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: September 30, 2004
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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
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BUCS FINANCIAL CORP
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(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 November 8, 2004:
$0.10 Par Value Common Stock 400,984
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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 September 30, 2004 (unaudited)
and December 31, 2003 (audited).................................................................1
Consolidated Statements of Operations for the nine and three month periods
ended September 30, 2004 and 2003 (unaudited)...................................................2
Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 2004 and 2003 (unaudited).....................................3
Notes to Consolidated Financial Statements......................................................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................................8
Item 3. Controls and Procedures..............................................................................16
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings....................................................................................17
Item 2. Unregistered Sales of Equity Securities Use of Proceeds..............................................17
Item 3. Defaults Upon Senior Securities......................................................................17
Item 4. Submission of Matters to a Vote of Security-Holders..................................................17
Item 5. Other Information....................................................................................17
Item 6. Exhibits ............................................................................................17
Signatures
BUCS FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(Unaudited)
September 30, December 31
2004 2003
------------- ------------
ASSETS
------
Cash and cash equivalents $ 3,153,878 $ 3,486,463
Securities available for sale 9,964,749 16,988,850
Securities held to maturity 9,742,497 11,204,342
Loans receivable 90,627,002 77,759,069
Allowance for loan losses (720,532) (630,702)
------------ ------------
Loans receivable, net 89,906,470 77,128,367
Accrued interest receivable 369,691 409,549
Property and equipment, net 4,215,809 4,683,974
Investment required by law - Federal Home Loan Bank Stock 1,050,000 1,140,000
Goodwill - 165,668
Other Intangible assets - 298,858
Assets held for sale 776,417 -
Bank Owned Life Insurance 2,116,923 2,045,410
Prepaid expenses and other assets 827,577 767,735
------------ ------------
Total Assets $122,124,011 $118,319,216
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits $ 87,047,920 $84,187,323
Accounts payable and other liabilities 775,146 803,825
Borrowed funds - Federal Home Loan Bank 21,000,000 20,300,000
Notes payable - 30,000
Guaranteed preferred beneficial interest in Company's
subordinated debt 3,000,000 3,000,000
------------ ------------
Total Liabilities 111,823,066 108,321,148
------------ ------------
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, 400,984 and 364,585 shares issued and outstanding
at September 30, 2004 and December 31, 2003, respectively 40,098 36,459
Stock dividends distributable - 3,640
Additional paid-in capital 5,905,030 4,117,839
Retained earnings 4,557,818 6,021,020
Unallocated common stock held by Employee Stock Ownership
Plan ("ESOP") (233,352) (233,352)
Accumulated other comprehensive income 31,351 52,462
------------ ------------
Total Stockholders' Equity 10,300,945 9,998,068
------------ ------------
Total Liabilities and Stockholders' Equity $122,124,011 $118,319,216
============ ============
The accompanying notes are an intregal part of these consolidated statements
1
BUCS FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
Nine month periods ended Three month periods ended
September 30 September 30
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Interest Income
Loans receivable $ 3,522,186 $ 3,220,361 $ 1,252,381 $ 1,074,980
Investment securities 700,392 1,012,456 215,083 346,754
----------- ----------- ----------- -----------
Total interest income 4,222,578 4,232,817 1,467,464 1,421,734
----------- ----------- ----------- -----------
Interest expense
Deposits 1,077,653 1,294,306 362,326 395,552
Borrowed funds 558,612 530,869 187,454 197,466
----------- ----------- ----------- -----------
Total interest expense 1,636,265 1,825,175 549,780 593,018
----------- ----------- ----------- -----------
Net interest income 2,586,313 2,407,642 917,684 828,716
Provision for loan losses 243,822 195,671 86,538 63,810
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 2,342,491 2,211,971 831,146 764,906
----------- ----------- ----------- -----------
Noninterest income
Fees and service charges 2,011,133 1,718,610 734,410 577,574
Gain/(Loss) on sale of investment securities (179) - - -
Fee to process and maintain cash facility 90,000 90,000 30,000 30,000
Other 132,207 12,332 61,880 11,196
----------- ----------- ----------- -----------
Total noninterest income 2,233,161 1,820,942 826,290 618,770
----------- ----------- ----------- -----------
Noninterest expense
Compensation and benefits 2,028,120 1,662,604 728,832 583,886
Professional fees 182,682 147,922 61,018 44,080
Occupancy expense 821,069 573,931 281,106 195,115
Office operations 640,687 625,199 224,879 207,869
Advertising and marketing expense 208,804 214,920 70,063 88,435
Other operating expense 229,026 238,912 62,709 79,000
----------- ----------- ----------- -----------
Total noninterest expense 4,110,388 3,463,488 1,428,607 1,198,385
----------- ----------- ----------- -----------
Income before income taxes 465,264 569,425 228,829 185,291
Income taxes 171,564 208,328 85,103 65,985
----------- ----------- ----------- -----------
Income from continuing operations 293,700 361,097 143,726 119,306
Discontinued operations
Gain/(loss) from operations of discontinued component 51,814 (12,465) 3,917 (4,495)
Income benefit/(tax) (20,065) 4,626 (1,513) 1,686
----------- ----------- ----------- -----------
Net gain/(loss) on discontinued operation 31,749 (7,839) 2,404 (2,809)
----------- ----------- ----------- -----------
Net income 325,449 353,258 146,130 116,497
Reclassification adjustment for losses included in
net income, net of tax 113 - - -
Net change in unrealized gains/(losses) on securities
available for sale, net of deferred income tax benefit (21,224) (242,670) 96,070 (272,504)
----------- ----------- ----------- -----------
Total comprehensive income $ 304,338 $ 110,588 $ 242,200 $ (156,007)
=========== =========== =========== ===========
Earnings per share - basic $ 0.88 $ 0.95 $ 0.39 0.31
=========== =========== =========== ===========
Shares used in computing basic earnings per share 371,750 371,750 371,750 371,750
=========== =========== =========== ===========
Earnings per share - diluted $ 0.86 $ 0.95 $ 0.38 $ 0.31
=========== =========== =========== ===========
Shares used in computing diluted earnings per share 380,553 371,750 380,553 371,750
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
2
BUCS FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 325,449 $ 353,259
Reconciliation of net income to net cash provided by
operating activities:
Loss on sale of investment securities 179 -
Provision for loan losses 243,822 195,671
Increase in cash surrender value of life insurance (71,513) -
Depreciation and amortization 439,450 363,316
Loans originated for sale (1,048,307) -
Proceeds from sale of loans originated for sale 1,052,172 -
Gain from sale of loans originated for sale (3,865) -
Effects of changes in operating assets and liabilities:
Accrued interest receivable 39,858 (34,512)
Prepaid expenses and other assets (64,885) (199,352)
Accounts payable and other liabilities 2,770 78,065
------------ ------------
Net cash provided by operating activities 915,130 756,447
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (14,124,260) (6,511,272)
Proceeds from maturities, redemption and sales
of securities available-for-sale 6,941,793 12,980,547
Proceeds from repayments on securities held-to-maturity 1,433,661 1,991,305
Purchase of securities available-for-sale - (12,104,930)
Purchase of securities held-to-maturity - (12,179,497)
Proceeds from sale of loans 1,126,750 -
Gain on sale of loans (24,415) -
Redemption/(purchase) of FHLB stock 90,000 (265,000)
Purchase of Bank Owned Life Insurance - (2,018,164)
Purchase of property and equipment (220,380) (1,878,273)
------------ ------------
Net cash used in investing activities (4,776,851) (19,985,284)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in borrowed funds from the FHLB 700,000 7,800,000
Proceeds from issuance of Trust Preferred Debenture - 3,000,000
Net increase in deposits 2,860,597 9,839,872
Cash paid for fractional shares of stock dividend (1,461) -
Repayment of notes payable (30,000) (138,000)
------------ ------------
Net cash provided by financing activities 3,529,136 20,501,872
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (332,585) 1,273,035
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,486,463 4,094,866
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,153,878 $ 5,367,901
============ ============
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 198,100 $ 463,571
============ ============
Cash paid for interest $ 1,489,674 $ 1,824,544
============ ============
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 four
offices, two in Owings Mills, Maryland and two 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 the nine and three month
periods ended September 30, 2004 and 2003 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, 2003,
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, 2003
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 September 30, 2004, the results of its operations and cash flows
for the nine and three month periods ended September 30, 2004. The results of
the interim periods are not necessarily indicative of the results expected for
the full fiscal year or any other period.
4
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.
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.
Discontinued Operations Held for Sale
The Company entered into a definitive agreement to sell the intangible assets
and goodwill of its wholly-owned subsidiary, Armor Insurance Group, Inc., on
September 30, 2004. The net asset value of the discontinued operation is
reported as an asset held for sale as of September 30, 2004.
The Company realized cash proceeds for this sale of $709,944 on October 1, 2004.
These proceeds resulted in a before tax gain on sale of $274,095 and
tax-adjusted gain on sale of approximately $168,240. The Company retains the
right to additional cash proceeds in the first or second quarter of 2005
contingent upon performance of the assets sold as determined through year-end
2004 but such additional proceeds are not certain at September 30, 2004. The
Company further expects to liquidate tangible assets of the discontinued
operation that carry a book value of approximately $352,000 at September 30,
2004. The liquidation of these tangible assets may not be completed before
December 31, 2004.
NOTE 3 - 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
options and warrants. At September 30, 2004, the Company had 43,450 options
outstanding. Earnings per share amounts have been given retroactive effect to
the 10% stock dividend declared December 22, 2003.
5
NOTE 4 - 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 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 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 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 proceeds were used for general corporate
purposes, including in part to fund the purchase of mortgage-backed securities
in connection with a leverage strategy.
NOTE 5 - Fair Value Accounting for Stock Plans
-------------------------------------
Stock-Based Compensation
- ------------------------
The Company's stock-based compensation plan is accounted for
based on the intrinsic value method set forth in Accounting Principles Board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Compensation expense for stock options is generally not
recognized if the exercise price of the option equals or exceeds the fair market
value of the stock on the date of grant.
6
The option strike price was equal to the market price of the
common stock at the date of the grant for all options granted; accordingly, no
compensation expense related to options was recognized. If the Company had
applied a fair value based method to recognize compensation cost for the options
granted, net income and earnings per share would have been changed to the
following pro forma amounts for the period ended September 30, 2004 and 2003:
Three months ended Nine months ended
Sept 30 Sept 30 Sept 30 Sept 30
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income - as reported $ 146,130 $ 116,497 $ 325,449 $ 353,258
Deduct: Total stock-based compensation determined
under fair value based method for all awards,
net of related income tax effects - (139,000) (4,812) (155,000)
----------- ----------- ----------- -----------
Pro forma net income (loss) $ 146,130 $ (22,503) $ 320,637 $ 198,258
=========== =========== =========== ===========
Earnings (loss) per share:
Basic - as reported $ .39 $ .31 $ .88 $ .95
=========== =========== ========== ==========
Basic - pro forma $ .39 $ (.06) $ .86 $ .53
=========== =========== ========== ==========
Diluted - as reported $ .38 $ .31 $ .86 $ .95
=========== =========== ========== ==========
Diluted - pro forma $ .38 $ (.06) $ .84 $ .53
=========== =========== ========== ==========
For purposes of pro forma disclosures, the estimated minimum value of the
options is amortized to expense over the option's vesting period. Note that the
effects of applying Statement of Financial Account Standard No. 123 for pro
forma disclosures in the current year are not necessarily representative of the
effects on pro forma net income for future years. The following weighted average
assumptions were used in the Black-Scholes option pricing model:
Dividend yield 0.00%
Expected volatility 29.17%
Risk-free interest rate 4.58%
Expected lives (in years) 10
7
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 $122.1 million at September 30, 2004
reflect an increase of $3.8 million as compared to $118.3 million at December
31, 2003. The increase in assets was comprised primarily of increases in loans
receivable, net and assets held for sale of $12.9 million and $776,000,
respectively, partially offset by declines in securities available for sale,
securities held to maturity, cash and cash equivalents, goodwill and other
intangible assets, and property and equipment, net of $7.0 million, $1.5
million, $333,000, $465,000 and $468,000, respectively.
8
The increase in the Company's liabilities was due primarily to an
increase in deposits and Federal Home Loan Bank borrowings of $2.9 million and
$700,000, respectively, partially offset by a $59,000 decline in accounts
payable and other liabilities. 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 stated maturity and Federal
funds sold, decreased by $333,000 or 9.5% to $3.2 million at September 30, 2004
compared to $3.5 million at December 31, 2003. The decline is due to use of
available cash to help fund loan demand.
Investment Securities Available for Sale. Investment securities
available for sale decreased by $7.0 million or 41.3% to $10.0 million at
September 30, 2004 as compared to $17.0 million at December 31, 2003. This is
primarily the result of sales of $3.1 million of mortgage-backed securities, the
redemption of $1.0 million in callable securities, and principal payments on
mortgage-backed securities totaling $2.9 million.
Securities Held to Maturity. Securities held to maturity decreased by
$1.5 million or 13.0% to $9.7 million at September 30, 2004 as compared to $11.2
million at December 31, 2003. The decrease is the result of principal payments
on mortgage-backed securities.
Loans Receivable, Net. Net loans receivable at September 30, 2004
totaled $89.9 million, an increase of $12.8 million or approximately 16.6%, as
compared to $77.1 million at December 31, 2003. Originations of $41.0 million,
which includes $31.4 million of consumer loans including home equity loans, $1.9
million of first mortgage loans on one-to-four-family residences, and $7.7
million of commercial loans in the Bank's prime lending area were offset by
principal repayments and loan participations sold totaling $28.1 million.
Assets Held for Sale. Assets held for sale totaled $776,000 at
September 30, 2004 as compared to zero as of December 31, 2003. The increase is
the result of the transfer of the total balances of goodwill and other
intangible assets of $166,000 and $270,000, respectively, and $340,000 of
property and equipment to assets held for sale in conjunction with the Company's
entering into a definitive agreement to sell of its wholly-owned subsidiary,
Armor Insurance Group, Inc. on September 30, 2004. The sale occurred on October
1, 2004.
Bank Owned Life Insurance. During July 2003, the Registrant entered
into an investment in Bank Owned Life Insurance (BOLI) in the amount of
$2,000,000. The investment was made in the form of insurance policies on the
life of the Registrant's president in the amount of $1 million and on the lives
of four senior executive officers of the Bank in the amount of $250,000 each.
The income derived from this investment will be used to fund benefits for
employees and directors of the Bank, including Endorsement Method Split Dollar
Life Insurance Plans that provide death benefits to the Bank and all insured
employees, a contribution of up to $50,000 per year to a Supplemental Employee
Retirement Plan (SERP) for the president, and other benefits as determined from
time to time by the board of directors.
Deposits. Total deposits, after interest credited, increased by $2.9
million or 3.4% to $87.1 million at September 30, 2004, as compared to $84.2
million at December 31, 2003. The increase was primarily due to increased
activity at the two bank branch locations opened during 2003. This resulted in
increases in regular savings, non-interest bearing checking, and money market
account balances of $1.5 million, $2.3 million, and $1.6 million, respectively,
partially offset by a decrease in certificate of deposit balances of $2.5
million.
9
FHLB Advances. FHLB advances totaled $21.0 million at September 30,
2004, an increase of $700,000 or 3.4% compared to $20.3 million at December 31,
2003. The borrowing increase was the result of the Bank needing funding to meet
increased loan demand.
Stockholders' Equity. Stockholders' equity totaled $10.3 million at
September 30, 2004, an increase of $303,000 from $10.0 million at December 31
2003. The increase was due to net income during the nine months of $325,000,
partially offset by a decrease in accumulated other comprehensive income of
$22,000 resulting from a decrease in the estimated fair value of investment
securities available for sale.
Results of Operations for the Nine Months Ended September 30, 2004 and 2003
Net Income. The Company recorded net income of $325,000 for the
nine-month period ended September 30, 2004, as compared to $353,000 for the same
period in 2003, representing a $28,000 or 7.9% decrease. Net interest income
increased $178,000, noninterest income increased by $412,000, the net gain from
discontinued operations (Armor Insurance Group, Inc.) increased by $40,000 and
the provision for income taxes on continuing operations decreased by $37,000,
while noninterest expense increased by $647,000 and the provision for loan
losses increased by $48,000. Changes in the components of income and expense are
discussed herein.
Net Interest Income Net interest income increased $178,000 or 7.4% for
the nine-month period ended September 30, 2004, as compared to the same period
in 2003. The average balance of interest-earning assets increased $5.6 million
or 5.4%, while the average yield thereon decreased 29 basis points. The average
balance of interest-bearing liabilities increased $7.7 million or 7.6%, and the
average rate paid thereon decreased 40 basis points. The increase in
interest-bearing liabilities is attributed to the increase in deposit volume at
all of the Bank's office locations and to increased FHLB borrowings. 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 in the general economy. The cost of interest-bearing liabilities
declined faster than the yield on interest-earning assets because the Company's
interest-earning assets repriced more rapidly than interest-bearing liabilities
as the Federal Reserve began raising interest rates in mid-2004. The net
interest rate spread, which is the difference between average yield on
interest-earning assets and the average cost of interest-bearing liabilities,
increased to 3.08% for the nine-month period ended September 30, 2004 from 2.96%
for the same period in 2003. The increase in the net interest rate spread is
primarily due to the fact that interest-earning assets repriced more rapidly
than interest-bearing liabilities.
Interest Income. Interest income decreased $10,000 or 0.2% to $4.22
million for the nine-month period ended September 30, 2004, as compared to $4.23
million for the same period in 2003.
Interest on loans receivable increased $302,000 or 9.4% for the
nine-month period ended September 30, 2004, as compared to the same period in
2003. The increase is mainly the result of a $15.1 million increase in the
average balance of loans receivable, partially offset by a 65 basis point
decline in the average yield on loans.
Interest income on investment securities decreased by $312,000 or 30.8%
for the nine-month period ended September 30, 2004, as compared to the same
period in 2003. The decrease
10
is the result of a $9.5 million or 26.0% decrease in the average balance of
investment securities and a 24 basis point decline in the average yield on
investments.
The average yield on interest-earning assets was 5.09% and 5.38% for
the nine-month periods ended September 30, 2004 and 2003, respectively.
Interest Expense. Interest expense totaled $1.64 million for the
nine-month period ended September 30, 2004, as compared to $1.83 million for the
same period in 2003, a decrease of $190,000, or 10.4%. The average balance of
interest-bearing liabilities increased $7.7 million or 7.6%, however, the
average rate paid thereon decreased by 40 basis points.
Interest expense on deposits decreased $217,000 or 16.7% for the
nine-month period ended September 30, 2004, as compared to the same period in
2003. The decrease was due to a decline in the average cost of deposits of 44
basis points, partially offset an increase in the average balance of deposits of
$7.7 million or 9.3%.
Interest on borrowed funds increased by $28,000 or 5.2% for the
nine-month period ended September 30, 2004, as compared to the same period in
2003. The increase was due to an increase in the cost of borrowed of funds of 19
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 2.01% and 2.42%
for the nine-month periods ended September 30, 2004 and 2003, respectively.
Net Gain on Discontinued Operations. The net gain on discontinued
operations reflects the performance of the Company's wholly owned subsidiary
Armor Insurance Group, Inc. prior to its sale. The net gain for the nine-month
period ended September 30, 2004 of $32,000 represents an increase of $40,000
compared to the same period in 2003. The increase is due to improved sales
volume and the purchase of two small books of business from other insurance
carriers.
Provision for Loan Losses. During the nine-month period ended September
30, 2004 and 2003, the Company established provisions for loan losses of
$244,000 and $196,000, 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 $48,000 or 24.6% is the
result of growth of the loan portfolio, especially commercial loans.
At September 30, 2004, the allowance for loan losses totaled $721,000
or .80% and 638.1% of total loans and total non-performing loans, respectively,
as compared to $611,000 or .83% and 1971.0%, respectively, at September 30 2003.
The Bank's non-performing loans (non-accrual loans and accruing loans 90 or more
days overdue) totaled $113,000 and $31,000 at September 30, 2004 and 2003,
respectively, which represents .12% and .04% of the Bank's total loans,
respectively. The Bank's ratio of non-performing loans to total assets was .09%
and .03% at September 30, 2004 and 2003, respectively.
Noninterest Income. Total noninterest income, primarily fees and
service charges, increased $412,000 or 22.6% for the nine-month period ended
September 30, 2004, as compared to the same period in 2003. The increase
reflects an emphasis on charging appropriate fees for services, such as ATM
fees, insufficient funds fees, and interchange income generated by customers'
use of check cards.
11
Noninterest Expense. Total noninterest expense increased by $647,000 or
18.7% for the nine-month period ended September 30, 2004, as compared to the
same period in 2003. This increase was attributable to increases of $366,000 or
22.0% in compensation and benefits resulting from the addition of employees at
the Bank, increased cost for employee insurance programs, and normal cost of
living increases, $35,000 or 23.5% in professional fees resulting from increased
attorney, accounting, training and consulting fees as the Bank and Company have
continued to grow and costs associated with compliance issues have increased,
and $263,000 or 21.9% in office occupancy and operation expenses resulting
primarily from the opening of a new full service branch office in Columbia,
Maryland during September 2003.
Income Tax Expense. The provision for income taxes on continuing
operations totaled $172,000 for the nine-month period ended September 30, 2004,
as compared to $208,000 for the same period in 2003. The $37,000 or 17.6%
decrease is the result of decreased net taxable income.
Results of Operations for the Three Months Ended September 30, 2004 and 2003
Net Income. The Company recorded net income of $146,000 for the
three-month period ended September 30, 2004, as compared to $116,000 for the
same period in 2003, representing a $30,000 or 25.4% increase. Net interest
income increased $89,000, noninterest income increased by $208,000, and the net
gain from discontinued operations (Armor Insurance Group, Inc.) increased by
$5,000, while noninterest expense increased by $230,000, the provision for loan
losses increased by $23,000, and the provision for income taxes on continuing
operations increased by $19,000. Changes in the components of income and expense
are discussed herein.
Net Interest Income Net interest income increased $89,000 or 10.7% for
the three-month period ended September 30, 2004, as compared to the same period
in 2003. The average balance of interest-earning assets increased $3.1 million
or 2.8%, and the average yield thereon increased by 2 basis points. The average
balance of interest-bearing liabilities increased $4.3 million or 4.0%, and the
average rate paid thereon decreased 24 basis points. The increase in
interest-bearing liabilities is attributed to the increase in deposit volume at
all of the Bank's office locations. The average yield on interest-earning assets
increased slightly while average cost of interest-bearing liabilities declined
primarily due to the Bank's interest-earning assets repricing more rapidly than
interest-bearing liabilities as the Federal Reserve began raising interest rates
in mid-2004. The net interest rate spread, which is the difference between
average yield on interest-earning assets and the average cost of
interest-bearing liabilities, increased to 3.23% for the three-month period
ended September 30, 2004 from 2.96% for the same period in 2003. The increase in
the net interest rate spread is primarily due to the fact that interest-earning
assets repriced more rapidly then interest-bearing liabilities.
Interest Income. Interest income increased $45,000 or 3.2% to $1.47
million for the three-month period ended September 30, 2004, as compared to
$1.42 million for the same period in 2003.
Interest on loans receivable increased $177,000 or 16.5% for the
three-month period ended September 30, 2004, as compared to the same period in
2003. The increase is mainly the result of a $17.7 million increase in the
average balance of loans receivable, partially offset by a 41 basis point
decline in the average yield on loans.
12
Interest income on investment securities decreased by $132,000 or 38.0%
for the three-month period ended September 30, 2004, as compared to the same
period in 2003. The decrease is the result of a $14.6 million or 38.2% decline
in the average balance of investment securities, partially offset by a 1 basis
point increase in the average yield thereon.
The average yield on interest-earning assets was 5.23% and 5.21% for
the three-month periods ended September 30, 2004 and 2003, respectively.
Interest Expense. Interest expense totaled $550,000 for the three-month
period ended September 30, 2004, as compared to $593,000 for the same period in
2003, a decrease of $43,000, or 7.3%. The average balance of interest-bearing
liabilities increased $4.3 million or 4.0%, however, the average rate paid
thereon decreased by 24 basis points.
Interest expense on deposits decreased $33,000 or 8.4% for the
three-month period ended September 30, 2004, as compared to the same period in
2003. The decrease was due to a decline in the average cost of deposits of 26
basis points, partially offset an increase in the average balance of deposits of
$5.2 million or 6.1%.
Interest on borrowed funds decreased by $10,000 or 5.1% for the
three-month period ended September 30, 2004, as compared to the same period in
2003. The decrease was due to a decrease in the average balance of advances
outstanding of $937,000 or 4.5% and a decrease in the cost of borrowed funds of
2 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 2.00% and 2.24%
for the three-month periods ended September 30, 2004 and 2003, respectively.
Provision for Loan Losses. During the three-month periods ended
September 30, 2004 and 2003, the Company established provisions for loan losses
of $87,000 and $64,000, 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 $23,000 or 35.6% is the
result of continued 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 losses resulting from unpaid overdrawn accounts but this was more than offset
by the resulting increase in noninterest income from the fees associated with
the program.
Noninterest Income. Total noninterest income, primarily fees and
service charges, increased $208,000 or 33.5% for the three-month period ended
September 30, 2004, as compared to the same period in 2003. The increase
reflects an emphasis on charging appropriate fees for services, such as ATM
fees, insufficient funds fees, and interchange income generated by customers'
use of check cards.
Noninterest Expense. Total noninterest expense increased by $230,000 or
19.2% for the three-month period ended September 30, 2004, as compared to the
same period in 2003. This increase was attributable to an increase of $145,000
or 24.8% in compensation and benefits, resulting from addition of employees at
the Bank, increased cost for employee insurance programs, and normal cost of
living increases, an increase of $17,000 or 38.4% in professional fees resulting
from increased attorney, accounting, training and consulting fees as the Bank
and
13
Company have continued to grow and costs associated with compliance issues have
increased, and an increase of $103,000 or 25.6% in office occupancy and
operations expenses resulting primarily from the opening of a new full service
branch office in Columbia, Maryland during September 2003, partially offset by a
decrease of $35,000 or 21.3% in marketing costs and other miscellaneous
operating expenses.
Net Gain on Discontinued Operations. The net gain on discontinued
operations reflects the performance of the Company's wholly owned subsidiary
Armor Insurance Group, Inc. prior to its sale. The net gain for the three-month
period ended September 30, 2004 of $2,400 represents an increase of $5,200
compared to the same period in 2003. The increase is due to improved sales
volume during the three-month period ended September 30, 2004.
Income Tax Expense. The provision for income taxes on continuing
operations totaled $85,000 for the three-month period ended September 30, 2004,
as compared to $66,000 for the same three-month period in 2003. The $19,000 or
29.0% increase is the result of increased net taxable income.
Liquidity. Liquidity is measured using an approach designed to examine
the Company's assets to ensure funding is available to meet the expected cash
flow needs for loan demand, liability maturities and withdrawals, while
minimizing non-earning cash balances such as branch cash, reserves and checks
held for collection. Additionally, the approach takes into account anticipated
investment security maturities, call provisions, and principal paydowns in
determining funding needs.
The Company also maintains external sources of funds, which can be
drawn upon when required to meet liquidity needs. The primary source of external
liquidity is a line of credit for $30,531,000 from the Federal Home Loan Bank of
Atlanta, of which approximately $9,531,000 was available to fund liquidity needs
at September 30, 2004. Based upon its liquidity analysis, including external
sources of available liquidity, management believes the liquidity position is
appropriate at September 30, 2004.
The following is a schedule of significant commitments at September 30,
2004:
(In thousands)
Commitments to extend credit:
Commitments to originate residential mortgages $ 22
Commitments to originate non-residential, commercial mortgages 4,041
Unused home equity lines of credit 16,488
Unused commercial lines of credit 1,082
Other commitments to extend credit 4,808
--------
$ 26,441
========
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 September 30, 2004, the Bank was in compliance with all
of its regulatory capital requirements.
14
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.
15
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.
16
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 September 30, 2004 that would have a material effect on
operations or income.
Item 2. Unregistered Sales of Equity 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.
-----------------
None.
Item 6. Exhibits.
--------
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
17
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: November 8, 2004 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: November 8, 2004 Date: November 8, 2004
18