UNITED STATES
SECURITY AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20849
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD
COMMISSION FILE NUMBER 0-50237
VSB Bancorp, Inc.
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(Name of Small Business Issuer in its charter)
New York
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(State or other jurisdiction of incorporation or organization)
11 - 3680128
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(I. R. S. Employer Identification No.)
3155 Amboy Road, Staten Island, New York 10306
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(Address of principal executive offices)
(718) 979-1100
-------------------------
Issuer's telephone number
Common Stock
----------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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]
Transitional small business disclosure format: Yes [ ] No [X]
The Registrant had 1,891,027 common shares outstanding as of May 3, 2006.
CROSS REFERENCE INDEX
PART I
Page
----
Item 1 Consolidated Statements of Financial Condition as of March 31, 2006 and
December 31, 2005 (unaudited). 4
Consolidated Statements of Operations for the Three Months Ended
March 31, 2006 and 2005 (unaudited) 5
Consolidated Statements of Changes in Stockholders' Equity for the Three Months Ended
March 31, 2006 and the Year Ended December 31, 2005 (unaudited) 6
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2006 and 2005 (unaudited) 7
Notes to Consolidated Financial Statements for the Three Months Ended
March 31, 2006 and 2005 (unaudited) 8 to 13
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 to 20
Item 3 Control and Procedures 20
PART II
Item 1 Legal Proceedings 20 to 21
Item 4 Submission of Matters to a Vote of Security Holders 22
Signature Page 23
Exhibit 31.1, 31.2, 32.1, 32.2 24 to 27
2
Forward-Looking Statements
When used in this periodic report, or in any written or oral statement
made by us or our officers, directors or employees, the words and phrases "will
result," "expect," "will continue," "anticipate," "estimate," "project," or
similar terms are intended to identify "forward-looking statements." A variety
of factors could cause our actual results and experiences to differ materially
from the anticipated results or other expectations expressed in any
forward-looking statements. Some of the risks and uncertainties that may affect
our operations, performance, development and results, the interest rate
sensitivity of our assets and liabilities, and the adequacy of our loan loss
allowance, include, but are not limited to:
o deterioration in local, regional, national or global economic
conditions which could result in, among other things, an increase in
loan delinquencies, a decrease in property values, or a change in
the real estate turnover rate;
o changes in market interest rates or changes in the speed at which
market interest rates change;
o changes in laws and regulations affecting the financial service
industry;
o changes in competition; and
o changes in consumer preferences by our customers or the customers of
our business borrowers.
Please do not place undue reliance on any forward-looking statement,
which speaks only as of the date made. There are many factors, including those
described above, that could affect our future business activities or financial
performance and could cause our actual future results or circumstances to differ
materially from those we anticipate or project. We do not undertake any
obligation to update any forward-looking statement after it is made.
3
VSB Bancorp, Inc.
Consolidated Statements of Financial Condition
(unaudited)
March 31, December 31,
2006 2005
------------- -------------
Assets:
Cash and due from banks $ 30,926,808 $ 31,324,147
Investment securities, available for sale 111,187,745 106,023,293
Loans receivable 70,877,036 73,944,105
Allowance for loan loss (1,181,859) (1,153,298)
------------- -------------
Loans receivable, net 69,695,177 72,790,807
Bank premises and equipment, net 1,360,996 1,441,087
Accrued interest receivable 751,858 728,627
Deferred taxes 2,762,337 2,298,195
Other assets 1,661,689 1,169,556
------------- -------------
Total assets $ 218,346,610 $ 215,775,712
============= =============
Liabilities and stockholders' equity:
Liabilities:
Deposits:
Demand and checking $ 71,959,437 $ 66,692,436
NOW 23,701,324 23,574,056
Money market 22,317,394 20,177,240
Savings 13,672,742 14,809,010
Time 63,152,428 67,731,273
------------- -------------
Total Deposits 194,803,325 192,984,015
Escrow deposits 908,931 267,144
Subordinated debt 5,155,000 5,155,000
Accounts payable and accrued expenses 2,558,856 2,553,208
------------- -------------
Total liabilities 203,426,112 200,959,367
------------- -------------
Employee Stock Ownership Plan Repurchase Obligation 273,878 284,411
Stockholders' equity:
Common stock, ($.0001 par value, 3,000,000 shares
authorized, 1,887,278 issued and outstanding at
March 31, 2006 and 1,887,278 issued and
outstanding at December 31, 2005) 151 151
Additional paid in capital 8,751,712 8,743,200
Retained earnings 9,211,604 8,621,693
Unallocated ESOP Shares (1,366,714) (1,408,983)
Accumulated other comprehensive loss,
net of taxes of $1,701,118 and $1,242,278,
respectively (1,950,133) (1,424,127)
------------- -------------
Total stockholders' equity 14,646,620 14,531,934
------------- -------------
Total liabilities and stockholders'
equity $ 218,346,610 $ 215,775,712
============= =============
See notes to consolidated financial statements.
4
VSB Bancorp, Inc.
Consolidated Statements of Operations
(unaudited)
Three months Three months
ended ended
March 31, 2006 March 31, 2005
-------------- --------------
Interest and dividend income:
Loans receivable $ 1,748,773 $ 1,300,636
Investment securities 1,205,762 1,319,485
Other interest earning assets 179,448 66,305
-------------- --------------
Total interest income 3,133,983 2,686,426
Interest expense:
NOW 23,203 22,025
Money market 84,216 54,047
Savings 18,334 18,227
Subordinated debt 89,040 89,040
Time 453,883 187,117
-------------- --------------
Total interest expense 668,676 370,456
-------------- --------------
Net interest income 2,465,307 2,315,970
Provision (credit) for loan loss 25,000 (30,000)
-------------- --------------
Net interest income
after provision for loan loss 2,440,307 2,345,970
-------------- --------------
Non-interest income:
Loan fees 22,767 23,459
Service charges on deposits 389,756 404,017
Net rental income 3,375 11,063
Other income 67,651 20,896
-------------- --------------
Total non-interest income 483,549 459,435
-------------- --------------
Non-interest expenses:
Salaries and benefits 1,032,077 938,496
Occupancy expenses 259,460 246,760
Legal expense 58,874 9,924
Professional fees 48,000 75,000
Computer expense 60,528 54,812
Director's fees 55,900 43,175
Other expenses 304,434 233,643
-------------- --------------
Total non-interest expenses 1,819,273 1,601,810
-------------- --------------
Income before income taxes 1,104,583 1,203,595
Provision/(benefit) for income taxes:
Current 519,974 558,302
Deferred (5,302) 2,501
-------------- --------------
Total provision for income taxes 514,672 560,803
-------------- --------------
Net income $ 589,911 $ 642,792
============== ==============
Basic income per common share $ 0.33 $ 0.36
============== ==============
Diluted net income per share $ 0.32 $ 0.35
============== ==============
Comprehensive income/(loss) $ 63,905 $ (247,392)
============== ==============
Book value per common share $ 7.91 $ 6.70
============== ==============
All per share data has been adjusted for the 5 for 4 stock split, in the form of
a 25% stock dividend, payable on May 18, 2006.
See notes to consolidated financial statements.
5
VSB Bancorp, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Year Ended December 31, 2005 and Three Months Ended March 31, 2006
(unaudited)
Accumulated
Number of Additional Unallocated Other Total
Common Common Paid-In Retained ESOP Comprehensive Stockholders'
Shares Stock Capital Earnings Shares Loss Equity
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 2004 1,881,278 $ 150 $ 8,818,313 $ 6,054,264 $ (1,578,061) $ (465,045) $ 12,829,621
Exercise of stock option 6,000 1 63,731 63,732
Amortization of earned
portion of ESOP
common stock 169,078 169,078
Amortization of excess
fair value over cost
- ESOP 18,742 18,742
Transfer from ESOP
repurchase
obligation (157,586) (157,586)
Comprehensive income:
Net income 2,567,429 2,567,429
Other comprehensive
income, net:
Unrealized holding
loss arising
during the year -- -- -- -- -- (959,082) (959,082)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total comprehensive
income 1,608,347
Balance at
December 31, 2005 1,887,278 $ 151 $ 8,743,200 $ 8,621,693 $ (1,408,983) $ (1,424,127) $ 14,531,934
------------ ------------ ------------ ------------ ------------ ------------ ------------
Amortization of earned
portion of ESOP
common stock 42,269 42,269
Amortization of excess
fair value over cost
- ESOP (2,021) (2,021)
Transfer from ESOP
repurchase
obligation 10,533 10,533
Comprehensive income:
Net income 589,911 589,911
Other comprehensive
income, net:
Unrealized holding
loss arising
during the year -- -- -- -- -- (526,006) (526,006)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total comprehensive
income 63,905
Balance at
March 31, 2006 1,887,278 $ 151 $ 8,751,712 $ 9,211,604 $ (1,366,714) $ (1,950,133) $ 14,646,620
============ ============ ============ ============ ============ ============ ============
See notes to consolidated financial statements.
All per share data has been adjusted for the 5 for 4 stock split, in the form of
a 25% stock dividend, payable on May 18, 2006.
6
VSB Bancorp, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Three months Three months
ended ended
March 31, 2006 March 31, 2005
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 589,911 $ 642,792
Adjustments to reconcile net income to net cash
used in operating activities
Depreciation and amortization 102,325 113,936
Accretion of income, net of amortization of premium (90,622) (24,937)
ESOP compensation expense 40,248 43,179
Provision/(credit) for loan losses 25,000 (30,000)
Increase in prepaid and other assets (492,133) (220,906)
(Increase)/decrease in accrued interest receivable (23,231) 23,536
(Increase)/decrease in deferred income taxes (5,302) 2,501
Increase in accrued expenses and other liabilities 5,648 346,679
-------------- --------------
Net cash provided by operating activities 151,844 896,780
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in loan receivable 3,169,202 1,669,904
Proceeds from repayment of investments securities,
available for sale 4,812,832 7,127,909
Purchase of investments securities, available for sale (10,970,080) --
Purchase of premises and equipment (22,234) (7,417)
-------------- --------------
Net cash( used in)/provided by investing activities (3,010,280) 8,790,396
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 2,461,097 (11,744,752)
-------------- --------------
Net cash provided by/(used in) financing activities 2,461,097 (11,744,752)
-------------- --------------
NET INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS (397,339) (2,057,576)
-------------- --------------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 31,324,147 35,659,073
-------------- --------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 30,926,808 $ 33,601,497
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 794,699 $ 363,000
============== ==============
Taxes $ 384,889 $ 237,812
============== ==============
See notes to consolidated financial statements.
7
VSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
2006 AND 2005 (UNAUDITED)
--------------------------------------------------------------------------------
1. GENERAL
VSB Bancorp, Inc. ("Bancorp" or "Company") became the holding company for
Victory State Bank ("Bank"), a New York State chartered commercial bank on May
30, 2003 as the result of a reorganization of the Bank into the holding company
form of organization. Through the Bank, the Company is primarily engaged in the
business of commercial banking, and to a lesser extent retail banking, in Staten
Island New York. The stockholders of the Bank became the stockholders of VSB
Bancorp, Inc. as a result of the reorganization, receiving three shares of VSB
Bancorp, Inc. stock for each two shares of Victory State Bank stock. Each
stockholder owned the same percentage interest in VSB Bancorp immediately after
the reorganization that the stockholder owned in the Bank immediately before the
reorganization, subject to immaterial differences due to adjustments for cash in
lieu of fractional shares. VSB Bancorp now owns 100% of the capital stock of the
Bank. No stockholders of the Bank exercised dissenter's rights to receive cash
instead of shares of the Company. The transaction between these entities under
common control was accounted for at historical cost on an "as if pooled basis".
Through the Bank, the Company is primarily engaged in the business of
commercial banking, and to a lesser extent retail banking. The Bank gathers
deposits from individuals and businesses primarily in Staten Island, New York
and makes loans throughout that community. The Bank invests funds that are not
used for lending primarily in government securities, mortgage backed securities
and collateralized mortgage obligations. Customer deposits are insured, up to
the applicable limit, by the Federal Deposit Insurance Corporation ("FDIC"). The
Bank is supervised by the New York State Banking Department and the FDIC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting and reporting
policies followed in preparing and presenting the accompanying consolidated
financial statements. These policies conform with accounting principles
generally accepted in the United States of America ("GAAP").
Principles of Consolidation - The consolidated financial statements of the
Company include the accounts of the Company, including its subsidiary Victory
State Bank. All significant inter-company accounts and transactions between the
Company and Bank have been eliminated in consolidation.
Use of Estimates - The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the amounts
of revenues and expenses during the reporting period. Actual results can differ
from those estimates. The allowance for loan losses, prepayment estimates on the
mortgage-backed securities and Collateralized Mortgage Obligation portfolios,
contingencies and fair values of financial instruments are particularly subject
to change.
Reclassifications - Some items in the prior year financial statements were
reclassified to conform to the current presentation.
Cash and Cash Equivalents - Cash and cash equivalents consists of cash on
hand, due from banks and interest-bearing deposits. Net cash flows are reported
for customer loan and deposit transactions and interest-bearing deposits.
Regulation D of the Board of Governors of the Federal Reserve system requires
that Victory State Bank maintain non-interest-bearing deposits or cash on hand
as reserves against its demand deposits. The amount of reserves which Victory
State Bank is required to maintain depends upon its level of transaction
accounts. During the fourteen day period from March 30, 2006 through April 12,
8
2006, Victory State Bank was required to maintain reserves, after deducting
vault cash, of $3,496,000. Reserves are required to be maintained on a fourteen
day basis, so, from time to time, Victory State Bank may use available cash
reserves on a day to day basis, so long as the fourteen day average reserves
satisfy Regulation D requirements. Victory State Bank is required to report
transaction account levels to the Federal Reserve on a weekly basis.
Interest-bearing bank balances - Interest-bearing bank balances mature
overnight and are carried at cost.
Investment Securities, Available for Sale - Investment securities,
available for sale, are to be held for an unspecified period of time and include
securities that management intends to use as part of its asset/liability
strategy. These securities may be sold in response to changes in interest rates,
prepayments or other factors and are carried at estimated fair value. Gains or
losses on the sale of such securities are determined by the specific
identification method. Interest income includes amortization of purchase premium
and accretion of purchase discount. Premiums and discounts are recognized in
interest income using a method that approximates the level yield method without
anticipating prepayments, except for mortgage-backed securities where
prepayments are estimated. Unrealized holding gains or losses, net of deferred
income taxes, are excluded from earnings and reported as other comprehensive
income in a separate component of stockholders' equity until realized. Declines
in the fair value of securities below their cost that are other than temporary
are reflected as realized losses. In estimating other-than-temporary losses,
management considers: (1) the length of time and extent that fair value has been
less than cost, (2) the financial condition and near term prospects of the
issuer, and (3) the Company's ability and intent to hold the security for a
period sufficient to allow for any anticipated recovery in fair value.
The Company invests primarily in agency Collateralized Mortgage-Backed
Obligations ("CMOs") with estimated average lives primarily under 4.5 years and
Mortgage-Backed Securities. These securities are primarily issued by the Federal
National Mortgage Association ("FNMA"), the Government National Mortgage
Association ("GNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") and
are primarily comprised of mortgage pools guaranteed by FNMA, GNMA or FHLMC. The
Company also invests in whole loan CMOs, all of which are AAA rated. These
securities expose the Company to risks such as interest rate, prepayment and
credit risk and thus pay a higher rate of return than comparable treasury
issues.
Loans Receivable - Loans receivable, that management has the intent and
ability to hold for the foreseeable future or until maturity or payoff, are
stated at unpaid principal balances, adjusted for deferred net origination and
commitment fees and the allowance for loan losses. Interest income on loans is
credited as earned.
It is the policy of the Company to provide a valuation allowance for
probable incurred losses on loans based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations which
may affect the borrower's ability to repay, estimated value of underlying
collateral and current economic conditions in the Company's lending area. The
allowance is increased by provisions for loan losses charged to earnings and is
reduced by charge-offs, net of recoveries. While management uses available
information to estimate losses on loans, future additions to the allowance may
be necessary based upon the expected growth of the loan portfolio and any
changes in economic conditions beyond management's control. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on judgments
different from those of management. Management believes, based upon all relevant
and available information, that the allowance for loan losses is adequate.
The Company has a policy that all loans 90 days past due are placed on
non-accrual status. It is the Company's policy to cease the accrual of interest
on loans to borrowers past due less than 90 days where a probable loss is
estimated and to reverse out of income all interest that is due. The Company
applies payments received on non-accrual loans to the outstanding principal
balance due. On a limited basis, the Company may apply a payment to interest on
a non-accrual loan if there is no impairment or no estimatible loss on this
asset. The Company continues to accrue interest on construction loans that are
90 days past contractual maturity date if the loan is expected to be paid in
full in the next 60 days and all interest is paid up to date.
9
Loan origination fees and certain direct loan origination costs are
deferred and the net amount recognized over the contractual loan terms using the
level-yield method, adjusted for periodic prepayments in certain circumstances.
The Company considers a loan to be impaired when, based on current
information, it is probable that the Company will be unable to collect all
principal and interest payments due according to the contractual terms of the
loan agreement. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Impairment is measured on a
loan by loan basis for commercial and construction loans. Impaired loans are
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral. The fair value of
the collateral, as reduced by costs to sell, is utilized if a loan is collateral
dependent. Large groups of smaller balance homogeneous loans, such as consumer
loans and residential loans, are collectively evaluated for impairment.
Long-Lived Assets - The Company periodically evaluates the recoverability
of long-lived assets, such as premises and equipment, to ensure the carrying
value has not been impaired. In performing the review for recoverability, the
Company would estimate the future cash flows expected to result from the use of
the asset. If the sum of the expected future cash flows is less than the
carrying amount an impairment will be recognized. The Company reports these
assets at the lower of the carrying value or fair value.
Subordinated Debt - In August of 2003, the Company formed VSB Capital Trust
I (the "Trust"). The Trust is a statutory business trust organized under
Delaware law and the Company owns all of its common securities. The Trust issued
$5.0 million of Trust Preferred Capital Securities to an independent investor
and $155,000 of common securities to the Company. The Company issued a $5.16
million subordinated debenture to the Trust. The subordinated debenture is the
sole asset of the Trust. The subordinated debenture and the Trust Preferred
Capital Securities pay interest and dividends, respectively, on a quarterly
basis, at a rate of 6.909%, for the first five years. They mature thirty years
after the issuance of the securities and are non-callable for five years. After
the first five years, the Trust Preferred Securities may be called by the
Company at any quarterly interest payment date at par and the rate of interest
that fluctuates quarterly based upon 300 basis points over the 90 day LIBOR
rate. The Trust is not consolidated with the Company.
Premises and Equipment - Premises, leasehold improvements, and furniture
and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization are accumulated by the straight-line method over
the estimated useful lives of the respective assets, which range from three to
ten years. Leasehold improvements are amortized at the lesser of their useful
life or the term of the lease.
Federal Home Loan Bank (FHLB) Stock - The Bank is a member of the FHLB
system. Members are required to own a certain amount of stock based on the level
of borrowings and other factors, and may invest in additional amounts. FHLB
stock is carried at cost, classified as a restricted security, and periodically
evaluated for impairment. Because this stock is viewed as a long term
investment, impairment is based on ultimate recovery of par value. Both cash and
stock dividends are reported as income.
Income Taxes - The Company utilizes the liability method to account for
income taxes. Under this method, deferred tax assets and liabilities are
determined on differences between financial reporting and the tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
expected to be in effect when the differences are expected to reverse. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
Financial Instruments - In the ordinary course of business, the Company has
entered into off-balance sheet financial instruments, primarily consisting of
commitments to extend credit.
Basic and Diluted Net Income Per Common Share - Basic net income per share
of common stock is based on 1,811,906 and 1,795,368, the weighted average number
of common shares outstanding for the three months ended March 31, 2006 and 2005,
respectively. Diluted net income per share of common stock is based on 1,858,416
and 1,857,212, the weighted average number of common shares and potentially
dilutive common shares outstanding for the three months ended March 31, 2006 and
10
2005, respectively. The weighted average number of potentially dilutive common
shares excluded in calculating diluted net income per common share due to the
anti-dilutive effect is 72,716 and 52,980 shares for the three months ended
March 31, 2006 and 2005, respectively. Common stock equivalents were calculated
using the treasury stock method. All per share data throughout this report has
been adjusted to reflect, retroactively, a 5 for 4 stock split, in the form of a
25% stock dividend, that was declared by the Board of Directors to stockholders
of record on May 3, 2006.
The reconciliation of the numerators and the denominators of the basic and
diluted per share computations for the three months ended March 31, are as
follows:
2006 2005
------------------------------------ ------------------------------------
Weighted Weighted
Net Average Per Share Net Average Per Share
Income Shares Amount Income Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
Basic earnings per
common share
-------------------------
Net income available to
common stockholders $ 589,911 1,811,906 $ 0.33 $ 642,792 1,795,368 $ 0.36
========== ==========
Effect of dilutive shares
-------------------------
Weighted average
shares, if converted 46,510 61,844
---------- ----------
Diluted earnings per
common share
-------------------------
Net income available to
common stockholders $ 589,911 1,858,416 $ 0.32 $ 642,792 1,857,212 $ 0.35
========== ========== ========== ========== ========== ==========
Stock Based Compensation - FAS 123, Revised, required companies to record
compensation expense for stock options provided to employees in return for
employment service. The cost is measured at the fair value of the options when
granted, and this cost is expensed over the employment service period, which is
normally the vesting period of the options. This applies to awards granted or
modified in fiscal years beginning in 2006. Compensation cost will also be
recorded for prior option grants that vest after the date of adoption. The
effect of result on operations will depend on the level of future option grants
and the calculation of the fair value of the options granted at such future
date, as well as the vesting periods provided, and so cannot currently be
predicted. In December 2005, the Board authorized the acceleration of the
vesting of all outstanding stock options issued to both employees and directors.
The decision to accelerate the vesting of these options, which the Company
believes is in the best interest of its stockholders, was made primarily to
reduce non-cash compensation expense, approximately $169,000 of future
compensation expense, net of taxes, that would have been recorded in its income
statement in future periods upon the adoption of Financial Accounting Standards
Board Statement No. 123R (Share-Based Payment) in January 2006.
If compensation cost for awards had been measured based on the fair value of the
stock options awarded at the grant dates, net income and basic and diluted
earnings per common share would have been reduced to the pro-forma amounts on
the table below for the three months ended March 31, 2005:
11
2005
------------
Net Income
As reported $ 642,792
Less: Total stock-based compensation expense
determined under the fair value method for
all rewards, net of related tax effects 13,464
------------
Pro-forma $ 629,328
============
2005
------------
Basic earnings per common share
As reported $ 0.36
Less: Total stock-based compensation expense
determined under the fair value method for
all rewards, net of related tax effects 0.01
------------
Pro-forma $ 0.35
============
2005
------------
Diluted earnings per common share
As reported $ 0.35
Less: Total stock-based compensation expense
determined under the fair value method for
all rewards, net of related tax effects 0.01
------------
Pro-forma $ 0.34
============
All per share data throughout this report has been adjusted to reflect,
retroactively, a 5 for 4 stock split, in the form of a 25% stock dividend,
that was declared by the Board of Directors to stockholders of record on
May 3, 2006.
Stock Options
Options to buy stock are granted to directors, officers and employees under
the VSB Bancorp, Inc. 2000 Incentive Plan, the 1998 Incentive Plan, the 2004
Directors' Plan, the 2000 Directors' Plan and the 1998 Directors' Plan which, in
the aggregate, provide for issue up to 243,750 options. Exercise price is the
market price at the date of grant, and compensation expense will be recognized
in the income statement in accordance with FAS 123, Revised. The maximum option
term is ten years, and the options vesting period is up to five years.
As of December 31, 2005 the Board accelerated the vesting on all
outstanding options so that they became immediately exercisable. By accelerating
the vesting of these options, we estimated that approximately $169,000 of future
compensation expense, net of taxes, was eliminated.
There were no stock option grants in 2006 and 2005.
The stock option components of the 2000 Incentive Plan, the 1998 Incentive
Plan and the 2004 Directors' Plan, the 2000 Directors' Plan and the 1998
Directors' Plan, as of March 31, 2006, and changes during the three months
ended, consist of the following:
12
2006
------------------------------------------
Weighted
Average Aggregate
Exercise Intrinsic
Shares (2) Price Value (1)
------------ ------------ ------------
Options outstanding 182,498 $ 10.31
at the beginning of the year
Granted -- --
Canceled -- --
Exercised -- --
------------
Options outstanding at March 31, 2006 182,498 $ 10.31 $ 965,414
============ ============ ============
Options exercisable at March 31, 2006 182,498 $ 10.31 $ 965,414
============ ============ ============
Weighted average remaining contractual life of
options outstanding at March 31, 2006 5.4 Years
(1) The aggregate intrinsic value is determined by taking the difference
between the closing price at March 31, 2006 ($15.60, as adjusted for
the 5 for 4 stock split) and the weighted average exercise price and
then multiplying the result by the options outstanding at March 31,
2006.
(2) All per share data throughout this report has been adjusted to
reflect, retroactively, a 5 for 4 stock split, in the form of a 25%
stock dividend, that was declared by the Board of Directors to
stockholders of record on May 3, 2006.
Described below is the range of exercise prices for options granted under
the following option plans as of March 31, 2006:
Range of Number of Weighted Average Weighted Average
Plan Description Exercise Prices Exercisable Shares Exercise Price Contractual Life
-------------------------------------- ---------------------- ------------------- ------------------ -------------------
1998 Director Stock Option Plan From $4.90 to $6.40 27,500 $ 6.13 2.86
1998 Incentive Stock Option Plan From $4.75 to $6.40 33,000 5.76 2.79
2000 Director Stock Option Plan $4.75 25,000 4.39 4.15
2000 Incentive Stock Option Plan $4.75 and $15.60 41,998 10.40 6.08
2004 Director Stock Option Plan $17.60 55,000 17.60 8.25
------------------- ------------------ -------------------
All Plans 182,498 $ 10.31 5.35
=================== ================== ===================
All per share data throughout this report has been adjusted to reflect,
retroactively, a 5 for 4 stock split, in the form of a 25% stock dividend,
that was declared by the Board of Directors to stockholders of record on
May 3, 2006.
Employee Stock Ownership Plan - The cost of shares issued to the ESOP, but
not yet allocated to participants, is shown as a reduction of stockholders'
equity. Compensation expense is based on the market price of shares as they are
committed to be released to participant accounts. Cash dividends on allocated
ESOP shares reduce retained earnings; cash dividends on unearned ESOP shares
reduce debt and accrued interest. As participants may put their ESOP shares back
to the Company upon termination, an amount of equity equal to these shares times
the current market price is reclassified out of stockholders' equity.
Comprehensive Income - Comprehensive income consists of net income and
other comprehensive income. Other comprehensive income includes unrealized gains
and losses, net of taxes, on securities available for sale which are also
recognized as separate components of equity.
13
Item 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Financial Condition at March 31, 2006
Total assets were $218,346,610 at March 31, 2006, an increase of
$2,570,898 or 1.2%, from December 31, 2005. The increase resulted from the
investment of funds available to us as the result of an increase in deposits.
The deposit increase was caused generally by our efforts to grow our franchise
and specifically by the deposit increases at our branch offices. We invested
these funds, together with funds resulting from a $3,095,630 decrease in net
loans receivable, primarily in investment securities available for sale, which
increased by $5,164,452. We purchased investment the securities to offset the
decline in loans and to increase investment collateral available to pledge for
municipal deposits that we expect to receive in connection with our opening of a
branch in a banking development district in the Rosebank section of Staten
Island.
Our deposits (including escrow deposits) were $195,712,256 at March 31,
2006, an increase of $2,461,097, or 1.3%, from December 31, 2005. The increase
in deposits resulted from increases of $5,267,001 in non-interest demand
deposits, $127,268 in NOW accounts and $2,140,154 in money market accounts,
partially offset by decreases of $1,136,268 in savings accounts and $4,578,845
in time deposits. The reduction in time deposits reflects the maturity of jumbo
certificates opened with the proceeds of like-kind exchange trusts, where such
trusts have a maximum six-month term.
Total stockholders' equity was $14,646,620 at March 31, 2006, an
increase of $114,686 from December 31, 2005. The increase reflected net income
of $589,911 for the three months ended March 31, 2006, reduced by an increase of
$526,006 in other comprehensive loss, due to an increase in the unrealized loss
in securities available for sale during the first three months of 2006. The
unrealized loss increased due to the increase in market interest rates, which
drove down the market value of the fixed rate bond portfolio. This unrealized
loss is excluded from the calculation of regulatory capital. Management does not
anticipate selling securities in this portfolio, but changes in market interest
rates or in the demand for funds may change management's plans with respect to
the securities portfolio. If there is a material increase in interest rates, the
market value of the available for sale portfolio may decline further. Management
believes that the principal and interest payments on this portfolio, combined
with the existing liquidity, will be sufficient to fund loan growth and
potential deposit outflow.
The change in stockholders' equity also included an increase of $8,512
in additional paid in capital due to reclassification of $10,533 representing
the Employee Stock Ownership Plan Repurchase Obligation and a decrease in
unearned ESOP shares of $42,269 reflecting the effect of the gradual payment of
the loan we made to fund the ESOP's purchase of our stock.
For financial statement reporting purposes, we record the compensation
expense related to the ESOP when shares are to be released from the security
interest for the loan. The amount of the compensation expense is based upon the
fair market value of the shares at that time, not the original purchase price.
The initial sale of shares to the ESOP did not increase our capital by the
amount of the purchase price because the purchase price was paid by the loan we
made to the ESOP. Instead, capital increases as the shares are allocated or
committed to be allocated to employee accounts (i.e., as the ESOP loan is
gradually repaid), based upon the fair market value of the shares at that time.
When we calculate earnings per share, only shares allocated or committed to be
allocated to employee accounts are considered to be outstanding. However, all
shares that the ESOP owns are legally outstanding, so they have voting rights
and, if we pay dividends, dividends will be paid on all ESOP shares.
14
Results of Operations for the Three Months Ended March 31, 2006 and March 31,
2005
Our results of operations are dependent primarily on net interest
income, which is the difference between the income we earn on our loan and
investment portfolios and our cost of funds, consisting primarily of interest we
pay on customer deposits. Our operating expenses principally consist of employee
compensation and benefits, occupancy expenses, professional fees, advertising
and marketing expenses and other general and administrative expenses. Our
results of operations are significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities.
General. We had net income of $589,911 for the quarter ended March 31,
2006, compared to net income of $642,792 for the comparable quarter in 2005. The
principal categories which make up the 2006 net income are:
o Interest income of $3,133,983
o Reduced by interest expense of $668,676
o Reduced by the provision for loan losses of $25,000
o Increased by non-interest income of $483,549
o Reduced by non-interest expense of $1,819,273
o Reduced by $514,672 in income tax expense
We discuss each of these categories individually and the reasons for
the differences between the quarters ended March 31, 2006 and 2006 in the
following paragraphs.
Interest Income. Interest income was $3,133,983 for the quarter ended
March 31, 2006, compared to $2,686,426 for the quarter ended March 31, 2005, an
increase of $447,557, or 16.66%. We accomplished the increase in interest
income, despite the decrease in total average interest-earning assets of
$3,191,930, principally because of increases in the yields on our prime-based
loans, which make up most of our loan portfolio. The decrease in average
interest-earning assets was composed of a decrease in the average balance of
investment securities of $16,476,797, partially offset by a $6,971,846 increase
in the average balance of the loan portfolio and a $6,313,021 increase in other
interest-earning assets.
The yields on all principal asset categories increased as the Fed Funds
rate increased, causing increases in other interest rate indexes, such as the
prime rate, and market interest rates generally. The yields on our loan
portfolio and our other interest earning assets, principally short term liquid
assets, increased more rapidly than the yield on our investment securities. This
occurred because most of our loans and liquid assets tend to have interest rates
that increase rapidly upon changes in market rates while the rates we earn on
our investment securities are primarily either fixed rates or rates that adjust
at less frequent intervals than our the rates on our loans.
The average balance of our loans increased to $73,192,245 for the
quarter ended March 31, 2006 from $66,220,399, or 10.53%, during the 2005
quarter. In conjunction with the increase in volume, the average yield on loans
increased by 155 basis points as the prime rate, upon which many of our loans
are based on, rose to the point where the interest rates on our loans increased
above the interest rate floors, which had been effective when the prime rate was
at historically low levels. As of the first quarter of 2006, the interest rates
on all of our prime-based loans have risen above their interest rate floors and
will now re-price upwards in the event of future increases in the prime rate.
Finally, we had a $113,143 increase in income from overnight funds and
other interest earning assets due to the higher market rates on short term and
overnight investments. The average balance of overnight investments increased
$6,313,021, or 56.12%, from the first quarter of 2005 to the first quarter of
2006, the yield also increased 190 basis points. We increased the average
balance of overnight investments because they provide us with greater
reinvestment flexibility and the gap between the rates on those investments
versus the rates on investment securities narrowed as short-term market rates
rose while longer term rates remained more steady.
15
The average yield on all non-loan interest earning assets was
approximately 4.46% during the first quarter of 2006, compared to approximately
4.11% during the first quarter of 2005. The yield on other interest earning
assets rose to 4.14% in 2006 from 2.24% during the same period in 2005, while
the yield on investment securities rose from 4.28% to 4.51%. The investment
securities portfolio represented 86.1% of average non-loan interest earning
assets in the 2006 period compared to 91.7% in the 2005 period.
Interest Expense. Interest expense was $668,676 for the quarter ended
March 31, 2006, compared to $370,456 for the quarter ended March 31, 2005, an
increase of 80.5%. The increase was primarily the result of an increase in the
rates we paid on deposits, coupled with increases in the average balance of
interest-bearing deposits, primarily time deposits. The average balance of time
deposits increased more rapidly than other interest-bearing deposits because we
have opened a number of large balance time deposit accounts for like-kind
exchange trusts. These trusts are created by attorneys in real estate
transactions. The deposits have a maximum term of six months and cannot be
renewed. The volume of these deposits tends to fluctuate with activity in the
real estate markets and competitive pressures, so there can be no assurance that
we will be able to replace these funds when these time deposits mature.
Our average cost of funds increased from 1.30% to 2.13% between the two
periods, primarily due to an increase of 127 basis points in the average rate we
paid on time deposits. Competition and the increase in prevailing market
interest rates required an increase in the rates we offered on both new and
renewing time deposits. While we have been able to impose greater limits on
interest rate increases in other deposit categories as market interest rates
began to rise, further increases in market rates, if they occur, can be expected
to compel increases in the rates we offer on these deposit categories to
maintain our competitive posture. Any further increase in competition may
accelerate the increase in our cost of funds resulting from increases in market
interest rates as more banks compete for customer deposits.
Net Interest Income Before Provision for Loan Losses. Net interest
income before the provision for loan losses was $2,465,307 for the quarter ended
March 31, 2006, an increase of $149,337, or 6.5% over the $2,315,970 in the
comparable 2005 quarter. The increase was driven by an increase in loans and
other interest earning assets, partially offset by a decline in investment
securities. Our interest rate spread and net interest margin increased to 4.13%
and 4.90% in the first quarter of 2006 compared to 4.03% and 4.58% in the first
quarter of 2005, respectively. On the asset side, the average yield of earning
assets in the 2006 period increased to 6.26% from 5.33% in the March 2005
period, or an increase of 93 basis points. On the liability side, there was an
increase in our cost of funds of 83 basis points. The resulting 10 basis point
improvement in spread was the result of the combined effect of a variety of
strategies, including efforts to increase our loan portfolio, which is our
highest earning asset category, and limits on increases in the rates we offered
on some deposit categories.
Changes in our time deposit portfolio, our highest cost deposit
product, contributed to the increase in cost of funds. First, time deposits
comprised 133% of the increase in average interest-bearing liabilities, and
increased from 44.9% of average interest bearing liabilities in the 2005 quarter
to 52.9% in the 2006 quarter. The average rate on these deposits increased 127
basis points from 1.46% in the 2005 quarter to 2.73% in the 2006 quarter. We do
not have and we do not seek brokered time deposits.
Our non-interest checking accounts have declined recently. Management
seeks to maintain a high level of non-interest checking accounts through
developing relationships with local businesses. Maintaining a high percentage of
non-interest checking accounts is particularly advantageous in a rising rate
environment because these no-cost funds can be invested at the higher yields.
However, an increase in market interest rates may make interest-bearing deposit
products more attractive to customers and cause funds to shift from non-interest
checking into interest-bearing deposit products.
Provision for Loan Losses. The provision for loan losses was $25,000
for the quarter ended March 31, 2006, compared to $30,000 credit to the
provision for loan losses, for the quarter ended March 31, 2005. The increase in
the provision was primarily due to an increase in loan delinquencies at the
beginning of the first quarter of 2006. The provision for loan losses in any
16
period depends upon the amount necessary to bring the allowance for loan losses
to the level management believes is adequate, after taking into account charge
offs and recoveries. Our allowance for loan losses is based on management's
evaluation of the risks inherent in our loan portfolio and the general economy.
Management periodically evaluates both broad categories of performing loans and
problem loans individually to assess the appropriate level of the allowance.
Although management uses available information to assess the adequacy
of the allowance on a quarterly basis in consultation with outside advisors and
the board of directors, changes in national or local economic conditions, the
circumstances of individual borrowers, or other factors, may change, increasing
the level of problem loans and requiring an increase in the level of the
allowance. The allowance for loan losses represented 1.66% of total loans at
March 31, 2006, but there can be no assurance that a higher level, or a higher
provision for loan losses, will not be necessary in the future.
Non-interest Income. Non-interest income was $483,549 for the three
months ended March 31, 2006, compared to $459,435 during the same period last
year. The $24,114, or 5.3%, increase in non-interest income was a direct result
of a $46,755 increase in other income offset by a $14,261 decrease in service
charges on deposits (primarily non-sufficient fund fees). Service fees on
deposit accounts declined from 2005 to 2006 as the volume of deposit account
transactions generating fee income declined. Service fees on deposit accounts,
principally non-sufficient funds fees, declined from 2005 to 2006 as customers
reduced the frequency with which they overdrew their deposit accounts.
Non-interest Expense. Non-interest expense was $1,819,273 for the
quarter ended March 31, 2006, compared to $1,601,810 for the quarter ended March
31, 2005. The principal causes of the $217,463 increase were:
o $93,581 in higher salary and benefits costs due to normal salary
increases, an increase in staffing to support growth and higher
benefit costs.
o $48,950 increase in higher legal expenses incurred in connection with
a number of pending lawsuits involving a former customer of the Bank.
o $70,791 more of "other expenses," primarily pre-opening expenses for
our fifth branch .
Income Tax Expense. Income tax expense was $514,672 for the quarter
ended March 31, 2006, compared to income tax expense of $560,803 for the quarter
ended March 31, 2005. The reduction in interest expense was due to the $99,012
decrease in income before income taxes in the 2006 quarter. Our effective tax
rate remained the same for the quarters ended March 31, 2006 and 2005 at 46.6%.
17
VSB Bancorp, Inc.
Consolidated Average Balance Sheets
(unaudited)
Three Three
Months Ended Months Ended
March 31, 2006 March 31, 2005
--------------------------------------- ---------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------------ ------------ -------- ------------ ------------ --------
Assets:
Interest-earning assets:
Loans receivable $ 73,192,245 $ 1,748,773 9.37% $ 66,220,399 $ 1,300,636 7.82%
Investment securities, AFS 108,531,686 1,205,762 4.51 125,008,483 1,319,485 4.28
Other interest-earning assets 17,561,236 179,448 4.14 11,248,215 62,118 2.24
------------ ------------ ------------ ------------
Total interest-earning assets 199,285,167 3,133,983 6.26 202,477,097 2,682,239 5.33
Non-interest earning assets 14,168,160 13,246,980
------------ ------------
Total assets $213,453,327 $215,724,077
============ ============
Liabilities and equity:
Interest-bearing liabilities:
Savings accounts $ 14,798,671 18,334 0.50 $ 14,670,365 18,227 0.50
Time accounts 67,460,105 453,883 2.73 51,990,462 187,117 1.46
Money market accounts 19,878,287 84,216 1.72 22,891,548 54,047 0.96
Now accounts 20,126,130 23,203 0.47 21,085,338 22,025 0.42
Trust preferred 5,155,000 89,040 6.91 5,155,000 89,040 6.91
------------ ------------ ------------ ------------
Total interest-bearing
liabilities 127,418,193 668,676 2.13 115,792,713 370,456 1.30
Checking accounts 68,300,650 84,229,837
------------ ------------
Total deposits 195,718,843 200,022,550
Other liabilities 2,668,707 2,414,505
------------ ------------
Total liabilities 198,387,550 202,437,055
Equity 15,065,777 13,287,022
------------ ------------
Total liabilities and equity $213,453,327 $215,724,077
============ ============
Net interest income/net interest
rate spread $ 2,465,307 4.13% $ 2,311,783 4.03%
============ ======== ============ ========
Net interest earning assets/net
interest margin $ 71,866,974 4.90% $ 86,684,384 4.58%
============ ======== ============ ========
Ratio of interest-earning assets to
interest-bearing liabilities 1.56 x 1.75 x
============ ============
Return on Average Assets 1.06% 1.18%
============ ============
Return on Average Equity 15.06% 19.23%
============ ============
Tangible Equity to Total Assets 6.71% 5.63%
============ ============
18
Liquidity and Capital Resources
Our primary sources of funds are increases in deposits and proceeds
from the repayment of investment securities. We use these funds principally to
purchase new investment securities and to fund new and renewing loans in our
loan portfolio.
During the three months ended March 31, 2006, we had a net increase in
deposits of $2,461,097, proceeds from repayment of investment securities totaled
$4,812,832 and a net decrease in loans receivable of $3,169,202. We used the
resulting increase in funds, along with other available funds, primarily to
purchase $10,970,080 of investment securities.
In contrast, during the comparable period of 2005, our principal
sources of cash were proceeds from the repayment of investment securities of
$7,127,909 and a net decrease in loans receivable of $1,669,904, which were used
to fund a net decrease in deposits of $11,744,752. We did not need to sell any
investment securities prior to maturity to fund the deposit outflow.
The Bank satisfied all capital ratio requirements of the Federal
Deposit Insurance Corporation at March 31, 2006, with a Tier I Leverage Capital
ratio of 9.90%, a ratio of Tier I Capital to Risk-Weighted Assets ratio of
21.05%, and a Total Capital to Risk-Weighted Assets ratio of 22.23%.
VSB Bancorp, Inc. satisfied all capital ratio requirements of the
Federal Reserve at March 31, 2006, with a Tier I Leverage Capital ratio of
10.25%, a ratio of Tier I Capital to Risk-Weighted Assets ratio of 21.75%, and a
Total Capital to Risk-Weighted Assets ratio of 22.93%.
In the first three months of 2006, we experienced a $397,339 decrease
in cash and cash equivalents compared to a $2,057,576 decrease in cash and cash
equivalents during the first three months of 2005. Total cash and cash
equivalents at March 31, 2006 were $30,926,808. One of the important tasks
facing management in upcoming periods is to balance the level of cash and cash
equivalents for liquidity purposes and the reinvestment opportunities into
higher yielding interest-earning assets such as loans or securities.
The following table sets forth our contractual obligations and
commitments for future lease payments, time deposit maturities and loan
commitments.
Contractual Obligations and Commitments at March 31, 2006
Contractual Obligations Payment due by Period
------------------------------------------------------------------------
Less than One to three Four to five After Total Amounts
One Year years years five years committed
------------ ------------ ------------ ------------ ------------
Minimum annual rental payments under
non-cancelable operating leases $ 492,622 $ 810,688 $ 828,348 $ 2,845,981 $ 4,977,639
Remaining contractual maturities of time
deposits 59,805,570 1,012,955 2,333,903 -- 63,152,428
------------ ------------ ------------ ------------ ------------
Total contractual cash obligations $ 60,298,192 $ 1,823,643 $ 3,162,251 $ 2,845,981 $ 68,130,067
============ ============ ============ ============ ============
Other commitments Amount of commitment Expiration by Period
------------------------------------------------------------------------
Less than One to three Four to five After Total Amounts
One Year years years five years committed
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Loan commitments $ 13,886,265 $ 7,472,094 $ -- $ -- $ 21,358,359
============ ============ ============ ============ ============
19
Our loan commitments shown in the above table represent both
commitments to make new loans and obligations to make additional advances on
existing loans, such as construction loans in process and lines of credit.
Substantially all of these commitments involve loans with fluctuating interest
rates, so the outstanding commitments do not expose us to interest rate risk
upon fluctuation in market rates. We consider the amount of outstanding
commitments when we assess our allowance for loan losses.
Critical Accounting Policies and Judgments
We are required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the amounts
of revenues and expenses during the reporting period. The allowance for loan
losses, prepayment estimates on the mortgage-backed securities and
Collateralized Mortgage Obligation portfolios, contingencies and fair values of
financial instruments are particularly subject to change and to management's
estimates. Actual results can differ from those estimates and may have an impact
on our financial statements.
Item 3 - Controls and Procedures
Evaluation of Disclosure Controls and Procedures:
------------------------------------------------
As of March 31, 2006, we undertook an evaluation of our disclosure controls and
procedures under the supervision and with the participation of Merton Corn,
President and CEO, and Raffaele M. Branca, Executive Vice President and CFO.
Disclosure controls are the systems and procedures we use that are designed to
ensure that information we are required to disclose in the reports we file or
submit under the Securities Exchange Act of 1934 (such as annual reports on Form
10-KSB and quarterly periodic reports on Form 10-QSB) is recorded, processed,
summarized and reported, in a manner which will allow senior management to make
timely decisions on the public disclosure of that information. Messrs. Corn and
Branca concluded that our current disclosure controls and procedures are
effective in ensuring that such information is (i) collected and communicated to
senior management in a timely manner, and (ii) recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms.
Since our last evaluation of our disclosure controls, we have not made any
significant changes in, or corrective actions taken regarding, either our
internal controls or other factors that could significantly affect those
controls.
We intend to continually review and evaluate the design and
effectiveness of our disclosure controls and procedures and to correct any
deficiencies that we may discover. Our goal is to ensure that senior management
has timely access to all material financial and non-financial information
concerning our business so that they can evaluate that information and make
determinations as to the nature and timing of disclosure of that information.
While we believe the present design of our disclosure controls and procedures is
effective to achieve this goal, future events may cause us to modify our
disclosure controls and procedures.
Part II
Item 1 - Legal Proceedings
The Bank is a defendant in an action pending in Supreme Court, Richmond
County, commenced by IndyMac Bank, F.S.B. against the Bank, LaMattina &
Associates, Inc. ("LAI") and various individuals and entities alleged to be
officers, directors or otherwise to have relationships with LAI. LAI was a
deposit customer of the Bank engaged in the business of providing real estate
settlement services to lenders making residential mortgage loans. The plaintiff
alleges that it was such a lender and that it had provided funds to LAI by
wiring those funds to an account of LAI at the Bank to use to fund mortgage
loans to be made by the plaintiff, only to have LAI not use those funds for
20
their intended purpose. The action was commenced in August 2005. In November
2005, the plaintiff amended its complaint to add the Bank as a defendant and
asserted a claim against the Bank for aiding and abetting a breach of a
fiduciary duty.
After the Bank made a motion to dismiss the claims against it, the plaintiff
requested court permission to drop the aiding and abetting a breach of fiduciary
duty claim, and to instead assert, in a second amended complaint, different
claims based upon alleged negligence, misappropriation and deceptive business
practices under the New York General Business Law. The proposed second amended
complaint requests monetary damages against the Bank of $1,817,041 plus recovery
of attorney's fees. The court permitted the plaintiff to serve the second
amended complaint, but the plaintiff did not do so. Instead, the plaintiff has
proposed to revise the second amended complaint but assert the same claims
against the Bank that were included in the original second amended complaint.
The Bank intends to defend aggressively the amended claims and has referred the
litigation to its insurance carrier, which has indicated that at least some of
the claims in the original second amended complaint are covered by insurance.
The Bank has forwarded the proposed revised second amended complaint to its
insurance carrier for review.
21
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to security holders for a vote during the period
from January 1, 2006 through March 31, 2006. VSB Bancorp, Inc. held its third
Annual Meeting of Stockholders on April 25, 2006 at its principal office, 3155
Amboy Road, Staten Island, New York 10306, at 5:00 P.M. At that meeting,
1,309,023 shares of the capital stock of the Company were represented in person
or by proxy, being 86.7 % of all outstanding shares of the capital stock of the
Company, with a quorum being present. The Annual Meeting was held for the
purpose of voting on two proposals, with the results of the voting as follows:
1. The election of three directors for three-year terms:
Percentage of Percentage of
Director Votes shares Votes shares
Elected For voted Withheld voted
----------------------------- -------------- ----------------- ------------- -----------------
Alfred C. Johnsen 1,303,085 99.5% 5,938 0.5%
Carlos Perez, M.D. 1,303,085 99.5% 5,938 0.5%
Bruno Savo 1,303,085 99.5% 5,938 0.5%
No other persons received any votes.
The following directors continued as directors of the Company: Joseph J.
LiBassi, Raffaele M. Branca, Joan Nerlino Caddell, Merton Corn, Robert S.
Cutrona, Sr., and Chaim Farkas.
2. The ratification of the appointment of Crowe Chizek and Company LLC as
our independent public accountants for the fiscal year ending December
31, 2006.
Percentage of Percentage of Percentage of
Votes shares Votes shares Votes shares
For voted Against voted Abstained voted
---------------- ---------------- --------------- ---------------- --------------- ----------------
1,297,485 99.1% 5,538 0.4% 6,000 0.5%
There were no broker non-votes.
22
Signature Page
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
VSB Bancorp, Inc.
Date: May 9, 2006 /s/ MERTON CORN
-------------------------------------
Merton Corn
President and Chief Executive Officer
Date: May 9, 2006 /s/ RAFFAELE M. BRANCA
-------------------------------------
Raffaele M. Branca
Executive Vice President and Chief
Financial Officer
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------ ----------------------
31.1 Rule 13A-14(a)/15D-14(a) Certification of Chief Executive Officer
31.2 Rule 13A-14(a)/15D-14(a) Certification of Chief Financial Officer
32.1 Certification by CEO pursuant to 18 U.S.C. 1350.
32.2 Certification by CFO pursuant to 18 U.S.C. 1350.
-------------------------------------
Item 6 - Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
31.1 Rule 13A-14(a)/15D-14(a) Certification of Chief Executive Officer
31.2 Rule 13A-14(a)/15D-14(a) Certification of Chief Financial Officer
32.1 Certification by CEO pursuant to 18 U.S.C. 1350.
32.2 Certification by CFO pursuant to 18 U.S.C. 1350.
23