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 September 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-26360
Frankfort First Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 61-1271129
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
216 West Main Street, Frankfort, Kentucky 40602
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(Address of principal executive offices) (Zip Code)
(502) 223-1638
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of November 11, 1996: 3,440,000
Page 1 of 11 pages
1
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
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Item 1 Consolidated Statements of Financial Condition at
September 30, 1996 and June 30, 1996 3
Consolidated Statements of Operations for the three
months ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the three
months ended September 30, 1996 and 1995 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
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Item 1 Legal Proceedings 10
Item 2 Changes in Securities 10
Item 3 Defaults upon Senior Securities 10
Item 4 Submission of Matters to a
Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
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2
Frankfort First Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, June 30,
1996 1996
ASSETS
Cash and due from banks $ 143 $ 144
Interest-bearing deposits in other financial institutions 4,429 5,673
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Cash and cash equivalents 4,572 5,817
Certificates of deposit in other financial institutions 200 200
Investment securities - at amortized cost, approximate fair market value of
$7,711 and $8,811 as of September 30, 1996 and June 30, 1996 7,866 8,872
Loans receivable - net 112,686 110,331
Office premises and equipment - at depreciated cost 1,633 1,606
Federal Home Loan Bank stock - at cost 1,078 1,078
Accrued interest receivable on loans 260 264
Accrued interest receivable on investments and interest-bearing deposits 138 156
Prepaid expenses and other assets 100 126
Prepaid federal income taxes 138 21
Deferred federal income taxes 39 42
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Total assets $ 128,710 $ 128,513
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 86,693 $ 87,777
Advances from the Federal Home Loan Bank 6,423 4,998
Other borrowed money -- 500
Advances by borrowers for taxes and insurance 339 267
Accrued interest payable 123 138
Other liabilities 1,277 568
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Total liabilities 94,855 94,248
Commitments -- --
Shareholders' equity
Preferred stock, 5,000,000 shares authorized, $.01 par
value: no shares issued -- --
Common stock, 7,500,000 shares authorized, $.01 par
value: 3,450,000 shares issued 35 35
Additional paid-in capital 19,595 19,595
Retained earnings - restricted 18,707 19,120
Shares acquired by employee stock benefit plans (4,379) (4,485)
Less 10,000 shares of treasury stock - at cost (103) --
Total shareholders' equity 33,855 34,265
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Total liabilities and shareholders' equity $ 128,710 $ 128,513
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3
Frankfort First Bancorp, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended September 30,
(In thousands)
1996 1995
Interest Income
Loans $ 2,054 $ 1,922
Investment securities 195 501
Interest-bearing deposits and other 19 17
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Total interest income 2,268 2,440
Interest expense
Deposits 1,075 1,095
Borrowings 91 69
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Total interest expense 1,166 1,164
Net interest income 1,102 1,276
Provision for losses on loans 3 3
Net interest income after provision for
losses on loans 1,099 1,273
Other operating income 23 26
General, administrative, and other expense
Employee compensation and benefits 441 341
Occupancy and equipment 40 40
Federal deposit insurance premiums 637 67
Franchise and other taxes 37 25
Data processing 32 30
Other operating 92 103
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Total general, administrative, and other expense 1,279 606
Earnings (loss) before income taxes (credits) (157) 693
Federal income taxes (credits)
Current (57) 225
Deferred 3 (24)
Total federal income taxes (credits) (54) 201
NET EARNINGS (LOSS) $ (103) $ 492
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EARNINGS (LOSS) PER SHARE $ (0.03) $ 0.15
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4
Frankfort First Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended September 30
(in thousands)
1996 1995
Cash flows from operating activities:
Net earnings (loss for the period $ (103) $ 492
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating
activities:
Amortization of discounts and premiums on
loans, investments, and mortgage backed
securities, net 6 (3)
Amortization of deferred loan origination fees (6) (10)
Depreciation and amortization 31 23
Provision for losses on loans 3 3
Amortization expense or expense related to
employee stock benefit plans 106 --
Federal Home Loan Bank stock dividends -- (16)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 22 (91)
Prepaid expenses and other assets 26 573
Other liabilities 694 225
Federal income taxes
Current (117) 259
Deferred 3 (6)
Net cash provided by operating activities 665 1,449
Cash flows provided by (used in) investing activites:
Purchase of investment securities designated as
held to maturity -- (5,750)
Proceeds from maturity of investment securities 1,000 --
Loan principal repayments 6,405 7,459
Loan disbursements (8,757) (9,358)
Purchase of office premises and equipment (58) (1)
Net cash used in investing activities (1,410) (7,650)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts (1,084) (35,420)
Net proceeds from the issuance of common stock -- 30,680
Purchase of treasury stock (103) --
Proceeds from Federal Home Loan Bank advances 1,500 --
Repayment of Federal Home Loan Bank advances (75) (61)
Repayment of other borrowed money (500) --
Advances by borrowers for taxes and insurance 72 3
Dividends on common stock (310) (311)
Net cash used in financing activities (500) (5,109)
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Net increase (decrease) in cash and cash equivalents (1,245) (11,310)
Cash and cash equivalents at beginning of period 5,817 38,617
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Cash and cash equivalents at end of period $ 4,572 $ 27,307
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Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 60 $ --
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Interest on deposits and borrowings $ 1,181 $ 1,201
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5
Frankfort First Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 1996 and 1995
(1) BASIS OF PRESENTATIONS
On July 7, 1995, First Federal Savings Bank of Frankfort converted from a
Federal mutual savings bank to a Federal stock savings bank. The stock of the
Bank was issued to the holding company (Frankfort First Bancorp, Inc., the
"Company") formed in connection with the conversion. Pursuant to the Bank's
Plan of Conversion, shares of capital stock of the Company were offered
initially for subscription to eligible account holders, the employee stock
ownership plan (ESOP) of the Company, supplemental eligible account holders,
other members of the Bank, and members of the public pursuant to priorities
established by applicable regulations. The number of shares sold was 3,450,000,
at $10 per share, resulting in gross proceeds of $34,500,000.
Pursuant to the Bank's plan of conversion, the Company loaned to the Bank's
ESOP trust $2,710,000 for purchase of stock by the ESOP. In addition, the
Company has reimbursed the Bank for conversion costs incurred by the Bank. The
total conversion cost was $1,110,048. The Company invested one half of the
remainder, $16,694,976 to purchase 100% of the ownership of the Bank. The
remaining proceeds have been invested or used for general corporate purposes.
The Company charged the deferred conversion costs against the gross proceeds and
accounts for its investment in the Bank under the equity method.
The accompanying unaudited 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 operations, 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 statement of operations for the three month period ended
September 30, 1996 is 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 for the
year ended June 30, 1996.
(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 (LOSS) PER SHARE
Primary and fully diluted earnings (loss) per share for the three months ended
September 30, 1996 and 1995 are based upon the weighted average shares
outstanding during the periods plus those stock options that are dilutive, less
shares in the ESOP that are unallocated and not committed to be released.
Weighted average common shares deemed outstanding totaled 3,198,392 and
3,179,000 for the three months ended September 30, 1996 and 1995, respectively.
6
(4) EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Mortgage Servicing Rights. In May, 1995, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights." SFAS No.
122 requires that the Company recognizes as separate assets rights to service
mortgage loans for others, regardless of how those servicing rights were
acquired. An institution that acquires mortgage servicing rights through either
the purchase or origination of mortgage loans and sells those loans with
servicing rights retained would allocate some of the cost of the loans to the
mortgage servicing rights. SFAS No. 122 also requires that an enterprise
allocate the cost of purchasing or originating the mortgage loans between the
mortgage servicing rights and the loans when mortgage loans are securitized, if
it is practicable to estimate the fair value of mortgage servicing rights.
Additionally, SFAS No. 122 requires that capitalized mortgage servicing rights
and capitalized excess servicing receivables be assessed for impairment.
Impairment would be measured based on fair value. SFAS No. 122 is to be applied
prospectively to the Company's fiscal year beginning July 1, 1996, to
transactions in which an entity acquires mortgage servicing rights and to
impairment evaluations of all capitalized mortgage servicing rights and
capitalized excess servicing receivables whenever acquired. Retroactive
application is prohibited. Management adopted SFAS No. 122 on July 1, 1996, as
required, without material effect on the Company's consolidated financial
position or results of operations.
Accounting for Stock-Based Compensation. In October, 1994, the FASB issued
SFAS No. 123 entitled "Accounting for Stock Based Compensation." SFAS No. 123
established a fair value based method of accounting for stock-based compensation
paid to employees. SFAS No. 123 recognizes the fair value of an award of stock
or stock options on the grant date and is effective for transactions occurring
after December 1995. Companies are allowed to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting, which
generally does not result in compensation expense recognition for most plans.
Companies that elect to remain with the existing accounting are required to
disclose in a footnote to the financial statements pro forma net earnings and,
if presented, earnings per share, as if SFAS No. 123 had been adopted.
Management has determined that the Company will continue to account for stock-
based compensation pursuant to Accounting Principles Board Opinion No. 25 and
therefore adoption of SFAS No. 123 will not have a material effect on the
Company's consolidated financial condition or results of operations.
Accounting for Transfers of Financial Assets. In June 1996, the FASB
issued SFAS No. 125. "Accounting for Transfers of Financial Assets, Servicing
Rights, and Extinguishment of Liabilities," that provides accounting guidance on
transfers of financial assets, servicing of financial assets, and extinguishment
of liabilities. SFAS No. 125 introduces an approach to accounting for transfers
of financial assets that provides a means of dealing with more complex
transactions in which the seller disposes of only a partial interest in the
assets, retains rights or obligations, makes use of special purpose entities in
the transaction, or otherwise has continuing involvement with the transferred
assets. The new accounting method, the financial components approach, provides
that the carrying amount of the financial assets transferred be allocated to
components of the transaction based on their relative fair values. SFAS No. 125
provides criteria for determining whether control of assets has been
relinquished and whether a sale has occurred. If the transfer does not qualify
as a sale, it is accounted for as a secured borrowing. Transactions subject to
the provisions of SFAS No. 125 include, among others, transfers involving
repurchase agreements, securitizations of financial assets, loan participations,
factoring arrangements, and transfers of receivables with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or liability
that is purchased or assumed is initially recognized at its fair value.
Servicing assets and liabilities are amortized in proportion to and over the
period of estimated net servicing income or net servicing loss and are subject
to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet
only if the debtor either pays the creditor and is relieved of its obligation
for the liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishment of liabilities occurring after December 31, 1996 and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management does not believe that adoption of SFAS No. 125 will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
7
Management's Discussion and Analysis
General
The principal business of Frankfort First Bancorp, Inc. (the Company) is
that of First Federal Savings Bank of Frankfort (the Bank). On July 7, 1995 in
connection with the Bank's conversion to stock form, the Company issued
3,450,000 shares of common stock to the public and the Bank issued all of its
issued and outstanding common stock to the Company. Financial information for
periods prior to July 7, 1995, reflects the Bank only. 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,
Government Agency-issued bonds, and other investments.
Comparison of Financial Condition at September 30, 1996 and June 30, 1996
Assets: The Company's total assets increased slightly from $128.5 million
at June 30, 1996 to $128.7 million at September 30, 1996. The Company's net
loans receivable increased from $110.3 million at June 30, 1996 to $112.7
million at September 30, 1996 for an increase of $2.4 million or 2.1%. Cash used
to fund this increase in loans was drawn from investment securities (which
decreased by $1.0 million or 11.3%) and cash and cash equivalents (which
decreased by $1.2 million or 21.4%).
Liabilities: Deposits decreased from $87.8 million at June 30, 1996 to
$86.7 million at September 30, 1996, a decrease of $1.1 or 1.2%. Advances from
the Federal Home Loan Bank increased from $5.0 million at June 30, 1996 to $6.4
million at September 30, 1996, an increase of $1.4 million or 28.5%. Generally,
the rates paid on advances from the Federal Home Loan Bank are higher than rates
paid on consumer deposits. However, these advances are being used to fund fixed
rate mortgages which generally provide a higher yield than adjustable rate
mortgages, which is the Company's primary loan product. Also, by matching long
term advances from the Federal Home Loan Bank with fixed rate mortgages, the
Company can reduce its exposure to interest rate risk.
Shareholder's Equity: Shareholder's equity decreased from $34.3 million at
June 30, 1996 to $33.9 million at September 30, 1996, a net decrease of $410,000
or 1.2%. This decrease was primarily caused by the Company's net loss of
$103,000 in the three months ended September 30, 1996 and the Company's accrual
for its regular dividend of $310,000 paid to shareholders on October 15, 1996.
The Company's book value per share was $9.84 at September 30, 1996 compared to
$9.93 at June 30, 1996.
Comparison of Results of Operations for the Three Months Ended September 30,
1996 and September 30, 1995
Net Earnings: The Company's net earnings decreased from $492,000 for the
three-month period ended September 30, 1995 to a net loss of $103,000 for the
three-month period ended September 30, 1996, a decrease of $595,000 or 120.9%.
The decrease is primarily attributable to an increase in general,
administrative, and other expenses of $673,000 coupled with a $174,000 decrease
in net interest income. The Company's earnings per share fell from $0.15 per
share for the three months ended September 30, 1995 to a loss of $0.03 per share
for the three months ended September 30, 1996.
Net Interest Income: Net interest income decreased from $1.3 million for
the three-month period ended September 30, 1995 to $1.1 million for the three-
month period ended March 31, 1996 for a decrease of $174,000 or 13.6%. This
decrease was primarily due to the decrease in interest income.
Interest Income: Interest income decreased from $2.4 million for the three-
month period ended September 30, 1995 to $2.3 million for the three-month period
ended September 30, 1996, a decrease of $172,000 or 7.0%. This decrease was
primarily due to the decrease in the Company's average interest-earning assets
which fell from $137.3 million for the three months ended September 30, 1995 to
$125.9 million for the three-month period ended September 30, 1996. This
reduction is primarily the result of the Company's one-time return of capital
paid to stockholders on June 3, 1996 in the amount of $13.8 million.
8
Interest Expense: Interest expense remained virtually the same at $1.2
million for both the three month period ended September 30, 1995 and the three
month period ended September 30, 1996.
Provision for Losses on Loans: Provision for losses on loans remained
constant at $3,000 for both periods. Management believed, on the basis of its
analysis of the risk profile of the Company's assets, that it was appropriate to
maintain a constant provision for loan losses for the three-month period ended
September 30, 1996. 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.
Other Operating Income: Other operating income decreased from $26,000 for
the three months ended September 30, 1995 to $23,000 for the three months ended
September 30, 1996. Noninterest income is not a significant component of the
Company's statement of operations.
General, Administrative, and Other Expenses: General, administrative, and
other expense increased from $606,000 for the three-month period ended September
30, 1995 to $1.3 million for the three-month period ended September 30, 1996 for
an increase of $673,000 or 111.1%. This increase was primarily caused by the
one-time special assessment of $567,000 to recapitalize the Savings Association
Insurance Fund. Commencing in 1997, the premium that the Company pays for FDIC
Insurance will be reduced from 23 basis points to a lesser amount comprised of
6.5 basis points plus potentially an additional amount anticipated to be
announced by the FDIC during 1996. This lower premium will reduce the Company's
expense for FDIC insurance in future periods. In addition, the Company's expense
for employee compensation and benefits increased by $100,000 or 29.3%, which is
primarily the result of accrued expense for the Company's Management Recognition
Plan which was approved by stockholders at the Annual Meeting of the Company
held January 16, 1996.
Income Tax: The Company's provision for federal income taxes declined by
$255,000 to a credit provision of $54,000 for the three months ended September
30, 1996 as compared to a provision of $201,000 for the comparable period in
1995. The decline resulted primarily from the decline in pretax earnings of
$850,000. The Company's effective tax rates were 34.4% and 29.0% for the three
months ended September 30, 1996 and 1995, respectively.
Non-Performing Assets: At March 31, 1996, the Bank had approximately
$204,000 in loans 90 days or more past due but still accruing. The Bank had no
loans classified as Substandard, Doubtful, or Loss. These delinquent loans
represent 0.18% of the Bank's net loans.
Dividends: On September 14, 1995, the Company announced a dividend policy
whereby it will pay a quarterly cash dividend of $0.09 per share, per quarter,
payable on the 15th day of the month following the end of each quarter, to
stockholders of record as of the last business day of each quarter. 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 July 15, 1996. At September 30, 1996 the Company had accrued
approximately $310,000 for the payment of a dividend on October 15, 1996.
In addition to this regular dividend policy, on June 3, 1996 the Company
also paid a one-time return of capital in the amount of $4 per share to
shareholders of record on May 15, 1996. Based on a Private Letter Ruling from
the I.R.S., the Company has determined that $3.96 of this dividend $0.08 of each
of the first and second regular quarterly cash dividends paid in fiscal 1996
will not be considered taxable dividends, but will be applied against and will
reduce the shareholders' adjusted basis in the Company's common stock.
Stock Repurchase: On September 18, 1996, the Company announced a plan to
purchase up to 172,500 shares of the Company's common stock, which represents
approximately 5% of the outstanding common stock. The program will be dependent
upon market conditions and there is no guarantee as to the exact number of
shares to be repurchased by the Company. The repurchase should be completed
within nine months. Management 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 September 30, 1996, 10,000 shares had been
repurchased at an average price of $10.25 per share.
9
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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
On September 18, 1996, the Company filed an 8-K which announced the
commencement of a stock repurchase program to purchase up to 172,500
shares of the Company's common stock, which represents approximately 5%
of the outstanding common stock.
10
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: November 11, 1996
/S/ William C. Jennings
----------------------------------
William C. Jennings
Chairman, President, and
Chief Executive Officer
(Principal Executive Officer
and Principal Financial and
Accounting Officer)
11