SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: June 30, 2003
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[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
SEC File Number: 000-32437
BUCS FINANCIAL CORP
-------------------
(Exact name of registrant as specified in its charter)
Maryland 52-2265986
- ----------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10455 Mill Run Circle, Owings Mills, Maryland 21117
- --------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(410 998-5304
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(Registrant's telephone number, including area code)
Check whether the registrant: (1) filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 subsequent
to the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of common stock as of August 8, 2003:
$0.10 Par Value Common Stock 364,585
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Class Shares Outstanding
Transitional Small Business Disclosure Format (check one)
Yes No X
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BUCS FINANCIAL CORP AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
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Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2003 (unaudited)
and December 31, 2002 (audited)..........................................1
Consolidated Statements of Operations for the six and three months
ended June 30, 2003 and 2002 (unaudited).................................2
Consolidated Statements of Cash Flows for the six
months ended June 30, 2003 and 2002 (unaudited)..........................3
Notes to Consolidated Financial Statements...............................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................7
Item 3. Controls and Procedures.......................................................12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................13
Item 2. Changes in Securities and Use of Proceeds.....................................13
Item 3. Defaults Upon Senior Securities...............................................13
Item 4. Submission of Matters to a Vote of Security-Holders...........................13
Item 5. Other Information.............................................................13
Item 6. Exhibits and Reports on Form 8-K..............................................13
Signatures
BUCS FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2003 AND DECEMBER 31, 2002
(Unaudited)
June 30 December 31
2003 2002
------------- --------------
ASSETS
------
Cash and cash equivalents $ 6,927,400 $ 4,094,866
Investment securities available for sale 23,248,477 20,023,154
Investment securities held to maturity 12,694,422 1,430,628
Loans receivable 68,614,001 66,916,522
Allowance for loan losses (620,049) (579,627)
------------- --------------
Loans receivable, net 67,993,952 66,336,895
Accrued interest receivable 365,312 321,214
Property and equipment, net 4,039,556 2,920,855
Investment required by law - Federal Home Loan Bank Stock 1,015,000 875,000
Goodwill 165,668 165,667
Intangible assets 215,554 229,762
Prepaid expenses and other assets 566,790 387,696
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Total Assets $117,232,131 $ 96,785,737
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits $ 83,024,331 $ 73,654,190
Accounts payable and other liabilities 834,184 794,475
Borrowed funds - Federal Home Loan Bank 20,300,000 12,500,000
Notes payable 138,000 168,000
Guaranteed preferred beneficial interest in company's
subordinated debt 3,000,000 -
------------- --------------
Total Liabilities 107,296,515 87,116,665
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Stockholders' Equity:
Preferred stock, par value $0.10 per share, 2,000,000 shares - -
authorized, 0 shares issued and outstanding
Common stock, par value $0.10 per share, 5,000,000 shares authorized,
364,585 shares issued and outstanding
at June 30, 2003 and December 31, 2002 36,459 36,459
Additional paid-in capital 3,092,686 3,140,377
Retained earnings 6,771,368 6,486,967
Unallocated common stock held by Employee Stock Ownership
Plan ("ESOP") (265,762) (265,762)
Accumulated other comprehensive income 300,865 271,031
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Total Stockholders' Equity 9,935,616 9,669,072
------------- --------------
Total Liabilities and Stockholders' Equity $117,232,131 $ 96,785,737
============= ==============
The accompanying notes are an intregal part of these consolidated statements
1
BUCS FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX AND THREE MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
Six month periods ended Three month periods ended
June 30 June 30
2003 2002 2003 2002
------------ ------------- ------------ ------------
Interest Income
Loans receivable $ 2,145,381 $ 2,113,594 $ 1,060,776 $ 1,056,507
Investment securities 665,702 624,697 408,359 325,207
------------ ------------ ------------ ------------
Total interest income 2,811,083 2,738,291 1,469,135 1,381,714
------------ ------------ ------------ ------------
Interest expense
Deposits 898,754 966,216 450,957 486,860
Borrowed funds 335,080 313,082 207,716 156,976
------------ ------------ ------------ ------------
Total interest expense 1,233,834 1,279,298 658,673 643,836
------------ ------------ ------------ ------------
Net interest income 1,577,249 1,458,993 810,462 737,878
Provision for loan losses 131,861 108,000 56,861 54,000
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 1,445,388 1,350,993 753,601 683,878
------------ ------------ ------------ ------------
Noninterest income
Fees and service charges 1,141,036 829,868 558,740 427,008
Gain on sale of investment securities - 19,205 - 19,205
Fee to process and maintain cash facility 60,000 60,000 30,000 30,000
Other 220,410 177,831 111,906 97,500
------------ ------------ ------------ ------------
Total noninterest income 1,421,446 1,086,904 700,646 573,713
------------ ------------ ------------ ------------
2,866,834 2,437,897 1,454,247 1,257,591
------------ ------------ ------------ ------------
Noninterest expense
Compensation and benefits 1,233,385 1,001,920 624,033 499,726
Professional fees 104,702 122,765 61,195 61,883
Occupancy expense 394,499 291,593 188,249 156,378
Office operations 469,216 416,161 226,056 213,136
Other operating expense 288,867 212,630 166,171 115,940
------------ ------------ ------------ ------------
Total noninterest expense 2,490,669 2,045,069 1,265,704 1,047,063
------------ ------------ ------------ ------------
Income before income taxes 376,165 392,828 188,543 210,528
Income taxes 139,403 145,420 69,911 77,904
------------ ------------ ------------ ------------
Net income 236,762 247,408 118,632 132,624
Net change in unrealized gains/losses on securities
available for sale, net of deferred
income tax benefit 29,834 132,921 78,347 242,612
------------ ------------ ------------ ------------
Total comprehensve income $ 266,596 $ 380,329 $ 196,979 $ 375,236
============ ============ ============ ============
Earnings per share - basic $ 0.70 0.68 $ 0.35 $ 0.38
Shares used in computing earnings per share 338,009 362,398 338,009 349,670
============ ============ ============ ============
Earnings per share - diluted $ 0.70 $ 0.68 $ 0.35 $ 0.38
Shares used in computing earnings per share 338,009 362,398 338,009 349,670
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
2
BUCS FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 236,762 $ 247,408
Reconciliation of net income to net cash provided
by operating activities:
Gain on sale of investment securities - (19,205)
Provision for loan losses 131,861 108,000
Depreciation and amortization 231,453 204,382
Effects of changes in operating assets and liabilities:
Accrued interest receivable (44,098) (946)
Prepaid expenses and other assets (179,094) 80,699
Accounts payable and other liabilities 22,136 52,644
------------ ------------
Net cash provided by operating activities 399,020 672,982
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CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (1,788,919) (1,445,498)
Proceeds from maturities, redemption and sales
of securities available-for-sale 5,912,667 4,641,144
Proceeds from repayments on securities held-to-maturity 907,114 136,661
Purchase of securities available-for-sale (9,122,430) (8,015,688)
Purchase of securities held-to-maturity (12,179,497) -
Purchase of FHLB stock (140,000) -
Purchase of insurance subsidiary - (30,900)
Purchase of property and equipment (1,295,562) (1,027,530)
------------ ------------
Net cash used in investing activities (17,706,627) (5,741,811)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in borrowed funds from the FHLB 7,800,000 -
Proceeds from issuance of Trust Preferred Debenture 3,000,000 -
Repurchase of common stock - (809,186)
Net increase in deposits 9,370,141 8,293,031
Repayments of notes payable (30,000) (77,000)
------------ ------------
Net cash provided by financing activities 20,140,141 7,406,845
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NET INCREASE IN CASH AND CASH EQUIVALENTS 2,832,534 2,338,016
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,094,866 2,359,036
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,927,400 $ 4,697,052
============ ============
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 216,541 $ 302,314
============ ============
Cash paid for interest $ 1,232,203 $ 1,278,861
============ ============
The accompanying notes are an intregal part of these consolidated statements
3
BUCS FINANCIAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - Organization
------------
BUCS Financial Corp (the "Company") was incorporated under the laws of the State
of Maryland in October 2000, primarily to hold all the outstanding shares of
capital stock of BUCS Federal Bank (the "Bank").
The Company's primary operations are conducted by the Bank, which operates three
offices, two in Owings Mills, Maryland and one in Columbia, Maryland. The Bank
is principally engaged in the business of providing retail banking services,
with an emphasis on residential mortgage loans and home equity, auto, and other
consumer loans.
NOTE 2 - Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation
The accompanying consolidated financial statements include the activity of BUCS
Financial Corp and its wholly-owned subsidiaries BUCS Federal Bank, BUCS
Financial Capital Trust I and Armor Insurance Group, Inc. All material
intercompany transactions have been eliminated in consolidation.
The accompanying consolidated financial statements for June 30, 2003 and the
three and six month periods ending June 30, 2003 and 2002 have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. However, the
Company believes that the disclosures are adequate to make the information
presented not misleading.
These consolidated financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31, 2002,
included in the Company's Annual Report on Form 10-KSB, filed with the
Securities and Exchange Commission. The balance sheet as of December 31, 2002
has been derived from the audited financial statements at that date.
The unaudited consolidated financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments) which are, in the
opinion of management, necessary to state fairly the financial position of the
Company as of June 30, 2003, the results of its operations for the three and six
month periods ended June 30, 2003, and cash flows for the six month period ended
June 30, 2003. The results of the interim periods are not necessarily indicative
of the results expected for the full fiscal year or any other period.
Cash and Cash Equivalents
Cash and cash equivalents include interest-bearing deposits in other banks with
original maturities of less than three months, overnight investment funds with
no stated maturity and Federal funds sold. Generally, Federal funds are
purchased and sold for one-day periods.
Federal Home Loan Bank Stock
Federal Home Loan Bank stock is carried at cost.
4
Use of Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NOTE 3 - Recent Accounting Pronouncements
--------------------------------
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards (SFAS) No.148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which provides guidance on how to
transition from the intrinsic value method of accounting for stock-based
employee compensation under APB 25 to SFAS No. 123's fair value method of
accounting, if a company so elects. The Company will not adopt the fair value
method of recording stock options under SFAS No. 123 and, accordingly, this
standard will not have a material impact on results of operations, financial
position or liquidity.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation
of Variable Interest Entities, which clarifies the application of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, relating to
consolidation of variable interest entities (VIE). The provisions of FIN 46 are
effective July 1, 2003 for VIE created on or before January 31, 2003, and
immediately for VIE created after January 31, 2003. The Company has determined
that the implementation of this standard will not have a material effect on the
financial statements.
In January 2003, the Emerging Issues Task Force (EITF) of the FASB released
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, which is
effective for revenue arrangements entered into on or after July, 1 2003. This
issue addresses certain aspects of the accounting for arrangements under which a
company will perform multiple revenue-generating activities. Specifically, it
addresses whether and/or how to separate multiple-deliverable arrangements and
how to allocate revenue among those deliverables. The Company has determined
that EITF Issue No. 00-21 will not have a material effect on the financial
statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which is effective for contracts
entered into or modified and hedging relationships designated after June 30,
2003. This Statement amends and clarifies financial accounting and reporting for
derivative instruments including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The Company has determined the
implementation of this standard will not have a material effect on the financial
statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which was
effective May 31, 2003 for new or modified financial instruments and July 1,
2003 for existing financial instruments. This standard addresses the
classification and measurement of financial instruments with characteristics of
both liabilities and equity. The Company has determined the implementation of
this standard will not have a material effect on the financial statements.
NOTE 4 - Earnings Per Share
------------------
Earnings per common share is computed by dividing net income by the weighted
average number of common shares outstanding, less unearned ESOP shares, during
the period. Diluted net income per common share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period, including any potentially dilutive common shares outstanding, such as
5
options and warrants. At June 30, 2003, the Company had 10,300 options
outstanding, which had an immaterial dilutive effect at such date.
NOTE 5 - Capital Commitments
-------------------
The Company had capital commitments of approximately $311,011 at June 30, 2003
related to the purchase and construction of a new branch office in Columbia,
Maryland which is expected to be completed in September of 2003.
NOTE 6 - Guaranteed Preferred Beneficial Interest in Company's Subordinated Debt
-----------------------------------------------------------------------
In March 2003, the Company formed a wholly-owned subsidiary, BUCS Financial
Capital Trust I, a Delaware business trust (the "Trust"). On March 27, 2003, the
Trust sold $3.0 million of pooled capital securities (the "Capital Securities")
to Tropic CDO I, Ltd., an unaffiliated entity, with a stated value and
liquidation preference of $1,000 per share. The obligations of the Trust under
the Capital Securities are fully and unconditionally guaranteed by the Company
and the Trust has no independent operations. The entire proceeds from the sale
of the Capital Securities were used by the Trust to invest in junior
subordinated debt securities of the Company (the "Junior Subordinated Debt").
The Junior Subordinated Debt is unsecured and ranks subordinate and junior in
right of payment to all indebtedness, liabilities and obligations of the
Company. The Junior Subordinated Debt is the sole asset of the Trust. Interest
on the Capital Securities is cumulative and payable quarterly in arrears. The
Capital Securities mature on April 7, 2033. The Company has the right to
optionally redeem the Junior Subordinated Debt prior to the maturity date, but
no sooner than five years after the issuance, at 100% of the principal amount to
be redeemed, plus accrued and unpaid distributions, if any, on the redemption
date. Upon the occurrence of certain events, the Company has the right to redeem
the Junior Subordinated Debt before five years have elapsed in whole, but not in
part, at a special redemption price of 107.5% of the principal amount to be
redeemed, plus accrued and unpaid distributions, if any, on the redemption date.
Proceeds from any redemption of the Junior Subordinated Debt will cause a
mandatory redemption of Capital Securities having an aggregate liquidation
amount equal to the principal amount of the Junior Subordinated Debt redeemed.
Additionally, under the terms of the Junior Subordinated Debt, the Company will
have the right, with certain limitations, to defer the payment of interest on
the Junior Subordinated Debt at any time for a period not exceeding twenty
consecutive quarterly periods. Consequently, distributions on the Capital
Securities would be deferred and accumulate interest, compounded quarterly. The
Capital Securities were issued without registration under the Securities Act of
1933, as amended, in reliance upon an exemption from registration as provided by
Regulation S. The interest rate on the capital securities and junior
subordinated debt is fixed until April 7, 2008 at 6.65%. The interest rate
resets quarterly after April 7, 2008 to LIBOR plus 3.25%. The interest rate at
June 30, 2003 was 6.65%. The proceeds were used for general corporate purposes,
including in part to fund the purchase of mortgage-backed securities in
connection with a leverage strategy.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company may from time to time make written or oral forward-looking
statements, including statements contained in the Company's filings with the
Securities and Exchange Commission (including this Quarterly Report on Form
10-QSB), in its reports to stockholders and in other communications by the
Company, which are made in good faith by the Company pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economy in which the Company conducts operations;
the effects of, and changes in, trade, monetary and fiscal policies and laws,
including interest rate policies of the board of governors of the federal
reserve system, inflation, interest rate, market and monetary fluctuations; the
impact of changes in financial services' laws and regulations (including laws
concerning taxes, banking, securities and insurance); competition; and the
success of the Company at managing the risks involved in the foregoing.
The Company cautions that the foregoing list of important factors is
not exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
The Company's results of operations are primarily dependent upon net
interest income, which is the difference between the interest income earned on
interest-earnings assets, primarily loans, mortgage-backed securities and
investments, and the interest expense on interest-bearing liabilities, primarily
deposits and borrowings. Net interest income may be affected significantly by
general economic and competitive conditions and policies of regulatory agencies,
particularly those with respect to market interest rates. The results of
operations are also significantly influenced by the level of noninterest
expenses such as employee salaries and benefits, noninterest income, such as
loan related fees and fees on deposit related services, and the provision for
loan losses.
Changes in Financial Condition
The Company's total assets of $117.2 million at June 30, 2003 reflect
an increase of $20.4 million as compared to $96.8 million at December 31, 2002.
The increase in assets was mainly comprised of increases in cash and
equivalents, investment securities, loans receivable, net, and property and
equipment of $2.8 million, $14.5 million, $1.7 million and $1.1 million,
respectively.
The increase in the Company's liabilities was due primarily to an
increase in advances from the Federal Home Loan Bank ("FHLB") of $7.8 million
and an increase of $9.3 million in deposits. In addition, the Company, through a
newly formed subsidiary, BUCS Financial Capital Trust I, sold $3.0 million of
pooled capital securities in March 2003, the proceeds of which were used for
general corporate purposes, including in part to fund the purchase of
mortgage-backed securities in connection with a leverage strategy. Changes in
the components of major assets, liabilities and equity are discussed herein.
Cash and Cash Equivalents. Cash and cash equivalents, which include
interest-bearing deposits in other banks with original maturities of less than
three months, overnight investment funds with no
7
stated maturity and Federal funds sold, totaled approximately $6.9 million at
June 30, 2003, an increase of $2.8 million or 69.2% as compared to $4.1 million
at December 31, 2002. The increase is due primarily to an increase of $7.8
million in borrowing from the Federal Home Loan Bank, the sale of $3.0 million
in pooled capital securities, and the effect of payroll deposits during the last
few days of June 2003, reflecting the cyclical nature of the Bank's deposit
levels resulting from its status as a former credit union. As is common with
credit unions, there is a strong tie to several employer groups whose employees
use the services of the employer-endorsed financial institution (credit union or
bank). This results in significant cash inflows to the Bank on employer group
paydays. The majority of this is transaction account funds and, as a result, a
good portion of these deposits flow back out during the ensuing two-week pay
cycle.
Investment Securities Available for Sale. Investment securities
available for sale increased by $3.2 million or 16.1% to $23.2 million at June
30, 2003 as compared to $20.0 million at December 31, 2002. This is primarily
the result of purchases of $4.0 million federal agency securities and $2.0
million of mortgage-backed securities, offset by maturities of available for
sale investments and repayments on mortgage-backed securities totaling $2.8
million.
Investment Securities Held to Maturity. Investment securities held to
maturity increased by $11.3 million or 787.3% to $12.7 million primarily due to
the purchase of $12.1 million of mortgage-backed securities in connection with a
leverage strategy, offset by $800,000 of principal payments on mortgage-backed
securities.
Loans Receivable, Net. Net loans receivable at June 30, 2003 totaled
$68.0 million, an increase of $1.7 million or approximately 2.5%, as compared to
$66.3 million at December 31, 2002. Originations of $19.9 million, which
includes $13.4 million of consumer loans including home equity loans, $4.8
million in first mortgage loans on one-to-four-family residences, and $1.7
million of commercial real estate loans in the Bank's prime lending area, were
offset by principal repayments and loan participations sold totaling $18.2
million.
Deposits. Total deposits, after interest credited, increased by $9.3
million or 12.7% to $83.0 million at June 30, 2003, as compared to $73.7 million
at December 31, 2002. The increase was primarily due to the cyclical trends
resulting from the Bank's former status as a credit union and activity at the
new Red Run branch office in Owings Mills, MD, which opened in January, 2003.
This resulted in increases in regular savings, non-interest bearing checking,
money market account, and certificate of deposit balances of $3.4 million, $2.1
million, $1.8 million, and $2.0 million, respectively.
FHLB Advances. FHLB advances totaled $20.3 million at June 30, 2003, an
increase of $7.8 million or 62.4% compared to $12.5 million at December 31,
2002. The borrowing increase was used to partially fund a leverage strategy
whereby the Bank, in early April 2003, purchased $10.6 million of
mortgage-backed securities in order to take advantage of interest spread
opportunities provided by the current interest rate environment.
Stockholders' Equity. Stockholders' equity totaled $9.94 million at
June 30, 2003, an increase of $267,000 from $9.67 million at December 31, 2002.
The increase to equity was the result of net income of $237,000 during the
period and by an increase of $30,000 in accumulated other comprehensive income
resulting from an increase in the estimated fair value of investment securities
available for sale.
Results of Operations for the Six Months Ended June 30, 2003 and 2002
Net Income. The Company recorded net income of $237,000 for the
six-month period ended June 30, 2003, as compared to $247,000 for the same
period in 2002, representing a $10,000 or 4.3% decrease. Net interest income
increased by $118,000 and noninterest income increased by $335,000, while
noninterest expense increased by $446,000 and the provision for income taxes
decreased by $6,000. The increases in interest income and noninterest income
were partially offset by a $24,000 increase in
8
provision for loan losses. Changes in the components of income and expense are
discussed herein.
Net Interest Income. Net interest income increased $118,000 or 8.1% for
the six-month period ended June 30, 2003, as compared to the same period in
2002. The average balance of interest-earning assets increased $18.6 million or
22.1%, while the average yield thereon decreased 104 basis points. The average
balance of interest-bearing liabilities increased $19.7 million or 25.1% and the
average rate paid thereon decreased 74 basis points. The increase in average
interest-earning assets is attributed to the increase in deposit volume at all
of the Bank's office locations, the increase in FHLB advances, and the
investment of funds from the sale of pooled capital securities. The average
yield on interest-earning assets and the average cost of interest-bearing
liabilities both declined primarily due to the continued low interest rate
environment over the past two years. The yield on interest-earning assets
declined faster than the cost of interest-bearing liabilities because the
Company's interest-earning assets repriced more quickly than interest-bearing
liabilities. The net interest rate spread, which is the difference between
average yield on interest-earning assets and the average cost of
interest-bearing liabilities, decreased to 2.96% for the six-month period ended
June 30, 2003 from 3.25% for the same period in 2002. The decrease in the net
interest rate spread is primarily due to the fact that the Bank implemented a
leverage strategy during March and April 2003 that added approximately $10.6
million in interest-earning assets and interest-bearing liabilities to the
balance sheet. The average interest rate spread on this transaction, while
positive at approximately 77 basis points, accounted for the reduction in the
overall interest rate spread of the Company.
Interest Income. Interest income increased $72,000 or 2.6% to $2.811
million for the six-month period ended June 30, 2003, as compared to $2.739
million for the same period in 2002.
Interest on loans receivable increased $31,000 or 1.5% for the
six-month period ended June 30, 2003, as compared to the same period in 2002.
The increase is mainly the result of a $7.3 million increase in the average
balance of loans receivable, partially offset by a 68 basis point decline in the
average yield on loans.
Interest income on investment securities increased by $41,000 or 6.6%
for the six-month period ended June 30, 2003, as compared to the same period in
2002. The increase is the result of an $11.3 million increase in the average
balance of investment securities, partially offset by a 140 basis point decline
in the yield on investment
The average yield on interest-earning assets was 5.47% and 6.51% for
the six-month periods ended June 30, 2003 and 2002, respectively.
Interest Expense. Interest expense totaled $1.234 million for the
six-month period ended June 30, 2003, as compared to $1.279 for the same period
in 2002, a decrease of $45,000, or 3.5%. The average balance of interest-bearing
liabilities increased $19.7 million or 25.1%, however, the average rate paid
thereon decreased by 74 basis points.
Interest expense on deposits decreased $67,000 or 6.9% for the
six-month period ended June 30, 2003, as compared to the same period in 2002.
The decrease was due to a decline in the average cost of deposits of 74 basis
points, partially offset an increase in the average balance of deposits of $15.9
million or 24.3%.
Interest on borrowed funds increased by $22,000 or 7.0% for the
six-month period ended June 30, 2003, as compared to the same period in 2002.
The increase was due to an increase in the average balance of borrowed funds of
$3.8 million, partially offset by a decrease in the cost of borrowed funds of 81
basis points. The Company uses FHLB advances as a funding source and has in the
past used borrowings to supplement deposits, which are the Company's primary
source of funds.
The average cost of interest-bearing liabilities was 2.51% and 3.25%
for the six month periods ended June 30, 2003 and 2002, respectively.
9
Provision for Loan Losses. During the six-month periods ended June 30,
2003 and 2002, the Company established provisions for loan losses of $132,000
and $108,000, respectively. This reflected management's evaluation of the
underlying credit risk of the loan portfolio and the level of allowance for loan
losses. The increase in the loan loss provision of $24,000 or 22.1% reflects
management's decision to increase funding from the prior period based on the
overall growth of the loan portfolio, especially commercial loans, and from an
increase in losses from a checking overdraft program begun in December 2001.
This program, by which the Bank honors insufficient funds checks up to a preset
limit for qualified customers, accounted for a moderate increase in loan losses
resulting from unpaid overdrawn accounts but this was offset by a greater
increase in noninterest income from the fees associated with the service.
At June 30, 2003, the allowance for loan losses totaled $620,000 or
0.90% and 1016.4% of total loans and total non-performing loans, respectively,
as compared to $668,000 or 1.09%, or 586.0%, respectively, at June 30, 2002. The
Bank's non-performing loans (non-accrual loans and accruing loans 90 or more
days overdue) totaled $61,000 and $114,000 at June 30, 2003 and 2002,
respectively, which represented 0.09% and 0.19% of the Bank's total loans,
respectively. The Bank's ratio of non-performing loans to total assets was 0.05%
and 0.12% at June 30, 2003 and 2002, respectively.
Noninterest Income. Total noninterest income, primarily fees and
service charges, increased $335,000 or 30.8% for the six-month period ended June
30, 2003, as compared to the same period in 2002. The increase reflects an
increased volume of fees for services, such as ATM fees, insufficient funds
fees, and overdraft privilege fees, in addition to interchange income generated
by customers' use of check cards. In addition, other noninterest income
comprised mainly of commissions on insurance sales by the Company's wholly-owned
subsidiary, Armor Insurance Group, Inc. increased to $220,000 for the six-month
period ended June 30, 2003 from $178,000 for the same period in 2002.
Noninterest Expense. Total noninterest expense increased by $446,000 or
21.8% for the six-month period ended June 30, 2003, as compared to the same
period in 2002. Compensation and benefits expense increased by $231,000 or 23.1%
due to the addition of employees, including two vice-president positions and
staffing for a new branch opened in January 2003, increased cost for employee
insurance programs, and normal cost of living increases. In addition, office
occupancy costs increased by $103,000 or 35.3% as a result of the costs
associated with the new Owings Mills branch opened in January 2003 and a new
Columbia branch currently under construction with opening planned for September
2003, and office and other operating expenses increased by $129,000 or 20.6% due
to costs associated with the operation of Armor Insurance Group, Inc. and the
opening of the new branch.
Income Tax Expense. The provision for income taxes totaled $139,000 for
the six-month period ended June 30, 2003, as compared to $145,000 for the same
period in 2002. The $6,000 or 4.1% decrease is the result of decreased net
taxable income.
Results of Operations for the Three Months Ended June 30, 2003 and 2002
Net Income. The Company recorded net income of $119,000 for the quarter
ended June 30, 2003, as compared to $133,000 for the same quarter in 2002,
representing a $14,000 or 10.6% decrease. Net interest income increased by
$73,000 and noninterest income increased by $127,000, while noninterest expense
increased by $219,000 and the provision for income taxes decreased by $8,000.
The increases in interest income and noninterest income were partially offset by
a $3,000 increase in provision for loan losses. Changes in the components of
income and expense are discussed herein.
Net Interest Income. Net interest income increased $73,000 or 9.8% for
the quarter ended June 30, 2003, as compared to the same quarter in 2002. The
average balance of interest-earning assets increased $23.2 million or 26.7%,
while the average yield thereon decreased 102 basis points. The average balance
of interest-bearing liabilities increased $24.7 million or 30.4% and the average
rate paid thereon decreased 68 basis points. The increase in average
interest-earning assets is attributed to the
10
investment of funds from an increase in deposit volume at all of the Bank's
office locations, the increase in FHLB advances, and the sale of pooled capital
securities. The average yield on interest-earning assets and the average cost of
interest-bearing liabilities both declined primarily due to the continued low
interest rate environment over the past two years. The yield on interest-earning
assets declined faster than the cost of interest-bearing liabilities because the
Company's interest-earning assets repriced more quickly than interest-bearing
liabilities. The net interest rate spread, which is the difference between the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities, decreased to 2.84% for the quarter ended June 30,
2003 from 3.18% for the same quarter in 2002. The decrease in the net interest
rate spread is primarily due to the fact that the Bank implemented a leverage
strategy during March and April 2003 that added approximately $10.6 million in
interest-earning assets and interest-bearing liabilities to the balance sheet.
The average interest rate spread on the related transactions, while positive at
approximately 77 basis points, accounted for the reduction in the overall
interest rate spread of the Company.
Interest Income. Interest income increased $89,000 or 6.4% to $1.47
million for the quarter ended June 30, 2003, as compared to $1.38 million for
the same quarter in 2002.
Interest on loans receivable increased $5,000 or 0.5% for the quarter
ended June 30, 2003, as compared to the same quarter in 2002. The increase is
mainly the result of a $7.2 million increase in the average balance of loans
receivable, partially offset by a 71 basis point decline in the average yield on
loans.
Interest income on investment securities increased by $83,000 or 25.5%
for the quarter ended June 30, 2003, as compared to the same quarter in 2002.
The increase is the result of a $16.1 million increase in the average balance of
investment securities, partially offset by a 106 basis point decline in the
yield on investment securities.
The average yield on interest-earning assets was 5.33% and 6.35% for
the quarters ended June 30, 2003 and 2002, respectively.
Interest Expense. Interest expense totaled $659,000 for the quarter
ended June 30, 2003, as compared to $644,000 for the same quarter in 2002, an
increase of $15,000, or 2.3%. The average balance of interest-bearing
liabilities increased $24.7 million or 30.4%, however, the average rate paid
thereon decreased by 68 basis points.
Interest expense on deposits decreased $36,000 or 7.4% for the quarter
ended June 30, 2003, as compared to the same quarter in 2002. The decrease was
due to a decline in the average cost of deposits of 73 basis points, partially
offset an increase in the average balance of deposits of $16.6 million or 24.3%.
Interest on borrowed funds increased by $51,000 or 32.5% for the
quarter ended June 30, 2003, as compared to the same quarter in 2002. The
increase is due to an increase in the average balance of advances outstanding of
$8.1 million or 62.4%, partially offset by a decline in the average cost of
advances of 89 basis points. The Company uses FHLB advances as a funding source
and has in the past used borrowings to supplement deposits, which are the
Company's primary source of funds.
The average cost of interest-bearing liabilities was 2.49% and 3.17%
for the quarters ended June 30, 2003 and 2002, respectively.
Provision for Loan Losses. During the quarters ended June 30, 2003 and
2002, the Company established provisions for loan losses of $57,000 and $54,000,
respectively. This reflected management's evaluation of the underlying credit
risk of the loan portfolio and the level of allowance for loan losses. The
increase in the loan loss provision of $3,000 or 5.3% reflects management's
decision to increase funding from the prior period based on the overall growth
of the loan portfolio, especially commercial loans, and from an increase in
losses from a checking overdraft program begun in December 2001. This
11
program, by which the Bank honors insufficient funds checks up to a preset limit
for qualified customers, accounted for a moderate increase in loan losses
resulting from unpaid overdrawn accounts but this was offset by the greater
resulting increase in noninterest income from the fees associated with the
service.
Noninterest Income. Total noninterest income, primarily fees and
service charges, increased $127,000 or 22.1% for the quarter ended June 30,
2003, as compared to the same quarter in 2002. The increase reflects an
increased volume of fees for services, such as ATM fees, insufficient funds
fees, and overdraft privilege fees, in addition to interchange income generated
by customers' use of check cards. In addition, other noninterest income
comprised mainly of commissions on insurance sales by the Company's wholly-owned
subsidiary, Armor Insurance Group, Inc. increased to $112,000 for the quarter
ended June 30, 2003 from $97,000 for the same quarter in 2002.
Noninterest Expense. Total noninterest expense increased by $219,000 or
20.9% for the quarter ended June 30, 2003, as compared to the same quarter in
2002. Compensation and benefits expense increased by $124,000 or 24.9% due to
the addition of employees, including two vice-president positions and staffing
for a new branch opened in January 2003, increased cost for employee insurance
programs, and normal cost of living increases. In addition, office occupancy
costs increased by $32,000 or 20.4% as a result of the costs associated with the
new Owings Mills branch opened in January 2003 and the new Columbia branch
currently under construction with opening planned for September 2003, and other
office operating expenses increased by $63,000 or 19.2% due to costs associated
with the operation of Armor Insurance Group, Inc. and the opening of the new
branch.
Income Tax Expense. The provision for income taxes totaled $70,000 for
the quarter ended June 30, 2003, as compared to $78,000 for the same quarter in
2002. The $8,000 or 10.3% decrease is the result of decreased net taxable
income.
Capital Requirements
The Bank is subject to federal regulations that impose certain minimum
capital requirements. Quantitative measures, established by regulation to ensure
capital adequacy, require the Bank to maintain amounts and ratios of tangible
and core capital to adjusted total assets and of total risk-based capital to
risk-weighted assets. On June 30, 2003, the Bank was in compliance with all of
its regulatory capital requirements.
Management believes that under current regulations, the Bank will
continue to meet its minimum capital requirements in the foreseeable future.
Events beyond the control of the Bank, such as changes in market interest rates
or a downturn in the economy in areas in which the Bank operates could adversely
affect future earnings and, as a result, the ability of the Bank to meet its
future minimum capital requirements.
ITEM 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
of the Company's disclosure controls and procedures (as defined in Rule 13-15(e)
under the Securities Exchange Act of 1934 (the "Exchange Act")), the Company's
principal executive officer and principal financial officer have concluded that
as of the end of the period covered by this Quarterly Report on Form 10-QSB such
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms.
(b) Changes in internal control over financial reporting. During the quarter
under report, there was no change in the Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
The Registrant and its subsidiaries, from time to time, may be a party
to routine litigation, which arises in the normal course of business, such as
claims to enforce liens, condemnation proceedings on properties in which BUCS
Federal Bank, the wholly-owned subsidiary of the Registrant, holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to its business. There were no lawsuits pending or known
to be contemplated at June 30, 2003 that would have a material effect on
operations or income.
Item 2. Changes in Securities and Use of Proceeds.
------------------------------------------
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
---------------------------------------------------
None.
Item 5. Other Information.
------------------
The Registrant's wholly-owned subsidiary, BUCS Federal Bank (the
"Bank") opened a new full-service branch office and administrative center in
Owings Mills, Maryland during January 2003. In addition, as previously reported,
the Bank is in the process of building a full service branch in Columbia
Maryland. The completion of construction and the opening of the Columbia branch
is now anticipated to occur in September 2003.
The Registrant had previously reported an agreement whereby its
wholly-owned subsidiary, Armor Insurance Group, Inc., had agreed to acquire the
Lentz Insurance Agency, Inc. Subsequent to that reporting, negotiations between
the parties terminated and the acquisition was not completed and is not expected
to be in the future.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
a) Exhibits:
31 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
b) Reports on Form 8-K:
None.
13
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BUCS FINANCIAL CORP
Date: August 8, 2003 By: /s/Herbert J. Moltzan
--------------------------------------
Herbert J. Moltzan
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/Herbert J. Moltzan /s/Matthew J. Ford
- ------------------------------------ --------------------------------
Herbert J. Moltzan Matthew J. Ford
President and Chief Executive Officer Chief Financial Officer
Date: August 8, 2003 Date: August 8, 2003