reductions in the
Company's expense.
INCOME TAX: The Company's provision for federal income
taxes increased from $196,000 for the three month period ended
December 31, 1997 to $208,000 for the three month period ended
December 31, 1998. The increase was a result of the increase in
the Company's pretax earnings. The Company's effective tax rate
was 33.1% for the three month period ended December 31, 1998 and
34.0% for the three month period December 31, 1997.
page 12
PART II.
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
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 10, 1998
(b) Not applicable
(c) The only matter to be voted upon at the Annual
Meeting was the election of two individuals
as directors.
Nominee Votes For Votes Withheld
- ------- --------- --------------
Charles A. Cotton, III 1,444,631 1,756
Danny A. Garland 1,444,343 2,043
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits: Financial Data Schedule as of December 31,
1998.
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 08, 1999 /s/ William C. Jennings
-------------------------------
William C. Jennings
Chairman, President, and
Chief Executive Officer
(Principal Executive Officer
and Principal Financial and
Accounting Officer)
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