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, 1997
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission file number: 0-26360
Frankfort First Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 61-1271129
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
216 West Main Street, Frankfort, Kentucky 40602
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(Address of principal executive offices) (Zip Code)
(502) 223-1638
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of November 10, 1997: 3,279,952.
Page 1 of 12 pages
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
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Item 1 Consolidated Statements of Financial Condition at
September 30, 1997 and June 30, 1997 3
Consolidated Statements of Operations for the three
months ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the three
months ended September 30, 1997 and 1996 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 11
Item 2 Changes in Securities 11
Item 3 Defaults upon Senior Securities 11
Item 4 Submission of Matters to a
Vote of Security Holders 11
Item 5 Other Information 11
Item 6 Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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2
Frankfort First Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
September 30, June 30,
1997 1997
ASSETS
Cash and due from banks $ 129 $ 161
Interest-bearing deposits in other financial institutions 2,395 2,590
------------------ ------------------
Cash and cash equivalents 2,524 2,751
Certificates of deposit in other financial institutions 200 200
Investment securities - at amortized cost, approximate
market value of $3,836 and $4,819 as of
September 30, 1997 and June 30, 1997 3,847 4,850
Loans receivable - net 123,442 120,888
Office premises and equipment - at depreciated cost 1,553 1,573
Federal Home Loan Bank stock - at cost 1,156 1,156
Accrued interest receivable on loans 330 316
Accrued interest receivable on investments and
interest-bearing deposits 74 79
Prepaid expenses and other assets 86 95
Deferred federal income tax assets 43 130
------------------ ------------------
Total assets $ 133,255 $ 132,038
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 85,037 $ 85,957
Advances from the Federal Home Loan Bank 21,842 9,006
Other borrowed money 2,000 13,000
Advances by borrowers for taxes and insurance 387 298
Accrued interest payable 144 129
Accrued federal income taxes 247 141
Other liabilities 1,172 1,162
------------------ ------------------
Total liabilities 110,829 109,693
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: 3,344,952 shares issued 35 35
Additional paid-in capital 5,858 5,858
Retained earnings - restricted 17,613 17,532
Shares acquired by employee stock benefit plans (414) (414)
Less 65,000 shares of treasury stock - at cost (666) (666)
------------------ ------------------
Total shareholders' equity 22,426 22,345
------------------ ------------------
Total liabilities and shareholders' equity $ 133,255 $ 132,038
================== ==================
3
Frankfort First Bancorp, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended September 30,
(In thousands, except per share data)
1997 1996
Interest income
Loans $ 2,297 $ 2,054
Investment securities 22 195
Interest-bearing deposits and other 90 19
---------------- ----------------
Total interest income 2,409 2,268
Interest expense
Deposits 1,025 1,075
Borrowings 400 91
---------------- ----------------
Total interest expense 1,425 1,166
---------------- ----------------
Net interest income 984 1,102
Provision for losses on loans -- 3
---------------- ----------------
Net interest income after provision for
losses on loans 984 1,099
Other operating income 12 23
General, administrative, and other expense
Employee compensation and benefits 224 441
Occupancy and equipment 37 40
Federal deposit insurance premiums 14 637
Franchise and other taxes 25 37
Data processing 32 32
Other operating expense 94 92
---------------- ----------------
Total general, administrative,
and other expense 426 1,279
---------------- ----------------
Earnings (loss) before income taxes (credits) 570 (157)
Federal income taxes (credits)
Current 107 (57)
Deferred 87 3
---------------- ----------------
Total federal income taxes (credits) 194 (54)
---------------- ----------------
NET EARNINGS (LOSS) $ 376 $ (103)
================ ================
EARNINGS (LOSS) PER SHARE $ 0.12 $ (0.03)
================ ================
4
Frankfort First Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOW
For the three months ended September 30,
(In thousands) 1997 1996
Cash flows from operating activities:
Net earnings (loss) for the period $ 376 $ (103)
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 3 6
Amortization of deferred loan origination fees -- (6)
Depreciation and amortization 20 31
Provision for losses on loans -- 3
Amortization of expense related to stock benefit
plans -- 106
Increase (decrease) in cash due to changes in:
Accrued interest receivable (9) 22
Prepaid expenses and other assets 9 26
Other liabilities 25 694
Federal income taxes
Current 106 (117)
Deferred 87 3
---------- -----------
Net cash provided by operating activities 617 665
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities 1,000 1,000
Loan principal repayments 6,751 6,405
Loan disbursements (9,305) (8,757)
Purchase of office premises and equipment -- (58)
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Net cash used in investing activities (1,554) (1,410)
Cash flows provided by (used in) financing activities:
Net decrease in deposit accounts (920) (1,084)
Purchase of treasury stock -- (103)
Proceeds from Federal Home Loan Bank advances 24,000 1,500
Repayment of Federal Home Loan Bank advances (11,164) (75)
Repayment of other borrowed money (11,000) (500)
Advances by borrowers for taxes and insurance 89 72
Dividends on common stock (295) (310)
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Net cash provided by (used in) financing
activities 710 (500)
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Net decrease in cash and cash equivalents (227) (1,245)
Cash and cash equivalents at beginning of period 2,751 5,817
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Cash and cash equivalents at end of period $ 2,524 $ 4,572
========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ -- $ 60
========== ===========
Interest on deposits and borrowings $ 1,410 $ 1,181
========== ===========
5
Frankfort First Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 1997 and 1996
(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 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 results of operations for the three month period
ended September 30, 1997 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, 1997.
(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, 1997 and 1996 are based upon the weighted average shares
outstanding during the periods plus those stock options that are dilutive, less
shares in the Employee Stock Ownership Plan that are unallocated and not
committed to be released. Weighted average common shares deemed outstanding
totaled 3,051,797 and 3,198,392 for the three months ended September 30, 1997
and 1996, respectively.
(4) EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Transfers of Financial Assets. In June 1996, the
Financial Accounting Standards Board (the "FASB") issued Statement of Financial
Accounting Standards ("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, 1997 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.
6
In February, 1997, the FASB issued SFAS No. 128, "Earnings Per Share",
which requires companies to present basic earnings per share and, if applicable,
diluted earnings per share, instead of primary and fully diluted earnings per
share, respectively. Basic earnings per share is computed without including
potential common shares, i.e. no dilutive effect. Diluted earnings per share is
computed taking into consideration common shares outstanding and dilutive
potential common shares, including options, warrants, convertible securities,
and contingent stock agreements. SFAS No. 128 is effective for periods ending
after December 15, 1997. Early application is not permitted. Based upon the
provisions of SFAS No. 128, the Company's basic and diluted earnings per share
for the three-month period ended September 30, 1997 would have each been $0.12.
In February, 1997, the FASB issued SFAS No. 129, "Disclosures of
Information about Capital Structure." SFAS No. 129 consolidated existing
accounting guidance relating to disclosure about a company's capital structure.
SFAS No. 129 is effective for financial statements for periods ending after
December 15, 1997. SFAS No. 129 is not expected to have a material impact on the
Company's financial statements.
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 statements 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 statements.
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. SFAS No. 130 is not expected to
have a material impact on the Company's financial statements.
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.
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 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. 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, 1997 and June 30, 1997
Assets: The Company's total assets increased slightly from $132.0
million at June 30, 1997 to $133.3 million at September 30, 1997, an increase of
$1.2 million or 0.9%. The Company's net loans receivable increased from $120.9
million at June 30, 1997 to $123.4 million at September 30, 1997, an increase of
$2.6 million or 2.1%. Cash used to fund this increase in loans was in part drawn
from the maturity of investment securities (which decreased by $1.0 million or
20.7%). The remainder was funded with Federal Home Loan Bank advances.
Liabilities: Deposits decreased from $86.0 million at June 30, 1997 to
$85.0 million at September 30, 1997, a decrease of $920,000 or 1.1%. Advances
from the Federal Home Loan Bank increased from $9.0 million at June 30, 1997 to
$21.8 million at September 30, 1997. Other borrowed money decreased from $13.0
million at June 30, 1997 to $2.0 million at September 30, 1997. At June 30,
1997, the Company had borrowed $13.0 million from a commercial bank to fund the
$4 per share return of capital paid to shareholders on June 24, 1997. After June
30, 1997, the Company paid off $11.0 million of this loan with proceeds from
various advances from the Federal Home Loan Bank. Management believes that, when
compared to loans from commercial banks, FHLB advances offer better rates and
terms that can be more easily matched to the characteristics of the Company's
assets. All borrowings increased from $22.0 million at June 30, 1997 to $23.8
million at September 30, 1997, an increase of $1.8 million or 8.3%. The increase
in overall borrowings was used to fund new loan originations. Management's
current intention is to fund future loan growth primarily with FHLB advances.
While rates paid on deposits are generally less than those paid on FHLB
advances, FHLB advances can be tailored to match the expected life of the Bank's
loans. Also, while the Bank could obtain new deposits by offering rates higher
than its competitors, such practice tends to increase the rate paid on the
Bank's existing deposits.
Shareholders' Equity: Shareholders' equity increased from $22.3 million
at June 30, 1997 to $22.4 million at September 30, 1997, an increase of $81,000
or 0.4%. This increase was caused by the Company's net earnings of $376,000 less
the dividend accrued on September 30, 1997 in the amount of $295,000 for payment
to shareholders on October 15, 1997. The Company's book value per share was
$6.84 at September 30, 1997.
Comparison of Results of Operations for the Three Months Ended September 30,
1997 and September 30, 1996
Net Earnings: The Company's net earnings increased from a net loss of
$103,000 for the three months ended September 30, 1996 to $376,000 for the three
months ended September 30, 1997, a increase of $479,000. The increase is
primarily attributable to the decrease in general, administrative, and other
expenses of $853,000 which was partially offset by a $118,000 decrease in net
interest income and a $248,000 increase in the provision for federal income
taxes. The Company's earnings per share for the three months ended September 30,
1997 was $0.12, up from a $0.03 loss for the three months ended September 30,
1996.
8
Net Interest Income: Net interest income decreased from $1.1 million
for the three months ended September 30, 1996 to $984,000 for the three months
ended September 30, 1997, a decrease of $118,000 or 10.7%. This decrease was
primarily due to an increase in interest expense.
Interest Income: Interest income increased from $2.3 million for the
three month period ended September 30, 1996 to $2.4 million for the three months
ended September 30, 1997, an increase of $141,000 or 6.2%. This increase was
primarily due to an increase in the Company's level of loans receivable, the
upward adjustment of some of the Company's adjustable rate mortgages, and a
higher percentage of fixed rate mortgages compared to adjustable rate mortgages
in the Company's mortgage loan portfolio. Fixed rate mortgages generally pay a
higher rate of interest than adjustable rate mortgages.
Interest Expense: Interest expense increased from $1.2 million for the
three months ended September 30, 1996 to $1.4 million for the three months ended
September 30, 1997, an increase of $259,000 or 22.2%. This increase is primarily
attributable to an increase of $309,000 in the Bank's expense on borrowings,
while the expense on deposits decreased by $50,000. The increase in interest
expense on borrowings is due to the increase in the balances of Federal Home
Loan Bank advances and other borrowed money. These funds were used to fund the
$4 special distribution to shareholders paid on June 24, 1997 and to fund the
Company's loan growth. Management expects that the proportion of interest
expense attributable to FHLB advances will continue to grow as FHLB advances are
used to fund loan growth. In general, rates paid on FHLB advances are greater
than rates paid on deposits (see "Comparison of Financial
Condition--Liabilities").
Provision for Losses on Loans: The provision for losses on loans
decreased from $3,000 for the three months ended September 30, 1996 to no
provision for the three months ended September 30, 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 during the prior year. 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 $23,000
for the three months ended September 30, 1996 to $12,000 for the three months
ended September 30, 1997. Other operating income is not a significant component
of the Company's statement of operations.
General, Administrative, and Other Expense: General, administrative,
and other expense decreased from $1.3 million for the three months ended
September 30, 1996 to $426,000 for the three months ended September 30, 1997, a
decrease of $853,000 or 66.7%. The primary reason for the disparity in
non-interest expense between the periods was the Company's payment, in the
September 1996 quarter, of a one-time special assessment to recapitalize the
Savings Association Insurance Fund. This recapitalization has resulted in lower
FDIC premiums in subsequent periods. Also, the Company's expense for employee
compensation and benefits has decreased from $441,000 for the three months ended
September 30, 1996 to $224,000 for the three months ended September 30, 1997, a
decrease of $217,000 or 49.2%. This reduction was caused by the termination of
the Company's Employee Stock Ownership Plan and Management Recognition Plan in
June, 1997 which was a component of the Company's Restructuring Plan announced
on June 5, 1997. The primary purposes of this plan was to improve profitability
by, among other things, reducing compensation expense.
Income Tax: The Company's provision for federal income taxes was
$194,000 for the three months ended September 30, 1997, compared to a $54,000
federal income tax credit for the three months ended September 30, 1996. The
increase was a result of the increase in the Company's pretax earnings. The
Company's effective tax rate was 34.0% for the three months ended September 30,
1997 and 34.4% for the three months ended September 30, 1996.
Non-Performing Assets: At September 30, 1997, the Bank had
approximately $125,000 in loans 90 days or more past due but still accruing.
These delinquent loans represent 0.1% of the Bank's net loans. The Bank had no
loans classified as Doubtful, Substandard, or Loss and has not charged-off any
loans during the period.
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 shareholders 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, 1997. At September 30, 1997 the Company had recorded
dividends payable of $295,000 for the payment of a dividend on
9
October 15, 1997. 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 year 1997 are taxable.
10
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
None.
11
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 10, 1997
/s/ William C. Jennings
-------------------------------
William C. Jennings
Chairman, President, and
Chief Executive Officer
(Principal Executive Officer
and Principal Financial and
Accounting Officer)
12