--------------------------------------------------------------------------------
Frankfort First Bancorp, Inc.
Annual Report
2000
--------------------------------------------------------------------------------
Parent Company of
First Federal Savings Bank of Frankfort
<PAGE>
TABLE OF CONTENTS
================================================================================
President's Message ................................................ 1
Frankfort First Bancorp, Inc. ...................................... 2
First Federal Savings Bank of Frankfort ............................ 2
Market Information ................................................. 2
Selected Consolidated Financial and Other Data ..................... 3
Management's Discussion and Analysis of
Financial Condition and Results of Operations .................... 5
Independent Auditors' Report ....................................... 18
Consolidated Financial Statements
Consolidated Statements of Financial Condition .................. 19
Consolidated Statements of Operations ........................... 20
Consolidated Statements of Shareholders' Equity ................. 21
Consolidated Statements of Cash Flow ............................ 22
Notes to Consolidated Financial Statements ...................... 23
Corporate Information .............................................. 43
<PAGE>
Frankfort First Bancorp, Inc.
Parent Company of First Federal Savings Bank of Frankfort
President's Message
Dear Shareholder:
We are pleased to present Frankfort First Bancorp's Annual Report to
Shareholders for the fiscal year ended June 30, 2000. We have continued down the
road to increased shareholder value by following the tenets of our 1997
restructuring plan and taking advantage of opportunities to repurchase shares of
the Company's common stock.
While net earnings for the year ended June 30, 2000, were slightly less than the
previous year, basic earnings per share rose from $1.06 to $1.13 per share, an
increase of $0.07 or 6.60%. It is important to note that this increase was made
during a period of generally rising interest rates and uncertainty in the
capital markets. Return on average equity continued its upward climb to 7.89%,
an increase of 3.54% over the previous year, primarily as a result of our stock
repurchase program. During the year we acquired over 178,000 shares or
approximately 12% of our outstanding shares.
We have also continued to maintain our superior efficiency in operations. Our
ratio of operating expenses to average assets at 1.20% remains very low by
industry standards. Our dividend rate also remains very strong. During the year
we maintained a dividend of $0.24 per quarter and increased our regular
quarterly dividend to $0.26 per share beginning with the quarter ended September
29, 2000. This represents a $0.02 or 8% increase over the previous dividend
amount of $0.24 per share. Your Company continues to provide one of the highest
dividend yields in the thrift industry.
As with almost every other business, our primary operational focus this year was
the successful transition into the Year 2000. Our staff devoted many hours to
testing our critical computer systems and in developing contingency plans to
cope with a variety of possible events. It pleases us to report that as of the
date of this report, no malfunctions have been detected and the Bank has not
experienced any problems or delays in its ability to serve its customers. We
believe that all of the hard work that went into preparing for this once in a
lifetime event helped to make it a non-event. The Company will continue to
benefit from the self-imposed scrutiny that we underwent.
We look forward to seeing you at our annual meeting and encourage you to give us
a call if at any time you have any questions or concerns.
Sincerely,
/s/ William C. Jennings
William C. Jennings
President
<PAGE>
FRANKFORT FIRST BANCORP, INC.
Frankfort First Bancorp, Inc. (the "Company") was incorporated under the
laws of the State of Delaware in August 1994 at the direction of the Board of
Directors of First Federal Savings Bank of Frankfort ("First Federal" or the
"Bank") for the purpose of serving as a savings institution holding company of
First Federal upon the acquisition of all of the capital stock issued by First
Federal upon its conversion from mutual to stock form (the "Conversion"). The
Conversion was completed July 7, 1995, with the Company issuing 1,725,000 shares
of its common stock, par value $0.01 per share (the "Common Stock") to the
public, and the Bank issuing all of its outstanding common stock to the Company.
Prior to and since the Conversion, the Company has not engaged in any material
operations. The Company has no significant assets other than the outstanding
capital stock of First Federal. The Company's principal business is the business
of First Federal. At June 30, 2000, the Company had total assets of $145.5
million, deposits of $82.5 million and shareholders' equity of $18.8 million.
As approved by the shareholders at the Company's 1997 Annual Meeting of
Shareholders, the Company effected a one-for-two reverse stock split on December
1, 1997. Consequently, all stock information in this report has previously been
adjusted to reflect the reverse split.
FIRST FEDERAL SAVINGS BANK OF FRANKFORT
First Federal was originally chartered in 1934 as a Kentucky-chartered
building and loan association known as "Greater Frankfort Building and Loan
Association" and was rechartered in 1938 as First Federal Savings and Loan
Association of Frankfort. First Federal has been a member of the Federal Home
Loan Bank ("FHLB") of Cincinnati and its deposits have been federally insured
since 1938. In 1989, First Federal became a federal mutual savings bank and
adopted its current name. First Federal currently operates through three banking
offices located in Frankfort, Kentucky.
First Federal is primarily engaged in the business of attracting deposits
from the general public and originating loans secured by first mortgages on one-
to four-family residences in First Federal's market area. First Federal also
originates, to a lesser extent, church loans, home equity loans and other loans.
As a federally chartered savings institution, First Federal is subject to
extensive regulation by the Office of Thrift Supervision ("OTS"). The lending
activities and other investments of First Federal must comply with various
federal regulatory requirements, and the OTS periodically examines First Federal
for compliance with various regulatory requirements. The Federal Deposit
Insurance Corporation ("FDIC") also has authority to conduct special
examinations. First Federal must file reports with the OTS describing its
activities and financial condition and is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
Both the Company's and First Federal's executive offices are located at 216
W. Main Street, Frankfort, Kentucky 40601, and their main telephone number is
(502) 223-1638.
MARKET INFORMATION
The Common Stock began trading under the symbol "FKKY" on the Nasdaq
National Market on July 10, 1995. On September 15, 2000, there were 1,261,108
shares of the Common Stock outstanding and the number of registered holders was
559.
2
<PAGE>
The following table shows the high and low stock prices for the Common Stock and
dividends declared on a quarterly basis for the fiscal years ended June 30, 2000
and 1999.
Fiscal 1999 Dividends
Quarter ended High Low Declared
------------- ---- --- ---------
September 30, 1998 $15.875 $13.625 $0.20
December 31, 1998 16.500 13.500 0.22
March 31, 1999 15.625 14.375 0.22
June 30, 1999 15.000 14.625 0.22
Fiscal 1998 Dividends
Quarter ended High Low Declared
------------- ---- --- ---------
September 30, 1999 $15.375 $14.625 $0.24
December 31, 1999 15.875 14.563 0.24
March 31, 2000 15.188 11.000 0.24
June 30, 2000 12.438 11.000 0.24
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following summary of selected consolidated financial information and
other data does not purport to be complete and is qualified in its entirety by
reference to the detailed information and consolidated financial statements and
accompanying notes appearing elsewhere herein.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets............................. $145,454 $140,322 $134,485 $132,038 $128,513
Loans receivable, net.............. 137,792 131,639 126,328 120,888 110,331
Cash and investment securities..... 3,075 4,795 4,517 7,801 14,889
Deposits........................... 82,502 86,254 81,891 85,957 87,777
Advances from FHLB................. 42,108 30,878 28,260 9,006 4,998
Shareholders' equity--substantially
restricted (1)................... 18,824 21,266 22,706 22,345 34,265
Number of:
Real estate loans outstanding...... 2,770 2,772 2,814 2,732 2,685
Deposits accounts.................. 7,245 7,523 7,671 8,032 8,397
Offices............................ 3 3 3 3 3
</TABLE>
3
<PAGE>
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest income................................. $10,087 $9,691 $9,751 $9,226 $9,699
Interest expense................................ 6,015 5,595 5,685 4,685 4,585
------ ------ ------ ------ ------
Net interest income............................. 4,072 4,096 4,066 4,541 5,114
Provision for loan losses....................... 1 -- -- 5 12
Other income.................................... 45 41 60 61 54
General, administrative and other expense....... 1,707 1,636 1,732 4,474 2,669
------ ------ ------ ------ ------
Earnings before federal income taxes............ 2,409 2,501 2,394 123 2,487
Federal income taxes............................ 828 851 814 491 827
------ ------ ------ ------ ------
Net earnings (loss)............................. $1,581 $1,650 $1,580 $ (368) $1,660
====== ====== ====== ====== ======
Earnings (loss) per share:
Basic......................................... $ 1.13 $ 1.06 $1.00 $(0.23) $ 1.04
Diluted....................................... $ 1.12 $ 1.05 $0.96 $ n/a $ 1.04
</TABLE>
<TABLE>
<CAPTION>
KEY OPERATING RATIOS
At or for the Year Ended June 30,
---------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
PERFORMANCE RATIOS
Return on assets (net earnings (loss) divided by
average total assets)................................... 1.11% 1.21% 1.18%
Return on equity (net earnings (loss) divided by
average equity)......................................... 7.89% 7.62% 6.58%
Equity to assets ratio (average equity divided by
average total assets)................................... 14.13% 16.10% 17.93%
Interest rate spread for the period....................... 2.24% 2.26% 2.20%
Net interest margin for the period........................ 2.92% 3.04% 3.11%
Operating expenses to average assets...................... 1.20% 1.20% 1.29%
Ratio of average interest-earning assets to average
interest-bearing liabilities............................ 115.73% 118.78% 120.92%
REGULATORY CAPITAL RATIOS
Tangible capital as a percent of assets................... 13.86% 16.06% 17.40%
Core capital as a percent of assets....................... 13.86% 16.06% 17.40%
Risk-based capital as a percent of risk-weighted assets... 26.52% 31.34% 33.68%
ASSET QUALITY RATIO
Non-performing assets to total assets..................... 0.35% 0.13% 0.27%
Loan loss allowance to total assets....................... 0.07% 0.07% 0.07%
Loan loss allowance to total non-performing assets........ 20.12% 53.19% 27.50%
</TABLE>
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's principal business, since July 7, 1995, has been that of
First Federal. 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 federal agency debt instruments, FHLB stock, and certificates of
deposit at the FHLB and other federally insured financial institutions.
The Bank's net earnings are dependent primarily on its net interest income,
which is the difference between interest income earned on its loan and
investment portfolio and interest paid on interest-bearing liabilities. To a
lesser extent, the Bank's net earnings are also affected by the level of other
income, such as service charges and other fees. In addition to net interest
income, net earnings are also affected by the level of general, administrative
and other expenses. Also impacting net earnings are competitive conditions in
the Bank's market area.
The operations of First Federal and the entire thrift industry's earnings
are significantly affected by prevailing economic conditions, competition, and
the monetary and fiscal policies of governmental agencies. Lending activities
are influenced by the demand for and supply of housing, competition among
lenders, the level of interest rates, and the availability of funds. The Bank's
deposit flows and costs of funds are influenced by prevailing market rates of
interest--primarily on competing investments, account maturities, and the levels
of personal income and savings in the Bank's market area.
RESTRUCTURING PLAN
In June 1997, the Company's Board of Directors approved a plan designed to
improve the Company's profitability through a series of actions consisting of a
special cash distribution of $8.00 per share (adjusted), termination of the
Company's employee stock ownership plan ("ESOP") and management recognition plan
("MRP") and a one-for-two reverse stock split, which was effected in December
1997. The special cash distribution of $8.00 was paid on June 24, 1997.
ASSET/LIABILITY MANAGEMENT
Net interest income, the primary component of the Bank's net earnings, is
derived from the difference or "spread" between the yield on interest-earning
assets and the cost of interest-bearing liabilities. First Federal has sought to
reduce its exposure to changes in interest rates by matching the effective
maturities or repricing characteristics of its interest-sensitive assets with
those of its liabilities. Management has emphasized the origination of
adjustable rate mortgages with rate adjustments indexed to the National Average
Contract Interest Rate for Major Lenders on the Purchase of Previously Occupied
Homes ("NACR"). The Bank also offers fixed-rate mortgages, which are fully or
partially funded with long-term FHLB advances. Management believes that advances
allow the Bank to respond to customer demand without incurring undue interest
rate or credit risk and without an increase in operating expenses. At June 30,
2000, first mortgage loans with adjustable rates represented 67.9% of the Bank's
mortgage loan portfolio. Nearly all of the Bank's adjustable rate mortgage loans
have an annual adjustment cap of one percent and a lifetime cap of five percent.
In a rising interest rate environment, these caps may restrict the interest
rates from increasing at the same pace that the Bank's cost of funds also
increase. In addition, some of the rates on adjustable rate mortgages may
already be at their lifetime caps or lifetime floors. The Bank currently expects
to fund future loan growth from working capital, FHLB advances, and, if
possible, proceeds from deposit growth.
5
<PAGE>
The Bank's Asset/Liability management program primarily involves monitoring
of Net Present Value ("NPV") through interest rate sensitivity analysis. NPV
represents the market value of portfolio equity and is equal to the market value
of assets minus the market value of liabilities, with adjustments made for
off-balance sheet items. Management monitors and considers methods of managing
the rate sensitivity and repricing characteristics of balance sheet components
in an effort to maintain acceptable levels of change in NPV and net interest
income in the event of changes in prevailing market interest rates. Interest
rate sensitivity analysis is used to measure the Company's interest rate risk by
computing estimated changes in NPV that are a result of changes in the net
present value of its cash flows from assets, liabilities, and off-balance sheet
items. These changes in cash flow are estimated based on hypothetical
instantaneous and permanent 1% through 3% increases and decreases in market
interest rates.
As part of the Bank's interest rate risk policy, the Board of Directors
establishes maximum decreases in NPV given these assumed instantaneous changes
in interest rates. The Company's exposure to interest rate risk is reviewed on a
quarterly basis by the Board of Directors. If estimated changes to NPV are not
within the limits established by the Board, the Board may direct management to
adjust its asset and liability mix to bring interest rate risk within
Board-approved limits.
The following tables set forth the interest rate sensitivity of the Bank's
NPV as of June 30, 2000 and 1999 in the event of 1%, 2%, and 3% instantaneous
and permanent increases and decreases in market interest rates, respectively.
All market risk-sensitive instruments presented in these tables are held to
maturity. The Company has no trading securities or securities available for
sale.
<TABLE>
<CAPTION>
June 30, 2000
Board of
Director
Net Portfolio Value NPV as % of Portfolio Value of Assets Limits
Change ----------------------------- ------------------------------------- --------
in Rates Amount $ Change % Change NPV Ratio Basis Point Changes % Change
-------- ------ -------- -------- --------- ------------------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
+300 bp $13,332 $(5,677) (30%) 10.18% -322 bp 35%
+200 bp 15,549 (3,460) (18%) 11.53% -187 bp 25
+100 bp 17,515 (1,494) (8%) 12.64% -76 bp 10
0 bp 19,009 13.40% --
-100 bp 19,751 742 +4% 13.66% +26 bp 10
-200 bp 19,547 538 +3% 13.35% -5 bp 25
-300 bp 19,098 89 0% 12.90% -50 bp 35
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
Board of
Director
Net Portfolio Value NPV as % of Portfolio Value of Assets Limits
Change ----------------------------- ------------------------------------- --------
in Rates Amount $ Change % Change NPV Ratio Basis Point Changes % Change
-------- ------ -------- -------- --------- ------------------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
+300 bp $19,496 $(5,813) (23%) 14.96% -308 bp 35%
+200 bp 21,946 (3,363) (13%) 16.37% -167 bp 25
+100 bp 24,008 (1,301) (5%) 17.46% -58 bp 10
0 bp 25,309 18.04% --
-100 bp 25,703 394 +2% 18.06% +2 bp 10
-200 bp 25,545 236 +1% 17.76% -28 bp 25
-300 bp 25,385 76 0% 17.44% -60 bp 35
</TABLE>
6
<PAGE>
The preceding table indicates that at June 30, 2000, in the event of a
sudden and sustained increase in prevailing market interest rates, the Company's
NPV would be expected to decrease, and that in the event of a sudden and
sustained decrease in prevailing interest rates, the Company's NPV would be
expected to increase. At June 30, 2000 and 1999, the Company's estimated changes
in NPV were within the targets established by the Board of Directors.
NPV is calculated by the OTS using information provided by the Company. The
calculation is based on the net present value of discounted cash flows utilizing
market prepayment assumptions and market rates of interest. Computations or
prospective effects of hypothetical interest rate changes are based on numerous
assumptions, including relative levels of market interest rates, loan
prepayments, and deposit run-offs. These computations should not be relied upon
as indicative of actual results. Further, the computations do not contemplate
any actions the Bank may undertake in response to changes in interest rates.
Certain shortcomings are inherent in this method of computing NPV. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in differing degrees to changes in market
interest rates. The interest rates on certain types of assets and liabilities
may fluctuate in advance of changes in market interest rates, while interest
rates on other types may lag behind changes in market rates. Additionally,
certain assets, such as adjustable rate loans, which represent the Bank's
primary loan product, have features which restrict changes in interest rates on
a short-term basis and over the life of the asset. In addition, the proportion
of adjustable rate loans in the Bank's portfolio could decrease in future
periods if market interest rates remain at or decrease below current levels due
to refinance activity. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in the tables. Finally, the ability of many borrowers to service
their adjustable-rate debt may decrease in the event of an interest rate
increase.
The OTS's risk-based capital rules incorporate an interest rate risk
("IRR") component. The IRR component is a dollar amount that is deducted from
total capital for the purpose of calculating an institution's risk-based capital
requirement and is measured in terms of the sensitivity of its NPV to changes in
interest rates. An institution's IRR is measured as the change to its NPV as a
result of a hypothetical 200 basis point change in market interest rates. A
resulting change in NPV of more than 2% of the estimated market value of its
assets requires the institution to deduct from its capital 50% of that excess
change. Under the rule, the OTS calculates the IRR component quarterly for each
institution with information as of the preceding quarter end. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS requires any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such a schedule on a quarterly basis. Based on the Bank's
asset size and capital ratio at June 30, 2000, it was not subject to any
increased capital requirements in connection with its level of interest rate
risk.
The following table sets forth the interest rate risk capital component for
the Bank at June 30, 2000 and 1999 given a hypothetical 200 basis point rate
change in market interest rate.
<TABLE>
<CAPTION>
At June 30, At June 30,
2000 1999
<S> <C> <C>
Pre-Shock NPV Ratio: NPV as % of Portfolio Value of Assets 13.40% 18.04%
Exposure Measure: Post-Shock NPV Ratio 11.53% 16.37%
Sensitivity Measure: Change in NPV Ratio (187bp) (167bp)
Interest Rate Risk Capital Component ($000) -- --
</TABLE>
7
<PAGE>
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to the Bank's
average balance sheet and reflects an average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid for the periods indicated. Such yields and costs are derived by dividing
income or expense by the average monthly balance of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
monthly balances. Management does not believe that the use of monthly balances
instead of daily balances has caused any material difference in the information
presented.
The table also represents information for the periods indicated with
respect to the difference between the weighted average yield earned on
interest-earning assets and weighted average rate paid on interest-bearing
liabilities, or "interest rate spread," which savings institutions have
traditionally used as an indicator of profitability. Another indicator of an
institution's net interest income is its "net interest margin." Net interest
income is affected by the interest rate spread and by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income.
8
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- ---------------------------- -------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable....................... $134,797 9,778 7.25% $129,398 $9,388 7.26% $124,319 $9,331 7.51%
Investment securities (1).............. 4,506 309 6.86% 5,201 303 5.83% 6,325 420 6.64%
-------- ------ -------- ------ --------- ------
Total interest-earning assets........ 139,303 10,087 7.24% 134,599 9,691 7.20% 130,644 9,751 7.46%
Non-interest-earning assets.............. 2,537 2,188 3,255
-------- -------- ---------
Total assets......................... $141,840 $136,787 $133,899
======== ======== =========
Interest bearing liabilities:
Deposits............................... $ 83,463 3,856 4.62% $ 83,499 3,915 4.69% $ 83,493 4,000 4.79%
Borrowings............................. 36,902 2,159 5.85% 29,822 1,680 5.63% 24,552 1,685 6.86%
-------- ------ -------- ------ --------- ------
Total interest-bearing liabilities... 120,365 6,015 5.00% 113,321 5,595 4.94% 108,045 5,685 5.26%
------ ------ ------
Non-interest-bearing liabilities......... 1,428 1,801 1,849
-------- -------- ---------
Total liabilities.................... 121,793 115,122 109,894
Shareholders' equity..................... 20,047 21,665 24,005
-------- -------- ---------
Total liabilities and shareholders'
equity............................. $141,840 $136,787 $133,899
======== ======== =========
Net interest income...................... $4,072 $4,096 $4,066
====== ====== ======
Interest rate spread..................... 2.24% 2.26% 2.20%
====== ====== ======
Net interest margin...................... 2.92% 3.04% 3.11%
====== ====== ======
Average interest-earning assets as
a percentage of average interest-
bearing liabilities.................... 115.73% 118.78% 120.92%
====== ====== ======
</TABLE>
-----------------
(1) Includes interest bearing deposits at other financial institutions.
9
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate), (ii) changes in rates (change in
rate multiplied by old volume), and (iii) total change. Changes in rate-volume
(changes in rate multiplied by changes in volume) are allocated proportionately
between changes in rate and changes in volume.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
------------------------- ----------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------- ----------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loan portfolio....................... $ 403 $ (13) $ 390 $ 310 $(253) $ 57
Investment securities (1)............ (48) 54 6 (70) (47) (117)
----- ----- ----- ------ ----- ------
Total interest-earning assets...... 355 41 396 240 (300) (60)
Interest expense:
Savings deposits..................... (1) (58) (59) -- (85) (85)
FHLB Advances........................ 413 66 479 (30) 25 (5)
----- ----- ----- ------ ----- ------
Total interest-bearing
liabilities...................... 412 8 420 (30) (60) (90)
----- ----- ----- ------ ----- ------
Change in net interest income.......... $ (57) 33 (24) 270 $(240) $ 30
===== ===== ===== ====== ===== ======
</TABLE>
-------------
(1) Includes interest-bearing deposits at other financial institutions.
10
<PAGE>
NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risk and
uncertainties. Economic circumstances, the Company's operations and the
Company's actual results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or contribute
to such differences are discussed herein but also include changes in the local
and national economy, as well as changes in the general level of interest rates.
OTHER MATTERS -- YEAR 2000
In previous filings, the Company has reported on efforts to ensure a smooth
transition of its computer systems to the Year 2000. As of the date of this
report, no malfunctions have been detected and the Bank has not experienced any
problems or delays in its ability to serve its customers. Likewise, there has
been no detectable interruption in service from the Bank's primary vendors or
utilities. As reported, the Bank has spent approximately $80,000 on the project
but has obtained computer equipment that will be useful for some years to come.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND 1999
ASSETS: The Company's total assets increased $5.1 million or 3.7% to $145.5
million at June 30, 2000. The increase is due primarily to an increase in net
loans receivable, which rose from $131.6 million at June 30, 1999, to $137.8
million at June 30, 2000, an increase of $6.2 million or 4.7%. Also contributing
to the increase in total assets was an increase in FHLB stock of $730,000 or
45.0%, which rose to $2.4 million at June 30, 2000. Offsetting the increases in
net loans receivable and FHLB stock was a decrease in cash and cash equivalents
from $2.6 million at June 30, 1999, to $978,000 at June 30, 2000, a decrease of
$1.6 million or 62.3%.
Loan disbursements for the year ended June 30, 2000, totaled $32.6 million
and were partially offset by principal repayments of $26.5 million. The Bank
experienced a decline of $8.3 million or 20.4% in its loan originations from the
year ended June 30, 1999, to the year ended June 30, 2000. The Bank also
experienced a decline of $9.2 million or 25.9% in loan principal repayments from
the preceding year to the year ended June 30, 2000. These changes are largely
related to rising interest rates from year to year, as borrowers generally
choose not to refinance their mortgages during a period of rising interest
rates. At June 30, 1999, the Company's allowance for losses on loans totaled
$100,000 and increased $1,000 or 1.0% to $101,000 at June 30, 2000. That
allowance represents approximately 0.07% of total assets and 20.1% of
nonperforming assets at June 30, 2000. Nonperforming assets at June 30, 2000,
and 1999, were $502,000 and $188,000, respectively, and consisted solely of
loans past due 90 days or more but still accruing. While management believes
that the allowance for loan losses at June 30, 2000, was adequate under the
circumstances, there can be no assurance that unforeseen additions to this
allowance will not be necessary. Such additions could adversely affect the
Company's results of operations.
LIABILITIES: The Company's total liabilities increased $7.6 million or 6.4%
to $126.6 million at June 30, 2000. The increase is attributed primarily to a
net increase in FHLB advances. FHLB advances rose $11.2 million or 36.4% to
$42.1 million at June 30, 2000. Deposits decreased from $86.3 million at June
30, 1999, to $82.5 million at June 30, 2000, a decrease of $3.8 million or 4.4%.
Deposits at June 30, 1999 included approximately $2.2 million deposited just
prior to the end of that fiscal year and withdrawn within a few days. Also
contributing to the increase in total liabilities was an increase in other
borrowings, which increased by $89,000.
SHAREHOLDERS' EQUITY: Shareholders' equity decreased $2.4 million or 11.5%
to $18.8 million at June 30, 2000. This change is a result of net earnings of
$1.6 million for the year ended June 30, 2000, less $1.3 million returned to the
shareholders in the form of dividends and less $2.7 million for the repurchase
of 178,395 common shares. At June 30, 2000, the Company's book value per share
was $14.26 compared to $14.19 at June 30, 1999.
11
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
NET EARNINGS: Net earnings decreased $69,000 or 4.2% to $1.6 million for
the year ended June 30, 2000. The decrease is primarily attributable to an
increase in general, administrative and other expense of $71,000.
NET INTEREST INCOME: Net interest income decreased $24,000 or 0.6% and
totaled $4.1 million for the years ended June 30, 2000, and 1999. An increase in
interest income of $396,000 was more than offset by an increase in interest
expense of $420,000.
INTEREST INCOME: Interest income increased $396,000 or 4.1% to $10.1
million for the year ended June 30, 2000. The increase is related primarily to
an increase in interest income from loans, which increased $390,000 or 4.2% to
$9.8 million for the year ended June 30, 2000. Also contributing to the increase
in interest income was an increase in interest income from investment
securities, which increased $17,000 or 17.2% from $99,000 for the year ended
June 30, 1999 to $116,000 for the year ended June 30, 2000. Offsetting the
increases in interest income from loans and investment securities was a decrease
in interest income from interest-bearing deposits and other of $11,000. As
interest rates in the economy generally increased during the year, the Company's
average coupon rate earned on invested assets also increased. Management
believes that, generally, rates paid on short-term investments and deposits are
less than the rates that can be earned on mortgage loans, and prefers to use
excess funds to either make new loans or reduce advances. As such, the
investment emphasis during the year ended June 30, 2000, has been on loans and
management expects that emphasis to continue. While the Company experienced a
net increase in interest income from loans, the net increase is attributed to
increased volume rather than an increase in the weighted average interest rate
earned on the loan portfolio. The Company's weighted average interest rate
earned on the loan portfolio has decreased slightly, principally due to a
preponderance of newly originated loans having an adjustable rate, which,
compared to fixed rate loans, generally earn a lower interest rate during the
first year after origination. The increase in interest income from the
investment portfolio is a result of an increase in the average rate paid by the
market; the average balance of the investment portfolio has decreased. The
decrease in interest income from interest-bearing deposits and other is
primarily a result of a decrease in the average balance of those assets, despite
generally higher interest rates earned on that component of the portfolio. These
results reflect management's intentional shift in the composition of the
interest-earning assets of the Company from investment securities toward those
earning higher rates.
In the latter part of the 2000 fiscal year, rates in general had increased.
If this trend continues, the weighted average rate on the Bank's asset portfolio
is expected to increase. This increase is caused by both the origination of new
loans at higher rates and the contractual increase in the coupon rate of the
Bank's adjustable rate mortgages (although such increases only occur annually
and are limited by a 1% cap). However, in times of increasing rates, generally
the level of new originations declines and consumer preference tends to shift
toward the adjustable rate mortgages, which usually have an initial coupon rate
that is less than the rates offered on fixed rate mortgages. These two factors
tend to offset the expected increase in returns on the assets and could result
in a short-term decline in the weighted average rate of the Bank's assets.
INTEREST EXPENSE: Interest expense increased from $5.6 million for the year
ended June 30, 1999 to $6.0 million for the year ended June 30, 2000, an
increase of $420,000 or 7.5%. The increase was due primarily to an increase in
the interest paid on FHLB advances which increased $479,000 or 28.5% to $2.2
million for the year ended June 30, 2000. The increase in the interest paid on
FHLB advances is primarily attributable to an increase in the volume of
borrowings outstanding, although the average rate paid on FHLB advances and
other borrowings increased approximately 22 basis points from the year ended
June 30, 1999 to the year ended June 30, 2000. Interest expense from the
Company's deposits remained relatively constant at $3.9 million for the years
ended June 30, 2000 and 1999, decreasing only $59,000, or 1.5%. Management
expects that the proportion of interest expense attributable to FHLB advances
will continue to grow as advances are used to fund loan growth. In general,
rates paid on FHLB advances are greater than rates paid on deposits. 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.
12
<PAGE>
As discussed above, near the end of the 2000 fiscal year, interest rates in
general had increased. During a period of increasing rates, the cost of
liabilities is expected to increase as well. Management cannot predict whether
the cost of liabilities will increase at a faster pace than the increase in the
Bank's income generated by the loan and investment portfolio.
PROVISION FOR LOSSES ON LOANS: The Company's provision for losses on loans
remained relatively constant with only a $1,000 provision for the year ended
June 30, 2000 and no provision for the year ended June 30, 1999. Management
believed, on the basis of its analysis of the risk profile of the Company's
assets, that it was appropriate to increase the allowance for loan losses
slightly to $101,000. 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 for loan losses (see "Comparison of Financial Condition--Assets") will
be adequate to cover losses on nonperforming assets in the future.
OTHER OPERATING INCOME: Other operating income increased from $41,000 for
the year ended June 30, 1999 to $45,000 for the year ended June 30, 2000, an
increase of $4,000 or 9.8%. Other operating income is generally comprised of
service charges and fees charged on loan and deposit accounts.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE: General, administrative and
other expense increased $71,000 or 4.3% from $1.6 million for the year ended
June 30, 1999 to $1.7 million for the year ended June 30, 2000. The increase was
due primarily to an $83,000 or 9.6% increase in employee compensation and
benefits and a $16,000, or 10.7%, increase in occupancy and equipment. Data
processing expenses declined from $156,000 for the fiscal year ended June 30,
1999, to $136,000 for the fiscal year ended June 30, 2000, while Federal deposit
insurance premiums decreased from $50,000 for the year ended June 30, 1999 to
$33,000 for the year ended June 30, 2000. The increase in employee compensation
and benefits is primarily related to normal increases in salaries and wages, a
reduction in the level of deferred loan costs and increased costs of health
insurance provided for employees. The increase in occupancy and equipment is
primarily attributable to depreciation expense associated with various computer
systems upgrades, which were implemented in the years ended June 30, 2000 and
1999. The decrease in data processing expense is attributed primarily to year
2000 costs which were charged to expense in earlier periods and which are
nonrecurring. The decrease in Federal deposit insurance premiums expense is
attributed to a reduction in the "FICO" (Financing Corporation) assessment that
became effective January 1, 2000, for Savings Association Insurance Fund
("SAIF") deposits. The FICO debt service assessment became applicable to all
insured institutions as of January 1, 1997, in accordance with the Deposit
Insurance Act of 1996. Beginning January 1, 2000 the FICO rate is the same for
both SAIF and Bank Insurance Fund ("BIF") insured deposits.
INCOME TAX: The effective income tax rates for the years ended June 30,
2000 and 1999 were 34.4% and 34.0%, respectively.
DIVIDENDS: On September 15, 1999, the Company announced a dividend policy
whereby it will pay a quarterly cash dividend of $0.24 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
represented an increase from the previous quarterly dividend of $0.22 per share.
On September 13, 2000, the Company announced another dividend policy change
whereby it will pay a quarterly cash dividend of $0.26 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 in both instances that the increase in the amount of the
dividend was appropriate in light of the Company's earnings, 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. At June 30, 2000 the Company had recorded
dividends payable of $317,000 for the payment of a dividend on July 14, 2000,
which was the last dividend paid by the Company.
13
<PAGE>
STOCK REPURCHASE: The following table presents information related to the
Company's stock repurchase programs for the year ended June 30, 2000:
Number Number Average
Date of Shares Date of Shares Cost of shares
Initiated In Program Concluded Repurchased Repurchased
--------- ---------- --------- ----------- -----------
3/24/99 77,000 10/6/99 76,337 $14.96
10/6/99 73,295 1/13/00 73,295 $15.15
1/13/00 72,500 1/26/00 72,500 $15.00
6/27/00 66,000 9/13/00 59,000 $12.88
9/13/00 65,000
At September 15, 2000, no shares had been repurchased under the program
initiated on September 13, 2000. The program is dependent upon market conditions
and there is no guarantee as to the exact number of shares to be repurchased by
the Company. Management believes that the repurchase program should be completed
within nine months of commencement. The Board of Directors considers the
Company's common stock to be an attractive investment, and the repurchase
program may improve liquidity in the market for the common stock and result in
increased per share earnings and book value per share.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
NET EARNINGS: Net earnings increased from $1.6 million for the year ended
June 30, 1998, to a total of $1.7 million for the year ended June 30, 1999, an
increase of $70,000 or 4.4%. The increase is primarily attributable to a
decrease in general, administrative and other expense of $96,000, and supported
by a $30,000 increase in net interest income. Offsetting these advances was an
increase in total federal income taxes of $37,000.
NET INTEREST INCOME: Net interest income increased $30,000, or 0.7%, and
totaled $4.1 million for the years ended June 30, 1999 and 1998. A decrease in
interest income of $60,000 was more than offset by a decrease in interest
expense of $90,000.
INTEREST INCOME: Interest income decreased from $9.8 million for the year
ended June 30, 1998 to $9.7 million for the year ended June 30, 1999, a decrease
of $60,000 or 0.6%. The decrease is related primarily to a decrease in interest
income from investment securities, which declined from $220,000 for the year
ended June 30, 1998 to $99,000 for the year ended June 30, 1999, a decrease of
$121,000 or 55.0%. Offsetting the decrease in interest income from investment
securities were increases in interest income from loans and interest-bearing
deposits and other of $57,000 and $4,000, respectively. As interest rates in the
economy generally declined during the year, the Company's average coupon rate
earned on invested assets also declined. Management believes that generally
rates paid on short-term investments and deposits are less than the rates that
can be earned on mortgage loans, and prefers to use excess funds to either make
new loans or reduce advances. As such, the investment emphasis during the year
ended June 30, 1999, has been on loans. While the Company experienced a net
increase in interest income from loans, the net increase is attributed to
increased volume rather than an increase in the weighted average interest rate
earned on the loan portfolio. The Company's weighted average interest rate
earned on the loan portfolio has decreased as a result of refinancing of
mortgages and the downward adjustment of adjustable rate mortgages in the
portfolio. The decrease in interest income from the investment portfolio is a
result of both a decline in the average rate paid by the market as well as
management's intentional shift in the composition of the interest-earning assets
of the Company from investment securities toward those earning higher rates.
INTEREST EXPENSE: Interest expense decreased from $5.7 million for the year
ended June 30, 1998 to $5.6 million for the year ended June 30, 1999, a decrease
of $90,000 or 1.6%. The decrease was due primarily to a decrease in the interest
paid on deposits, which declined from $4.0 million for the year ended June 30,
1998 to $3.9 million for the year ended June 30, 1999, a decrease of $85,000, or
2.1%. Interest expense from the Company's borrowings remained relatively
constant at $1.7 million for the years ended June 30, 1999 and 1998, decreasing
only $5,000, or 0.3%.
14
<PAGE>
PROVISION FOR LOSSES ON LOANS: The Company's provision for losses on loans
remained constant with no provision for either of the years ended June 30, 1999
or 1998. 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, a level which had been reached previously. In
determining the appropriate provision, management considers a number of factors,
including specific loans in the Company's portfolio, real estate market trends
in the Company's market area, economic conditions, interest rates, and other
conditions that may affect a borrower's ability to comply with repayment terms.
OTHER OPERATING INCOME: Other operating income decreased from $60,000 for
the year ended June 30, 1998 to $41,000 for the year ended June 30, 1999, a
decrease of $19,000 or 31.7%. Other operating income is generally comprised of
service charges and fees charged on loan and deposit accounts. However, the
Company realized a gain on the sale of property and equipment of $8,000 during
the fiscal year ended June 30, 1998. The nonreccurance of this sale and a
decline in charges and fees assessed on loan and deposit accounts of $11,000 are
responsible for the overall decrease in other operating income.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE: General, administrative and
other expense decreased $96,000 or 5.5% from $1.7 million for the year ended
June 30, 1998 to $1.6 million for the year ended June 30, 1999. The decrease was
due primarily to a decrease in other operating expense and a decrease in
employee compensation and benefits. Other operating expenses decreased $73,000
or 19.2% to $307,000 for the fiscal year ended June 30, 1999, while employee
compensation and benefits decreased $57,000 or 6.2% to $862,000 for the year
ended June 30, 1999. Offsetting somewhat the decreases in other operating
expense and employee compensation and benefits were increases in data processing
expense and franchise and other taxes. Data processing expense increased
$20,000, or 14.7%, from $136,000 for the year ended June 30, 1998, to $156,000
for the year ended June 30, 1999. The increase in data processing expense is
primarily related to Year 2000 readiness preparations. Franchise and other taxes
increased $19,000, or 20.4%, from $93,000 for the year ended June 30, 1998, to
$112,000 for the year ended June 30, 1999. This increase is due primarily to a
refund of an overpayment of the Delaware franchise tax recognized in the year
ended June 30, 1998, which did not reoccur in the year ended June 30, 1999.
INCOME TAX: The effective income tax rate for the years ended June 30, 1999
and 1998 was 34.0%.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since July 7, 1995, the Company has had no business other than that of the
Bank and investment of the portion of the net Conversion proceeds retained by
the Company. Management believes that dividends that may be paid from the Bank
to the Company will provide sufficient funds for its future operations,
including the servicing of any debt, which may exist. The Company's primary
sources of liquidity are dividends paid by the Bank. The Bank is subject to
certain regulatory limitations with respect to the payment of dividends to the
Company. At June 30, 2000, the Bank exceeded all regulatory minimum capital
requirements.
The Bank's primary sources of funds are (i) cash generated from operations,
(ii) deposits, (iii) principal repayments on loans, and (iv) advances from the
FHLB. As reflected in the Consolidated Statements of Cash Flows, net cash flow
provided by operating activities for fiscal years 2000, 1999, and 1998 was $1.4
million, $1.3 million, and $1.5 million, respectively.
Net cash used in investing activities for fiscal years 2000, 1999, and 1998
was $6.6 million, $4.2 million, and $3.8 million, respectively. Amounts
fluctuate from period to period primarily as a result of the volume of principal
repayments on loans and loan disbursements.
Net cash provided by financing activities was $3.6 million, $4.2 million
and $929,000 for fiscal years 2000, 1999, and 1998, respectively.
The primary investing activity of the Bank is the origination of mortgage
loans. During the years ended June 30, 2000, 1999, and 1998, the Bank originated
loans of $32.6 million, $40.9 million, and $36.6 million, respectively. Other
investing activities include investment in Federal agency issues, FHLB
certificates of deposit and insured certificates of deposit in other
institutions. The Bank may in the future consider other investing activities
that may provide higher yields. The primary financing activity of the Bank is
the attraction of savings deposits, though the Bank has somewhat reduced its
reliance on deposits as a source of funds in recent periods due to the
competitive conditions in First Federal's market area.
Another source of liquidity is the Bank's ability to obtain FHLB advances.
In addition, the Bank maintains a portion of its investments in FHLB overnight
funds that are available when needed.
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which may be changed at the direction of
the OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required minimum ratio at
June 30, 2000 and 1999 was 4.0%. The Bank's average daily liquidity during June
2000, 1999, and 1998 was 7.66%, 5.43% and 6.07%, respectively. Historically,
management has sought to maintain a relatively high level of liquidity in order
to retain flexibility in terms of investment opportunities and deposit pricing.
In recent years, however, management has elected to maintain a lower level of
liquidity in order to minimize interest expense. Should significant demands for
cash occur, the Bank has access to immediately available short-term FHLB
advances. The result of such action could adversely affect net earnings in
future periods. See "---Comparison of Financial Condition at June 30, 2000 and
1999."
The Bank's most liquid asset is cash held in an interest-bearing demand and
overnight deposit accounts at the FHLB. The level of cash available at any point
in time is dependent on the Bank's operating, financing and investing activities
during any given period. At June 30, 2000, 1999, and 1998, cash and cash
equivalents totaled $978,000, $2.6 million, and $1.3 million, respectively.
Management believes that the Bank will have sufficient funds available to
meet its current commitments. At June 30, 2000, the Bank had commitments to
originate loans of $1.0 million. Additionally, the Bank was obligated under
unused lines of credit totaling $5.7 million. Certificates of deposit, which
were scheduled to mature in less than one year at June 30, 2000, totaled $42.8
million. On the basis of historical experience, management believes that a
significant portion of such deposits will remain with the Bank.
16
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which required the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased costs of
the Company's operations. Unlike most industrial companies, nearly all of the
assets and liabilities of the Company are monetary. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative Instruments and Hedging Activities. In June,
1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which requires entities to recognize all derivatives in
their financial statements as either assets or liabilities measured at fair
value. SFAS No. 133 also specifies new methods of accounting for hedging
transactions, prescribes the items and transactions that may be hedged, and
specifies detailed criteria to be met to qualify for hedge accounting.
The definition of a derivative financial instrument is complex, but in
general, it is an instrument with one or more underlyings, such as an interest
rate or foreign exchange rate, that is applied to a notional amount, such as an
amount of currency, to determine the settlement amount(s). It generally requires
no significant initial investment and can be settled net or by delivery of an
asset that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. On adoption, entities are permitted to transfer
held-to-maturity debt securities to the available-for-sale or trading category
without calling into question their intent to hold other debt securities to
maturity in the future. Management adopted SFAS No. 133 effective July 1, 2000,
as required, without material impact on the Company's financial statements.
<PAGE>
CONTENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 4
CONSOLIDATED STATEMENTS OF EARNINGS 5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 6
CONSOLIDATED STATEMENTS OF CASH FLOWS 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Frankfort First Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of Frankfort First Bancorp, Inc. as of June 30, 2000 and 1999, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the years ended June 30, 2000, 1999 and 1998. These consolidated
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Frankfort First
Bancorp, Inc. as of June 30, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the years ended June 30, 2000, 1999
and 1998, in conformity with generally accepted accounting principles.
/s/GRANT THORNTON LLP
Cincinnati, Ohio
August 22, 2000
<PAGE>
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 2000 1999
<S> <C> <C>
Cash and due from banks $ 133 $ 991
Interest-bearing deposits in other financial institutions 845 1,600
---------- ---------
Cash and cash equivalents 978 2,591
Certificates of deposit in other financial institutions 100 200
Investment securities held to maturity - at amortized cost, approximate market
value of $1,965 and $1,999 as of June 30, 2000 and 1999 1,979 2,004
Loans receivable - net 137,792 131,639
Office premises and equipment - at depreciated cost 1,453 1,477
Federal Home Loan Bank stock - at cost 2,351 1,621
Accrued interest receivable on loans 413 367
Accrued interest receivable on investments and
interest-bearing deposits 41 39
Prepaid expenses and other assets 77 127
Prepaid federal income taxes 251 170
Deferred federal income taxes 19 87
----------- -----------
Total assets $ 145,454 $ 140,322
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 82,502 $ 86,254
Advances from the Federal Home Loan Bank 42,108 30,878
Other borrowed money 373 284
Advances by borrowers for taxes and insurance 337 308
Accrued interest payable 59 79
Other liabilities 1,251 1,253
----------- -----------
Total liabilities 126,630 119,056
Commitments -- --
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 5,876 5,876
Retained earnings - restricted 18,412 18,166
Less 352,335 and 173,940 shares of treasury stock - at cost (5,481) (2,793)
----------- -----------
Total shareholders' equity 18,824 21,266
----------- -----------
Total liabilities and shareholders' equity $ 145,454 $ 140,322
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
For the year ended June 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Interest income
Loans $ 9,778 $ 9,388 $ 9,331
Investment securities 116 99 220
Interest-bearing deposits and other 193 204 200
------- ------- -------
Total interest income 10,087 9,691 9,751
Interest expense
Deposits 3,856 3,915 4,000
Borrowings 2,159 1,680 1,685
------- ------- -------
Total interest expense 6,015 5,595 5,685
------- ------- -------
Net interest income 4,072 4,096 4,066
Provision for losses on loans 1 -- --
------- ------- -------
Net interest income after provision
for losses on loans 4,071 4,096 4,066
Other operating income 45 41 60
General, administrative and other expense
Employee compensation and benefits 945 862 919
Occupancy and equipment 165 149 150
Federal deposit insurance premiums 33 50 54
Franchise and other taxes 109 112 93
Data processing 136 156 136
Other operating 319 307 380
------- ------- -------
Total general, administrative and other expense 1,707 1,636 1,732
------- ------- -------
Earnings before income taxes 2,409 2,501 2,394
Federal income taxes
Current 760 882 740
Deferred 68 (31) 74
------- ------- -------
Total federal income taxes 828 851 814
------- ------- -------
NET EARNINGS $ 1,581 $ 1,650 $ 1,580
======= ======= =======
EARNINGS PER SHARE
Basic $ 1.13 $ 1.06 $ 1.00
======= ======= =======
Diluted $ 1.12 $ 1.05 $ .96
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended June 30, 2000, 1999 and 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
SHARES
ADDITIONAL ACQUIRED
COMMON PAID-IN RETAINED BY STOCK TREASURY
STOCK CAPITAL EARNINGS BENEFIT PLANS STOCK TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1997 $ 33 $ 5,860 $ 17,532 $ (414) $ (666) $ 22,345
Effect of 2 for 1 reverse stock split (16) 16 -- -- -- --
Amortization expense related to stock benefit plans -- -- -- 414 (367) 47
Net earnings for the year -- -- 1,580 -- -- 1,580
Cash dividends of $.78 per common share -- -- (1,266) -- -- (1,266)
-------- -------- -------- -------- -------- --------
Balance at June 30, 1998 17 5,876 17,846 -- (1,033) 22,706
Net earnings for the year -- -- 1,650 -- -- 1,650
Cash dividends of $.86 per common share -- -- (1,330) -- -- (1,330)
Acquisition of treasury stock -- -- -- -- (1,760) (1,760)
-------- -------- -------- -------- -------- --------
Balance at June 30, 1999 17 5,876 18,166 -- (2,793) 21,266
Net earnings for the year -- -- 1,581 -- -- 1,581
Cash dividends of $.96 per common share -- -- (1,335) -- -- (1,335)
Acquisition of treasury stock -- -- -- -- (2,688) (2,688)
-------- -------- -------- -------- -------- --------
Balance at June 30, 2000 $ 17 $ 5,876 $ 18,412 $ -- $ (5,481) $ 18,824
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 1,581 $ 1,650 $ 1,580
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 (5) (2) 4
Amortization of deferred loan origination fees (57) (61) (11)
Depreciation and amortization 81 72 78
Provision for losses on loans 1 -- --
Loans originated for sale -- (80) --
Amortization of expense related to stock benefit plans -- -- 47
Federal Home Loan Bank stock dividends (135) (108) (92)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (48) (6) (5)
Prepaid expenses and other assets 50 (37) 5
Accrued interest payable (20) -- --
Other liabilities (2) 9 32
Federal income taxes
Current (81) (73) (238)
Deferred 68 (31) 74
-------- -------- --------
Net cash provided by operating activities 1,433 1,333 1,474
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as held to maturity (1,970) (3,006) (4,000)
Proceeds from maturity of investment securities 2,100 4,000 5,850
Purchase of Federal Home Loan Bank stock (595) (19) (246)
Loan principal repayments 26,474 35,723 31,153
Loan disbursements (32,571) (40,893) (36,582)
Purchase of office premises and equipment (57) (46) (8)
-------- -------- --------
Net cash used in investing activities (6,619) (4,241) (3,833)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts (3,752) 4,363 (4,066)
Proceeds from Federal Home Loan Bank advances 46,850 17,250 32,500
Repayment of Federal Home Loan Bank advances (35,620) (14,632) (13,246)
Proceeds from other borrowed money 2,199 288 --
Repayment of other borrowed money (2,110) (4) (13,000)
Advances by borrowers for taxes and insurance 29 3 7
Dividends paid on common stock (1,335) (1,330) (1,266)
Acquisition of treasury stock (2,688) (1,760) --
-------- -------- --------
Net cash provided by financing activities 3,573 4,178 929
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (1,613) 1,270 (1,430)
Cash and cash equivalents at beginning of year 2,591 1,321 2,751
-------- -------- --------
Cash and cash equivalents at end of year $ 978 $ 2,591 $ 1,321
======== ======== ========
</TABLE>
<PAGE>
FRANKFORT FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 840 $ 925 $1,040
======= ====== ======
Interest on deposits and borrowings $ 6,035 $5,601 $5,729
======= ====== ======
Transfer of loans from held for sale classification to
loans receivable - net $ -- $ 80 $ --
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Frankfort First Bancorp, Inc. (the "Corporation") is a savings and loan
holding company whose activities are primarily limited to holding the stock
of First Federal Savings Bank of Frankfort (the "Savings Bank"). The Savings
Bank conducts a general banking business in central Kentucky which primarily
consists of attracting deposits from the general public and applying those
funds to the origination of loans for residential, consumer and
nonresidential purposes. The Savings Bank's profitability is significantly
dependent on net interest income, which is the difference between interest
income generated from interest-earning assets (i.e. loans and investments)
and the interest expense paid on interest-bearing liabilities (i.e. customer
deposits and borrowed funds). Net interest income is affected by the
relative amount of interest-earning assets and interest-bearing liabilities
and the interest received or paid on these balances. The level of interest
rates paid or received by the Savings Bank can be significantly influenced
by a number of environmental factors, such as governmental monetary policy,
that are outside of management's control.
The consolidated financial information presented herein has been prepared in
accordance with generally accepted accounting principles ("GAAP") and
general accounting practices within the financial services industry. In
preparing consolidated financial statements in accordance with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could differ from
such estimates.
The following is a summary of the Corporation's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
1. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Corporation and the Savings Bank. All significant intercompany balances and
transactions have been eliminated.
2. Investment Securities
---------------------
The Corporation accounts for investment securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115 requires
that investments in debt and equity securities be categorized as
held-to-maturity, trading, or available for sale. Securities classified as
held-to-maturity are to be carried at cost only if the Corporation has the
positive intent and ability to hold these securities to maturity. Trading
securities and securities designated as available for sale are carried at
fair value with resulting unrealized gains or losses recorded to operations
or shareholders' equity, respectively. At June 30, 2000 and 1999, the
Corporation had designated all investment securities as held-to-maturity.
<PAGE>
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities (continued)
---------------------
Realized gains and losses on sales of securities are recognized using the
specific identification method.
3. Loans Receivable
----------------
Loans receivable are stated at the principal amount outstanding, adjusted
for deferred loan origination fees and the allowance for loan losses.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Interest on loans that are contractually past due is charged off, or
an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all
interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment,
the borrower's ability to make periodic interest and principal payments has
returned to normal, in which case the loan is returned to accrual status. If
the ultimate collectibility of the loan is in doubt, in whole or in part,
all payments received on nonaccrual loans are applied to reduce principal
until such doubt is eliminated.
4. Loan Origination Fees
---------------------
The Savings Bank accounts for loan origination fees in accordance with SFAS
No. 91 "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Cost of Leases". Pursuant
to the provisions of SFAS No. 91, origination fees received from loans, net
of direct origination costs, are deferred and amortized to interest income
using the level-yield method, giving effect to actual loan prepayments.
Additionally, SFAS No. 91 generally limits the definition of loan
origination costs to the direct costs attributable to originating a loan,
i.e., principally actual personnel costs. Fees received for loan commitments
that are expected to be drawn upon, based on the Savings Bank's experience
with similar commitments, are deferred and amortized over the life of the
loan using the level-yield method. Fees for other loan commitments are
deferred and amortized over the loan commitment period on a straight-line
basis.
5. Allowance for Loan Losses
-------------------------
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past loss experience, trends in the level
of delinquent and problem loans, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral and current and anticipated economic conditions in the primary
lending area. When the collection of a loan becomes doubtful, or otherwise
troubled, the Savings Bank records a loan charge-off 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).
<PAGE>
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Loan Losses (continued)
-------------------------
The Savings Bank 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. The Savings Bank's current procedures for evaluating impaired
loans result in carrying such loans at the lower of cost or fair value.
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 Savings Bank
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
Savings Bank'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.
At June 30, 2000 and 1999, the Savings Bank had no loans that would be
defined as impaired under SFAS No. 114.
6. Office Premises and Equipment
-----------------------------
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation and amortization are provided on the straight-line and
accelerated methods over the useful lives of the assets, estimated to be
forty years for buildings, ten to forty years for building improvements, and
five to ten years for furniture and equipment. An accelerated method is used
for tax reporting purposes.
<PAGE>
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
7. Federal Income Taxes
--------------------
The Corporation accounts for federal income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109
established financial accounting and reporting standards for the effects of
income taxes that result from the Corporation's activities within the
current and previous years. Pursuant to the provisions of SFAS No. 109, a
deferred tax liability or deferred tax asset is computed by applying the
current statutory tax rates to net taxable or deductible differences between
the tax basis of an asset or liability and its reported amount in the
financial statements that will result in taxable or deductible amounts in
future periods. Deferred tax assets are recorded only to the extent that the
amount of net deductible temporary differences or carryforward attributes
may be utilized against current period earnings, carried back against prior
years earnings, offset against taxable temporary differences reversing in
future periods, or utilized to the extent of management's estimate of future
taxable income. A valuation allowance is provided for deferred tax assets to
the extent that the value of net deductible temporary differences and
carryforward attributes exceeds management's estimates of taxes payable on
future taxable income. Deferred tax liabilities are provided on the total
amount of net temporary differences taxable in the future.
The Corporation's principal temporary differences between pretax financial
income and taxable income result from different methods of accounting for
deferred loan origination fees and costs, Federal Home Loan Bank stock
dividends, the general loan loss allowance, deferred compensation, and the
recapture of percentage of earnings bad debt deductions. Additional
temporary differences result from depreciation computed using accelerated
methods for tax purposes.
8. Retirement and Employee Benefit Plans
-------------------------------------
The Corporation had an Employee Stock Ownership Plan ("ESOP"). The ESOP
provided retirement benefits for substantially all employees who had
completed one year of service and had attained the age of 21. During the
fiscal year ended June 30, 1997, the Board of Directors elected to terminate
the ESOP and had filed with the Internal Revenue Service for a favorable
determination letter in this regard. The Corporation recognized
approximately $47,000 in expense upon final termination of the ESOP during
the fiscal year ended June 30, 1998.
<PAGE>
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
8. Retirement and Employee Benefit Plans (continued)
-------------------------------------
The Corporation also had a Management Recognition Plan ("MRP"). The MRP
purchased 68,460 shares of the Corporation's common stock in the open market
during fiscal 1996. All of the shares available under the MRP were granted
to executive officers, directors and employees of the Savings Bank upon
receipt of shareholder approval of the MRP. During fiscal 1997, the Board of
Directors terminated the MRP. In conjunction therewith, the Corporation
received cash of $900,000 and 52,524 common shares at fair value from the
MRP. The common shares received upon termination of the MRP were placed in
treasury and simultaneously deemed retired. Coincident with termination of
the MRP, the Corporation established a deferred unfunded compensation plan
liability for the benefit of management and the directors. The Corporation
recognized $63,800 in expense under this plan for the fiscal year ended June
30, 1998, while no expense was recognized for fiscal 2000 and 1999.
The Savings Bank also has a multiemployer defined benefit pension plan. All
employees over 21 years of age enter this plan at the first entrance date
after completing one year of service. Due to the overfunded status of the
plan, the Savings Bank recorded no expense for this plan during the fiscal
years ended June 30, 2000, 1999 and 1998.
9. Earnings Per Share
------------------
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period less shares in the ESOP that were unallocated
and not committed to be released. Weighted-average common shares deemed
outstanding, which gives effect to a reduction for 46,732 weighted-average
unallocated shares held by the ESOP for the fiscal year ended June 30, 1998,
totaled 1,405,845, 1,561,656 and 1,572,379 for the fiscal years ended June
30, 2000, 1999 and 1998, respectively.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under
the Corporation's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
1,406,760, 1,578,313 and 1,640,817 for the fiscal years ended June 30, 2000,
1999 and 1998, respectively. Incremental shares related to the assumed
exercise of stock options included in the computation of diluted earnings
per share totaled 915, 16,657 and 68,438 for the fiscal years ended June 30,
2000, 1999 and 1998, respectively. Options to purchase 4,747 shares of
common stock with an exercise price of $14.91 were outstanding at June 30,
2000 and 1999, but were excluded from the computation of diluted earnings
per share because the exercise price was greater than the average market
price of the common shares.
<PAGE>
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of the fair value of financial instruments, both assets
and liabilities whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair
values are based on estimates using present value and other valuation
methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair
values presented may not represent amounts that could be realized in an
exchange for certain financial instruments.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at June 30,
2000 and 1999:
Cash and cash equivalents: The carrying amounts presented in
--------------------------
the consolidated statements of financial condition for cash
and cash equivalents are deemed to approximate fair value.
Certificates of deposit in other financial institutions: The
--------------------------------------------------------
carrying amounts presented in the consolidated statements of
financial condition for certificates of deposit in other
financial institutions are deemed to approximate fair value.
Investment securities: For investment securities, fair value
---------------------
is deemed to equal the quoted market price.
Loans receivable: The loan portfolio has been segregated into
----------------
categories with similar characteristics, such as one-to-four
family residential, multi-family residential and
nonresidential real estate. These loan categories were further
delineated into fixed-rate and adjustable-rate loans. The fair
values for the resultant loan categories were computed via
discounted cash flow analysis, using current interest rates
offered for loans with similar terms to borrowers of similar
credit quality. For loans on deposit accounts and consumer and
other loans, fair values were deemed to equal the historic
carrying values. The historical carrying amount of accrued
interest on loans is deemed to approximate fair value.
Federal Home Loan Bank stock: The carrying amount presented in
----------------------------
the consolidated statements of financial condition is deemed
to approximate fair value.
Deposits: The fair value of NOW accounts, passbook accounts,
--------
money market deposits and advances by borrowers for taxes and
insurance are deemed to approximate the amount payable on
demand. Fair values for fixed-rate certificates of deposit
have been estimated using a discounted cash flow calculation
using the interest rates currently offered for deposits of
similar remaining maturities.
<PAGE>
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. Fair Value of Financial Instruments (continued)
-----------------------------------
Advances from the Federal Home Loan Bank: The fair value of
------------------------------------------
these advances is estimated using the rates currently offered
for similar advances of similar remaining maturities or, when
available, quoted market prices.
Other borrowed money: The fair value of other borrowed money
---------------------
is estimated using rates currently offered for similar
borrowings of similar remaining maturities or, when available,
quoted market prices.
Commitments to extend credit: For fixed-rate and
-----------------------------------
adjustable-rate loan commitments, the fair value estimate
considers the difference between current levels of interest
rates and committed rates. The difference between the fair
value and notional amount of outstanding loan commitments at
June 30, 2000 and 1999, was not material.
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments at June 30 are as follows:
<TABLE>
<CAPTION>
2000 1999
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 978 $ 978 $ 2,591 $ 2,591
Certificates of deposit in other financial
institutions 100 100 200 200
Investment securities 1,979 1,965 2,004 1,999
Loans receivable 137,792 133,752 131,639 130,681
Stock in Federal Home Loan Bank 2,351 2,351 1,621 1,621
-------- -------- -------- --------
$143,200 $139,146 $138,055 $137,092
======== ======== ======== ========
Financial liabilities
Deposits $ 82,502 $ 81,787 $ 86,254 $ 86,763
Advances from the Federal Home Loan Bank 42,108 41,685 30,878 30,525
Other borrowed money 373 373 284 284
Advances by borrowers for taxes and insurance 337 337 308 308
-------- -------- -------- --------
$125,320 $124,182 $117,724 $117,880
======== ======== ======== ========
</TABLE>
<PAGE>
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
11. Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and interest-bearing deposits in other financial
institutions with original maturities of less than ninety days.
12. Comprehensive Income
--------------------
The Corporation had no components of other comprehensive income for the
fiscal years ended June 30, 2000, 1999 and 1998.
13. Advertising
-----------
Advertising costs are expensed when incurred. The Corporation's advertising
expense totaled $46,000, $48,000 and $48,000 for the fiscal years ended June
30, 2000, 1999 and 1998, respectively.
14. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the 2000
consolidated financial statement presentation.
NOTE B - INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities held
to maturity at June 30 are summarized as follows:
2000 1999
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
(In thousands)
U.S. Government agency
obligations $1,979 $1,965 $2,004 $1,999
====== ====== ====== ======
At June 30, 2000 and 1999, the carrying value of the Corporation's
investment securities exceeded the estimated fair value by $14,000 and
$5,000, respectively, consisting solely of gross unrealized losses.
<PAGE>
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE B - INVESTMENT SECURITIES (continued)
The amortized cost and estimated fair value of U.S. Government agency
obligations designated as held to maturity, by contractual term to maturity
at June 30 are shown below:
<TABLE>
<CAPTION>
2000 1999
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
<S> <C> <C> <C> <C>
Due within one year $ -- $ -- $2,004 $1,999
Due after one year through five years 1,979 1,965 -- --
------ ------ ------ ------
$1,979 $1,965 $2,004 $1,999
====== ====== ====== ======
</TABLE>
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at June 30 is as follows:
<TABLE>
<CAPTION>
2000 1999
(In thousands)
<S> <C> <C>
Residential real estate
One-to-four family $ 130,880 $ 124,081
Multi-family 76 78
Construction 878 808
Nonresidential real estate and land 1,555 1,756
Consumer and other 5,226 5,640
--------- ---------
138,615 132,363
Less:
Undisbursed portion of loans in process (375) (246)
Deferred loan origination fees (347) (378)
Allowance for loan losses (101) (100)
--------- ---------
$ 137,792 $ 131,639
========= =========
</TABLE>
The Savings Bank's lending efforts have historically focused on one-to-four
family and multi-family residential real estate loans, which comprise
approximately $131.5 million, or 95%, of the total loan portfolio at June
30, 2000, and $124.7 million, or 95%, of the total loan portfolio at June
30, 1999. Generally, such loans have been underwritten on the basis of no
more than an 80% loan-to-value ratio, which has historically provided the
Savings Bank with adequate collateral coverage in the event of default.
Nevertheless, the Savings Bank, as with any lending institution, is subject
to the risk that real estate values could deteriorate in its primary lending
area of central Kentucky, thereby impairing collateral values. However,
management is of the belief that residential real estate values in the
Savings Bank's primary lending area are presently stable.
<PAGE>
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE C - LOANS RECEIVABLE (continued)
In the normal course of business, the Savings Bank has made loans to some of
its directors, officers and employees. Related party loans are made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unrelated
persons and do not involve more than the normal risk of collectibility. The
aggregate dollar amount of loans outstanding to directors and officers
totaled approximately $1.1 million and $911,000 at June 30, 2000 and 1999,
respectively.
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for
the years ended June 30:
2000 1999 1998
(In thousands)
Balance at beginning of year $100 $100 $100
Provision for loan losses 1 -- --
---- ---- ----
Balance at end of year $101 $100 $100
==== ==== ====
As of June 30, 2000, the Savings Bank's allowance for loan losses was solely
general in nature, and is includible as a component of regulatory risk-based
capital, subject to certain percentage limitations.
Nonperforming loans totaled approximately $502,000, $188,000 and $363,000 at
June 30, 2000, 1999 and 1998, respectively. The Savings Bank did not incur
any reduction in interest income related to such nonperforming loans during
the respective periods.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at June 30 are comprised of the following:
2000 1999
(In thousands)
Land and improvements $ 187 $ 187
Office buildings and improvements 1,731 1,728
Furniture, fixtures and equipment 828 774
------ ------
2,746 2,689
Less accumulated depreciation and
amortization 1,293 1,212
------ ------
$1,453 $1,477
====== ======
<PAGE>
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE F - DEPOSITS
Deposits consist of the following major classifications at June 30:
DEPOSIT TYPE AND WEIGHTED-
AVERAGE INTEREST RATE 2000 1999
(In thousands)
NOW accounts
2000 - 2.95% $ 4,437
1999 - 3.09% $ 3,622
Passbook
2000 - 3.00% 10,240
1999 - 2.94% 10,563
Money market deposit accounts
2000 - 3.23% 3,952
1999 - 3.08% 7,204
------- -------
Total demand, transaction and
passbook deposits 18,629 21,389
Certificates of deposit
Original maturities of:
Less than 12 months
2000 - 5.74% 21,802
1999 - 4.33% 8,442
12 months to 24 months
2000 - 4.92% 25,866
1999 - 5.04% 41,842
30 months to 36 months
2000 - 5.21% 2,696
1999 - 5.70% 6,989
More than 36 months
2000 - 5.91% 13,509
1999 - 5.63% 7,592
------- -------
Total certificates of deposit 63,873 64,865
------- -------
Total deposit accounts $82,502 $86,254
======= =======
At June 30, 2000 and 1999, the Savings Bank had certificate of deposit accounts
with balances in excess of $100,000 totaling approximately $9.9 million and $9.0
million, respectively.
<PAGE>
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE F - DEPOSITS (continued)
Maturities of outstanding certificates of deposit at June 30 are summarized
as follows:
2000 1999
(In thousands)
Less than one year $42,771 $48,481
One to three years 20,116 14,651
Over three years 986 1,733
------- -------
$63,873 $64,865
======= =======
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at June 30, 2000 by
pledges of certain residential mortgage loans totaling $63.8 million, and
the Savings Bank's investment in Federal Home Loan Bank stock, are
summarized as follows:
MATURING
YEAR ENDING
INTEREST RATE JUNE 30, 2000 1999
(Dollars in thousands)
5.84% 2000 $ - $ 500
6.86% 2001 600 --
6.45% - 6.95% 2004 334 409
6.40% - 6.75% 2007 1,452 1,567
5.31% - 6.40% 2008 5,292 8,653
4.22% - 7.35% 2009 10,584 16,366
5.96% - 6.86% 2010 21,000 --
6.90% 2012 429 452
5.75% 2013 570 750
6.15% - 6.95% 2016 796 824
6.30% - 6.35% 2017 460 594
6.20% 2018 591 763
-------- --------
$ 42,108 $30,878
======== ========
Weighted-average interest rate 6.12% 5.50%
======= ========
NOTE H - OTHER BORROWED MONEY
Other borrowed money consisted of a $1.0 million variable-rate, unsecured
line of credit with an outstanding balance of $373,000 and $284,000, and an
interest rate of 9.25% and 7.50%, at June 30, 2000 and 1999, respectively.
<PAGE>
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE I - FEDERAL INCOME TAXES
Federal income taxes do not differ materially from the amounts computed at
the statutory corporate tax rate for the years ended June 30, 2000, 1999 and
1998, respectively.
The composition of the Corporation's net deferred tax asset at June 30 is as
follows:
2000 1999
(In thousands)
Taxes (payable) refundable on temporary
differences at estimated corporate tax rate:
Deferred tax assets:
General loan loss allowance $ 34 $ 34
Deferred loan origination fees 118 129
Deferred compensation 68 67
Book/tax depreciation -- 15
----- -----
Total deferred tax assets 220 245
Deferred tax liabilities:
Percentage of earnings bad debt deductions (32) (39)
Federal Home Loan Bank stock dividends (164) (119)
Book/tax depreciation (5) --
----- -----
Total deferred tax liabilities (201) (158)
----- -----
Net deferred tax asset $ 19 $ 87
===== =====
The Savings Bank was allowed a special bad debt deduction, generally limited
to 8% of otherwise taxable income, and subject to certain limitations based
on aggregate loans and deposit account balances at the end of the year. If
the amounts that qualified as deductions for federal income taxes are later
used for purposes other than bad debt losses, including distributions in
liquidation, such distributions will be subject to federal income taxes at
the then current corporate income tax rate. Retained earnings at June 30,
2000 include approximately $5.3 million for which federal income taxes have
not been provided. The amount of unrecognized deferred tax liability
relating to the cumulative bad debt deduction was approximately $1.8 million
at June 30, 2000.
The Savings Bank is required to recapture as taxable income approximately
$140,000 of its tax bad debt reserve, which represents the post-1987
additions to the reserve, and will be unable to utilize the percentage of
earnings method to compute its bad debt deduction in the future. The Savings
Bank has provided deferred taxes for this amount and began to amortize the
recapture of the bad debt reserve into taxable income over a six year period
in fiscal 1998.
<PAGE>
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE J - LOAN COMMITMENTS
The Savings Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers, including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the consolidated statements of financial condition.
The contract or notional amounts of the commitments reflect the extent of
the Savings Bank's involvement in such financial instruments.
The Savings Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
is represented by the contractual notional amount of those instruments. The
Savings Bank uses the same credit policies in making commitments and
conditional obligations as those utilized for on-balance-sheet instruments.
At June 30, 2000, the Savings Bank had outstanding commitments of
approximately $1.0 million to originate loans. Additionally, the Savings
Bank was obligated under unused lines of credit totaling $5.7 million. In
the opinion of management all loan commitments equaled or exceeded prevalent
market interest rates as of June 30, 2000, and will be funded from normal
cash flow from operations.
NOTE K - REGULATORY CAPITAL
The Savings Bank is subject to minimum regulatory capital standards
promulgated by the Office of Thrift Supervision (the "OTS"). Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Savings Bank must meet specific capital guidelines
that involve quantitative measures of the Savings Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Savings Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
The minimum capital standards of the OTS generally require the maintenance
of regulatory capital sufficient to meet each of three tests, hereinafter
described as the tangible capital requirement, the core capital requirement
and the risk-based capital requirement. The tangible capital requirement
provides for minimum tangible capital (defined as shareholders' equity less
all intangible assets) equal to 1.5% of adjusted total assets. The core
capital requirement provides for minimum core capital (tangible capital plus
certain forms of supervisory goodwill and other qualifying intangible
assets) generally equal to 4.0% of adjusted total assets except for those
associations with the highest examination rating and acceptable levels of
risk. The risk-based capital requirement currently provides for the
maintenance of core capital plus general loss allowances equal to 8.0% of
risk-weighted assets. In computing risk-weighted assets, the Savings Bank
multiplies the value of each asset on its statement of financial condition
by a defined risk-weighting factor, e.g., one- to four-family residential
loans carry a risk-weighted factor of 50%.
<PAGE>
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE K - REGULATORY CAPITAL (continued)
During the 2000 fiscal year, the Savings Bank was notified from its
regulator that it was categorized as "well-capitalized" under the regulatory
framework for prompt corrective action. To be categorized as
"well-capitalized" the Savings Bank must maintain minimum capital ratios as
set forth in the following tables.
As of June 30, 2000 and 1999, management believes that the Savings Bank met
all capital adequacy requirements to which it was subject.
AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $20,129 13.9% =>$2,179 =>1.5% =>$7,264 => 5.0%
Core capital $20,129 13.9% =>$5,811 =>4.0% =>$8,717 => 6.0%
Risk-based capital $20,230 26.5% =>$6,101 =>8.0% =>$7,627 =>10.0%
AS OF JUNE 30, 1999
<CAPTION>
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $22,513 16.1% =>$2,102 =>1.5% =>$7,007 => 5.0%
Core capital $22,513 16.1% =>$5,606 =>4.0% =>$8,408 => 6.0%
Risk-based capital $22,613 31.3% =>$5,773 =>8.0% =>$7,216 =>10.0%
</TABLE>
The Savings Bank's management believes that, under the current regulatory
capital regulations, the Savings Bank will continue to meet its minimum
capital requirements in the foreseeable future. However, events beyond the
control of the Savings Bank, such as increased interest rates or a downturn
in the economy in the Savings Bank's market area, could adversely affect
future earnings and, consequently, the ability to meet future minimum
regulatory capital requirements.
<PAGE>
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE L - CONDENSED FINANCIAL STATEMENTS OF FRANKFORT FIRST BANCORP, INC.
The following condensed financial statements summarize the financial
position of Frankfort First Bancorp, Inc. as of June 30, 2000 and 1999, and
the results of its operations and its cash flows for the fiscal years ended
June 30, 2000, 1999 and 1998.
Frankfort First Bancorp, Inc.
STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands)
ASSETS 2000 1999
Interest-bearing deposits in First Federal
Savings Bank of Frankfort $ 1 $ 29
Investment in First Federal Savings Bank of
Frankfort 20,129 22,513
Prepaid expenses and other 336 285
-------- --------
Total assets $ 20,466 $ 22,827
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other borrowed money $ 373 $ 284
Dividends payable 317 330
Deferred compensation 815 813
Other liabilities 137 134
-------- --------
1,642 1,561
Shareholders' equity
Common stock 17 17
Additional paid-in capital 5,876 5,876
Retained earnings 18,412 18,166
Treasury stock - at cost (5,481) (2,793)
-------- --------
Total shareholders' equity 18,824 21,266
-------- --------
Total liabilities and shareholders' equity $ 20,466 $ 22,827
======== ========
<PAGE>
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE L - CONDENSED FINANCIAL STATEMENTS OF FRANKFORT FIRST BANCORP, INC.
(continued)
Frankfort First Bancorp, Inc.
STATEMENTS OF EARNINGS
Years ended June 30,
(In thousands)
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Revenue
Interest income $ 6 $ 15 $ 27
Equity in earnings of First Federal Savings Bank of Frankfort 1,716 1,760 1,849
------- ------- -------
Total revenue 1,722 1,775 1,876
General and administrative expenses 210 181 435
------- ------- -------
Earnings before income tax credits 1,512 1,594 1,441
Federal income tax credits (69) (56) (139)
------- ------- -------
NET EARNINGS $ 1,581 $ 1,650 $ 1,580
======= ======= =======
</TABLE>
Frankfort First Bancorp, Inc.
STATEMENTS OF CASH FLOWS
Years ended June 30,
(In thousands)
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Cash from operating activities:
Net earnings for the year $ 1,581 $ 1,650 $ 1,580
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Distributions from subsidiary in excess of earnings 2,384 786 10,836
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (51) (72) (85)
Other liabilities (8) 113 119
-------- -------- --------
Net cash provided by operating activities
(balance carried forward) 3,906 2,477 12,450
-------- -------- --------
</TABLE>
<PAGE>
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE L - CONDENSED FINANCIAL STATEMENTS OF FRANKFORT FIRST BANCORP, INC.
(continued)
FRANKFORT FIRST BANCORP, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended June 30,
(In thousands)
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Net cash provided by operating activities
(balance brought forward) $ 3,906 $ 2,477 $ 12,450
Cash flows provided by (used in) financing activities:
Proceeds from other borrowed money 2,199 288 --
Repayments of other borrowed money (2,110) (4) (13,000)
Dividends paid on common stock (1,335) (1,330) (1,266)
Purchase of treasury stock (2,688) (1,760) --
-------- -------- --------
Net cash used in financing activities (3,934) (2,806) (14,266)
-------- -------- --------
Net decrease in cash and cash equivalents (28) (329) (1,816)
Cash and cash equivalents at beginning of year 29 358 2,174
-------- -------- --------
Cash and cash equivalents at end of year $ 1 $ 29 $ 358
======== ======== ========
</TABLE>
The Savings Bank is subject to regulations imposed by the OTS regarding the
amount of capital distributions payable by the Savings Bank to the
Corporation. Generally, the Savings Bank's payment of dividends is limited,
without prior OTS approval, to net income for the current calendar year plus
the two preceding calendar years, less capital distributions paid over the
comparable time period. Insured institutions are required to file an
application with the OTS for capital distributions in excess of this
limitation. During fiscal 2000, the Savings Bank received OTS approval to
make up to $3.5 million in capital distributions during fiscal 2001.
NOTE M - STOCK OPTION PLAN
The Board of Directors adopted the Frankfort First Bancorp, Inc. 1995 Stock
Option and Incentive Plan (the "Plan") that provided for the issuance of
251,860 (adjusted) shares of authorized, but unissued shares of common stock
at fair value at the date of grant. The Corporation had initially granted
options to purchase shares at the 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 Plan, commencing in
January 1996. As of June 30, 2000, none of the stock options granted had
been exercised.
<PAGE>
FRANKFORT FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE M - STOCK OPTION PLAN (continued)
The Corporation 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 Corporation 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 disclosure of pro-forma net
earnings and earnings per share required under SFAS No. 123 is not
applicable, as the Corporation did not grant options during the fiscal years
ended June 30, 2000, 1999 and 1998.
A summary of the status of the Corporation's stock option plan as of June
30, 2000, 1999 and 1998, and changes during the periods ending on those
dates is presented below:
<TABLE>
<CAPTION>
2000 1999 1998
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 239,492 $13.82 251,860 $13.82 251,860 $13.82
Granted -- -- -- -- -- --
Exercised -- -- -- -- -- --
Forfeited -- -- (12,368) -- -- --
-------- ------ -------- ------ -------- ------
Outstanding at end of year 239,492 $13.82 239,492 $13.82 251,860 $13.82
======== ====== ======== ====== ======== ======
Options exercisable at year-end 190,639 $13.82 142,740 $13.81 107,211 $13.81
======== ====== ======== ====== ======== ======
</TABLE>
The following information applies to options outstanding at June 30, 2000:
Number outstanding 239,432
Range of exercise prices $13.80 - $14.91
Weighted-average exercise price $13.82
Weighted-average remaining contractual life 5.5 years
<PAGE>
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
<S> <C> <C>
WILLIAM C. JENNINGS CHARLES A. COTTON, III DAVID G. EDDINS
President and Chairman of the Board Commissioner of the Department Certified Public Accountant
of the Company of Housing, Building and
Construction
Commonwealth of Kentucky
DANNY A. GARLAND HERMAN D. REGAN, JR. WILLIAM M. JOHNSON
President of the Bank and Vice Retired Chairman of the Board Attorney
President and Secretary of the and President of
Company Kenvirons, Inc.
FRANK MCGRATH C. MICHAEL DAVENPORT
President President
Frankfort Lumber Company C. Michael Davenport, Inc. and
Davenport Broadcasting, Inc.
EXECUTIVE OFFICERS
WILLIAM C. JENNINGS DANNY A. GARLAND JOYCE H. JENNINGS
President and Chairman of the Board Vice President and Secretary Vice President
DON D. JENNINGS R. CLAY HULETTE, CPA
Vice President and Treasurer Vice President and Principal
Financial and Accounting Officer
OFFICE LOCATIONS
MAIN OFFICE AND CORPORATE
HEADQUARTERS: BRANCH OFFICES:
216 West Main Street East Branch West Branch
P.O. Box 535 1980 Versailles Road 1220 US 127 South
Frankfort, Kentucky 40602 Frankfort, Kentucky 40601 Frankfort, Kentucky 40601
(502) 223-1638
GENERAL INFORMATION
INDEPENDENT AUDITORS ANNUAL MEETING SHAREHOLDER INQUIRIES AND
Grant Thornton, LLP The Annual Meeting of Share- AVAILABILITY OF 10-K REPORT
Suite 900 holders will be held on A COPY OF THE COMPANY'S
625 Eden Park Drive November 14, 2000 at ANNUAL REPORT ON FORM
Cincinnati, OH 45202-4181 4:30 p.m. at First Federal Savings 10-K FOR THE YEAR ENDED
Bank of Frankfort JUNE 30, 2000, AS FILED WITH
THE SECURITIES AND EX-
SPECIAL COUNSEL TRANSFER AGENT AND REGISTRAR CHANGE COMMISSION WILL
Stradley, Ronon, Housley, Illinois Stock Transfer Company BE FURNISHED WITHOUT
1220 19th Street N.W. Suite 700 209 W Jackson Blvd, Suite 903 CHARGE TO SHAREHOLDERS
Washington, D.C. 20036 Chicago, Illinois 60606-6905 AS OF THE RECORD DATE FOR THE
NOVEMBER 14, 2000 ANNUAL
MEETING UPON WRITTEN REQUEST
TO INVESTOR RELATIONS, FRANKFORT
FIRST BANCORP, INC., P.O. BOX
535, FRANKFORT, KY 40602
</TABLE>
