UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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 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 filed all reports required to be filed by Section 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 stock as of May 12, 2004: 1,266,613
Page 1
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
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Item 1 Consolidated Statements of Financial Condition at
March 31, 2004 (unaudited) and June 30, 2003 (audited) 3
Consolidated Statements of Earnings for the nine and three
months ended March 31, 2004 and 2003 4
Consolidated Statements of Comprehensive Income for the
nine months ended March 31, 2004 and 2003 5
Consolidated Statements of Cash Flows for the nine
months ended March 31, 2004 and 2003 6
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis or Plan of
Operation 11
Item 3 Controls and Procedures 15
PART II. OTHER INFORMATION
-----------------
Item 1 Legal Proceedings 16
Item 2 Changes in Securities and Small Business Issuer Purchases of
Equity Securities 16
Item 3 Defaults upon Senior Securities 16
Item 4 Submission of Matters to a
Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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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,
2004 2003
(Unaudited) (Audited)
ASSETS
Cash and due from banks $ 568 $ 478
Interest-bearing deposits in other financial institutions 43 1,550
---------------- -------------
Cash and cash equivalents 611 2,028
Certificates of deposit in other financial institutions 3,100 3,100
Mortgage-backed securities available for sale - at market 3,219 3,997
Loans receivable - net 126,298 124,596
Real estate acquired through foreclosure - net -- 29
Office premises and equipment - at depreciated cost 1,405 1,364
Federal Home Loan Bank stock - at cost 2,912 2,827
Accrued interest receivable on loans 303 293
Accrued interest receivable on investments and
interest-bearing deposits 29 15
Prepaid expenses and other assets 93 87
---------------- -------------
Total assets $ 137,970 $ 138,336
================ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 73,808 $ 75,622
Advances from the Federal Home Loan Bank 44,929 43,017
Advances by borrowers for taxes and insurance 142 324
Accrued interest payable 24 29
Accrued federal income taxes 296 261
Deferred federal income taxes 256 265
Other liabilities 838 820
---------------- -------------
Total liabilities 120,293 120,338
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 5,916 5,879
Retained earnings - restricted 18,185 18,525
Less 405,830 and 418,335 shares of treasury stock-at cost (6,350) (6,331)
Less shares acquired for stock benefit plan (90) (98)
Other comprehensive income (loss), unrealized gains (losses) on
securities designated as available for sale - net of related
tax effects (1) 6
---------------- -------------
Total shareholders' equity 17,677 17,998
---------------- -------------
Total liabilities and shareholders' equity $ 137,970 $ 138,336
================ =============
Book value per share $ 13.96 $ 14.35
================ =============
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,
2004 2003 2004 2003
Interest income
Loans $ 5,620 $ 6,416 $ 1,867 $ 2,033
Investment securities 121 21 41 16
Interest-bearing deposits and other 92 155 29 46
------------ ------------- ----------- ------------
Total interest income 5,833 6,592 1,937 2,095
Interest expense
Deposits 1,429 1,815 436 563
Borrowings 1,947 2,019 641 654
------------ ------------- ----------- ------------
Total interest expense 3,376 3,834 1,077 1,217
------------ ------------- ----------- ------------
Net interest income 2,457 2,758 860 878
Provision for losses on loans -- -- -- --
------------ ------------- ----------- ------------
Net interest income after provision for
losses on loans 2,457 2,758 860 878
Other operating income 38 55 13 11
General, administrative and other expense
Employee compensation and benefits 864 716 308 244
Occupancy and equipment 125 134 45 47
Franchise and other taxes 76 82 25 26
Data processing 90 93 34 35
Other operating 253 251 81 89
------------ ------------- ----------- ------------
Total general, administrative
and other expense 1,408 1,276 493 441
------------ ------------- ----------- ------------
Earnings before income taxes 1,087 1,537 380 448
Federal income taxes
Current 375 497 144 131
Deferred (4) 26 (15) 21
------------ ------------- ----------- ------------
Total federal income taxes 371 523 129 152
------------ ------------- ----------- ------------
NET EARNINGS $ 716 $ 1,014 $ 251 $ 296
============ ============= =========== ============
Earnings Per Share
Basic $ 0.57 $ 0.81 $ 0.20 $ 0.23
============ ============= =========== ============
Diluted $ 0.54 $ 0.79 $ 0.19 $ 0.23
============ ============= =========== ============
Page 4
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the nine months ended March 31,
(In thousands)
2004 2003
Net earnings $ 716 $ 1,014
Other comprehensive losses, net of tax:
Unrealized losses on securities, net of $5 tax benefits in 2004 (8) --
------------ ------------
Comprehensive income $ 708 $ 1,014
============ ============
Accumulated comprehensive loss $ (1) $ --
============ ============
Page 5
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended March 31,
(In thousands)
2004 2003
Cash flows from operating activities:
Net earnings for the period $ 716 $ 1,014
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 15 --
Amortization of deferred loan origination fees (25) (95)
Depreciation and amortization 56 59
Federal Home Loan Bank stock dividends (85) (91)
Amortization expense of stock benefit plan 13 --
Increase (decrease) in cash due to changes in:
Accrued interest receivable (24) 67
Prepaid expenses and other assets (6) 12
Accrued interest payable (5) (17)
Other liabilities 18 (574)
Federal income taxes
Current 35 142
Deferred (4) 26
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Net cash provided by operating activities 704 543
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities 751 --
Proceeds from maturity of investment securities 100 --
Purchase of certificates of deposit in other financial institutions (100) (3,000)
Loan principal repayments 20,854 27,634
Loan disbursements (22,502) (18,600)
Proceeds from sale of real estate acquired through foreclosure -- 311
Purchase of office premises and equipment (97) (71)
----------- -----------
Net cash provided by (used in) investing activities (994) 6,274
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts (1,814) 334
Proceeds from Federal Home Loan Bank advances 6,000 --
Repayment of Federal Home Loan Bank advances (4,088) (1,683)
Advances by borrowers for taxes and insurance (182) (141)
Exercise of stock options 13 --
Dividends paid on common stock (1,056) (1,049)
----------- -----------
Net cash used in financing activities (1,127) (2,539)
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,417) 4,278
Cash and cash equivalents at beginning of period 2,028 4,812
----------- -----------
Cash and cash equivalents at end of period $ 611 $ 9,090
=========== ===========
Page 6
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the nine months ended March 31,
(In thousands)
2004 2003
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 340 $ 360
=============== =============
Interest on deposits and borrowings $ 3,381 $ 3,851
=============== =============
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 $ (8) $ --
=============== =============
Supplemental disclosure of noncash financing activities:
Dividends declared but unpaid $ 354 $ 351
=============== =============
Issuance of shares under stock option plan in exchange
for previously issued shares and cash $ 478 $ --
=============== =============
Page 7
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended March 31, 2004 and 2003
(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, statements of comprehensive
income 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 nine and three
month periods ended March 31, 2004 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 1,259,507 and 1,264,583 for the nine and
three month periods ended March 31, 2004, respectively, and 1,246,108 for each
of the nine and three month periods ended March 31, 2003.
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 1,312,091 and 1,321,022
for the nine and three month periods ended March 31, 2004, respectively.
Incremental shares related to the assumed exercise of stock options included in
the calculation of diluted earnings per share totaled 52,584 and 56,439 for the
nine and three month periods ended March 31, 2004, respectively.
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. As of March 31, 2004, the
Company had 147,230 stock options outstanding of which 142,483 had an exercise
price of $13.80 per share and 4,747 had an exercise price of $14.91 per share.
(4) 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 8
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 month periods
ended March 31, 2004 and 2003, 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, 2004 and June 30, 2003 and 2002, and changes during the periods ending on
those dates is presented below:
NINE MONTHS ENDED YEAR ENDED
MARCH 31, JUNE 30,
2004 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 (34,629) 13.80 - - - -
Forfeited - - - - (57,636) 13.80
--------- ------- ------- ------- ---------- ----------
Outstanding at end of period 147,230 $13.84 181,859 $13.83 181,859 $13.83
======= ===== ======= ===== ======= =====
Options exercisable at period-end 147,230 $13.84 181,859 $13.83 181,859 $13.83
======= ===== ======= ===== ======= =====
The following information applies to options outstanding at March 31, 2004:
Number outstanding 147,230
Range of exercise prices $13.80 - $14.91
Weighted-average exercise price $13.84
Weighted-average remaining contractual life 1.75 years
(5) 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.
Page 9
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 statements that are forward-looking, as that term is defined
by the Private Securities Litigation Act of 1995 or the Securities and Exchange
Commission in its rules, regulations and releases. The Company intends that such
forward-looking statements be subject to the safe harbors created thereby. All
forward-looking statements are based on current expectation regarding important
risk factors including, but not limited to, real estate values and the impact of
interest rates on financing. Accordingly, actual results may differ from those
expressed in the forward-looking statements, and the making of such statements
should not be regarded as a representation by the Company or any other person
that results expressed therein will be achieved.
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,
mortgage-backed securities and other investments.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2004 AND JUNE 30, 2003
ASSETS: The Company's total assets were $138.0 million at March 31,
2004, a decrease of $366,000 or 0.3% from the June 30, 2003 level. The decrease
in total assets was primarily attributable to decreases in the Company's cash
and cash equivalents and mortgage-backed securities available for sale. Cash and
cash equivalents decreased $1.4 million or 69.9% to $611,000 at March 31, 2004,
compared to $2.0 million at June 30, 2003, as the Company successfully invested
excess liquidity into higher-yielding investments. The decrease in
mortgage-backed securities was attributable primarily to principal repayments of
$751,000 during the period, although premium amortization of $15,000 and a net
unrealized loss of $13,000 on the securities contributed to the decline.
Somewhat offsetting the decrease in cash and cash equivalents and
mortgage-backed securities was an increase in the increase in the Company's net
loans receivable which increased $1.7 million or 1.4% to $126.3 million at March
31, 2004.
LIABILITIES: The Company's total liabilities remained relatively
constant at $120.3 million at both March 31, 2004 and June 30, 2003. The
composition of liabilities changed in that deposits decreased $1.8 million or
2.4% to $73.8 million at March 31, 2004, while FHLB advances increased $1.9
million or 4.4% to $44.9 million at March 31, 2004.
SHAREHOLDERS' EQUITY: Shareholders' equity was $17.7 million at March
31, 2004, a decrease of $321,000 or 1.8% compared to June 30, 2003. The decrease
was due mainly to $1.1 million in dividends declared for the nine month period
ended March 31, 2004, which exceeded net earnings by $340,000. The Company's
book value per share was $13.96 at March 31, 2004, compared to $14.35 at June
30, 2003. The decrease in book value per share is attributable to the excess of
dividends over earnings for the nine month period ended March 31, 2004, as well
as additional outstanding shares, which resulted from the exercise of stock
options during the same nine month period. (See "Dividends").
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 2004 AND
MARCH 31, 2003
NET EARNINGS: The Company's net earnings decreased $298,000 or 29.4% to
$716,000 for the nine month period ended March 31, 2004 compared to 2003. The
decrease in net earnings was primarily attributable to a decrease in net
interest income of $301,000. The Company's basic earnings per share decreased
$0.24 or 29.6% from $0.81 per share for the nine month period ended March 31,
2003 to $0.57 per share for the comparable 2004 period. The Company's diluted
earnings per share also decreased $0.25 per share or 31.6% to $0.54 per share
for the nine month period just ended compared to $0.79 for the nine month period
ended March 31, 2003.
Page 11
NET INTEREST INCOME: Net interest income after provision for loan
losses was $2.5 million for the nine month period ended March 31, 2004 a
decrease of $301,000 or 10.9% compared to $2.8 million for the nine 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 interest income than the decrease in interest expense.
INTEREST INCOME: Interest income decreased $759,000 or 11.5% to $5.8
million for the nine month period ended March 31, 2004. The decrease was related
primarily to a decrease in interest income from loans, which decreased $796,000
or 12.4%, to $5.6 million for the nine 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 $63,000 or
40.6% from period to period. Interest income from investment securities
increased $100,000 from $21,000 for the nine month period ended March 31, 2003
to $121,000 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. The average
rate earned on the loan portfolio decreased 85 basis points ("bps") to 5.95% for
the nine month period ended March 31, 2004, compared to the prior year period,
while the average outstanding balance of the loan portfolio remained constant at
$125.9 million for both nine month periods ended March 31, 2004 and 2003. The
decrease in the average rate earned on the Company's loan portfolio was chiefly
a result of borrowers refinancing to lower rates and the downward adjustment of
adjustable rate mortgages. While margin compression is affecting many financial
institutions, the Company's earnings may have been impacted to a greater extent
as management has continued to adhere to its longstanding techniques for
managing interest rate risk, such as emphasizing investment in adjustable rate
mortgages as opposed to purchasing or originating higher-yielding fixed rate
investments. While this currently exacerbates the margin compression, such
techniques should prove to be beneficial when market interest rates rise.
INTEREST EXPENSE: Interest expense decreased $458,000 or 11.9% to $3.4
million for the nine month period ended March 31, 2004. This decrease was
primarily due to a decrease in interest expense on deposits, which decreased
$386,000 or 21.3% to $1.4 million for the nine month period ended March 31,
2004. The decrease in interest expense on deposits was attributable primarily to
a decrease in the average rate paid on deposits, which decreased 67 bps to 2.54%
for the nine month period ended March 31, 2004. Also contributing to the
decrease in the average rate paid on deposits was a slight decrease in the
average outstanding balance of deposits which decreased $393,000 or 0.5% to
$75.2 million for the period ended March 31, 2004, compared to the comparable
2003 period. Interest expense on FHLB advances decreased $72,000 or 3.6% to $1.9
million for the nine month period ended March 31, 2004, compared to the same
period in 2003. The decrease in interest expense on FHLB advances was
attributable to both a decrease in the average rate paid on the advances as well
as a decrease in the average balance outstanding. The average rate paid on
advances decreased 21 bps to 5.89% for the nine month period ended March 31,
2004, while the average balance outstanding decreased $52,000 or 0.1% to $44.1
million for the nine month period just ended compared to the prior year nine
month period. 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 future.
If market 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, resulting in decreased net income.
PROVISION FOR LOSSES ON LOANS: There was no provision for losses on
loans for the nine month periods ended March 31, 2004 or 2003. The allowance for
loan losses was $82,000 at March 31, 2004 and 2003, as well as June 30, 2003. As
a percentage of non-performing assets, the allowance for losses on loans
decreased from 17.5% at March 31, 2003 to 10.9% at March 31, 2004. This decrease
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 March 31, 2004. 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
GENERAL, ADMINISTRATIVE, AND OTHER EXPENSES: General, administrative,
and other expense increased $132,000 or 10.3% to $1.4 million for the nine month
period ended March 31, 2004. The increase was due primarily to a $148,000 or
20.7% increase in employee compensation and benefits, which resulted from a
variety of factors associated with employee compensation and the benefits
afforded the Company's personnel. One such factor is an increase in the
provision for expenses associated with the Company's defined benefit retirement
plan, which was $59,000 for the nine month period ended March 31, 2004, compared
to a $10,000 provision for the nine month period ended March 31, 2003. 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. Also
contributing to the higher level of employee compensation and benefits expense
were other expenses associated with employee benefit plans including the
Company's Junior Officer Recognition Plan, health insurance benefits and payroll
taxes on incentive stock options.
INCOME TAX: The Company's provision for federal income taxes decreased
$152,000 or 29.1% to $371,000 for the nine month period ended March 31, 2004.
The Company's effective tax rate was 34.1% and 34.0% for the nine month periods
ended March 31, 2004 and 2003, respectively.
NON-PERFORMING ASSETS: At March 31, 2004, the Bank had approximately
$752,000 (0.6% of net loans) in loans 90 days or more past due but still
accruing, as compared to $468,000 at March 31, 2003. Also, the Bank had
approximately $301,000 in loans listed as special mention and $981,000 in loans
internally classified as Substandard. No loans were classified as Doubtful or
Loss. Of the assets listed as loans 90 days or more past due but still accruing,
all were single-family residential mortgage loans. Of these loans, $612,000 or
81.4% had loan-to-value ratios (based on the original appraisal and current
principal balance) of less than 80%, one loan totaling $40,000 or 5.3% of
non-performing loans had a loan-to-value exceeding 80% but was covered by
private mortgage insurance, and two loans (which are secured by the same
property) totaling $100,000 or 13.3% of non-performing loans had a combined
loan-to-value ratio of 89% and were not secured by private mortgage insurance.
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. As of the
date of this report Management has initiated foreclosure proceedings with
respect to the aforementioned $100,000 loans (in the aggregate). Management
generally attempts to encourage the borrowers to remedy the delinquencies, with
foreclosure as a final option. The Bank has not charged off any loans during the
2004 and 2003 periods.
DIVIDENDS: On September 14, 2001, the Company announced a dividend
policy whereby it will pay a quarterly cash dividend of $0.28 per share, per
quarter, payable on the 15th day of the month following the end of each quarter,
to shareholders of record as of the last business day of each quarter. This
dividend policy was instituted at a time when the Company's earnings exceeded
(albeit slightly) the dividends paid. Earnings have since dropped significantly
and for the nine month period ended March 31, 2004, fell short of the dividend
paid by $0.27 per share. The Board is aware of this disparity and notes that it
is somewhat unusual. However, given the Company's level of excess capital, the
relatively high price level of the Company's stock (which has curtailed the
Company's stock repurchase plans that were an effective utilization of excess
capital in years past), and recent changes in income tax regulations that treat
income from dividends as favorably as income from capital gains, the Board has
decided to continue the current dividend policy. Although the Board of Directors
has adopted and elected to continue 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,
2004, the Company had recorded dividends payable of $354,000 for the payment of
a dividend on April 15, 2004.
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 nine
month period ended March 31, 2004, the Company did not have a repurchase program
in place and did not repurchase any shares of its stock. 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. However, during the nine month period ended March 31, 2004, 34,629
shares of stock options were exercised by the exchange of 22,124 previously
outstanding shares.
Page 13
LIQUIDITY: The Company maintains sufficient liquid assets to meet its
short-term obligations as they become due in the ordinary course of business. In
addition to its cash and cash equivalents the Company has additional borrowing
capacity with the Federal Home Loan Bank of approximately $24.5 million. Of that
additional borrowing capacity, the Company maintains a $10.0 million line of
credit with the Federal Home Loan Bank of which $3.3 million had been drawn at
March 31, 2004.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004
AND MARCH 31, 2003
NET EARNINGS: The Company's net earnings decreased $45,000 or 15.2% to
$251,000 for the three month period ended March 31, 2004 compared to 2003. The
decrease in net earnings was primarily attributable to an increase in general,
administrative and other expense of $52,000, although a decrease in net interest
income also contributed. The Company's basic earnings per share decreased $0.03
or 13.0% from $0.23 per share for the three month period ended March 31, 2003 to
$0.20 per share for the comparable 2004 period. The Company's diluted earnings
per share decreased $0.04 per share or 17.4% to $0.19 per share for the three
month period just ended compared to $0.23 for the three month period ended March
31, 2003.
NET INTEREST INCOME: Net interest income after provision for loan
losses was $860,000 for the three month period ended March 31, 2004, a decrease
of $18,000 or 2.1% compared 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 interest income than the decrease in interest expense.
INTEREST INCOME: Interest income decreased $158,000 or 7.5% to $1.9
million for the three month period ended March 31, 2004. The decrease was
related primarily to a decrease in interest income from loans, which decreased
$166,000 or 8.2%, 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 $17,000 or
37.0% from period to period. Interest income from investment securities
increased $25,000 from $16,000 for the three month period ended March 31, 2003
to $41,000 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, as the
average outstanding balance of the portfolio increased slightly from period to
period. The average rate earned on the loan portfolio decreased 75 bps to 5.88%
for the three month period ended March 31, 2004, compared to the prior year
period, while the average outstanding balance of the loan portfolio increased
$4.5 million or 3.7% to $127.1 million for the most recent three month period.
INTEREST EXPENSE: Interest expense decreased $140,000 or 11.5% to $1.1
million for the three month period ended March 31, 2004. This decrease was
primarily due to a decrease in interest expense on deposits, which decreased
$127,000 or 22.6% to $436,000 for the three month period ended March 31, 2004.
The decrease in interest expense on deposits was chiefly attributable to a
decrease in the average rate paid on deposits, which decreased 61 bps to 2.35%
for the three month period ended March 31, 2004. The average outstanding balance
of deposits decreased $1.7 million or 2.3% to $74.3 million for the three month
period ended March 31, 2004, compared to the 2003 period. Interest expense on
FHLB advances decreased $13,000 or 2.0% to $641,000 for the three month period
ended March 31, 2004, compared to the same period in 2003. The decrease in
interest expense on FHLB advances was attributable to a decrease in the average
rate paid, which decreased 40 bps to 5.63% for the three month period ended
March 31, 2004. The average balance outstanding increased $2.1 million or 4.9%
to $45.6 million for the three month period ended March 31, 2004 compared to the
three month period ended March 31, 2003.
GENERAL, ADMINISTRATIVE, AND OTHER EXPENSES: General, administrative,
and other expense increased $52,000 or 11.8% to $493,000 for the three month
period ended March 31, 2004. The increase was due primarily to a $64,000 or
26.2% increase in employee compensation and benefits, which resulted from a
combination of higher costs associated with the Company's defined benefit
pension program and other benefit expenses.
INCOME TAX: The Company's provision for federal income taxes decreased
$23,000 or 15.1% to $129,000 for the three month period ended March 31, 2004.
The Company's effective tax rate was 33.9% each of the three month periods ended
March 31, 2004 and 2003.
Page 14
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 have materially
affected or are reasonably likely to affect the Company's financial statements
as presented.
Page 15
PART II.
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
(a) None.
(b) None.
(c) None.
(d) None.
(e) The following table sets forth information regarding the Company's
repurchases of its common stock during the quarter ended March 31, 2004.
(c)
Total Number
of Shares (d)
Purchased Maximum
(a) as Part of Number of Shares
Total (b) Publicly that May Yet Be
Number of Average Announced Plans Purchased Under
Shares Price Paid or the Plans or
Period Purchased per Share Programs Programs
------ --------- --------- ------------ --------
January 2004 7,550 $21.28 -0- -0-
Beginning date: January 6
Ending date: January 30
February 2004 -0- -0- -0- -0-
Beginning date: February 3
Ending date: February 28
March 2004 -0- -0- -0- -0-
Beginning date: March 2
Ending date: March 31
Total 7,550 $21.28 -0- -0-
The repurchases reflected in the table above represent common stock of the
Company tendered to it, and thus repurchased by the Company, in payment for the
exercise price of stock options in accordance with the Company's 1995 Stock
Option and Incentive Plan (the "Plan"), which Plan became effective on January
17, 1996. Pursuant to the terms of the Plan, a participant may exercise options,
subject to provisions relative to termination or limitations on exercise, by
payment to the Company of cash, common stock of the Company, or a combination
thereof, in the amount of the exercise price of the options.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Page 16
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 January 20, 2004, the Company filed a report on
Form 8-K issuing a press release announcing its unaudited
financial results for the six months and three months
ended December 31, 2003. The full press release dated
January 20, 2004 was attached as Exhibit 99 to that
Form 8-K filing.
Page 17
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, 2004
/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 18