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, 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
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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 November 11, 2006:
$0.10 Par Value Common Stock 882,108
- ---------------------------- ------------------
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
- ------- ---------------------- ----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2006 (unaudited)
and December 31, 2005 ..........................................................................1
Consolidated Statements of Operations for the nine and three month periods
ended September 30, 2006 and 2005 (unaudited)...................................................2
Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 2006 and 2005 (unaudited).....................................3
Notes to Consolidated Financial Statements (unaudited)..........................................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................................................9
ITEM 3. CONTROLS AND PROCEDURES..............................................................................17
PART II. OTHER INFORMATION
- ------- -----------------
ITEM 1. LEGAL PROCEEDINGS....................................................................................18
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS..........................................18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS..................................................18
ITEM 5. OTHER INFORMATION....................................................................................18
ITEM 6. EXHIBITS ............................................................................................18
SIGNATURES
BUCS FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
(Unaudited)
September 30 December 31
2006 2005
------------- -------------
ASSETS
------
Cash and cash equivalents $ 2,278,846 $ 2,246,408
Interest-bearing deposits in other financial institutions 7,307,852 6,773,975
Securities available for sale, at fair value 3,355,113 4,221,024
Securities held to maturity 6,721,198 7,623,787
Loans receivable 120,580,621 109,311,562
Allowance for loan losses (820,747) (732,315)
------------- -------------
Loans receivable, net 119,759,874 108,579,247
Accrued interest receivable 574,565 505,900
Property and equipment, net 3,690,898 3,837,801
Investment required by law - Federal Home Loan Bank Stock 1,444,200 1,583,500
Bank Owned Life Insurance 2,272,955 2,213,018
Prepaid Merger Costs 139,053 --
Prepaid expenses and other assets 1,280,751 1,064,424
------------- -------------
Total Assets $ 148,825,305 $ 138,649,084
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits $ 107,023,527 $ 95,554,243
Accounts payable and other liabilities 1,087,136 1,087,785
Borrowed funds - Federal Home Loan Bank 26,000,000 27,700,000
Guaranteed preferred beneficial interest in Company's
subordinated debt 3,000,000 3,000,000
------------- -------------
Total Liabilities 137,110,663 127,342,028
------------- -------------
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 September 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 6,578,647 6,177,720
Unallocated common stock held by Employee Stock Ownership
Plan ("ESOP") (168,532) (168,532)
Accumulated other comprehensive loss (13,491) (20,859)
------------- -------------
Total Stockholders' Equity 11,714,642 11,307,056
------------- -------------
Total Liabilities and Stockholders' Equity $ 148,825,305 $ 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 NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2006 AND 2005
(Unaudited)
Nine month periods ended Three month periods ended
September 30 September 30
----------------------- --------------------------
2006 2005 2006 2005
----------------------- --------------------------
Interest Income
Loans receivable $ 5,758,435 $4,369,508 $ 2,084,831 $ 1,560,149
Investment securities 581,970 548,784 198,850 187,518
----------------------- --------------------------
Total interest income 6,340,405 4,918,292 2,283,681 1,747,667
----------------------- --------------------------
Interest expense
Deposits 1,931,712 1,156,936 787,709 438,416
Borrowed funds 1,057,837 755,724 360,343 294,760
----------------------- --------------------------
Total interest expense 2,989,549 1,912,660 1,148,052 733,176
----------------------- --------------------------
Net interest income 3,350,856 3,005,632 1,135,629 1,014,491
Provision for loan losses 350,917 241,752 144,835 70,000
----------------------- --------------------------
Net interest income after provision for loan losses 2,999,939 2,763,880 990,794 944,491
----------------------- --------------------------
Noninterest income
Fees and service charges 2,065,420 1,862,507 824,338 679,544
Fee to process and maintain cash facility 90,000 90,000 30,000 30,000
Other 90,729 95,128 30,251 31,852
----------------------- --------------------------
Total noninterest income 2,246,149 2,047,635 884,589 741,396
----------------------- --------------------------
Noninterest expense
Compensation and benefits 2,412,303 2,244,019 812,627 771,051
Professional fees 183,323 188,385 70,822 59,935
Occupancy expense 834,773 820,960 278,588 268,176
Office operations 660,450 612,651 227,536 213,689
Advertising and marketing expense 295,304 226,913 107,087 68,203
Conference and training expense 106,360 94,790 34,929 24,767
Loan servicing expense 26,435 56,126 10,872 20,322
Other operating expense 62,079 72,357 19,960 28,123
----------------------- --------------------------
Total noninterest expense 4,581,027 4,316,201 1,562,421 1,454,266
----------------------- --------------------------
Income before income taxes 665,061 495,314 312,962 231,621
Income tax expense 264,134 182,214 123,553 88,648
----------------------- --------------------------
Income from continuing operations 400,927 313,100 189,409 142,973
Discontinued operations
Gain from operations of discontinued component - 214,339 - 4,298
Income tax expense - (82,964) - (1,661)
----------------------- --------------------------
Net gain on discontinued operation - 131,375 - 2,637
----------------------- --------------------------
Net income 400,927 444,475 189,409 145,610
Net change in unrealized gains/(losses) on securities
available for sale, net of deferred income tax benefit 7,368 (13,577) 19,856 (10,253)
----------------------- --------------------------
Total comprehensive income $ 408,295 $ 430,898 $ 209,265 $ 135,357
======================= ==========================
Earnings per share - basic
From continuing operations $ 0.48 $ 0.42 $ 0.23 $ 0.19
From discontinued operations 0.00 0.18 0.00 0.00
----------------------- --------------------------
Net Income $ 0.48 $ 0.60 $ 0.23 $ 0.19
======================= ==========================
Shares used in computing basic earnings per share 841,324 750,630 841,324 750,630
======================= ==========================
Earnings per share - diluted
From continuing operations $ 0.45 $ 0.40 $ 0.21 $ 0.19
From discontinued operations 0.00 0.17 0.00 0.00
----------------------- --------------------------
Net Income $ 0.45 $ 0.57 $ 0.21 $ 0.19
======================= ==========================
Shares used in computing diluted earnings per share 897,907 774,845 897,907 774,845
======================= ==========================
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 NINE MONTH PERIODS ENDED SEPTEMBER 30, 2006 AND 2005
(Unaudited)
Nine month periods ended
September 30,
----------------------------------
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 400,927 $ 444,475
Reconciliation of net income to net cash provided by
operating activities:
Provision for loan losses 350,917 241,752
Increase in cash surrender value of life insurance (59,937) (63,135)
Depreciation and amortization 310,996 329,708
Proceeds from sale of loans originated for sale 956,035 2,764,000
Origination of loans originated for sale (950,000) -
Gain on sale of loans originated for sale (6,035) -
Effects of changes in operating assets and liabilities:
Accrued interest receivable (68,665) (55,183)
Prepaid merger costs (139,053) -
Prepaid expenses and other assets (216,327) (129,166)
Accounts payable and other liabilities (5,284) (221,255)
------------ ------------
Net cash provided by operating activities 573,574 3,311,196
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (11,531,544) (14,337,070)
Net (increase) decrease in interest-bearing
deposits of other financial institutions (533,877) 201,736
Proceeds from maturities, redemption and sales
of securities available-for-sale 875,909 1,269,094
Proceeds from repayments on securities held-to-maturity 886,774 1,260,725
Redemption (purchase) of FHLB stock 139,300 (243,600)
Proceeds from sale of assets from discontinued component - 362,915
Purchase of property and equipment (146,272) (92,206)
------------ ------------
Net cash used in investing activities (10,309,710) (11,578,406)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in borrowed funds from the FHLB (1,700,000) 5,200,000
Net increase in deposits 11,469,284 5,873,925
Cash in lieu of fractional shares (710) -
------------ ------------
Net cash provided by financing activities 9,768,574 11,073,925
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 32,438 2,806,715
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,246,408 886,787
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,278,846 $ 3,693,502
============ ============
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 441,351 $ 534,664
============ ============
Cash paid for interest $ 2,966,590 $ 1,835,669
============ ============
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 NINE AND THREE MONTHS ENDED SEPTEMBER 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 nine and three month
periods ended September 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 September 30, 2006, the results of its operations and cash flows
for the nine and three month periods ended September 30, 2006. The results of
the interim periods are not necessarily indicative of the results expected for
the full fiscal year or any other period.
4
USE OF ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NOTE 3 - 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 nine month period
ended September 30, 2005. The assets were comprised of office condominium units
in Ellicott City, Maryland and office equipment. Additionally, during the nine
months ended September 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 nine month periods ended September 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 outstanding securities, such as options and
warrants. At September 30, 2006, the Company had 95,586 options outstanding.
None of the outstanding options had any antidilutive effects on earnings per
share for the nine and three months ended September 30, 2006 or September 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.
NOTE 5 - STOCK-BASED COMPENSATION
------------------------
At September 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
5
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 nine and three month periods ended September 30, 2006 the Company did
not award any stock option grants, and the Company 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
$22.50 the aggregate intrinsic value of stock options outstanding and
exercisable at September 30, 2006 was $1,273,206.
The following table summarizes the stock option activity for the periods
indicated:
Nine months ended Year ended
September 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 September 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 5.58 $ 8.73 24,926 $ 8.73
9.34 70,660 6.92 9.34 70,660 9.34
------ ------ ---- ------ ------ ------
$ 8.73 - $ 9.34 95,586 6.57 $ 9.18 95,586 $ 9.18
---------------- ------ ---- ------ ------ ------
6
NOTE 6 - PREPAID MERGER COSTS
--------------------
On September 6, 2006, the Registrant and Community Banks, Inc. ("Community")
announced the execution of a definitive agreement pursuant to which the
Registrant will merge into Community, with Community as the surviving
corporation. Completion of the merger is subject to various conditions including
the approval of the Registrant's stockholders and receipt of all required
regulatory approvals. The parties anticipate that the merger will be consummated
by April 1, 2007, assuming satisfaction of all conditions.
NOTE 7 - 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
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
7
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 NINE AND THREE MONTHS ENDED SEPTEMBER 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 $148.8 million at September 30, 2006
reflect an increase of $10.2 million as compared to $138.6 million at December
31, 2005. The increase in assets was comprised of increases in cash and cash
equivalents, interest bearing deposits in other financial institutions, loans
receivable, net, accrued interest receivable, bank owned life insurance, prepaid
merger costs, and prepaid expenses and other assets of $32,000, $534,000, $11.2
million, $69,000, $60,000, $139,000 and $216,000, respectively. These were
partially offset by decreases in securities available for sale, securities held
to maturity, property and equipment, net and investment in Federal Home Loan
Bank stock of $866,000, $903,000, $147,000 and $139,000, respectively.
9
The increase in the Company's total liabilities and stockholders' equity of
$10.2 million at September 30, 2006 as compared to December 31, 2005 was due
primarily to increases in deposits and stockholders' equity of $11.5 million and
$408,000, respectively, partially offset by a decrease in borrowed funds from
the Federal Home Bank of $1.7 million. Changes in the components of major
assets, liabilities and equity are discussed herein.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents totaled approximately
$2.3 million at September 30, 2006, a decrease of $32,000 or 1.4% as compared to
$2.25 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.
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 $7.3 million
at September 30, 2006, an increase of $534,000 or 7.9% as compared to $6.8
million at December 31, 2005. This increase was primarily the result of the Bank
investing excess cash in higher yielding short-term investments pending
anticipated increases in loan demand.
INVESTMENT SECURITIES AVAILABLE FOR SALE. Investment securities available
for sale decreased by $866,000 or 20.5% to $3.4 million at September 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
$903,000 or 11.8% to $6.7 million at September 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
September 30, 2006 totaled $119.8 million, an increase of $11.2 million or
approximately 10.3%, as compared to $108.6 million at December 31, 2005.
Originations of $40.6 million, which includes $15.6 million of consumer loans
including home equity loans, $7.5 million in first mortgage loans on one to four
family residences and $17.5 million of commercial loans in the Bank's prime
lending area, were offset by principal repayments and loan participations sold
totaling $29.4 million.
BANK OWNED LIFE INSURANCE. The cash value of Bank Owned Life Insurance
policies (BOLI) owned by the Bank increased to $2.27 million at September 30,
2006 from $2.21 million at December 31, 2005, an increase of 2.7%.
10
PREPAID MERGER COSTS. On September 5, 2006, the Company announced that the
board of directors had approved a merger with Community Banks, Inc. of
Harrisburg, Pennsylvania. Thus far, the Company has accumulated $139,000 in
costs, mostly attorney fees, relating to the merger. No similar expenses existed
at December 31, 2005.
PREPAID EXPENSES AND OTHER ASSETS. Prepaid expenses and other assets
increased by $216,000 or 20.3% to $1.28 million at September 30, 2006 compared
to $1.06 million at December 31, 2005. The increase is primarily the result of
an increase in accounts receivable of $191,000 that resulted when the Bank sold
a foreclosed property during September 2006. The proceeds of the sale have not
yet been received from the attorney.
DEPOSITS. Total deposits, after interest credited, increased by $11.5
million or 12.0% to $107.0 million at September 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. These factors resulted in increases in
non-interest bearing checking, money market and certificate of deposit account
balances of approximately $1.5 million, $10.1 million and $6.6 million,
respectively. These increases were partially offset by decreases in regular
savings balances and floating rate individual retirement account balances of
approximately $6.1 million and $611,000, respectively.
FHLB ADVANCES. FHLB advances totaled $26.0 million at September 30, 2006 a
decrease of $1.7 million or 6.1% 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 $11.7 million at
September 30, 2006, an increase of $408,000 from $11.3 million at December 31,
2005. The increase was due to net income from operations during the period of
$401,000, and a decrease in accumulated other comprehensive loss of $7,000
resulting from a increase in the fair value of investment securities available
for sale.
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 $44.4 million from the Federal Home Loan Bank
of Atlanta, of which approximately $18.4 million was available to fund liquidity
needs at September 30, 2006. Based upon its liquidity analysis, including
external sources of available liquidity, management believes the liquidity
position is appropriate at September 30, 2006.
11
The following is a schedule of significant commitments at September 30,
2006:
Commitments to extend credit: (In thousands)
Commitments to originate non-residential, commercial mortgages $ 850
Commitments to originate non-mortgage commercial loans 1,419
Unused home equity lines of credit 26,061
Unused commercial lines of credit 4,708
Commercial Letters of Credit 100
Other commitments to extend credit 4,639
---------
Total Commitments to extend credit $ 37,777
========
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
NET INCOME. The Company recorded net income from continuing operations of
$401,000 for the nine-month period ended September 30, 2006 as compared to
$313,000 for the same period in 2005, an increase of 28.1%. Net interest income
increased $345,000 and noninterest income increased by $199,000, while
noninterest expense increased by $265,000, the provision for loan losses
increased by $109,000, and the provision for income taxes on continuing
operations increased by $82,000. For the nine-month period ended September 30,
2005, the Company also recorded a net gain on discontinued operations of
$131,000 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 $345,000 or 11.5% for
the nine-month period ended September 30, 2006, as compared to the same period
in 2005. The average balance of interest-earning assets increased $13.9 million
or 11.9%, and the average yield thereon increased by 85 basis points. The
average balance of interest-bearing liabilities increased $12.9 million or
11.4%, and the average rate paid thereon increased 91 basis points. The increase
in interest-bearing liabilities is attributed primarily to positive cash flows
resulting from an increase in average deposits of $9.0 million or 9.8% and an
increase in average short-term borrowings of $4.0 million or 18.2%. The average
cost of interest-bearing liabilities increased faster than the average yield on
interest-earning assets because most of the deposit growth came in higher
costing money market and certificate of deposit accounts as the Federal Reserve
increased interest rates during 2005 and early 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 nine-month period ended September 30, 2006 from 3.38% for the same
period in 2005. The 5 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 $1.4 million or 28.9% to $6.3
million for the nine-month period ended September 30, 2006, as compared to $4.9
million for the same period in 2005. Interest on loans receivable increased $1.4
million or 31.8% for the nine-month period ended September 30, 2006, as compared
to the same period in 2005. The increase is the result of a $16.6 million or
16.9% increase in the average balance of loans receivable and a 76 basis point
increase in the average yield on loans receivable.
Interest income on investment securities increased by $33,000 or 6.0% for
the nine-month period ended September 30, 2006, as compared to the same period
in 2005. The increase is the result of a 94 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 6.49% and 5.63% for
the nine-month periods ended September 30, 2006 and 2005, respectively.
12
INTEREST EXPENSE. Interest expense totaled $3.0 million for the nine-month
period ended September 30, 2006, as compared to $1.9 million for the same period
in 2005, an increase of $1.1 million, or 56.3%. The increase is due to an
increase in the average balance of interest-bearing liabilities of $12.9 million
or 11.4% and an increase in the average rate paid thereon of 91 basis points.
Interest expense on deposits increased $775,000 or 67.0% for the nine-month
period ended September 30, 2006, as compared to the same period in 2005. The
increase was due to an increase of $9.0 million or 9.8% in average deposits and
a 88 basis point increase in the average cost of deposits.
Interest on borrowed funds increased by $302,000 or 39.9% for the
nine-month period ended September 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 $4.0 million or 18.2% and an increase in the average cost of
borrowed funds of 85 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 3.16% and 2.25% for
the nine-month periods ended September 30, 2006 and 2005, respectively.
PROVISION FOR LOAN LOSSES. During the nine-month periods ended September
30, 2006 and 2005, the Company established provisions for loan losses of
$351,000 and $242,000, respectively. The $109,000, or 45.2% increase is the
result of continued growth in the total loan portfolio and management's
evaluation of the underlying credit risk of the portfolio.
NONINTEREST INCOME. Total noninterest income, primarily fees and service
charges, increased $199,000 or 9.7% for the nine-month period ended September
30, 2006, as compared to the same period in 2005. This increase is primarily due
to an increase in checking account related fees and VISA Check card interchange
income totaling $233,000 as the Bank continued to open new checking accounts
during 2006. The increase was partially offset by declines in other fees,
especially commercial loan related fees and ATM transaction fees totaling
$34,000. 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 $265,000 or
6.1% for the nine-month period ended September 30, 2006, as compared to the same
period in 2005. This increase was mainly attributable to increases of $168,000
or 7.5% in compensation and benefits resulting from addition of employees at the
Bank as well as normal cost of living increases, $68,000 or 30.1% in marketing
and advertising expense as the Bank increased print and radio advertising to
help compete for loans and deposits, and $62,000 or 4.3% in various operating
expenses, primarily office occupancy and operating expenses. The increases were
partially offset by decreases in other expense categories including professional
fees and loan servicing expenses that decreased by $45,000 or 14.2%.
INCOME TAX EXPENSE. The provision for income taxes on continuing operations
totaled $264,000 for the nine-month period ended September 30, 2006 with an
effective tax rate of approximately 39.7%, as compared to $182,000 and an
effective tax rate of 36.8% for the same nine-month period in 2005. The $82,000
or 45.0% increase is the result of increased net taxable income from continuing
operations.
13
NET GAIN ON DISCONTINUED OPERATIONS. The net gain on discontinued
operations for the nine-month period ending September 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 nine-month
period ended September 30, 2005 of $131,000 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
NET INCOME. The Company recorded net income from continuing operations of
$189,000 for the three-month period ended September 30, 2006, as compared to
$143,000 for the same period in 2005, representing a $46,000 or 32.5% increase.
Net interest income increased $121,000 and noninterest income increased by
$143,000 while noninterest expense increased by $108,000, the provision for loan
losses decreased by $75,000, and the provision for income taxes on continuing
operations increased by $35,000. For the three-month period ended September 30,
2005, the Company also recorded a net gain on discontinued operations of $2,600
resulting from final disposition of the assets of its Armor Insurance Group,
Inc. wholly owned subsidiary which was sold in October 2004. Changes in the
components of income and expense are discussed herein.
NET INTEREST INCOME Net interest income increased $121,000 or 11.9% for the
three-month period ended September 30, 2006, as compared to the same period in
2005. The average balance of interest-earning assets increased $15.4 million or
12.9%, and the average yield thereon increased by 92 basis points. The average
balance of interest-bearing liabilities increased $14.4 million or 12.4%, and
the average rate paid thereon increased 99 basis points. The increase in
interest-bearing liabilities is attributed to an increase in average deposits of
$13.7 million or 14.8% and an increase in short-term borrowings of $766,000 or
3.2%. 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.
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 3.26% for the three-month period ended September 30, 2006 from
3.33% 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 during the three-month period ended
September 30, 2006 as compared to the same period in 2005.
INTEREST INCOME. Interest income increased $536,000 or 30.7% to $2.28
million for the three-month period ended September 30, 2006, as compared to
$1.75 million for the same period in 2005.
Interest on loans receivable increased $525,000 or 33.7% for the
three-month period ended September 30, 2006, as compared to the same period in
2005. The increase is mainly the result of an $18.0 million or 17.8% increase in
the average balance of loans receivable and an 83 basis point increase in the
average yield on loans.
Interest income on investment securities increased by $11,000 or 6.0% for
the three-month period ended September 30, 2006, as compared to the same period
in 2005. The increase is the result of a 98 basis point increase in the average
yield on investment securities, partially offset by a $3,000 or 14.4% decline in
the average balance of investment securities.
14
The average yield on all interest-earning assets was 6.77% and 5.85% for
the three-month periods ended September 30, 2006 and 2005, respectively.
INTEREST EXPENSE. Interest expense totaled $1.15 million for the
three-month period ended September 30, 2006, as compared to $733,000 for the
same period in 2005, an increase of $415,000, or 56.6%. The average balance of
interest-bearing liabilities increased $14.4 million or 12.4% while the average
rate paid thereon increased by 99 basis points
Interest expense on deposits increased $349,000 or 79.7% for the
three-month period ended September 30, 2006, as compared to the same period in
2005. The increase was due to an increase of $13.7 million or 14.8% in the
average balance of deposits and an increase of 108 basis points in the rate paid
thereon.
Interest on borrowed funds increased by $66,000 or 22.2% for the
three-month period ended September 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 $766,000 or 3.2% and an increase in the average cost of borrowed
funds of 91 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 3.51% and 2.52% for
the three-month periods ended September 30, 2006 and 2005, respectively.
PROVISION FOR LOAN LOSSES. During the three-month periods ended September
30, 2006 and 2005, the Company established provisions for loan losses of
$145,000 and $70,000, respectively. The $75,000, or 106.9% increase reflects
management's evaluation of the continuing rapid 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 $143,000 or 19.3% for the three-month period ended September
30, 2006, as compared to the same period in 2005. The increase is due mainly to
increased checking account and VISA check card related fees as the Bank
continued to open new checking accounts at all its branches. 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 $108,000 or
7.4% for the three-month period ended September 30, 2006, as compared to the
same period in 2005. This increase was mainly attributable to an increase of
$42,000 or 5.4% in compensation and benefits resulting from addition of
employees at the Bank and normal cost of living increases, an increase of
$39,000 or 57.0% in advertising and marketing expense as the Bank increased
print and radio advertising of deposit and loan products, and increases in
occupancy, office operations, professional fees, and training expenses totaling
$45,000 or 8.0% as the Bank continued to grow. These increases were partially
offset by decreases in loan servicing and other operating expenses of $18,000,
or 36.4%.
INCOME TAX EXPENSE. The provision for income taxes on continuing operations
totaled $124,000 for the three-month period ended September 30, 2006 with an
effective tax rate of approximately 39.5%, as compared to $89,000 and an
effective tax rate of 38.3% for the same
15
three-month period in 2005. The $35,000 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 September 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.
16
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.
17
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, 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.
---------------------------------------------------
None.
ITEM 5. OTHER INFORMATION.
-----------------
On September 6, 2006, the Registrant and Community Banks, Inc.
("Community") announced the execution of a definitive agreement pursuant to
which the Registrant will merge into Community, with Community as the surviving
corporation. The Registrant's stockholders will receive for each share of the
Registrant's common stock either $24.00 in cash or shares of Community common
stock having an approximate value of $24.00 with the precise exchange ratio to
be established at closing based on Community's stock price prior to completion
of the merger. The total purchase price is approximately $22.6 million, with
between 50% and 65% to be paid in shares of Community common stock. Completion
of the merger is subject to various conditions including the approval of the
Registrant's stockholders and receipt of all required regulatory approvals. The
parties anticipate that the merger will be consummated by April 1, 2007,
assuming satisfaction of all conditions. For more information, please refer to
the Registrant's Current Report on Form 8-K filed on September 7, 2006.
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
18
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 14, 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: November 14, 2006 Date: November 14, 2006