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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, 2007
[ ] 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.)
4142 Hylan Boulevard, Staten Island, New York 10308
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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 1,891,759 common shares outstanding as of May 3, 2007.
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CROSS REFERENCE INDEX
PART I
Page
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Item 1 Consolidated Statements of Financial Condition as of March 31, 2007 and
December 31, 2006 (unaudited). 4
Consolidated Statements of Operations for the Three Months Ended
March 31, 2007 and 2006 (unaudited) 5
Consolidated Statements of Changes in Stockholders' Equity for the Three Months Ended
March 31, 2007 and the Year Ended December 31, 2006 (unaudited) 6
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2007 and 2006 (unaudited) 7
Notes to Consolidated Financial Statements for the Three Months Ended
March 31, 2007 and 2006 (unaudited) 8 to 13
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 13 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,
2007 2006
------------- -------------
ASSETS:
Cash and due from banks $ 31,501,641 $ 25,363,069
Investment securities, available for sale 108,729,992 113,770,611
Loans receivable 61,433,260 66,410,677
Allowance for loan loss (1,014,951) (1,128,824)
------------- -------------
Loans receivable, net 60,418,309 65,281,853
Bank premises and equipment, net 4,237,101 1,554,363
Accrued interest receivable 808,387 805,681
Deferred taxes 1,721,300 2,030,647
Other assets 983,350 3,078,535
------------- -------------
Total assets $ 208,400,080 $ 211,884,759
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand and checking $ 64,010,794 $ 67,371,582
NOW 20,286,959 19,935,769
Money market 18,163,332 18,359,007
Savings 12,422,987 12,526,485
Time 67,326,258 68,229,244
------------- -------------
Total Deposits 182,210,330 186,422,087
Escrow deposits 394,197 261,063
Subordinated debt 5,155,000 5,155,000
Accounts payable and accrued expenses 2,001,494 2,306,312
------------- -------------
Total liabilities 189,761,021 194,144,462
------------- -------------
Employee Stock Ownership Plan Repurchase Obligation - 399,026
STOCKHOLDERS' EQUITY:
Common stock, ($.0001 par value, 3,000,000 shares
authorized, 1,891,759 issued and outstanding at
March 31, 2007 and December 31, 2006) 189 189
Additional paid in capital 9,060,955 8,667,665
Retained earnings 11,822,971 11,293,200
Unearned Employee Stock Ownership Plan shares (1,197,636) (1,239,905)
Accumulated other comprehensive loss,
net of taxes of $913,673 and $1,203,679,
respectively (1,047,420) (1,379,878)
------------- -------------
Total stockholders' equity 18,639,059 17,341,271
------------- -------------
Total liabilities and stockholders'
equity $ 208,400,080 $ 211,884,759
============= =============
See notes to consolidated financial statements.
4
VSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2007 MARCH 31, 2006
-------------- --------------
Interest and dividend income:
Loans receivable $ 1,572,353 $ 1,748,773
Investment securities 1,300,460 1,205,762
Other interest earning assets 247,065 179,448
-------------- --------------
Total interest income 3,119,878 3,133,983
Interest expense:
NOW 28,789 23,203
Money market 85,850 84,216
Savings 24,428 18,334
Subordinated debt 89,040 89,040
Time 615,136 453,883
-------------- --------------
Total interest expense 843,243 668,676
Net interest income 2,276,635 2,465,307
Provision (credit) for loan loss (30,000) 25,000
-------------- --------------
Net interest income
after provision for loan loss 2,306,635 2,440,307
-------------- --------------
Non-interest income:
Loan fees 27,468 22,767
Service charges on deposits 416,908 389,756
Net rental income 14,813 3,375
Other income 82,174 67,651
-------------- --------------
Total non-interest income 541,363 483,549
-------------- --------------
Non-interest expenses:
Salaries and benefits 1,017,330 1,032,077
Occupancy expenses 337,975 259,460
Legal expense 14,526 58,874
Professional fees 51,600 48,000
Computer expense 67,216 60,528
Directors' fees 52,150 55,900
Other expenses 315,359 304,434
-------------- --------------
Total non-interest expenses 1,856,156 1,819,273
-------------- --------------
Income before income taxes 991,842 1,104,583
Provision/(benefit) for income taxes:
Current 442,730 519,974
Deferred 19,341 (5,302)
-------------- --------------
Total provision for income taxes 462,071 514,672
-------------- --------------
Net income $ 529,771 $ 589,911
============== ==============
Earnings per share:
Basic $ 0.29 $ 0.33
============== ==============
Diluted $ 0.28 $ 0.32
============== ==============
Comprehensive income $ 862,229 $ 63,905
============== ==============
Book value per common share $ 9.85 $ 7.91
============== ==============
All per share data has been adjusted for the 5 for 4 stock split, in the form of
a 25% stock dividend, paid 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, 2006 AND THREE MONTHS ENDED MARCH 31, 2007
(unaudited)
ACCUMULATED
NUMBER OF ADDITIONAL UNEARNED OTHER TOTAL
COMMON COMMON PAID-IN RETAINED ESOP COMPREHENSIVE STOCKHOLDERS'
SHARES STOCK CAPITAL EARNINGS SHARES LOSS EQUITY
--------- --------- ---------- ----------- ----------- ------------- -------------
Balance at December 31, 2005 1,509,822 $ 151 $8,743,200 $ 8,621,693 $(1,408,983) $ (1,424,127) $ 14,531,934
Reclass due to the adoption of
SEC SAB 108 - - - 125,914 - - 125,914
--------- --------- ---------- ----------- ----------- ------------- -------------
Balance at January 1, 2006 1,509,822 151 8,743,200 8,747,607 (1,408,983) (1,424,127) 14,657,848
Exercise of stock option,
including tax benefit 3,750 46,232 46,232
Amortization of earned portion
of ESOP common stock 169,078 169,078
5 for 4 stock split and purchase
of fractional shares 378,187 38 (367) (329)
Amortization of deficit fair
value of cost - ESOP (6,785) (6,785)
Transfer to ESOP repurchase
obligation (114,615) (114,615)
Comprehensive income:
Net income 2,545,593 2,545,593
Other comprehensive income, net:
Change in unrealized loss on
securities available for sale,
net of tax effects - - - - - 44,249 44,249
--------- --------- ---------- ----------- ----------- ------------- -------------
Total comprehensive income 2,589,842
Balance at December 31, 2006 1,891,759 189 8,667,665 11,293,200 (1,239,905) (1,379,878) 17,341,271
--------- --------- ---------- ----------- ----------- ------------- -------------
Amortization of earned portion
of ESOP common stock 42,269 42,269
Amortization of deficit fair
value of cost - ESOP (5,736) (5,736)
Transfer from ESOP repurchase
obligation 399,026 399,026
Comprehensive income:
Net income 529,771 529,771
Other comprehensive income, net:
Change in unrealized loss on
securities available for sale,
net of tax effects - - - - - 332,458 332,458
--------- --------- ---------- ----------- ----------- ------------- -------------
Total comprehensive income 862,229
Balance at March 31, 2007 1,891,759 $ 189 $9,060,955 $11,822,971 $(1,197,636) $ (1,047,420) $ 18,639,059
========= ========= ========== =========== =========== ============= =============
All per share data has been adjusted for the 5 for 4 stock split, in the form of
a 25% stock dividend, paid on May 18, 2006. See notes to consolidated financial
statements.
6
VSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2007 MARCH 31, 2006
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 529,771 $ 589,911
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 143,851 102,325
Accretion of income, net of amortization
of premium (57,712) (90,622)
ESOP compensation expense 36,533 40,248
Provision/(credit) for loan losses (30,000) 25,000
Increase in prepaid and other assets (47,681) (492,133)
Increase in accrued interest receivable (2,706) (23,231)
Decrease/(increase) in deferred income taxes 19,341 (5,302)
(Decrease)/increase in accrued expenses and
other liabilities (304,818) 5,648
-------------- --------------
Net cash provided by operating activities 286,579 151,844
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in loan receivable 4,948,058 3,169,202
Proceeds from repayment of investment securities,
available for sale 5,666,281 4,812,832
Purchases of investment securities, available
for sale - (10,970,080)
Purchases of premises and equipment (683,723) (22,234)
-------------- --------------
Net cash provided by/(used in) investing
activities 9,930,616 (3,010,280)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease)/increase in deposits (4,078,623) 2,461,097
-------------- --------------
Net cash (used in)/provided by financing
activities (4,078,623) 2,461,097
-------------- --------------
NET INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS 6,138,572 (397,339)
-------------- --------------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 25,363,069 31,324,147
-------------- --------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 31,501,641 $ 30,926,808
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 995,097 $ 794,699
============== ==============
Taxes $ 541,294 $ 384,889
============== ==============
Transfer of construction in progress to premises
and equipment $ 2,142,866 $ -
============== ==============
See notes to consolidated financial statements.
7
VSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
2007 AND 2006
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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.
8
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 29, 2007 through April 11,
2007, Victory State Bank was required to maintain reserves, after deducting
vault cash, of $2,927,000. 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 before applying any amount to interest, until the loan is restored
to an accruing status. On a limited basis, the Company may apply a payment to
interest on a non-accrual loan if there is no impairment or no estimated 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.
10
Basic and Diluted Net Income Per Common Share - Basic net income per share
of common stock is based on 1,826,519 shares and 1,811,906 shares, the weighted
average number of common shares outstanding for the three months ended March 31,
2007 and 2006, respectively. Diluted net income per share of common stock is
based on 1,876,460 and 1,858,416, the weighted average number of common shares
and potentially dilutive common shares outstanding for the three months ended
March 31, 2007 and 2006, 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 51,184 and 72,716 shares for
the three months ended March 31, 2007 and 2006, 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 ended March 31, are as follows:
Three Months Ended Three Months Ended
March 31, 2007 March 31, 2006
------------------------------------------ ------------------------------------------
Weighted Weighted
Net Average Per Share Net Average Per Share
Reconciliation of EPS Income Shares Amount Income Shares Amount
----------------------- ------------ --------- ------------ ------------ --------- ------------
Basic income per
common share
----------------
Net income available to
common stockholders $ 529,771 1,826,519 $ 0.29 $ 589,911 1,811,906 $ 0.33
============ ============
Effect of dilutive
shares
------------------
Weighted average
shares, if converted 49,941 46,510
--------- ---------
Diluted net income per
common share
----------------------
Net income available to
common stockholders $ 529,771 1,876,460 $ 0.28 $ 589,911 1,858,416 $ 0.32
============ ========= ============ ============ ========= ============
Stock Based Compensation - FAS 123, Revised, requires 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 on result of 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.
STOCK OPTIONS
Options to buy stock are granted to directors, officers and employees under
five stock option plans approved by stockholders between 1998 and 2004 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.
11
There were no stock option grants in 2007 and 2006.
The stock option components of the five stock option plans, as of March 31,
2007, and changes during the three months ended, consist of the following:
2007
------------------------------------
Weighted
Average Aggregate
Exercise Intrinsic
Shares (2) Price (2) Value (1)
---------- ---------- ----------
Options outstanding 177,998 $ 10.36
at the beginning of the year
Granted - -
Canceled - -
Exercised - -
----------
Options outstanding at March 31, 2007 177,998 $ 10.36 $ 799,211
========== ========== ==========
Options exercisable at March 31, 2007 177,998 $ 10.36 $ 799,211
========== ========== ==========
Weighted average remaining contractual life of
options outstanding at March 31, 2007 4.5 Years
Employee Stock Ownership Plan ("ESOP") - 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 the Company now lists
on a national exchange, NASDAQ Capital Markets, it is no longer required to
reclassify out of stockholders' equity an amount equal to the put option of the
allocated ESOP shares.
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.
Recently-Issued Accounting Standards - SFAS No. 157, "Fair Value
Measurements." SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 is effective for the Company
on January 1, 2008 and is not expected to have a significant impact on the
Company's financial statements.
SFAS No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities-Including an amendment of FASB Statement No. 115." SFAS 159 permits
entities to choose to measure eligible items at fair value at specified election
dates. Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings at each subsequent reporting date. The
fair value option (i) may be applied instrument by instrument, with certain
exceptions, (ii) is irrevocable (unless a new election date occurs) and (iii) is
applied only to entire instruments and not to portions of instruments. SFAS 159
is effective for the Company on January 1, 2008 and is not expected to have a
significant impact on the Company's financial statements.
12
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN
48"), which prescribes a recognition threshold and measurement attribute for a
tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. The Company adopted FIN 48 as of
January 1, 2007. A tax position is recognized as a benefit only if it is "more
likely than not" that the tax position would be sustained in a tax examination,
with a tax examination being presumed to occur. The amount recognized is the
largest amount of tax benefit that is greater than 50% likely of being realized
on examination. For tax positions not meeting the "more likely than not" test,
no tax benefit is recorded. The adoption had no affect on the Company's
consolidated financial position or results of operations.
The Company and its subsidiaries are subject to U.S. federal income tax as
well as income tax of the state of New York. The Company is no longer subject to
examination by taxing authorities for years before 2002. The Company does not
expect the total amount of unrecognized tax benefits to significantly increase
in the next twelve months.
The Company recognizes interest related to income tax matters as interest
expense and penalties related to income tax matters as other expense. The
Company did not have any amounts accrued for interest and penalties at January
1, 2007 and March 31, 2007.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION AT MARCH 31, 2007
Total assets were $208,400,080 at March 31, 2007, a decrease of $3,484,679 or,
1.6%, from December 31, 2006. The decline resulted from deposit outflow,
principally in non-interest demand deposits and time deposit accounts. We funded
the decline in deposits primarily with a reduction our purchases of investment
securities, which caused a decline in that portfolio during the quarter. In
addition, loan volume declined, and funds generated by the net reduction in
loans and the reduction in the investment securities portfolio were invested in
overnight investments. The net decrease in assets can be summarized as follows:
o A $6,138,572 increase in cash and equivalents; offset by
o A $4,863,544 decrease in net loans receivable; and
o A $5,040,619 decrease in investment securities available for sale; and
$2,142,866, reported as construction in progress at December 31, 2006 was
transferred to premises and equipment when we opened and occupied our new main
office at 4142 Hylan Boulevard on February 20, 2007. In addition, we also
experienced changes in other asset categories due to normal fluctuations in
operations.
Our deposits (including escrow deposits) were $182,604,527 at March 31,
2007, a decrease of $4,078,623, or 2.2%, from December 31, 2006. The decrease in
deposits resulted from decreases of $3,227,654 in non-interest demand deposit,
$195,675 in money market accounts, $103,498 in savings accounts and $902,986 in
time deposits, partially offset by an increase of $351,190 in NOW accounts. The
decrease in non-interest bearing accounts was due to the normal fluctuations
associated with the demand accounts and a softening of the real estate market
which lowers our aggregate real estate related demand deposits. The reduction in
time deposits represents the maturity of jumbo CD's associated with 1031
exchange trusts, also an effect of the weak real estate market.
13
Total stockholders' equity was $18,639,059 at March 31, 2007, an increase
of $1,297,788 from December 31, 2006. The increase reflected net income of
$529,771 for the three months ended March 31, 2007 increased by a reduction of
$42,269 in Unearned ESOP shares reflecting the effect of the gradual payment of
the loan we made to fund the ESOP's purchase of our stock. The unrealized loss
on securities available for sale decreased by $332,458 for the three months
ended March 31, 2007 principally due to the prepayment of the investment
securities and the change in market interest rates. The 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. 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 $393,290 in
additional paid in capital primarily due to a $399,026 transfer from the ESOP
repurchase obligation back to additional paid in capital, as our common stock is
now listed on the NASDAQ Capital Market and therefore we no longer have an
obligation to repurchase stock that the ESOP distributes to participants.
For financial statement reporting purposes, we record the compensation
expense related to the ESOP when shares are committed 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND MARCH 31,
2006
Our results of operations depend 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 $529,771 for the quarter ended March 31,
2007, compared to net income of $589,911 for the comparable quarter in 2006. The
principal categories which make up the 2007 net income are:
o Interest income of $3,119,878
o Reduced by interest expense of $843,243
o Increased by a credit to the provision for loan losses of $30,000
o Increased by non-interest income of $541,363
o Reduced by non-interest expense of $1,856,156
o Reduced by $462,071 in income tax expense
We discuss each of these categories individually and the reasons for the
differences between the quarters ended March 31, 2007 and 2006 in the following
paragraphs. In general, the principal reason for the decline in net income when
comparing the first quarter of 2007 with the same quarter in 2006 was a
reduction in interest-earning assets, which reduced net interest income, and an
increase in occupancy expenses due to the addition of one new branch office and
our new main office.
14
We have implemented a number of programs in an attempt to reverse the
decline in total assets. These include the increase in the number of banking
offices we maintain from four at year end 2005 to five at year end 2006. We have
opened a new main office in Great Kills section of Staten Island in 2007 and we
closed our original main office in Oakwood, as the lease expired at that
location. In addition, we have started to offer new products such as debit cards
and online bill pay. Adding new branches and new products also creates new
expenses associated with their introduction and their ongoing operation.
Although there can be no assurance that these actions will be successful,
management continues to exert efforts to grow our banking franchise because we
believe that growth is an important road in the direction of an increase in net
income.
Interest Income. Interest income was $3,119,878 for the quarter ended March
31, 2007, compared to $3,133,983 for the quarter ended March 31, 2006, a
decrease of $14,105, or 0.45%. The principal reason for this decrease was a
$9,943,899 decrease in the average balance of our loan portfolio. Loans are our
highest yielding asset category, and to the extent that we are unable to invest
available funds in satisfactory loans, we must invest those funds in lower
yielding investment securities and overnight investments at lower yields. In
addition, the decline in the loan portfolio was also a component of an overall
decline in total assets. The decline in the average balance of loans was the
principal component of a $4,424,248 decline in average earning assets from
$199,285,167 for the first quarter of 2006 to $194,860,919 for the first quarter
of 2007. This decline in average loans was partially offset by an increase in
the average loan yield. The decrease in interest income from the decline in
average loans was also partially mitigated by an increase of $3,050,812 in the
average balance of investment securities and an increase of $2,468,829 in the
average balance of other interest-earning assets, coupled with the increase in
the average yields on those 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 adjust more quickly as market interest rates change 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 decreased 13.6% to $63,248,356 for the
quarter ended March 31, 2007 from $73,192,245 during the 2006 quarter. The
decrease in average balance reflects the volatility inherent in the shorter
maturity loans, the increase in competition for such loans and the general
softening of the real estate market. The average yield on loans increased by 65
basis points, from 9.37% to 10.02%, as the Prime Rate rose during the first six
months of 2006. The net effect of the increase in average yield and the decline
in average loan balance was a $176,420 decrease in interest income from our loan
portfolio. In the future, fluctuations in the prime rate will have a direct
effect on our loan yields, except to the extent that the effect of a significant
future decline in the prime rate may cause a lesser reduction in yield because
many of our loans have interest rate floors that would be triggered if such a
decline occurs.
The average yield on our investment securities portfolio increased 22 basis
points, from 4.51% to 4.73%, also due to increases in market interest rates. The
yield on investment securities increased more slowly than the yield on loans
because most of the bonds and notes in our investment portfolio have either
fixed interest rates or interest rates that react more slowly than our loans to
changes in market interest rate conditions. The average balance of our
investment portfolio increased by $3,050,812, or 2.81%, between the periods. The
increase in yield and volume resulted in an overall $94,698 increase in interest
income from investment securities. The investment securities portfolio
represented 84.8% of average non-loan interest earning assets in the 2007 period
compared to 86.1% in the 2006 period.
Finally, we had a $67,617 increase in income from overnight funds and other
interest earning assets due to the higher market rates on short term and
overnight investments and an increase in average balance. The yield on these
investments increased 86 basis points from the first quarter of 2006 to the
first quarter of 2007, reflecting the effect of increases in the federal funds
rate during the first half of 2006. We increased the average balance of
overnight investments because they provide us with greater reinvestment
flexibility as we exert efforts to increase our loan portfolio and because the
gap between the rates on overnight investments versus the rates on investment
securities narrowed as short-term market rates rose while longer term rates
remained more steady.
15
Interest Expense. Interest expense was $843,243 for the quarter ended March
31, 2007, compared to $668,676 for the quarter ended March 31, 2006, an increase
of 26.1%. More than 92%, or $161,253, of the $174,567 increase in interest
expense was represented by an increase in the cost of our time deposits.
Although the average balance of time accounts decreased by $699,622 (or 1.0%),
the effect of the balance decline was far outweighed by a 101 basis point
increase in the average cost of time deposits. The increase in rate was due to
the increase in market rates between the two comparable quarters.
Our average cost of funds increased from 2.13% to 2.79% between the periods
primarily due to the increase in the cost of time deposits and to a lesser
extent, the increased cost of other interest bearing 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 were able to
impose greater limits on interest rate increases in other deposit categories as
market interest rates rose, 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 $2,276,635 for the quarter ended March
31, 2007, a decrease of $188,672, or 7.7% over the $2,465,307 in the comparable
2006 quarter. The decrease resulted principally from an increase in our cost of
funds and a decline in the average balance of our loan portfolio. Our net
interest spread decreased to 3.68% in the first quarter of 2007 compared to
4.13% in the first quarter of 2006 and our net interest margin decreased to
4.72% in the first quarter of 2007 compared to 4.90% in the first quarter of
2006, respectively. On the asset side, the average yield on earning assets in
the 2007 period rose to 6.47% from 6.26% in the March 2006 period, or an
increase of 21 basis points. On the liability side, there was an increase in our
cost of funds of 66 basis points from 2006.
We note that our margin declined more slowly than our spread because, as
the average yields on our assets increase, checking accounts, which represent a
no-cost funding source, become more valuable because we can invest the proceeds
of those deposits at higher yields. However, our average volume of checking
accounts has declined recently. This has resulted from a softening real estate
market, which causes the aggregate balance of demand deposits to decline due to
our strategy of attracting deposits from attorneys and other customers linked to
the real estate businesses. Management continually seeks to maintain a high
level of non-interest checking accounts through developing relationships with
local businesses and attorneys. 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,
increases in market interest rates make interest-bearing deposit products more
attractive to customers and may cause funds to shift from non-interest checking
into interest-bearing deposit products.
Provision for Loan Losses. For the quarter ended March 31, 2007, we took a
$30,000 credit to the provision for loan losses, compared to a $25,000 provision
for loan losses for the quarter ended March 31, 2006. The credit to the
provision for loan losses was due to the decline the loan portfolio balance, and
the level of recoveries on loans previously charged-off, which are added to the
allowance for loan loss. The provision for loan losses in any 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
appropriateness 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 loss represented
1.65% of total loans at March 31, 2007, but there can be no assurance that a
higher level, or a higher provision for loan losses, will not be necessary in
the future.
16
Non-interest Income. Non-interest income was $541,363 for the three months
ended March 31, 2007, compared to $483,549 during the same period last year. The
$57,814, or 12.0%, increase in non-interest income was a direct result of a
$27,152 increase in service charges on deposits (primarily non-sufficient fund
fees), an $11,438 increase in net rental income and a $14,523 increase in other
income. Service fees on deposit accounts, principally non-sufficient funds fees,
increased from 2006 to 2007 as the volume of deposit account transactions
generating fee income increased. The increase in other income is a direct result
of the Bank taking on a select, limited group of licensed consumer check cashing
companies as deposit customers. These companies generate fee income through per
item charges on their deposits.
Non-interest Expense. Non-interest expense was $1,856,156 for the quarter
ended March 31, 2007, compared to $1,819,273 for the quarter ended March 31,
2006. The principal causes of the $36,883 increase were:
o $14,747 decrease in salaries and benefits expense, due to a reduction in
our incentive compensation accrual, partially offset by normal salary
increases, an increase in SAR related expenses , a slight increase in
staffing to support branch growth and higher benefit costs.
o $78,515 in higher occupancy expenses due to the operation of our branch in
Rosebank and the opening of our new main office in Great Kills.
o $44,348 decrease in legal expenses due to the recovery of legal fees paid
on an unsecured commercial loan that was previously charged off and a
reduction in attorney fees from the 2006 quarter.
Income Tax Expense. Income tax expense was $462,071 for the quarter ended
March 31, 2007, compared to income tax expense of $514,672 for the quarter ended
March 31, 2006. The reduction in income tax expense was due to the $112,741
decrease in income before income taxes in the 2007 quarter. Our effective tax
rate remained the same for the quarters ended March 31, 2007 and 2006 at 46.6%.
17
VSB BANCORP, INC.
CONSOLIDATED AVERAGE BALANCE SHEETS
(unaudited)
Three Three
Months Ended Months Ended
March 31. 2007 March 31. 2006
------------------------------------- --------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------------- ---------- ------ ------------- ----------- -------
Assets:
Interest-earning assets:
Loans receivable $ 63,248,356 $ 1,572,353 10.02% $ 73,192,245 $ 1,748,773 9.37%
Investment securities, afs 111,582,498 1,300,460 4.73 108,531,686 1,205,762 4.51
Other interest-earning assets 20,030,065 247,065 5.00 17,561,236 179,448 4.14
------------- ----------- ------------- -----------
Total interest-earning assets 194,860,919 3,119,878 6.47 199,285,167 3,133,983 6.26
Non-interest earning assets 16,607,790 14,168,160
------------- -------------
Total assets $ 211,468,709 $ 213,453,327
============= =============
Liabilities and equity:
Interest-bearing liabilities:
Savings accounts $ 12,410,880 24,428 0.80 $ 14,798,671 18,334 0.50
Time accounts 66,760,483 615,136 3.74 67,460,105 453,883 2.73
Money market accounts 18,383,022 85,850 1.89 19,878,287 84,216 1.72
Now accounts 19,765,134 28,789 0.59 20,126,130 23,203 0.47
Subordinated debt 5,155,000 89,040 6.91 5,155,000 89,040 6.91
------------- ----------- ------------- -----------
Total interest-bearing liabilities 122,474,519 843,243 2.79 127,418,193 668,676 2.13
Checking accounts 68,086,917 68,300,650
------------- -------------
Total deposits and subordinated debt 190,561,436 195,718,843
Other liabilities 2,794,791 2,668,707
------------- -------------
Total liabilities 193,356,227 198,387,550
Equity 18,112,482 15,065,777
------------- -------------
Total liabilities and equity $ 211,468,709 $ 213,453,327
============= =============
Net interest income/net interest
rate spread $ 2,276,635 3.68% $ 2,465,307 4.13%
=========== ====== =========== =======
Net interest earning assets/net
interest margin $ 72,386,400 4.72% $ 71,866,974 4.90%
============= ====== ============= =======
Ratio of interest-earning assets
to interest-bearing liabilities 1.59 x 1.56 x
============= =============
Return on Average Assets (1) 1.01% 1.06%
============= =============
Return on Average Equity (1) 11.75% 15.06%
============= =============
Tangible Equity to Total Assets 8.94% 6.71%
============= =============
(1) Ratios have been annualized.
18
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are increases in deposits, proceeds from the
repayment of investment securities, and the repayment of loans. 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, 2007, we had a net decrease in
total deposits of $4,078,623 as a result of a $3,227,654 decrease in demand
deposits, a $902,986 decrease in time deposits, a $103,498 decline in savings
accounts and a $195,675 decline in money market accounts, partially offset by a
$351,190 increase in NOW accounts. We received proceeds from repayment of
investment securities of $5,666,281 which we used to fund the deposit outflow.
We had a net loan reduction of $4,948,058 and we used $2,826,589 of cash for
capitalized leasehold improvements and equipment for our new main office in
Great Kills. These changes resulted in an overall increase in cash and cash
equivalents of $6,138,572.
In contrast, 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.
Victory State Bank satisfied all capital ratio requirements of the Federal
Deposit Insurance Corporation at March 31, 2007, with a Tier I Leverage Capital
ratio of 11.33%, a ratio of Tier I Capital to Risk-Weighted Assets ratio of
26.94%, and a Total Capital to Risk-Weighted Assets ratio of 28.08%.
VSB Bancorp, Inc. satisfied all capital ratio requirements of the Federal
Reserve at March 31, 2007, with a Tier I Leverage Capital ratio of 11.67%, a
ratio of Tier I Capital to Risk-Weighted Assets ratio of 27.72%, and a Total
Capital to Risk-Weighted Assets ratio of 28.86%.
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, 2007
Payment due by Period
----------------------------------------------------------------------------------
Less than One to three Four to five After Total Amounts
Contractual Obligations One Year years years five years committed
------------------------------------- -------------- -------------- -------------- -------------- --------------
Minimum annual rental payments under
non-cancelable operating leases $ 391,585 $ 795,425 $ 821,832 $ 2,533,146 $ 4,541,988
Remaining contractual maturities of
time deposits 64,265,368 1,310,021 1,750,869 - 67,326,258
-------------- -------------- -------------- -------------- --------------
Total contractual cash obligations $ 64,656,953 $ 2,105,446 $ 2,572,701 $ 2,533,146 $ 71,868,246
============== ============== ============== ============== ==============
Amount of commitment Expiration by Period
----------------------------------------------------------------------------------
Less than One to three Four to five After Total Amounts
Other commitments One Year years years five years committed
-------------- -------------- -------------- -------------- --------------
Loan commitments $ 18,585,173 $ 12,507,481 $ 250,000 $ - $ 31,342,654
============== ============== ============== ============== ==============
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.
19
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, 2007, 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 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. The plaintiff amended its complaint
again and the Bank moved to dismiss the claims. In February 2007, the court
dismissed two of the claims against the Bank but allowed the Plaintiff to
proceed and conduct discovery with respect to two claims, one for negligence and
the other for conversion.
20
The amended complaint requests monetary damages against the Bank of $1,817,041.
The Bank intends to defend aggressively the amended claims and has referred the
litigation to its insurance carrier, which has indicated that the claims
asserted against the Bank are covered by insurance. The Bank has also asserted
cross-claims against various former customers, principals of those customers,
and other related persons on the grounds that if the Bank is held liable to the
plaintiff, then the liability is the result of the misdeeds or negligence of
those other parties.
VSB Bancorp, Inc., is not involved in any pending legal proceedings. The Bank,
from time to time, is involved in routine collection proceedings in the ordinary
course of business on loans in default. Management believes that such other
routine legal proceedings in the aggregate are immaterial to our financial
condition or results of operations.
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, 2007 through March 31, 2007. VSB Bancorp, Inc. held its fourth
Annual Meeting of Stockholders on April 24, 2007 at its principal office, 4142
Hylan Boulevard, Staten Island, New York 10308 at 5:00 P.M. At that meeting,
1,742,449 shares of the capital stock of the Company were represented in person
or by proxy, being 92.1 % 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 Percentage
Director Votes of shares Votes of shares
Elected For voted Withheld voted
-------------------- ----------- ---------- ------------ ----------
Joseph J. LiBassi 1,698,949 97.5% 43,500 2.5%
Merton Corn 1,698,949 97.5% 43,500 2.5%
Joan Nerlino Caddell 1,697,158 97.4% 45,291 2.6%
No other persons received any votes.
The following directors continued as directors of the Company: Raffaele M.
Branca, Robert S. Cutrona, Sr., Chaim Farkas, Alfred C. Johnsen, Carlos
Perez MD, and Bruno Savo.
2. The ratification of the appointment of Crowe Chizek and Company LLC as
our independent public accountants for the fiscal year ending December
31, 2007.
Percentage Percentage Proxies
Votes of shares Votes of shares marked
For voted Against voted Abstained
--------- ------------ ------------ ------------ ------------
1,682,699 97.9% 36,000 2.1% 23,750
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 8, 2007 /s/ Merton Corn
--------------------------------------
Merton Corn
President and Chief Executive Officer
Date: May 8, 2007 /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