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, 2006
-------------
[ ] 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
----------------------------------------------------
(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
--- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of common stock as of August 11, 2006:
$0.10 Par Value Common Stock 882,108
- ---------------------------- ------------------
Class Shares Outstanding
Transitional Small Business Disclosure Format (check one)
Yes No X
--- ---
BUCS FINANCIAL CORP AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2006 (unaudited)
and December 31, 2005 ..........................................................................1
Consolidated Statements of Operations for the six and three month periods
ended June 30, 2006 and 2005 (unaudited)........................................................2
Consolidated Statements of Cash Flows for the six
month periods ended June 30, 2006 and 2005 (unaudited)..........................................3
Notes to Consolidated Financial Statements......................................................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................................9
Item 3. Controls and Procedures..............................................................................16
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings....................................................................................17
Item 2. Unregistered Sales of Equity Securities and 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 JUNE 30, 2006 AND DECEMBER 31, 2005
(Unaudited)
June 30 December 31
2006 2005
------------- -------------
ASSETS
------
Cash and cash equivalents $ 1,735,175 $ 2,246,408
Interest-bearing deposits in other financial institutions 6,507,754 6,773,975
Securities available for sale 3,586,045 4,221,024
Securities held to maturity 7,043,074 7,623,787
Loans receivable 116,651,743 109,311,562
Allowance for loan losses (798,741) (732,315)
------------- -------------
Loans receivable, net 115,853,002 108,579,247
Accrued interest receivable 546,363 505,900
Property and equipment, net 3,770,456 3,837,801
Investment required by law - Federal Home Loan Bank Stock 1,385,700 1,583,500
Bank Owned Life Insurance 2,252,707 2,213,018
Prepaid expenses and other assets 1,023,510 1,064,424
------------- -------------
Total Assets $ 143,703,786 $ 138,649,084
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits $ 104,705,478 $ 95,554,243
Accounts payable and other liabilities 842,931 1,087,785
Borrowed funds - Federal Home Loan Bank 23,650,000 27,700,000
Guaranteed preferred beneficial interest in Company's
subordinated debt 3,000,000 3,000,000
------------- -------------
Total Liabilities 132,198,409 127,342,028
------------- -------------
Stockholders' Equity:
Preferred stock, par value $0.10 per share, 4,000,000 shares - -
authorized, 0 shares issued and outstanding
Common stock, par value $0.10 per share, 10,000,000
shares authorized, 882,108 and 801,968 shares issued
and outstanding at June 30, 2006 and December 31,
2005, respectively 88,211 80,197
Stock dividends distributable - 8,724
Additional paid-in capital 5,229,807 5,229,806
Retained earnings 6,389,238 6,177,720
Unallocated common stock held by Employee Stock Ownership
Plan ("ESOP") (168,532) (168,532)
Accumulated other comprehensive income (33,347) (20,859)
------------- -------------
Total Stockholders' Equity 11,505,377 11,307,056
------------- -------------
Total Liabilities and Stockholders' Equity $ 143,703,786 $ 138,649,084
============= =============
The accompanying notes are an intregal part of these
consolidated financial statements
1
BUCS FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX AND THREE MONTH PERIODS ENDED JUNE 30, 2006 AND 2005
(Unaudited)
Six month periods ended Three month periods ended
June 30 June 30
-------------------------- --------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Interest Income
Loans receivable $ 3,673,604 $ 2,809,359 $ 1,902,021 $ 1,459,816
Investment securities 383,120 361,266 192,288 186,843
----------- ----------- ----------- -----------
Total interest income 4,056,724 3,170,625 2,094,309 1,646,659
----------- ----------- ----------- -----------
Interest expense
Deposits 1,144,003 718,520 646,093 382,473
Borrowed funds 697,494 460,964 339,657 243,541
----------- ----------- ----------- -----------
Total interest expense 1,841,497 1,179,484 985,750 626,014
----------- ----------- ----------- -----------
Net interest income 2,215,227 1,991,141 1,108,559 1,020,645
Provision for loan losses 206,082 171,752 106,833 113,921
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 2,009,145 1,819,389 1,001,726 906,724
----------- ----------- ----------- -----------
Noninterest income
Fees and service charges 1,241,082 1,182,963 647,250 638,446
Fee to process and maintain cash facility 60,000 60,000 30,000 30,000
Other 60,478 63,276 24,779 31,703
----------- ----------- ----------- -----------
Total noninterest income 1,361,560 1,306,239 702,029 700,149
----------- ----------- ----------- -----------
Noninterest expense
Compensation and benefits 1,599,676 1,472,968 794,104 750,675
Professional fees 112,501 128,450 52,170 66,042
Occupancy expense 556,185 552,784 286,894 275,228
Office operations 432,914 398,962 212,236 197,600
Advertising and marketing expense 188,217 158,710 121,137 97,850
Conference and training expense 71,431 70,023 35,247 12,672
Loan servicing expense 15,563 35,804 8,058 16,642
Other operating expense 42,119 44,234 21,555 18,749
----------- ----------- ----------- -----------
Total noninterest expense 3,018,606 2,861,935 1,531,401 1,435,458
----------- ----------- ----------- -----------
Income before income taxes 352,099 263,693 172,354 171,415
Income tax expense 140,581 93,566 68,448 63,746
----------- ----------- ----------- -----------
Income from continuing operations 211,518 170,127 103,906 107,669
Discontinued operations
Gain from operations of discontinued component - 210,041 - 185,327
Income tax expense - (81,303) - (71,574)
----------- ----------- ----------- -----------
Net gain on discontinued operation - 128,738 - 113,753
----------- ----------- ----------- -----------
Net income 211,518 298,865 103,906 221,422
Net change in unrealized (losses)/gains on securities
available for sale, net of deferred income tax benefit (12,488) (3,324) (3,217) 16,920
----------- ----------- ----------- -----------
Total comprehensive income $ 199,030 $ 295,541 $ 100,689 $ 238,342
=========== =========== =========== ===========
Earnings per share - basic
From continuing operations $ 0.25 $ 0.23 $ 0.12 $ 0.14
From discontinued operations 0.00 0.17 0.00 0.15
----------- ----------- ----------- -----------
Net Income $ 0.25 $ 0.40 $ 0.12 $ 0.29
=========== =========== =========== ===========
Shares used in computing basic earnings per share 841,324 750,630 841,324 750,630
=========== =========== =========== ===========
Earnings per share - diluted
From continuing operations $ 0.24 $ 0.22 $ 0.12 $ 0.14
From discontinued operations 0.00 0.17 0.00 0.15
----------- ----------- ----------- -----------
Net Income $ 0.24 $ 0.39 $ 0.12 $ 0.29
=========== =========== =========== ===========
Shares used in computing diluted earnings per share 873,087 774,845 873,087 774,845
=========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
2
BUCS FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2006 AND 2005
(Unaudited)
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 211,518 $ 298,865
Reconciliation of net income to net cash provided by
operating activities:
Provision for loan losses 206,082 171,752
Increase in cash surrender value of life insurance (39,689) (42,090)
Depreciation and amortization 210,816 219,961
Proceeds from sale of loans originated for sale 262,604 1,052,172
Origination of loans originated for sale (260,000) (1,052,172)
Gain on sale of loans originated for sale (2,604) -
Effects of changes in operating assets and liabilities:
Accrued interest receivable (40,463) (55,504)
Prepaid expenses and other assets 40,914 (415,794)
Accounts payable and other liabilities (236,996) (255,086)
----------- -----------
Net cash provided by (used in) operating activities 352,182 (77,896)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (7,479,837) (8,961,369)
Net decrease in interest-bearing
deposits of other financial institutions 266,221 3,419,917
Proceeds from maturities, redemption and sales
of securities available-for-sale 613,268 801,200
Proceeds from repayments on securities held-to-maturity 569,934 781,249
Redemption (purchase) of FHLB stock 197,800 (153,600)
Proceeds from sale of assets from discontinued component - 362,915
Purchase of property and equipment (131,326) (63,464)
----------- -----------
Net cash used in investing activities (5,963,940) (3,813,152)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in borrowed funds from the FHLB (4,050,000) 3,200,000
Net increase in deposits 9,151,235 2,601,010
Cash in lieu of fractional shares (710) -
----------- -----------
Net cash provided by financing activities 5,100,525 5,801,010
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (511,233) 1,909,962
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,246,408 886,787
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,735,175 $ 2,796,749
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 224,706 $ 437,323
=========== ===========
Cash paid for interest $ 1,840,694 $ 1,051,390
=========== ===========
Transfer from loans receivable to other real estate owned $ - $ -
=========== ===========
The accompanying notes are an intregal part of these
consolidated financial statements
3
BUCS FINANCIAL CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the six and three months ended June 30, 2006 and 2005
(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, residential home equity loans,
commercial real estate, 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 and BUCS
Financial Capital Trust I. All material intercompany transactions have been
eliminated in consolidation.
The accompanying consolidated financial statements for the six and three month
periods ended June 30, 2006 and 2005 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, 2005,
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, 2005
has been derived from the audited financial statements at that date. Certain
reclassifications have been made to amounts previously reported to conform to
the classifications made in current periods.
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, 2006, the results of its operations and cash flows for
the six and three month periods ended June 30, 2006. The results of the interim
4
periods are not necessarily indicative of the results expected for the full
fiscal year or any other period.
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 - 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. As a result of this agreement the Company discontinued
operations of Armor Insurance Group, Inc. and proceeded to liquidate other fixed
assets owned by Armor Insurance Group, Inc.
Assets of Armor Insurance Group, Inc. were sold during the six month period
ended June 30, 2005. The assets were comprised of office condominium units in
Ellicott City, Maryland and office equipment. Additionally, during the six
months ended June 30, 2005, income was recognized and received as a result of
the sale of intangible assets. The Company realized a pretax net gain on sale
from the sale of those fixed and intangible assets of $206,825. Certain rents
and other miscellaneous revenues of $3,216 were also earned by the discontinued
operation during the six month periods ended June 30, 2005.
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 earnings 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 June 30, 2006, the Company had 95,586 options outstanding. None
of the outstanding options had any antidilutive effects on earnings per share
for the six and three months ended June 30, 2006 or June 30, 2005. Earnings per
share amounts have given retroactive effect to a 10% stock dividend declared on
December 19, 2005 and paid on January 1, 2006.
5
NOTE 5 - Stock-Based Compensation
------------------------
At June 30, 2006, the Company has one stock option plan, which is more fully
described in Note 10 in the Company's 2005 Annual Report on Form 10-KSB. On
January 1, 2006, the Company implemented Statement of Financial Accounting
Standards No. 123(R), "Share-Based Payments"("SFAS No. 123R") which replaced
SFAS No. 123 and supercedes Opinion No. 25 and the related implementation
guidance. SFAS No. 123R addresses accounting for equity-based compensation
arrangements, including employee stock options. The Company adopted the
"modified prospective method" where stock-based compensation expense is recorded
beginning on the adoption date and prior periods are not restated. Under this
method, compensation expense is recognized using the fair-value based method for
all new awards granted after January 1, 2006. Additionally, compensation expense
for unvested stock options that are outstanding at January 1, 2006 is recognized
over the requisite service period based on the fair value of those options as
previously calculated at the grant date under the pro-forma disclosures of SFAS
123. The fair value of each grant is estimated using the Black-Scholes option
pricing model.
During the six and three month periods ended June 30, 2006 the Company did not
award any stock option grants and has not awarded any new grants since August
2003. The Company did not recognize any pre-tax stock-based compensation expense
as a result of adopting SFAS 123R as all stock options previously awarded by the
Company were fully vested. Based upon a last trade of $10.90 per share on June
30, 2006 the aggregate intrinsic value of stock options outstanding and
exercisable at June 30, 2006 was $164,408.
6
The following table summarizes the stock option activity for the periods
indicated:
Six months ended Year ended
June 30, 2006 December 31, 2005
------------------------- -------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Options outstanding at the
beginning of period 95,586 $ 9.18 95,586 $ 9.18
Granted - - - -
Exercised - - - -
Canceled/expired - - - -
------ ------ ------ ------
Options outstanding at
end of period 95,586 $ 9.18 95,586 $ 9.18
Options exercisable 95,586 95,586
As of June 30, 2006
-------------------
Options outstanding Options exercisable
------------------- -------------------
Weighted Weighted
Weighted Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Outstanding Price
--------------- ----------- ---------------- ----- ----------- -----
(in years)
$ 8.73 24,926 5.83 $ 8.73 24,926 $ 8.73
9.34 70,660 7.17 9.34 70,660 9.34
------ ------ ---- ------ ------ ------
$ 8.73 - $ 9.34 95,586 6.82 $ 9.18 95,586 $ 9.18
====== ====== ====== ==== ====== ====== ======
NOTE 6 - Recent Accounting Pronouncements
--------------------------------
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 154, "Accounting Changes and
Error Corrections, a Replacement of APB Opinion No. 20 and FASB Statement No.
3." SFAS 154 establishes, unless impracticable, retrospective application as the
required method for reporting a change in accounting principle in the absence of
explicit transition requirements specific to a newly adopted accounting
principle. Previously, most changes in accounting principle were recognized by
including the cumulative effect of changing to the new account principle in net
income of the period of the change. Under SFAS 154, retrospective application
requires (i) the cumulative effect of the change to the new accounting priciple
on periods prior to those presented to be reflected in the carrying amounts of
assets and liabilities as of the beginning of the first period presented, (ii)
an offsetting adjustment, if any, to be made to the opening balance of retained
earnings (or other appropriate components of equity) for that period, and (iii)
financial statements for each individual prior period presented to be adjusted
to reflect the direct period-specific effects of applying the new accounting
principle. Special retroactive application rules apply in situations where it is
7
impracticable to determine either the period- specific effects or the cumulative
effect of the change. Indirect effects of a change in accounting principle are
required to be reported in the period in which the accounting change is made.
SFAS 154 carries forward the guidance in APB Opinion 20 "Accounting Changes,"
requiring justification of a change in accounting principle on the basis of
preferability. SFAS 154 also carries forward without change the guidance
contained in APB Opinion 20, for reporting the correction of an error in
previously issued financial statements and for a change in an accounting
estimate. SFAS is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. The adoption of SFAS 154
did not significantly impact the Company's financial statements.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments", an amendment of SFAS No. 133 and SFAS No.140. This
statement permits fair value re-measurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation.
It establishes a requirement to evaluate interests in securitized financial
assets to identify interests that are freestanding derivatives or that are
hybrid financial instruments that contain an embedded derivative requiring
bifurcation. In addition, SFAS 155 clarifies which interest-only strips and
principal-only strips are not subject to the requirements of Statement 133. It
also clarifies that concentrations of credit risk in the form of subordination
are not embedded derivatives. SFAS 155 amends Statement 140 to eliminate the
prohibition on a qualifying special- purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. This Statement is effective for all financial
instruments acquired or issued after the beginning of an entity's first fiscal
year that begins after September 15, 2006. The Company is evaluating the impact,
if any, of the adoption of this Statement on its financial results.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets". This Statement amends SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities", and
requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable and permits the
entities to elect either fair value measurement with changes in fair value
reflected in earnings or the amortization and impairment requirements of SFAS
No. 140 for subsequent measurement. The subsequent measurement of separately
recognized servicing assets and servicing liabilities at fair value eliminates
the necessity for entities that manage the risks inherent in servicing assets
and servicing liabilities with derivatives to qualify for hedge accounting
treatment and eliminates the characterization of declines in fair value as
impairments or direct write-downs. This Statement is effective as of the
beginning of an entity's first fiscal year that begins after September 15, 2006.
The Company is evaluating the impact, if any, of the adoption of this Statement
on its financial results.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2006 AND 2005
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 $143.7 million at June 30, 2006 reflect
an increase of $5.1 million as compared to $138.6 million at December 31, 2005.
The increase in assets was comprised of increases in loans receivable, net, of
$7.3 million, and accrued interest receivable and bank owned life insurance of
$40,000 each, partially offset by decreases in cash and cash equivalents,
interest-bearing deposits in other financial institutions, securities available
for sale, securities held to maturity, property and equipment, investment in
Federal Home Loan Bank stock, and prepaid expenses and other assets of $511,000,
$266,000, $635,000, $581,000, $67,000, $198,000, and $ 41,000 respectively.
9
The increase in the Company's total liabilities and stockholders'
equity of $5.1 million at June 30, 2006 as compared to December 31, 2005 was due
primarily to increases in deposits and stockholders' equity of $9.2 million and
$198,000, respectively, partially offset by decreases in borrowed funds from the
Federal Home Bank of $4.1 million and accounts payable and other liabilities of
$245,000, respectively. Changes in the components of major assets, liabilities
and equity are discussed herein.
Cash and Cash Equivalents. Cash and cash equivalents totaled
approximately $1.7 million at June 30, 2006, a decrease of $511,000 or 22.8% as
compared to $2.2 million at December 31, 2005. The decrease is due to the
Company's bank subsidiary, BUCS Federal Bank, investing cash in excess of
immediate needs into interest earning loans and investments.
Interest-Bearing Deposits in Other Financial Institutions.
Interest-bearing deposits in other financial institutions includes deposits at
other financial institutions with original maturities of less than three months,
overnight investment funds with no stated maturity and Federal funds sold.
Interest-bearing deposits in other financial institutions totaled $6.5 million
at June 30, 2006, a decrease of $266,000 or 3.9% as compared to $6.8 million at
December 31, 2005. This decrease was primarily the result of an increase in
loans receivable whereby interest-bearing deposits in other financial
institutions were invested in new loan originations to customers of BUCS Federal
Bank.
Investment Securities Available for Sale. Investment securities
available for sale decreased by $635,000 or 15.0% to $3.6 million at June 30,
2006 as compared to $4.2 million at December 31, 2005. This is the result of
normal principal payments on mortgage-backed securities. Cash flows from the
principal repayments on investment securities available for sale were primarily
used to fund new loan originations during the period.
Securities Held to Maturity. Securities held to maturity decreased by
$581,000 or 7.6% to $7.0 million at June 30, 2006 as compared to $7.6 million at
December 31, 2005. The decrease is the result of normal principal payments on
mortgage-backed securities. Cash flows from the principal repayments on
investment securities held to maturity were primarily used to fund new loan
originations during the period.
Loans Receivable, Net. Loans receivable net of allowance for loan
losses at June 30, 2006 totaled $115.9 million, an increase of $7.3 million or
approximately 6.7%, as compared to $108.6 million at December 31, 2005.
Originations of $25.9 million, which includes $11.5 million of consumer loans
including home equity loans, $4.9 million in first mortgage loans on one to four
family residences and $9.5 million of commercial loans in the Bank's prime
lending area, were offset by principal repayments and loan participations sold
totaling $18.6 million.
Bank Owned Life Insurance. The cash value of Bank Owned Life Insurance
policies (BOLI) owned by the Bank increased to $2.25 million at June 30, 2006
from $2.21 million at December 31, 2005, an increase of 1.8%.
During July 2003, the Company entered into an investment in BOLI with
an original cash value of $2,000,000. The investment was made in the form of
insurance policies on the life of the Company'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 is 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
10
contribution of up to $50,000 per year to a Supplemental Employee Retirement
Plan (SERP) for the president, and other benefits as determined by the board of
directors.
Deposits. Total deposits, after interest credited, increased by $9.2
million or 9.6% to $104.7 million at June 30, 2006, as compared to $95.6 million
at December 31, 2005. The increase was primarily due to increased new deposit
activity at bank branch locations, primarily in money market and certificate of
deposit products, and normal cyclical trends that include deposits from income
tax returns and employee bonuses during the first quarter of the calendar year.
These factors resulted in increases in non-interest bearing checking, money
market and certificate of deposit account balances of approximately $2.8
million, $5.6 million and $4.6 million, respectively. These increases were
partially offset by decreases in regular savings balances and floating rate
individual retirement account balances of approximately $3.5 million and
$470,000, respectively.
FHLB Advances. FHLB advances totaled $23.7 million at June 30, 2006 a
decrease of $4.1 million or 14.6% compared to $27.7 million at December 31,
2005. The decrease was the result of the Bank using excess cash from deposits to
pay down short-term borrowings.
Stockholders' Equity. Stockholders' equity totaled $11.5 million at
June 30, 2006, an increase of $198,000 from $11.3 million at December 31, 2005.
The increase was due to net income from operations during the period of
$212,000, partially offset by a decrease in accumulated other comprehensive
income of $12,000 resulting from a decrease in the estimated fair value of
investment securities available for sale and a decrease in retained earnings of
$1,000 resulting from a cash payment to shareholders for fractional shares of
stock in a 10% stock dividend paid to shareholders on January 1, 2006.
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 pay downs 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 $42,861,000 from the Federal Home Loan Bank of
Atlanta, of which approximately $19,211,000 was available to fund liquidity
needs at June 30, 2006. Based upon its liquidity analysis, including external
sources of available liquidity, management believes the liquidity position is
appropriate at June 30, 2006.
The following is a schedule of significant commitments at June 30,
2006:
Commitments to extend credit: (In thousands)
Commitments to originate residential mortgages $ 1,332
Commitments to originate non-residential, commercial mortgages 4,968
Commitments to originate non-mortgage commercial loans 825
Unused home equity lines of credit 24,152
Unused commercial lines of credit 4,427
Commercial Letters of Credit 200
Other commitments to extend credit 4,825
-------
Total Commitments to extend credit $40,729
=======
11
Results of Operations for the Six Months Ended June 30, 2006 and 2005
Net Income. The Company recorded net income from continuing operations
of $212,000 for the six-month period ended June 30, 2006 as compared to $170,000
for the same period in 2005, an increase of 24.3%. Net interest income increased
$224,000 and noninterest income increased by $55,000, while noninterest expense
increased by $157,000, the provision for loan losses increased by $34,000, and
the provision for income taxes on continuing operations increased by $47,000.
For the six-month period ended June 30, 2005, the Company also recorded a net
gain on discontinued operations of $129,000 resulting from final payment on the
sale of its Armor Insurance Group, Inc. wholly owned subsidiary in October 2004.
Changes in the components of income and expense are discussed herein.
Net Interest Income. Net interest income increased $224,000 or 11.3%
for the six-month period ended June 30, 2006, as compared to the same period in
2005. The average balance of interest-earning assets increased $12.6 million or
10.9%, and the average yield thereon increased by 85 basis points. The average
balance of interest-bearing liabilities increased $12.2 million or 11.0%, and
the average rate paid thereon increased 86 basis points. The increases in
interest-earning assets and interest-bearing liabilities are attributed
primarily to positive cash flows resulting from an increase in average deposits
of $6.8 million or 7.4% and an increase in average short-term borrowings of $5.5
million or 26.4%. The average yield on interest-earning assets and
interest-bearing liabilities increased at approximately the same rate because
both interest-earning assets and interest-bearing liabilities repriced
consistently as the Federal Reserve increased interest rates during 2005 and
2006. 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 3.40% for the six-month period ended June 30, 2006
from 3.41% for the same period in 2005. The 1 basis point decrease in the net
interest rate spread is primarily due to the fact that interest-bearing
liabilities repriced more rapidly than interest-earning assets during the
period.
Interest Income. Interest income increased $886,000 or 27.9% to $4.1
million for the six-month period ended June 30, 2006, as compared to $3.2
million for the same period in 2005. Interest on loans receivable increased
$864,000 or 30.8% for the six-month period ended June 30, 2006, as compared to
the same period in 2005. The increase is the result of a $15.3 million increase
in the average balance of loans receivable and a 75 basis point increase in the
average yield on loans receivable.
Interest income on investment securities increased by $22,000 or 6.1%
for the six-month period ended June 30, 2006, as compared to the same period in
2005. The increase is the result of a 93 basis point increase in the average
yield on investment securities, partially offset by a $2.7 million or 14.4%
decline in the average balance of investment securities.
The average yield on all interest-earning assets was 6.37% and 5.52%
for the six-month periods ended June 30, 2006 and 2005, respectively.
Interest Expense. Interest expense totaled $1.8 million for the
six-month period ended June 30, 2006, as compared to $1.2 million for the same
period in 2005, an increase of $662,000, or 56.1%. The increase is due to an
increase in the average balance of interest-bearing liabilities of $12.2 million
or 11.0% and an increase in the average rate paid thereon of 86 basis points.
12
Interest expense on deposits increased $425,000 or 59.2% for the
six-month period ended June 30, 2006, as compared to the same period in 2005.
The increase was due to an increase of $6.8 million or 7.4% in average deposits
and a 76 basis point increase in the average cost of deposits.
Interest on borrowed funds increased by $237,000 or 51.3% for the
six-month period ended June 30, 2006, as compared to the same period in 2005.
The increase was due to an increase in the average balance of advances
outstanding of $5.5 million or 26.4% and an increase in the average cost of
borrowed funds of 87 basis points. The Company uses FHLB advances as a funding
source to supplement deposits, which are the Company's primary source of funds.
The average cost of interest-bearing liabilities was 2.97% and 2.11%
for the six-month periods ended June 30, 2006 and 2005, respectively.
Provision for Loan Losses. During the six-month periods ended June 30,
2006 and 2005, the Company established provisions for loan losses of $206,000
and $172,000, respectively. The $34,000, or 20.0% increase reflect management's
evaluation of the growth in the overall loan portfolio and underlying credit
risk of the portfolio in determining the necessary level of allowance for loan
losses.
Noninterest Income. Total noninterest income, primarily fees and
service charges, increased $55,000 or 4.2% for the six-month period ended June
30, 2006, as compared to the same period in 2005. This increase is primarily due
to an increase of $54,000 in VISA check card interchange income during the
period ended June 30, 2006 as usage of these cards expanded. The Bank places 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 $157,000 or
5.5% for the six-month period ended June 30, 2006, as compared to the same
period in 2005. This increase was mainly attributable to increases of $127,000
or 8.6% in compensation and benefits resulting from addition of employees at the
Bank as well as normal cost of living increases, and $68,000 or 5.8% in various
operating expenses, primarily office operating expenses and advertising
expenses. The increases were partially offset by decreases in other expense
categories including professional fees and loan servicing expenses that
decreased by $38,000 or 18.4%.
Income Tax Expense. The provision for income taxes on continuing
operations totaled $141,000 for the six-month period ended June 30, 2006 with an
effective tax rate of approximately 39.9%, as compared to $94,000 and an
effective tax rate of 35.5% for the same six-month period in 2005. The $47,000
or 50.2% increase is the result of increased net taxable income from continuing
operations. The effective tax rate for the period ending June 30, 2006 was
39.9%.
Results of Operations for the Three Months Ended June 30, 2006 and 2005
Net Income. The Company recorded net income from continuing operations
of $104,000 for the three-month period ended June 30, 2006, as compared to
$108,000 for the same period in 2005, representing a $4,000 or 3.5% decrease.
Net interest income increased $88,000 and noninterest income increased by
$1,900, while noninterest expense increased by $96,000, the provision for loan
losses decreased by $7,000, and the provision for income taxes on continuing
operations increased by $4,000. For the three-month period ended June 30, 2005,
the Company also recorded a net gain on discontinued operations of $114,000
resulting from final payment on
13
the sale of its Armor Insurance Group, Inc. wholly owned subsidiary in October
2004. Changes in the components of income and expense are discussed herein.
Net Interest Income Net interest income increased $88,000 or 8.6% for
the three-month period ended June 30, 2006, as compared to the same period in
2005. The average balance of interest-earning assets increased $12.8 million or
11.0%, and the average yield thereon increased by 82 basis points. The average
balance of interest-bearing liabilities increased $11.9 million or 10.4%, and
the average rate paid thereon increased 94 basis points. The increase in
interest-bearing liabilities is attributed to an increase in average deposits of
$9.2 million or 10.0% and an increase in short-term borrowings of $2.6 million
or 12.3%. The average yield on interest-earning assets increased at a slower
rate than the average cost of interest-bearing liabilities because most deposit
growth came in higher costing money market and certificate of deposit accounts,
and the Bank's interest-bearing liabilities repriced more rapidly than
interest-earning assets as the Federal Reserve continued raising interest rates
in 2005 and 2006. 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 3.33% for the three-month period
ended June 30, 2006 from 3.44% for the same period in 2005. The decrease in the
net interest rate spread is primarily due to the fact that interest-bearing
liabilities repriced more rapidly than interest-earning assets.
Interest Income. Interest income increased $448,000 or 27.2% to $2.1
million for the three-month period ended June 30, 2006, as compared to $1.7
million for the same period in 2005.
Interest on loans receivable increased $442,000 or 30.3% for the
three-month period ended June 30, 2006, as compared to the same period in 2005.
The increase is mainly the result of a $15.4 million increase in the average
balance of loans receivable and a 75 basis point increase in the average yield
on loans.
Interest income on investment securities increased by $5,000 or 2.9%
for the three-month period ended June 30, 2006, as compared to the same period
in 2005. The increase is the result of a 78 basis point increase in the average
yield on investment securities, partially offset by a $2.5 million or 13.8%
decline in the average balance of investment securities.
The average yield on all interest-earning assets was 6.46% and 5.64%
for the three-month periods ended June 30, 2006 and 2005, respectively.
Interest Expense. Interest expense totaled $986,000 for the three-month
period ended June 30, 2006, as compared to $626,000 for the same period in 2005,
an increase of $360,000, or 57.5%. The average balance of interest-bearing
liabilities increased $11.9 million or 10.4% while the average rate paid thereon
increased by 94 basis points
Interest expense on deposits increased $264,000 or 68.9% for the
three-month period ended June 30, 2006, as compared to the same period in 2005.
The increase was due to an increase of $9.2 million in the average balance of
deposits and an increase of 89 basis points in the rate paid thereon.
Interest on borrowed funds increased by $96,000 or 39.5% for the
three-month period ended June 30, 2006, as compared to the same period in 2005.
The increase was due to an increase in the average balance of advances
outstanding of $2.6 million or 12.3% and an increase in the average cost of
borrowed funds of 110 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.
14
The average cost of interest-bearing liabilities was 3.13% and 2.20%
for the three-month periods ended June 30, 2006 and 2005, respectively.
Provision for Loan Losses. During the three-month periods ended June
30, 2006 and 2005, the Company established provisions for loan losses of
$107,000 and $114,000, respectively. The $7,000, or 6.2% decrease reflects
management's evaluation of the growth in the overall loan portfolio and
underlying credit risk of the portfolio in determining the necessary level of
allowance for loan losses.
Noninterest Income. Total noninterest income, primarily fees and
service charges, increased $1,900 or 0.3% for the three-month period ended June
30, 2006, as compared to the same period in 2005. The Bank places 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 $96,000 or
6.7% for the three-month period ended June 30, 2006, as compared to the same
period in 2005. This increase was mainly attributable to an increase of $43,000
or 5.8% in compensation and benefits resulting from addition of employees at the
Bank and normal cost of living increases, an increase of $26,000 or 5.6% in
occupancy and operations expense due to increased costs to operate branches and
an increase of $23,000 or 23.8% in advertising and marketing expense as the Bank
increased the use of print and radio advertising. These increases were partially
offset by decreases of $14,000 and $9,000 in professional fees and loan
servicing costs, respectively.
Net Gain on Discontinued Operations. The net gain on discontinued
operations for the three-month period ending June 30, 2005 reflects the
performance of the Company's wholly owned subsidiary Armor Insurance Group, Inc.
(Armor) which was sold on October 1, 2004. The net gain for the three-month
period ended June 30, 2005 of $114,000 represents the final payment on the sale
of the business and the net proceeds for the sale of property and equipment
previously owned by Armor.
Income Tax Expense. The provision for income taxes on continuing
operations totaled $68,000 for the three-month period ended June 30, 2006 with
an effective tax rate of approximately 39.7%, as compared to $64,000 and an
effective tax rate of 37.9% for the same three-month period in 2005. The $4,000
or 7.4% increase is the result of increased 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, 2006, 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.
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.
(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 June 30, 2006 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.
----------------------------------------------------
Brian Bowers, Harry Fox, Peg Ohrt, and Gregory Devou elected as
directors to the Board of Director's of the Company at the Annual
Meeting of Shareholders, April 26, 2006.
Ratification of the appointment of Stegman & Company as the Company's
Independent auditor for the fiscal year ending December 31, 2006 at the
Annual Meeting of Shareholders, April 26, 2006
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: August 8, 2006 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, 2006 Date: August 8, 2006