Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
VSBN > SEC Filings for VSBN > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for VSB BANCORP INC

Form 10-Q for VSB BANCORP INC


13-Nov-2012

Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations

Financial Condition at September 30, 2012

Total assets were $259,846,039 at September 30, 2012, an increase of $17,999,584, or 7.4%, from December 31, 2011. The increase resulted from the investment of funds available to us as the result of retained earnings and 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 primarily in the purchase of new investment securities and short term liquid funds. The principal changes resulting in the net increase in assets can be summarized as follows:

a $14,715,503 net increase in cash and cash equivalents and
a $3,793,159 net increase in investment securities available for sale.

In addition to these changes in major asset categories, we also experienced changes in other asset categories due to normal fluctuations in operations.

Our deposits (including escrow deposits) were $230,954,847 at September 30, 2012, an increase of $17,731,942 or 8.3%, from December 31, 2011 as a result of our active solicitation of retail deposits to increase funds for investment. The aggregate increase in deposits resulted from increases of $7,026,530 in non-interest demand deposits, $5,727,857 in money market accounts, $3,575,103 in savings accounts, $3,290,674 in NOW accounts, and $141,775 in escrow deposits, partially offset by a decrease of $2,029,997 in time deposits.

Total stockholders' equity was $27,712,459 at September 30, 2012, an increase of $610,199, or 2.25%, from December 31, 2011. The increase reflected: (i) a $690,656 increase in retained earnings due to net income of $1,010,945 for the nine months ended September 30, 2012, partially offset by $320,289 of dividends paid in 2012; (ii) a reduction of $126,809 in Unearned ESOP shares reflecting the gradual payment of the loan we made to fund the ESOP's purchase of our stock and (iii) an increase in the net unrealized gain on securities available for sale of $18,021. Additionally, there was a $234,477 increase in Treasury shares representing the cost of 22,000 shares of common stock we repurchased in the during the first nine months of 2012 under our Company's third stock repurchase plan.

The unrealized gain on securities available for sale 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 Current Economic Turmoil

The economy in the United States, including the economy in Staten Island, was and may still be in a recession. Although some analysts report that the economy is recovering, the extent and speed of the recovery is far from clear and some analysts predict a darker road ahead. There is substantial stress on many financial institutions and financial products. The federal government has intervened by making hundreds of billions of dollars in capital contributions to the banking industry. We draw a substantial portion of our customer base from local businesses, especially those in the building trades and related industries, and we believe that there continue to be substantial weaknesses in the business economy in our market area. Our customers have been adversely affected by the economic downturn, and if adverse conditions in the local economy continue, it will become more difficult for us to conduct prudent and profitable business in our community.

Making permanent residential mortgage loans is not a material part of our business, and our investments in mortgage-backed securities and collateralized mortgage obligations have been made with a view towards avoiding the types of securities that are backed by low quality mortgage-related assets. However, one of the primary focuses of our local business is receiving deposits from, and making loans to, businesses involved in the construction and building trades industry on Staten Island. Construction loans represented a significant component of our loan portfolio, reaching 39.8% of total loans at year end 2005. As we monitored the economy and the strength of the local construction industry, we elected to reduce our portfolio of construction loans. By September 30, 2012, the percentage had declined to 3.5%. However, developers and builders provide not only a source of loans, but they also provide us with deposits and other business. The weakness in the economy has had an adverse effect on some of our customers and potential customers, making it more difficult for us to find satisfactory loan opportunities. This compelled us to invest in lower yielding securities instead of higher-yielding loans. This has and may continue to reduce our net income.

Possible Adverse Effects on Our Net Income Due to Fluctuations in Market Rates

Our principal source of income is the difference between the interest income we earn on interest-earning assets, such as loans and securities, and our cost of funds, principally interest paid on deposits. These rates of interest change from time to time, depending upon a number of factors, including general market interest rates. However, the frequency of the changes varies among different types of assets and liabilities. For example, for a five-year loan with an interest rate based upon the prime rate, the interest rate may change every time the prime rate changes. In contrast, the rate of interest we pay on a five-year certificate of deposit adjusts only every five years, based upon changes in market interest rates.

In general, the interest rates we pay on deposits adjust more slowly than the interest rates we earn on loans because our loan portfolio consists primarily of loans with interest rates that fluctuate based upon the prime rate. In contrast, although many of our deposit categories have interest rates that could adjust immediately, such as interest checking accounts and savings accounts, changes in the interest rates on those accounts are at our discretion. Thus, the rates on those accounts, as well as the rates we pay on certificates of deposit, tend to adjust more slowly. As a result, the declines in market interest rates that occurred through the end of 2008 initially had an adverse effect on our net income because the yields we earn on our loans declined more rapidly than our cost of funds. However, many of our prime-based loans have minimum interest rates, or floors, below which the interest rate does not decline despite further decreases in the prime rate. As our loans reached their interest rate floors, our loan yields stabilized while our deposit costs continued to decline. This had a positive effect on our net interest income.

When market interest rates begin increasing, which we expect will occur at some point in the future, we anticipate an initial adverse effect on our net income. We anticipate that this will occur because our deposit rates should begin to rise, while loan yields remain relatively steady until the prime rate increases sufficiently that our loans begin to reprice above their interest rate floors. For most of our prime-rate based loans, this will not occur until the prime rate increases above 6%. Once our loan rates exceed the interest rate floors, increases in market interest rates should increase our net interest income because our cost of deposits should probably increase more slowly than the yields on our loans. However, customer preferences and competitive pressures may negate this positive effect because customers may choose to move funds into higher-earning deposit types as higher interest rates make them more attractive, or competitors offer premium rates to attract deposits. We also have a substantial portfolio of investment securities with fixed rates of interest, most of which are mortgage-backed securities with an estimated average life of not more than 7 years.

Delays in Foreclosure Proceedings

The length of time it takes to prosecute a foreclosure action and be able to sell real estate collateral in New York has substantially lengthened. It is not unusual for it to take more than a full year from the date a foreclosure action is commenced until the property is sold even in uncontested cases, and some uncontested cases can take as long as two years. This problem, if it continues or gets worse, could have a substantial adverse effect on the value of our collateral for loans in default. Especially in the case of construction loans, where property value deterioration during a lengthy foreclosure is more likely, the inability to realize upon collateral increases our loss in the event of a default.

Possible Effects of Hurricane Sandy

Hurricane Sandy has had a devastating effect on the homes and businesses of New York City, especially Staten Island. We have been able to open four of five locations the day after the Hurricane and we are operating in a reasonable manner. We are still assessing the full impact of Hurricane Sandy, including the effects on the allowance for loan loss and the loan portfolio, and we will address any of the associated issues as they arise.

Results of Operations for the Three Months Ended September 30, 2012 and September 30, 2011

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 $357,460 for the three months ended September 30, 2012, compared to net income of $422,288 for the comparable period in 2011. The principal categories which make up the 2012 net income are:

Interest income of $2,251,883
Reduced by interest expense of $200,612
Reduced by a provision for loan losses of $40,000
Increased by non-interest income of $607,828
Reduced by non-interest expense of $1,960,211
Reduced by income tax expense of $301,428

We discuss each of these categories individually and the reasons for the differences between the quarters ended September 30, 2012 and 2011 in the following paragraphs.

Interest Income. Interest income was $2,251,883 for the quarter ended September 30, 2012, compared to $2,494,086 for the quarter ended September 30, 2011, a decrease of $242,203 or 9.7%. The main reason for the decline was a 63 basis point decrease in the yield and a $2,089,124 decrease in average balance on investment securities between the periods, which combined to cause a $202,517 decline in interest income on investment securities. There was also a $52,707 decrease in interest income on loans

Interest income on loans decreased by $52,707 as a result of a decrease of $62,062 of interest collected on loans previously on non-accrual, from $100,523 for the third quarter of 2011 to $38,461 in the same period in 2012. There was a 12 basis point decrease in the average loan yield, partially offset by a $1,307,222 increase in the average balance of loans from the third quarter of 2011 to the third quarter of 2012. The increase in the average balance was the result of our efforts to increase our loan portfolio, which represents our highest yielding asset category. There was a $1,071,847 decrease in our average non-performing loans, from $7.2 million in the quarter ending September 30, 2011, to $6.1 million in the third quarter of 2012. During the period in which interest is not being paid, non-performing loans continue to be included in the calculation of average loan yield, but with an effective yield of zero. We estimate that if all non-performing loans were performing according to their contractual terms during the third quarter of 2012, our average loan yield would have been approximately 55 basis points higher. In contrast, we estimate that the comparable effect in 2011 period would have been approximately a 54 basis point increase in average loan yield. Substantially all of the non-accrual loans are secured by mortgages on real estate.

Interest rate floors on most of our loans have helped to stabilize interest income from the loan portfolio, but these floors will have the effect of limiting increases in our income until the prime rate rises above 6%.

We experienced a 63 basis point decrease in the average yield on our investment securities portfolio, from 3.18% to 2.55%, due to the purchase of new investment securities at lower market rates than the rates we had been earning on the investment securities previously purchased that were gradually being repaid. The average balance of our investment portfolio decreased by $2.1 million, or 1.8%, between the periods, as we limited our purchases of new investment securities due to the low yields available. The investment securities portfolio represented 68.1% of average non-loan interest earning assets in the 2012 period compared to 75.7% in the 2011 period.

Interest income from other interest earning assets (principally overnight investments) increased by $13,021 due to an increase in the yield of 4 basis points from 0.18% for the quarter ended September 30, 2011 to 0.22% for the quarter ended September 30, 2012. In addition, the average balance of our other interest earning assets (principally overnight investments) increased by $16.4 million between the periods because we elected to invest available funds in overnight investments rather than tie them up in longer term investment securities which were available only at relatively low yields.

Interest Expense. Interest expense was $200,612 for the quarter ended September 30, 2012, compared to $210,382 for the quarter ended September 30, 2011, a decrease of $9,770 or 4.6%. The decrease was primarily the result of a reduction in the rates we paid on deposits, principally time deposits, reflecting a 10 basis point decrease in the cost of time deposits between the periods, due to the continuing low market interest rates. As a result, our average cost of funds, excluding the effect of interest-free demand deposits, decreased to 0.53% from 0.61% between the periods.

Net Interest Income Before Provision for Loan Losses. Net interest income before the provision for loan losses was $2,051,271 for the quarter ended September 30, 2012, compared to $2,283,704 for the quarter ended September 30, 2011, a decrease of $232,433, or 10.2%. The decrease was primarily because the reduction in our interest income was greater than the reduction in our cost of funds when comparing the quarter ended September 30, 2012 to the same period ended 2011. The average yield on interest earning assets declined by 55 basis points, while the average cost of funds declined by 8 basis points. The reduction in the yield on assets was principally due to the 63 basis point drop in the yield on investment securities and the 12 basis point decrease in the yield on loans. The decline in the cost of funds was driven principally by the 10 basis point drop in the cost of time deposits. Overall, our interest rate spread declined 47 basis points, from 3.44% to 2.97% between the periods. Correspondingly, our net interest margin decreased to 3.18% for the quarter ended September 30, 2012 from 3.70% in the same period of 2011. The margin is higher than the spread because it takes into account the effect of interest free demand deposits and capital.

The spread and margin both decreased because of the combined effect of the decline in earnings we were able to obtain on our investments securities and the increase in the average balance of other interest earning assets, our lowest yielding asset class. These declines could not be offset by corresponding declines in the cost of deposits because the rates we paid on deposits were already low due to low markets rates so that we could not reduce them as much as the decline in the earnings on investment securities. In addition, we continued to incur interest expense on deposits that funded the non-performing loans that did not earn interest.

Provision for Loan Losses. 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 appropriate, after taking into account charge offs and recoveries. We took a provision for loan losses of $40,000 for the quarter ended September 30, 2012 compared to a provision for loan losses of $90,000 for the quarter ended September 30, 2011. The $50,000 decrease in the provision was a result of increased level of recoveries on loans previously charged off.

Our allowance for loan losses is based on management's evaluation of the risks inherent in our loan portfolio and the general economy. We use the following framework each calendar quarter to evaluate the appropriateness of our allowance for loan losses. We conduct a loan by loan evaluation of credit losses in all non-performing or classified loans and we conduct a collective analysis of homogenous groups of performing loans to estimate credit losses in those loans on a group by group basis. Our individual evaluation of non-performing mortgage loans, which represent most of our non-performing loans, is based primarily upon updated appraisals. Our evaluation of homogenous groups of performing loans takes into account historical charge off rates we have experienced, as adjusted for pertinent current factors that may affect the extent to which we should rely upon our charge off history.

We experienced a decrease of $2,415,471 in non-performing loans from $8,505,711 at September 30, 2011 to $6,090,240 at September 30, 2012. All the non-performing loans at September 30, 2012 were secured by real estate. We individually evaluated the non-performing loans based primarily upon updated appraisals of the real estate collateral as part of our analysis of the appropriate level of our allowance for loan and lease losses. We had charge-offs of $10,917 for the quarter ended September 30, 2012 as compared to charge-offs of $1,942 for the quarter ended September 30, 2011. We also had recoveries (which are added back to the allowance for loan losses) of $55,436 for the quarter ended September 30, 2012 as compared to $31,887 in the same period of 2011. After decreasing the provision for loan losses for the quarter ended September 30, 2012 compared to the same period in 2011, and considering other matters that increased or decreased the allowance, we determined that the level of our allowance at September 30, 2012 was appropriate to address probable and incurred losses. We are aggressively collecting charged-off loans in an effort to recover the amounts charged off whenever we believe that collection efforts are likely to be fruitful.

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. Overall, our allowance for loan losses increased from $1,312,575, or 1.59% of total loans, at September 30, 2011 to $1,666,916 or 2.03% of total loans, at September 30, 2012. 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 $607,828 for the quarter ended September 30, 2012, compared to $602,505 during the same period last year. The $5,323, or 0.9%, increase in non-interest income was a direct result of a $7,532 increase in net rental income and $3,414 increase in loans fees, partially offset by an $8,490 decrease in service charges on deposits. Service charges on deposits consist mainly of insufficient fund fees, which are inherently volatile, and are based upon the number of items being presented for payment against insufficient funds.

Non-interest Expense. Non-interest expense was $1,960,211 for the quarter ended September 30, 2012, compared to $2,017,676 for the quarter ended September 30, 2011, a decrease of $57,465 or 2.9%. The principal shifts in the individual categories were:

a $53,850 decrease in salaries and benefits costs due to reduced staff;
a $36,402 decrease in occupancy expense due to the one-time remediation costs at a branch damaged in the third quarter of 2011, partially offset by:
an $18,919 increase in professional fees due to increased costs and the hiring of a consultant, and
a $9,321 increase in other non-interest expenses due to an increase in the cost of holding real estate acquired in the collection of mortgage loans;

In addition to these changes, we also experienced changes in the various other non-interest expenses categories due to normal fluctuations in operations.

Income Tax Expense. Income tax expense was $301,428 for the quarter ended September 30, 2012, compared to income tax expense of $356,245 for the same period ended 2011. The decrease in income tax expense was due to the $119,645 decrease in income before income taxes in the 2012 period. Our effective tax rate for the quarters ended September 30, 2012 and 2011 was 45.8%.

Results of Operations for the Nine Months Ended September 30, 2012 and September 30, 2011

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 $1,010,945 for the nine months ended September 30, 2012, compared to net income of $1,281,783 for the comparable period in 2011. The principal categories which make up the 2012 net income are:

Interest income of $6,886,588
Reduced by interest expense of $608,093
Reduced by a provision for loan losses of $280,000
Increased by non-interest income of $1,856,784
Reduced by non-interest expense of $5,991,735
Reduced by income tax expense of $852,599

We discuss each of these categories individually and the reasons for the differences between the nine months ended September 30, 2012 and 2011 in the following paragraphs.

Interest Income. Interest income was $6,886,588 for the nine months ended September 30, 2012, compared to $7,349,585 for the nine months ended September 30, 2011, a decrease of $462,997 or 6.3%. The main reason for the decline was a 62 basis point decrease in the yield and a $4,177,726 decrease in average balance on investment securities between the periods, which combined to cause a $630,521 decline in interest income on investment securities. This was partially offset by the $131,172 increase in interest income on loans.

Interest income on loans increased by $131,172 as a result of an increase of $68,366 of interest collected on loans previously on non-accrual, from $123,588 in the first nine months of 2011 to $191,954 in the same period in 2012. Also contributing to the increase in income on loans were a $1.8 million increase in the average balance of loans and a 2 basis point increase in the average yield, from the first nine months of 2011 to the first nine months of 2012. The increase in the average balance was the result of our efforts to increase our loan portfolio, which represents our highest yielding asset category. There was a $1,071,847 decrease in our average non-performing loans, from $7.2 million in the first nine months of 2011 to $6.1 million in the first nine months ended of 2012. During the period in which interest is not being paid, non-performing loans continue to be included in the calculation of average loan yield, but with an effective yield of zero. We estimate that if all non-performing loans were performing according to their contractual terms during the first nine months of 2012, our average loan yield would have been approximately 34 basis points higher. In contrast, we estimate that the comparable effect in 2011 period would have been approximately a 46 basis point increase in average loan yield. Substantially all of the non-accrual loans are secured by mortgages on real estate.

Interest rate floors on most of our loans have helped to stabilize interest income from the loan portfolio, but these floors will have the effect of limiting increases in our income until the prime rate rises above 6%.

We experienced a 62 basis point decrease in the average yield on our investment securities portfolio, from 3.33% to 2.71%, due to the purchase of new investment securities at lower market rates than the rates we had been earning on the investment securities previously purchased that were gradually being repaid. The average balance of our investment portfolio decreased by $4.2 million, or 3.5%, between the periods. The investment securities portfolio represented 70.4% of average non-loan interest earning assets in the 2012 period compared to 77.9% in the 2011 period.

Interest income from other interest earning assets (principally overnight investments) increased by $36,352 due to an increase in the yield of 5 basis points from 0.17% for the nine months ended September 30, 2011 to 0.22% for the same period ended September 30, 2012. In addition, the average balance of our interest earning assets increased by $14.3 million between the periods because we elected to invest available funds in overnight investments rather than tie them up in longer term investment securities which were available only at relatively low yields.

Interest Expense. Interest expense was $608,093 for the nine months ended September 30, 2012, compared to $653,499 for the nine months ended September 30, 2011, a decrease of $45,406 or 7.0%. The decrease was primarily the result of a reduction in the rates we paid on deposits between the periods, principally a 10 basis point decrease in money market account rates and a 8 basis point decrease in the cost of Now account deposits, due to the continuing low market interest rates. As a result, our average cost of funds, excluding the effect of interest-free demand deposits, decreased to 0.55% from 0.63% between the periods.

Net Interest Income Before Provision for Loan Losses. Net interest income before the provision for loan losses was $6,278,495 for the nine months ended September 30, 2012, compared to $6,696,086 for the nine months ended September 30, 2011, a decrease of $417,591, or 6.2%. The decrease was primarily because the reduction in our interest income was greater than the reduction in our cost of funds when comparing the nine months ended September 30, 2012 to the same period ended 2011. The average yield on interest earning assets declined by 47 basis points, while the average cost of funds declined by 8 basis points. The reduction in the yield on assets was principally due to the 62 basis point drop in the yield on investment securities partially offset by the 2 basis point increase in the yield on loans. The decline in the cost of funds was driven principally by the 10 basis point decrease in money market accounts and the 8 basis point decrease in the cost of NOW account deposits. Overall, our interest rate spread declined 39 basis points, from 3.56% to 3.17% between the periods. Correspondingly, our net interest margin decreased to 3.39% for the nine months ended September 30, 2012 from 3.81% in the same period of 2011. The margin is higher than the spread because it takes into account the effect of interest free demand deposits and capital.

The spread and margin both decreased because of the combined effect of the decline in earnings we were able to obtain on our investments securities and the adverse effect of the decrease in interest received on problem loans. These declines could not be offset by corresponding declines in the cost of deposits . . .

  Add VSBN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for VSBN - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.