VSB BANCORP, INC.
1. GENERAL
VSB Bancorp, Inc. (referred to using terms such as “we,” “us,” or the “Company”) is the holding company for Victory State Bank (the “Bank”), a New York chartered commercial bank. Our primary business is owning all of the issued and outstanding stock of the Bank. Our common stock is listed on the NASDAQ Global Market. We trade under the symbol “VSBN”.
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. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the local Staten Island economic and real estate markets. The Bank invests funds that are not used for lending primarily in government securities, mortgage backed securities and collateralized mortgage obligations. Customer deposits are insured, up to the applicable limit, by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is supervised by the New York State Banking Department and the FDIC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting and reporting policies followed in preparing and presenting the accompanying consolidated financial statements. These policies conform with accounting principles generally accepted in the United States of America (“GAAP”).
Principles of Consolidation - The consolidated financial statements of the Company include the accounts of the Company, including its subsidiary Victory State Bank. All significant inter-company accounts and transactions between the Company and Bank have been eliminated in consolidation.
Use of Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses during the reporting period. Actual results can differ from those estimates. The allowance for loan losses, prepayment estimates on the mortgage-backed securities and collateralized mortgage obligation portfolios, contingencies and fair values of financial instruments are particularly subject to change.
Reclassifications – Some items in the prior year financial statements were reclassified to conform to the current presentation.
Cash and Cash Equivalents – Cash and cash equivalents consist of cash on hand, due from banks and interest-bearing deposits. Interest-bearing deposits with original maturities of 90 days or less are included in this category. Customer loan and deposit transactions are reported on a net cash basis. Regulation D of the Board of Governors of the Federal Reserve System requires that Victory State Bank maintain 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 September 22, 2011 through October 5, 2011, Victory State Bank was required to maintain reserves, after deducting vault cash, of $4,710,000. 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. For debt securities with other than temporary impairment (OTTI) that management does not intend to sell or expect to be required to sell, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
The Company invests primarily in agency collateralized mortgage-Backed obligations (“CMOs”) with estimated average lives primarily under 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 appropriate.
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 but has not been paid. 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.
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. The fair value of the collateral is estimated by obtaining a new appraisal, if the loan amount exceeds $100,000, or by discounting the most recent appraisal to reflect the current market if the loan is less than $100,000 or a more recent appraisal has yet to be received. Loans with modified terms that the Company would not normally consider, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Large groups of homogeneous 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.
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 fifteen 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, which is the price the Bank pays for the FHLB Stock. 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. As such, 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 Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Financial Instruments - In the ordinary course of business, the Company has entered into off-balance sheet financial instruments, primarily consisting of commitments to extend credit.
Basic and Diluted Net Income Per Common Share - The Company has stock compensation awards with non-forfeitable dividend rights which are considered participating securities. As such, earnings per share is computed using the two-class method. Basic earnings per common share is computed by dividing net income allocated to common stock by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted earnings per common share includes the dilutive effect of additional potential common shares from stock-based compensation plans, but excludes awards considered participating securities. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.
Basic net income per share of common stock is based on 1,772,464 shares and 1,772,566 shares, the weighted average number of common shares outstanding for the three months ended September 30, 2011 and 2010, respectively. Diluted net income per share of common stock is based on 1,772,464 and 1,772,635, the weighted average number of common shares outstanding plus potentially dilutive common shares for the three months ended September 30, 2011 and 2010, 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 43,065 and 36,876 shares for the three months ended September 30, 2011 and 2010, respectively. Common stock equivalents were calculated using the treasury stock method.
Basic net income per share of common stock is based on 1,767,607 shares and 1,754,466 shares, the weighted average number of common shares outstanding for the nine months ended September 30, 2011 and 2010, respectively. Diluted net income per share of common stock is based on 1,768,237 and 1,754,633, the weighted average number of common shares outstanding plus potentially dilutive common shares for the nine months ended September 30, 2011 and 2010, 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 32,991 and 34,677 shares for the nine months ended September 30, 2011 and 2010, respectively. Common stock equivalents were calculated using the treasury stock method.
The reconciliation of the numerators and the denominators of the basic and diluted per share computations for the three and nine months ended September 30, are as follows:
|
Reconciliation of EPS
|
|
|
|
|
|
|
| |
|
Three months ended
September 30, 2011
|
|
|
Three months ended
September 30, 2010
|
|
|
Basic
|
|
|
|
|
|
|
|
Distributed earnings allocated to common stock
|
|
$ |
106,348 |
|
|
$ |
106,354 |
|
|
Undistributed earnings allocated to common sock
|
|
|
309,119 |
|
|
|
390,555 |
|
|
Net earnings allocated to common stock
|
|
$ |
415,467 |
|
|
$ |
496,909 |
|
| |
|
|
|
|
|
|
|
|
|
Weighted common shares outstanding including participating securities
|
|
|
1,801,564 |
|
|
|
1,808,066 |
|
|
Less: Participating securities
|
|
|
(29,100 |
) |
|
|
(35,500 |
) |
|
Weighted average shares
|
|
|
1,772,464 |
|
|
|
1,772,566 |
|
| |
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$ |
0.23 |
|
|
$ |
0.28 |
|
| |
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
Net earnings allocated to common stock
|
|
$ |
415,467 |
|
|
$ |
496,909 |
|
| |
|
|
|
|
|
|
|
|
|
Weighted average shares for basic
|
|
|
1,772,464 |
|
|
|
1,772,566 |
|
|
Dilutive effects of:
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
— |
|
|
|
69 |
|
|
Unvested shares not considered participating securities
|
|
|
— |
|
|
|
— |
|
| |
|
|
1,772,464 |
|
|
|
1,772,635 |
|
| |
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$ |
0.23 |
|
|
$ |
0.28 |
|
|
Reconciliation of EPS
|
|
|
|
|
|
|
| |
|
Nine months ended
September 30, 2011
|
|
|
Nine months ended
September 30, 2010
|
|
|
Basic
|
|
|
|
|
|
|
|
Distributed earnings allocated to common stock
|
|
$ |
318,169 |
|
|
$ |
315,804 |
|
|
Undistributed earnings allocated to common sock
|
|
|
940,948 |
|
|
|
1,071,135 |
|
|
Net earnings allocated to common stock
|
|
$ |
1,259,117 |
|
|
$ |
1,386,939 |
|
| |
|
|
|
|
|
|
|
|
|
Weighted common shares outstanding including participating securities
|
|
|
1,799,426 |
|
|
|
1,774,343 |
|
|
Less: Participating securities
|
|
|
(31,819 |
) |
|
|
(19,877 |
) |
|
Weighted average shares
|
|
|
1,767,607 |
|
|
|
1,754,466 |
|
| |
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$ |
0.71 |
|
|
$ |
0.79 |
|
| |
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
Net earnings allocated to common stock
|
|
$ |
1,259,117 |
|
|
$ |
1,386,939 |
|
| |
|
|
|
|
|
|
|
|
|
Weighted average shares for basic
|
|
|
1,767,607 |
|
|
|
1,754,466 |
|
|
Dilutive effects of:
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
630 |
|
|
|
167 |
|
|
Unvested shares not considered participating securities
|
|
|
— |
|
|
|
— |
|
| |
|
|
1,768,237 |
|
|
|
1,754,633 |
|
| |
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$ |
0.71 |
|
|
$ |
0.79 |
|
Net earnings allocated to common stock for the period are distributed earnings during the period, such as dividends on common shares outstanding, plus a proportional amount of retained income for the period based on restricted shares granted but unvested compared to the total common shares outstanding.
Stock Based Compensation - The Company records 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.
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.
Stock Repurchase Programs – On September 8, 2008, the Company announced that its Board of Directors had authorized a Rule 10b5-1 stock repurchase program for the repurchase of up to 100,000 shares of the Company’s common stock. On April 21, 2009, the Company announced that its Board of Directors had authorized a second Rule 10b5-1 stock repurchase program for the repurchase of up to an additional 100,000 shares of the Company’s common stock. The Company has repurchased a total of 200,000 shares of its common stock under these stock repurchase programs, which was completed by the end of 2010. On September 14, 2011, the Company announced that its Board of Directors had authorized a third Rule 10b5-1 stock repurchase program for the repurchase of up to an additional 100,000 shares of the Company’s common stock. At September 30, 2011, the Company had repurchased a total of 100 shares of its common stock under this third stock repurchase program. Stock repurchases under the programs have been accounted for using the cost method, in which the Company will reflect the entire cost of repurchased shares as a separate reduction of stockholders’ equity on its balance sheet.
Retention and Recognition Plan – At the April 27, 2010 Annual Meeting, the stockholders of VSB Bancorp, Inc. approved the adoption of the 2010 Retention and Recognition Plan (the “RRP”). The RRP authorizes the award of up to 50,000 shares of its common stock to directors, officers and employees. In conjunction with the approval the RRP, stockholders approved the award of 4,000 shares of stock to each of its eight directors who had at least five years of service. The director awards will vest over five years, with 20% vesting annually for each of the first five years after the award is made, subject to acceleration and forfeiture. On April 27, 2011, 6,400 shares or 20% of the 32,000 shares of stock awarded to its eight directors who had at least five years of service had vested. On June 8, 2010, an additional 3,500 shares of stock were awarded to the President and CEO of the Company, which will vest over a 65 month period, with 20% vesting annually for each of the first five years starting in November 2011, subject to acceleration and forfeiture. The recipient of an award will not be required to make any payment to receive the award or the stock covered by the award. The Company recognizes compensation expense for the shares awarded under the RRP gradually as the shares vest, based upon the market price of the shares on the date of the award. For the nine months ended September 30, 2011, the Company recognized $60,557 of compensation expense related to the shares awarded. The income tax benefit resulting from this expense was $27,705. As of September 30, 2011, there was approximately $273,480 of unrecognized compensation costs related to the shares awarded. These costs are expected to be recognized over the next 3.50 years.
A summary of the status of the Company’s non-vested plan shares as of September 30, 2011 is as follows:
|
For the Nine Months Ended September 30, 2011:
|
|
|
|
|
| |
|
Shares
|
|
|
Weighted Average
Grant Date Share Value
|
|
| |
|
|
|
|
|
|
|
Non vested at beginning of period
|
|
|
35,500 |
|
|
$ |
11.46 |
|
|
Granted
|
|
|
— |
|
|
|
|
|
|
Vested
|
|
|
6,400 |
|
|
$ |
12.22 |
|
|
Non vested at end of period
|
|
|
29,100 |
|
|
$ |
11.46 |
|
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-Adopted Accounting Standards - In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-20,”Receivables: Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The objective of this ASU is for an entity to provide disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. An entity should provide disclosures on a disaggregated basis on two defined levels: 1) portfolio segment and 2) class of financing receivable. The ASU makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables, the aging of past due financing receivables at the end of the reporting period by class of financing receivables, and the nature and extent of TDRs that occurred during the period by class of financing receivables and their effect on the allowance for credit losses. The Company’s adoption on March 31, 2011 of the disclosures regarding activity in the allowance for loan losses and its adoption on December 31, 2010 of the other disclosures in this ASU except for those parts pertaining to TDRs, being disclosure-related only, had no impact on its results of operations. At its January 4, 2011, meeting, the FASB affirmed its decision to temporarily defer the effective date for TDRs.
In April 2011, the FASB issued ASU No. 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” This ASU amends Topic 310 and provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. The new guidance will require creditors to evaluate modifications and restructurings of receivables using a more principles-based approach, which may result in more modifications and restructurings being considered troubled debt restructurings. For purposes of measuring impairment of these receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. We do not expect that this accounting standards update will have a material impact on our financial condition, results of operations or financial statement disclosures.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 22): Presentation of Comprehensive Income.” The guidance contained in this ASU is the result of a joint project by the FASB and the International Accounting Standards Board (“IASB”) to improve the presentation of comprehensive income and to increase the consistency between U.S. GAAP and International Financial Reporting Standards (“IFRS”). The ASU provides only two options for presenting other comprehensive income (“OCI”). The first option is to present the total of comprehensive income in the statement of income in one continuous statement. The second option is to present two separate but consecutive statements. The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The amendments do not require any transition disclosures. We do not expect that this ASU will have a material impact on our financial condition, results of operations or financial statement disclosures.
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No.2011-4, “Fair Value Measurement and Disclosures (Topic 820)” (“ASU 2011-4”). ASU 2011-4 clarifies the guidance for determining fair value including some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This Update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with current accounting guidance. ASU 2011-4 is effective for interim and annual reporting periods ending on or after December 15, 2011. Adoption of AUS 2011-4 is not anticipated to have a material impact on the Company.
3. INVESTMENT SECURITIES, AVAILABLE FOR SALE
The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolio at September 30, 2011 and December 31, 2010 and the corresponding amounts of unrealized gains and losses therein:
| |
|
September 30, 2011 |
|
| |
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
| |
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA MBS - Residential
|
|
$ |
2,522,998 |
|
|
$ |
108,472 |
|
|
$ |
(259 |
) |
|
$ |
2,631,211 |
|
|
GNMA MBS - Residential
|
|
|
7,180,161 |
|
|
|
182,856 |
|
|
|
— |
|
|
|
7,363,017 |
|
|
Whole Loan MBS - Residential
|
|
|
860,967 |
|
|
|
23,224 |
|
|
|
— |
|
|
|
884,191 |
|
|
Collateralized mortgage obligations
|
|
|
98,878,858 |
|
|
|
3,250,379 |
|
|
|
(34 |
) |
|
|
102,129,203 |
|
| |
|
$ |
109,442,984 |
|
|
$ |
3,564,931 |
|
|
$ |
(293 |
) |
|
$ |
113,007,622 |
|
| |
|
December 31, 2010 |
|
| |
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
| |
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA MBS - Residential
|
|
$ |
3,428,696 |
|
|
$ |
142,521 |
|
|
$ |
— |
|
|
$ |
3,571,217 |
|
|
GNMA MBS - Residential
|
|
|
4,092,912 |
|
|
|
65,164 |
|
|
|
(76,964 |
) |
|
|
4,081,112 |
|
|
Whole Loan MBS - Residential
|
|
|
1,212,246 |
|
|
|
23,255 |
|
|
|
— |
|
|
|
1,235,501 |
|
|
Collateralized mortgage obligations
|
|
|
109,921,495 |
|
|
|
2,906,359 |
|
|
|
(407,777 |
) |
|
|
112,420,077 |
|
| |
|
$ |
118,655,349 |
|
|
$ |
3,137,299 |
|
|
$ |
(484,741 |
) |
|
$ |
121,307,907 |
|
There were no sales of investment securities for the nine months ended September 30, 2011 and the year ended December 31, 2010.
The amortized cost and fair value of the investment securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities, especially for collateralized mortgage obligations, if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
| |
|
September 30, 2011
|
|
| |
|
Amortized
|
|
|
Fair
|
|
| |
|
Cost
|
|
|
Value
|
|
| |
|
|
|
|
|
|
|
|
|
Less than one year
|
|
$ |
471,399 |
|
|
$ |
471,140 |
|
|
Due after one year through five years
|
|
|
1,923,615 |
|
|
|
2,069,945 |
|
|
Due after five years through ten years
|
|
|
19,077,009 |
|
|
|
19,974,832 |
|
|
Due after ten years
|
|
|
87,970,961 |
|
|
|
90,491,705 |
|
| |
|
$ |
109,442,984 |
|
|
$ |
113,007,622 |
|
The following table summarizes the investment securities with unrealized losses at September 30, 2011 and December 31, 2010 by aggregated major security type and length of time in a continuous unrealized loss position:
|
September 30, 2011
|
|
Less than 12 months
|
|
|
More than 12 months
|
|
|
Total
|
|
| |
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
| |
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA MBS
|
|
$ |
471,140 |
|
|
$ |
(259 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
471,140 |
|
|
$ |
(259 |
) |
|
GNMA MBS
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Whole Loan MBS
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Collateralized mortgage obligations
|
|
|
54,890 |
|
|
|
(34 |
) |
|
|
— |
|
|
|
— |
|
|
|
54,890 |
|
|
|
(34 |
) |
| |
|
$ |
526,030 |
|
|
$ |
(293 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
526,030 |
|
|
$ |
(293 |
) |
|
December 31, 2010
|
|
Less than 12 months
|
|
|
More than 12 months
|
|
|
Total
|
|
| |
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
| |
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA MBS
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
GNMA MBS
|
|
|
2,991,961 |
|
|
|
(76,964 |
) |
|
|
— |
|
|
|
— |
|
|
|
2,991,961 |
|
|
|
(76,964 |
) |
|
Whole Loan MBS
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Collateralized mortgage obligations
|
|
|
20,223,509 |
|
|
|
(407,777 |
) |
|
|
— |
|
|
|
— |
|
|
|
20,223,509 |
|
|
|
(407,777 |
) |
| |
|
$ |
23,215,470 |
|
|
$ |
(484,741 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
23,215,470 |
|
|
$ |
(484,741 |
) |
The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.
At September 30, 2011, the unrealized loss on investment securities was caused by average life increases. We expect that these securities, at maturity, will not be settled for less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in average life and not credit quality, and because the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before recovery of the amortized cost basis less any current-period loss, these investments are not considered other-than-temporarily impaired. At September 30, 2011, there were no debt securities with unrealized losses with aggregate depreciation of 5% or more from the Company’s amortized cost basis.
Securities pledged had a fair value of $52,725,284 and $66,089,701 at September 30, 2011 and December 31, 2010, respectively and were pledged to secure public deposits and balances in excess of the deposit insurance limit on certain customer accounts.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of FASB ASC 820, “Financial Instruments”. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The following methods and assumptions were used by the Company in estimating fair values of financial instruments:
Interest-bearing Bank Balances – Interest-bearing bank balances mature within one year and are carried at cost, which are estimated to be reasonably close to fair value.
Money Market Investments – The fair value of these securities approximates their carrying value due to the relatively short time to maturity
Investment Securities, Available For Sale – The estimated fair value of these securities is determined by using available market information and appropriate valuation methodologies. The estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
Loans Receivable - The fair value of commercial and construction loans is approximated by the carrying value as the loans are tied directly to the Prime Rate and are subject to change on a daily basis, subject to the applicable interest rate floors. The fair value of the remainder of the portfolio is determined by discounting the future cash flows of the loans using the appropriate discount rate.
Other Financial Assets - The fair value of these assets, principally accrued interest receivable, approximates their carrying value due to their short maturity.
Non-Interest Bearing and Interest Bearing Deposits - The fair value disclosed for non-interest bearing deposits is equal to the amount payable on demand at the reporting date. The fair value of interest bearing deposits is based upon the current rates for instruments of the same remaining maturity. Interest bearing deposits with a maturity of greater than one year are estimated using a discounted cash flow approach that applies interest rates currently being offered.
Other Liabilities - The estimated fair value of other liabilities, which primarily include accrued interest payable, approximates their carrying amount.
The carrying amounts and estimated fair values of financial instruments, at September 30, 2011 and December 31, 2010 are as follows:
| |
|
September 30, 2011
|
|
|
December 31, 2010
|
|
| |
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
| |
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
47,214,664 |
|
|
$ |
47,214,664 |
|
|
$ |
28,764,987 |
|
|
$ |
28,764,987 |
|
|
Investment securities, available for sale
|
|
|
113,007,622 |
|
|
|
113,007,622 |
|
|
|
121,307,907 |
|
|
|
121,307,907 |
|
|
Loans receivable
|
|
|
80,804,304 |
|
|
|
81,806,839 |
|
|
|
80,261,004 |
|
|
|
81,526,941 |
|
|
Other financial assets
|
|
|
594,314 |
|
|
|
594,314 |
|
|
|
673,967 |
|
|
|
673,967 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Financial Assets
|
|
$ |
241,620,904 |
|
|
$ |
242,623,439 |
|
|
$ |
231,007,865 |
|
|
$ |
232,273,802 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
$ |
78,549,968 |
|
|
$ |
78,549,968 |
|
|
$ |
66,626,755 |
|
|
$ |
66,626,755 |
|
|
Interest bearing deposits
|
|
|
137,312,568 |
|
|
|
137,198,331 |
|
|
|
140,779,902 |
|
|
|
140,634,427 |
|
|
Other liabilities
|
|
|
16,341 |
|
|
|
16,341 |
|
|
|
19,039 |
|
|
|
19,039 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Financial Liabilities
|
|
$ |
215,878,877 |
|
|
$ |
215,764,640 |
|
|
$ |
207,425,696 |
|
|
$ |
207,280,221 |
|
ASC 825 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing and asset or liability.
The fair value of securities available for sale is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or using matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
| |
|
Fair Value Measurements at September 30, 2011 Using |
|
| |
|
Total
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA MBS - Residential
|
|
$ |
2,631,211 |
|
|
$ |
— |
|
|
$ |
2,631,211 |
|
|
$ |
— |
|
|
GNMA MBS - Residential
|
|
|
7,363,017 |
|
|
|
— |
|
|
|
7,363,017 |
|
|
|
— |
|
|
Whole Loan MBS-Residential
|
|
|
884,191 |
|
|
|
— |
|
|
|
884,191 |
|
|
|
— |
|
|
Collateralized mortgage obligations
|
|
|
102,129,203 |
|
|
|
— |
|
|
|
102,129,203 |
|
|
|
— |
|
Total Available for sale Securities
|
|
$ |
113,007,622 |
|
|
$ |
— |
|
|
$ |
113,007,622 |
|
|
$ |
— |
|
| |
|
Fair Value Measurements at December 31, 2010 Using |
|
| |
|
Total
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA MBS - Residential
|
|
$ |
3,571,217 |
|
|
$ |
— |
|
|
$ |
3,571,217 |
|
|
$ |
— |
|
|
GNMA MBS - Residential
|
|
|
4,081,112 |
|
|
|
— |
|
|
|
4,081,112 |
|
|
|
— |
|
|
Whole Loan MBS - Residential
|
|
|
1,235,501 |
|
|
|
— |
|
|
|
1,235,501 |
|
|
|
— |
|
|
Collateralized mortgage obligations
|
|
|
112,420,077 |
|
|
|
— |
|
|
|
112,420,077 |
|
|
|
— |
|
Total Available for sale Securities
|
|
$ |
121,307,907 |
|
|
$ |
— |
|
|
$ |
121,307,907 |
|
|
$ |
— |
|
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
Assets and Liabilities Measured on a Non-Recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on internally customized discounting criteria and updated appraisals when received.
| |
|
Fair Value Measurements at September 30, 2011 Using
|
|
| |
|
Total
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$ |
1,266,982 |
|
|
|
— |
|
|
|
— |
|
|
$ |
1,266,982 |
|
| |
|
Fair Value Measurements at December 31, 2010 Using
|
|
| |
|
Total
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$ |
643,758 |
|
|
|
— |
|
|
|
— |
|
|
$ |
643,758 |
|
As of September 30, 2011, we had four impaired loans with specific reserves that were collateral dependent. Collateral dependent impaired loans, which are measured for impairment using the fair value of the collateral, had a carrying amount of $1,355,141, with a valuation allowance of $88,159 at that date.
As of December 31, 2010, we had two impaired loans with specific reserves that were collateral dependent. Collateral dependent impaired loans, which are measured for impairment using the fair value of the collateral, had a carrying amount of $727,217, with a valuation allowance of $83,459 at that date.
5. LOANS RECEIVABLE, NET
Loans receivable, net at September 30, 2011 and December 31, 2010 are summarized as follows:
| |
|
September 30,
|
|
|
December 31,
|
|
| |
|
2011
|
|
|
2010
|
|
|
Commercial loans (principally variable rate):
|
|
|
|
|
|
|
|
Secured
|
|
$ |
1,428,301 |
|
|
$ |
1,393,532 |
|
|
Unsecured
|
|
|
13,009,083 |
|
|
|
12,924,378 |
|
|
Total commercial loans
|
|
|
14,437,384 |
|
|
|
14,317,910 |
|
| |
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
59,695,615 |
|
|
|
58,204,596 |
|
|
Residential
|
|
|
2,367,614 |
|
|
|
2,460,114 |
|
|
Total real estate loans
|
|
|
62,063,229 |
|
|
|
60,664,710 |
|
| |
|
|
|
|
|
|
|
|
|
Construction loans (net of undisbursed funds of $2,095,000 and $2,672,000, respectively)
|
|
|
4,720,000 |
|
|
|
5,874,500 |
|
| |
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
470,140 |
|
|
|
533,860 |
|
|
Other loans
|
|
|
649,980 |
|
|
|
386,750 |
|
| |
|
|
1,120,120 |
|
|
|
920,610 |
|
|
Total loans receivable
|
|
|
82,340,733 |
|
|
|
81,777,730 |
|
| |
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Unearned loans fees, net
|
|
|
(223,854 |
) |
|
|
(239,506 |
) |
|
Allowance for loan losses
|
|
|
(1,312,575 |
) |
|
|
(1,277,220 |
) |
| |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
80,804,304 |
|
|
$ |
80,261,004 |
|
Nonaccrual loans outstanding at September 30, 2011 and December 31, 2010 are summarized as follows:
| |
|
September 30,
|
|
|
December 31,
|
|
| |
|
2011
|
|
|
2010
|
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
Unsecured commercial loans
|
|
$ |
348,522 |
|
|
$ |
37,706 |
|
|
Commercial real estate
|
|
|
5,101,974 |
|
|
|
4,064,281 |
|
|
Residential real estate
|
|
|
2,257,715 |
|
|
|
2,276,306 |
|
|
Construction
|
|
|
797,500 |
|
|
|
— |
|
|
Total nonaccrual loans
|
|
$ |
8,505,711 |
|
|
$ |
6,378,293 |
|
| |
|
September 30,
|
|
|
December 31,
|
|
| |
|
2011
|
|
|
2010
|
|
|
Interest income that would have been recorded during the period on nonaccrual loans outstanding in accordance with original terms
|
|
$ |
371,582 |
|
|
$ |
469,484 |
|
At September 30, 2011 and December 31, 2010, there were no loans 90 days past due and still accruing interest.
The following table presents the aging of the past due loan balances as of September 30, 2011 and December 31, 2010 by class of loans:
|
September 30, 2011
|
|
|
|
|
30-59 |
|
|
60-89 |
|
|
Greater
|
|
|
|
|
|
Loans
|
|
| |
|
|
|
|
Days
|
|
|
Days
|
|
than 90 Days
|
|
|
Total
|
|
|
Not
|
|
| |
|
Total
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
|
|
$ |
13,009,083 |
|
|
$ |
9,800 |
|
|
$ |
— |
|
|
$ |
348,522 |
|
|
$ |
358,322 |
|
|
$ |
12,650,761 |
|
|
Secured
|
|
|
1,428,301 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,428,301 |
|
|
Real Estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
59,695,615 |
|
|
|
2,389,308 |
|
|
|
2,381,343 |
|
|
|
5,101,974 |
|
|
|
9,872,625 |
|
|
|
49,822,990 |
|
|
Residential
|
|
|
2,367,614 |
|
|
|
— |
|
|
|
— |
|
|
|
2,257,715 |
|
|
|
2,257,715 |
|
|
|
109,899 |
|
|
Construction loans
|
|
|
4,720,000 |
|
|
|
285,000 |
|
|
|
— |
|
|
|
797,500 |
|
|
|
1,082,500 |
|
|
|
3,637,500 |
|
|
Consumer loans
|
|
|
470,140 |
|
|
|
7,549 |
|
|
|
— |
|
|
|
— |
|
|
|
7,549 |
|
|
|
462,591 |
|
|
Other loans
|
|
|
649,980 |
|
|
|
5,958 |
|
|
|
1,869 |
|
|
|
— |
|
|
|
7,827 |
|
|
|
642,153 |
|
|
Total loans
|
|
$ |
82,340,733 |
|
|
$ |
2,697,615 |
|
|
$ |
2,383,212 |
|
|
$ |
8,505,711 |
|
|
$ |
13,586,538 |
|
|
$ |
68,754,195 |
|
|
December 31, 2010
|
|
|
|
|
|
30-59 |
|
|
60-89 |
|
|
Greater
|
|
|
|
|
|
|
Loans
|
|
| |
|
|
|
|
|
Days
|
|
|
Days
|
|
than 90 Days
|
|
|
Total
|
|
|
Not
|
|
| |
|
Total
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
|
|
$ |
12,924,378 |
|
|
$ |
46,562 |
|
|
$ |
42,708 |
|
|
$ |
37,706 |
|
|
$ |
126,976 |
|
|
$ |
12,797,402 |
|
|
Secured
|
|
|
1,393,532 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,393,532 |
|
|
Real Estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
58,204,596 |
|
|
|
3,103,589 |
|
|
|
277,960 |
|
|
|
4,064,281 |
|
|
|
7,445,830 |
|
|
|
50,758,766 |
|
|
Residential
|
|
|
2,460,114 |
|
|
|
— |
|
|
|
— |
|
|
|
2,276,306 |
|
|
|
2,276,306 |
|
|
|
183,808 |
|
|
Construction loans
|
|
|
5,874,500 |
|
|
|
795,000 |
|
|
|
— |
|
|
|
— |
|
|
|
795,000 |
|
|
|
5,079,500 |
|
|
Consumer loans
|
|
|
533,860 |
|
|
|
11,277 |
|
|
|
— |
|
|
|
— |
|
|
|
11,277 |
|
|
|
522,583 |
|
|
Other loans
|
|
|
386,750 |
|
|
|
2,279 |
|
|
|
— |
|
|
|
— |
|
|
|
2,279 |
|
|
|
384,471 |
|
|
Total loans
|
|
$ |
81,777,730 |
|
|
$ |
3,958,707 |
|
|
$ |
320,668 |
|
|
$ |
6,378,293 |
|
|
$ |
10,657,668 |
|
|
$ |
71,120,062 |
|
Nonaccrual loans include smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
Loans individually evaluated for impairment were as follows:
| |
|
September 30,
|
|
|
December 31,
|
|
| |
|
2011
|
|
|
2010
|
|
| |
|
|
|
|
|
|
|
Loans with no allocated allowance for loan losses:
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$ |
3,389,250 |
|
|
$ |
39,377 |
|
|
Construction
|
|
|
397,500 |
|
|
|
— |
|
|
Residential real estate
|
|
|
2,200,000 |
|
|
|
— |
|
|
Loans with allocated allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
Commercial and financial
|
|
|
385,182 |
|
|
|
36,837 |
|
|
Commercial real estate
|
|
|
1,355,141 |
|
|
|
3,448,695 |
|
| |
|
$ |
7,727,073 |
|
|
$ |
3,524,909 |
|
| |
|
|
|
|
|
|
|
|
|
Amount of the allowance for loan losses allocated:
|
|
|
|
|
|
|
|
|
|
Commercial and financial
|
|
$ |
139,228 |
|
|
$ |
7,367 |
|
|
Commercial real estate
|
|
|
88,159 |
|
|
|
83,459 |
|
| |
|
$ |
227,387 |
|
|
$ |
90,826 |
|
The following table sets forth certain information about impaired loans with a measured impairment:
| |
|
Three Months
|
|
|
Nine Months
|
|
| |
|
Ending
|
|
|
Ending
|
|
| |
|
September 30,
|
|
|
September 30,
|
|
| |
|
2011
|
|
|
2011
|
|
|
Average of individually impaired loans during period:
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$ |
3,531,255 |
|
|
$ |
2,278,708 |
|
|
Construction
|
|
|
397,500 |
|
|
|
132,500 |
|
|
Commercial unsecured
|
|
|
300,009 |
|
|
|
125,704 |
|
|
Residential real estate
|
|
|
2,200,000 |
|
|
|
1,466,667 |
|
| |
|
$ |
6,428,764 |
|
|
$ |
4,003,579 |
|
| |
|
|
|
|
|
|
|
|
|
Interest income recognized during time period that loans were impaired, using accrual or cash-basis method of accounting
|
|
$ |
103,881 |
|
|
$ |
103,881 |
|
The Company has allocated $3,666 and $7,367 of specific reserves to customers whose loan terms have been modified in trouble debt restructurings (“TDRs”) as of September 30, 2011 and December 31, 2010. The Company has not committed to lend any additional amounts to customers with outstanding loans that are classified as TDRs.
During the period July 1, 2011 through September 30, 2011, there were no additional TDRs. The outstanding principal balance of trouble debt restructurings at September 30, 2011 was $2,784,832 and at December 31, 2010 was $2,825,494. None of the loans currently classified as TDRs have defaulted during this period. The TDR’s being reported on are all current and are paying under the modified arrangements.
The terms of certain other loans were modified during the nine months ending September 30, 2011 that did not meet the definition of a TDR. These loans have a total recorded investment as of September 30, 2011 of $279,570. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant. For the three months ended September 30, 2011 there were no loans that were modified that did not meet the definition of a TDR.
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debts such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
Special Mention. Loans categorized as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position as some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and vales, highly questionable and improbable.
The following table sets forth at September 30, 2011 and December 31, 2010, the aggregate carrying value of our assets categorized as Special Mention, Substandard and Doubtful according to asset type:
| |
|
At September 30, 2011 |
|
| |
|
Special
|
|
|
|
|
|
|
|
|
Not
|
|
|
|
|
| |
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Classified
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,428,301 |
|
|
$ |
1,428,301 |
|
|
Unsecured
|
|
|
50,447 |
|
|
|
186,244 |
|
|
|
219,523 |
|
|
|
12,552,869 |
|
|
|
13,009,083 |
|
|
Commercial Real Estate
|
|
|
3,729,678 |
|
|
|
8,187,728 |
|
|
|
— |
|
|
|
47,778,209 |
|
|
|
59,695,615 |
|
|
Residential Real Estate
|
|
|
— |
|
|
|
2,257,715 |
|
|
|
— |
|
|
|
109,899 |
|
|
|
2,367,614 |
|
|
Construction
|
|
|
— |
|
|
|
797,500 |
|
|
|
— |
|
|
|
3,922,500 |
|
|
|
4,720,000 |
|
|
Consumer
|
|
|
13,975 |
|
|
|
— |
|
|
|
— |
|
|
|
456,165 |
|
|
|
470,140 |
|
|
Other
|
|
|
7,827 |
|
|
|
— |
|
|
|
— |
|
|
|
642,153 |
|
|
|
649,980 |
|
|
Total loans
|
|
$ |
3,801,927 |
|
|
$ |
11,429,187 |
|
|
$ |
219,523 |
|
|
$ |
66,890,096 |
|
|
$ |
82,340,733 |
|
| |
|
At December 31, 2010 |
|
| |
|
Special
|
|
|
|
|
|
|
|
|
Not
|
|
|
|
|
| |
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Classified
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,393,532 |
|
|
$ |
1,393,532 |
|
|
Unsecured
|
|
|
459,160 |
|
|
|
37,706 |
|
|
|
— |
|
|
|
12,427,512 |
|
|
|
12,924,378 |
|
|
Commercial Real Estate
|
|
|
4,250,511 |
|
|
|
5,623,816 |
|
|
|
— |
|
|
|
48,330,269 |
|
|
|
58,204,596 |
|
|
Residential Real Estate
|
|
|
— |
|
|
|
2,276,306 |
|
|
|
— |
|
|
|
183,808 |
|
|
|
2,460,114 |
|
|
Construction
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,874,500 |
|
|
|
5,874,500 |
|
|
Consumer
|
|
|
18,117 |
|
|
|
— |
|
|
|
— |
|
|
|
515,743 |
|
|
|
533,860 |
|
|
Other
|
|
|
12,096 |
|
|
|
— |
|
|
|
— |
|
|
|
374,654 |
|
|
|
386,750 |
|
|
Total loans
|
|
$ |
4,739,884 |
|
|
$ |
7,937,828 |
|
|
$ |
— |
|
|
$ |
69,100,018 |
|
|
$ |
81,777,730 |
|
The activity in the allowance for loan losses, for the three and nine months ended September 30, 2011:
| |
|
Three Months
|
|
|
Nine Months
|
|
| |
|
Ended
|
|
|
Ended
|
|
| |
|
Sep. 30, 2011
|
|
|
Sep. 30, 2011
|
|
|
Beginning balance
|
|
$ |
1,192,630 |
|
|
$ |
1,277,220 |
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
Commercial Loans:
|
|
|
|
|
|
|
|
|
|
Unsecured
|
|
|
— |
|
|
|
(185,054 |
) |
|
Consumer
|
|
|
— |
|
|
|
— |
|
|
Other
|
|
|
(1,942 |
) |
|
|
(1,942 |
) |
|
Total charge-offs
|
|
|
(1,942 |
) |
|
|
(186,996 |
) |
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
Commercial Loans:
|
|
|
|
|
|
|
|
|
|
Unsecured
|
|
|
31,887 |
|
|
|
68,187 |
|
|
Commercial Real Estate
|
|
|
— |
|
|
|
5,500 |
|
|
Consumer
|
|
|
— |
|
|
|
164 |
|
|
Other
|
|
|
— |
|
|
|
3,500 |
|
|
Total recoveries
|
|
|
31,887 |
|
|
|
77,351 |
|
|
Provision
|
|
|
90,000 |
|
|
|
145,000 |
|
| |
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$ |
1,312,575 |
|
|
$ |
1,312,575 |
|
The following table presents the balance in the allowance for loan losses and the recorded balance in loans, by portfolio segment, and based on impairment method as of September 30, 2011 and December 31, 2010:
|
September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Commercial
|
|
|
Commercial
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
Other
|
|
|
|
|
| |
|
Unsecured
|
|
|
Secured
|
|
|
Construction
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Loans
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$ |
141,287 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
117,088 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
258,375 |
|
|
Collectively evaluated for impairment
|
|
|
486,417 |
|
|
|
12,938 |
|
|
|
35,532 |
|
|
|
480,781 |
|
|
|
831 |
|
|
|
37,701 |
|
|
|
1,054,200 |
|
|
Total ending allowance balance
|
|
$ |
627,704 |
|
|
$ |
12,938 |
|
|
$ |
35,532 |
|
|
$ |
597,869 |
|
|
$ |
831 |
|
|
$ |
37,701 |
|
|
$ |
1,312,575 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$ |
405,767 |
|
|
$ |
— |
|
|
$ |
797,500 |
|
|
$ |
8,187,728 |
|
|
$ |
2,257,715 |
|
|
$ |
— |
|
|
$ |
11,648,710 |
|
|
Collectively evaluated for impairment
|
|
|
12,603,316 |
|
|
|
1,428,301 |
|
|
|
3,922,500 |
|
|
|
51,507,887 |
|
|
|
109,899 |
|
|
|
1,120,120 |
|
|
|
70,692,023 |
|
|
Total ending loans balance
|
|
$ |
13,009,083 |
|
|
$ |
1,428,301 |
|
|
$ |
4,720,000 |
|
|
$ |
59,695,615 |
|
|
$ |
2,367,614 |
|
|
$ |
1,120,120 |
|
|
$ |
82,340,733 |
|
|
December 31, 2 010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Commercial
|
|
|
Commercial
|
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
Other
|
|
|
|
|
|
| |
|
Unsecured
|
|
|
Secured
|
|
|
Construction
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Loans
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$ |
7,541 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
132,511 |
|
|
$ |
1,717 |
|
|
$ |
— |
|
|
$ |
141,769 |
|
|
Collectively evaluated for impairment
|
|
|
513,412 |
|
|
|
13,486 |
|
|
|
52,138 |
|
|
|
520,851 |
|
|
|
5,457 |
|
|
|
30,107 |
|
|
|
1,135,451 |
|
|
Total ending allowance balance
|
|
$ |
520,953 |
|
|
$ |
13,486 |
|
|
$ |
52,138 |
|
|
$ |
653,362 |
|
|
$ |
7,174 |
|
|
$ |
30,107 |
|
|
$ |
1,277,220 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$ |
37,706 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,623,816 |
|
|
$ |
2,276,306 |
|
|
$ |
— |
|
|
$ |
7,937,828 |
|
|
Collectively evaluated for impairment
|
|
|
12,886,672 |
|
|
|
1,393,532 |
|
|
|
5,874,500 |
|
|
|
52,580,780 |
|
|
|
183,808 |
|
|
|
920,610 |
|
|
|
73,839,902 |
|
|
Total ending loans balance
|
|
$ |
12,924,378 |
|
|
$ |
1,393,532 |
|
|
$ |
5,874,500 |
|
|
$ |
58,204,596 |
|
|
$ |
2,460,114 |
|
|
$ |
920,610 |
|
|
$ |
81,777,730 |
|
The following table presents the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2011.
|
Three months ended September 30, 2 011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Commercial
|
|
|
Commercial
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
Other
|
|
|
|
|
| |
|
Unsecured
|
|
|
Secured
|
|
|
Construction
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Loans
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$ |
542,558 |
|
|
$ |
11,701 |
|
|
$ |
37,517 |
|
|
$ |
564,952 |
|
|
$ |
5,173 |
|
|
$ |
30,729 |
|
|
$ |
1,192,630 |
|
|
Provision for loan losses
|
|
|
53,259 |
|
|
|
1,237 |
|
|
|
(1,985 |
) |
|
|
32,917 |
|
|
|
(4,342 |
) |
|
|
8,914 |
|
|
|
90,000 |
|
|
Loans charged-off
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,942 |
) |
|
|
(1,942 |
) |
|
Recoveries
|
|
|
31,887 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
31,887 |
|
|
Total ending allowance balance
|
|
$ |
627,704 |
|
|
$ |
12,938 |
|
|
$ |
35,532 |
|
|
$ |
597,869 |
|
|
$ |
831 |
|
|
$ |
37,701 |
|
|
$ |
1,312,575 |
|
|
Nine months ended September 30, 20 11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Commercial
|
|
|
Commercial
|
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
Other
|
|
|
|
|
|
| |
|
Unsecured
|
|
|
Secured
|
|
|
Construction
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Loans
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$ |
520,953 |
|
|
$ |
13,486 |
|
|
$ |
52,138 |
|
|
$ |
653,362 |
|
|
$ |
7,174 |
|
|
$ |
30,107 |
|
|
$ |
1,277,220 |
|
|
Provision for loan losses
|
|
|
223,618 |
|
|
|
(548 |
) |
|
|
(16,606 |
) |
|
|
(60,993 |
) |
|
|
(6,343 |
) |
|
|
5,872 |
|
|
|
145,000 |
|
|
Loans charged-off
|
|
|
(185,054 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,942 |
) |
|
|
(186,996 |
) |
|
Recoveries
|
|
|
68,187 |
|
|
|
— |
|
|
|
— |
|
|
|
5,500 |
|
|
|
— |
|
|
|
3,664 |
|
|
|
77,351 |
|
|
Total ending allowance balance
|
|
$ |
627,704 |
|
|
$ |
12,938 |
|
|
$ |
35,532 |
|
|
$ |
597,869 |
|
|
$ |
831 |
|
|
$ |
37,701 |
|
|
$ |
1,312,575 |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Condition at September 30, 2011
Total assets were $245,376,094 at September 30, 2011, an increase of $10,122,395, or 4.3%, from December 31, 2010. The increase resulted from the investment of funds available to us as the result of an increase in deposits and retained earnings. 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 cash and cash equivalents. The principal changes resulting in the net increase in assets can be summarized as follows:
| |
●
|
an $18,449,677 net increase in cash and cash equivalents
|
| |
●
|
an $8,300,285 net decrease 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 $215,862,536 at September 30, 2011, an increase of $8,455,879 or 4.1%, from December 31, 2010 as a result of our active solicitation of retail deposits to increase funds for investment. The increase in deposits resulted from increases of $11,815,602 in non-interest demand deposits, $2,125,408 in savings accounts, $1,134,206 in time deposits, $446,903 in money market accounts, and $107,611 in escrow deposits partially offset by a decrease of $7,173,851 in NOW accounts.
Total stockholders’ equity was $27,641,640 at September 30, 2011, an increase of $1,596,784, or 6.13%, from December 31, 2010. The increase reflected: (i) $955,632 net increase in retained earnings due to net income of $1,281,783 for the nine months ended September 30, 2011 partially offset by $326,151 of dividends paid in 2011; (ii) an increase in the net unrealized gain on securities available for sale of $494,803; and (iii) 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.
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 Dodd-Frank Wall Street Reform and Consumer Protection Law
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Law was adopted. It has been described as the greatest legislative change in the supervision of financial institutions since the 1930s. Its effect on Victory State Bank and VSB Bancorp, Inc. cannot now be judged with certainty because the interpretation and implementation of the law, as well as the numerous regulations and studies required or permitted by it, are still evolving. However, we believe that the following areas, among others, will be or may be significant to our future operations:
| |
1.
|
The law exempts smaller reporting companies filing with the Securities and Exchange Commission, such as our company, from the internal controls attestation rules of Section 404(b) of the Sarbanes-Oxley Act. Thus far, we have incurred expenses to prepare for compliance but we have not been governed by Section 404(b) due to temporary SEC extensions of the compliance deadline. The permanent exemption means that we will not be required to incur the expense of actual compliance as long as we continue to qualify as a smaller reporting company.
|
| |
2.
|
Securities brokers may not vote shares held in “street name” unless they receive instructions from their customers on the election of directors, executive compensation or any other significant matter, as determined by the SEC. This may increase our costs of holding annual stockholder meetings if it becomes necessary for us to retain the services of a proxy solicitor to increase shareholder participation in our meetings or to obtain approval of matters that the Board presents to stockholders. However, we did not experience any difficulties or additional expense related to this issue in connection with our 2011 annual meeting of stockholders.
|
| |
|
|
| |
3.
|
At least every three years, we will be required to submit to our stockholders, for a non-binding vote, our executive compensation. This requirement may increase the cost of holding some stockholder meetings. The law also requires that the SEC implement other requirements for enhanced compensation disclosures. The SEC adopted a temporary exemption for smaller reporting companies, such as our company, until annual meetings occurring on or after January 21, 2013.
|
| |
|
|
| |
4.
|
The law includes a number of changes to expand FDIC insurance coverage, as well as changes to the premiums banks must pay for insurance coverage, and the requirements applicable to the reserve ratio (the ratio of the deposit insurance fund to the amount of insured deposits). One important change is that, in the future, deposit insurance premiums we pay will be based upon total assets minus tangible capital, rather than based upon deposits. Since we do not use material borrowings to provide funds for asset growth, and we do not have material intangible assets that are excluded from capital such as goodwill, our share of the total deposit premiums paid by all banks appears to have declined. However, other factors, such as required replenishment of the current reserve fund, which must be increased to 1.35% of total insured deposits by September 30, 2020, as well as future failures of banks that may further deplete the fund, may result in an increase in our future deposit insurance premium. The FDIC must provide an offset for smaller banks negating the adverse effect of requiring a reserve ratio in excess of 1.15%, but reaching even the 1.15% ratio may require additional burdens on smaller banks. The FDIC approved final regulations implementing these changes on February 25, 2011, effective April 1, 2011. According to the FDIC, the substantial majority of banks will see reduced deposit insurance premiums as a result of the new rules. We believe that will be the case for us as long as all other relevant factors remain unchanged.
|
| |
|
|
| |
5.
|
The law increases the amount of each customer’s deposits that are subject to FDIC insurance. The general limit has been permanently increased from $100,000 to $250,000. In addition, non-interest bearing transaction accounts will be fully insured, without limit, from December 31, 2010 to December 31, 2012.
|
| |
|
|
| |
6.
|
The law repeals the prohibition on paying interest on demand deposit accounts, effective in July 2011. Interest-free demand deposits represent a substantial portion of our deposit base. We are not currently offering a demand deposit product that pays interest. If other banks offer interest-bearing demand deposits in our community, that competitive pressure may require that we offer interest checking accounts to businesses in order to retain deposits. That could have a direct adverse effect on our cost of funds. Although current market interest rates are very low, and such deposits are unlikely to carry high rates of interest, an increase in market interest rates could result in significant additional costs in order to maintain the level of such deposits.
|
| |
|
|
| |
7.
|
The law makes interstate branching by banks much easier than in the past. We have no plans to branch outside New York State, but the law facilitates out of state banks branching into our market area, thus potentially increasing competition.
|
| |
|
|
| |
8.
|
The law creates a new federal agency – the Consumer Financial Protection Bureau (“Bureau”) – which has substantial authority to regulate consumer financial transactions, effective July 21, 2011. Our loans are primarily made to businesses rather than individual consumers, so the Bureau will not have a direct effect on many of our loan transactions. However, the Bureau also has authority to regulate other non-loan consumer transactions, such as deposits and electronic banking transactions. The implementation of new consumer regulations may increase our operating costs in a manner we cannot predict until regulations are adopted.
|
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, 2011, the percentage had declined to 5.7%. However, developers and builders provide not only a source of loans, but they also provide us with deposits and other business. If the weakness in the economy continues or worsens, then that could have a substantial adverse effect on our customers and potential customers, making it more difficult for us to find satisfactory loan opportunities and low-cost deposits. This could compel us to invest in lower yielding securities instead of higher-yielding loans and could also reduce low cost funding sources such as checking accounts and require that we replace them with higher cost deposits such as time deposits. Either or both of those shifts could reduce our net income.
Changes in FDIC Assessment Rates
The Bank is a member of the FDIC. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the FDIC.
In the past three years, there have been many failures and near-failures among financial institutions. The number of FDIC-insured banks that have failed has increased, and the FDIC insurance fund reserve ratio, representing the ratio of the fund to the level of insured deposits, declined dramatically due to losses caused by bank failures. As a result, the FDIC increased its deposit insurance premiums on remaining institutions, including well-capitalized institutions like Victory State Bank, in order to replenish the insurance fund. If bank failures continue to occur, and more so if the level of failures increases, the FDIC insurance fund may further decline, and the FDIC would be required to continue to impose higher premiums on healthy banks. Thus, despite the prudent steps we may take to avoid the mistakes made by other banks, our costs of operations may increase as a result of those mistakes by others.
Our FDIC regular insurance premium was $41,218 in the third quarter of 2011 compared to $98,359 in the third quarter of 2010, a decrease of 58.1%. As required by The Dodd –Frank Wall Street Reform and Consumer Protection Law (the “Dodd-Frank” Act), the FDIC has recently revised its deposit insurance premium assessment rates. Our Bank, even though we are in the lowest regulatory risk category, is subject to an assessment rate between five (5) and nine (9) basis points per annum. In general, the rates are applied to our bank’s total assets less tangible capital, in contrast to the former rule which applied the assessment rate to our level of deposits.
The deposit insurance premium change and the special assessment have begun to replenish the fund created to pay the cost of resolving failed banks and the fund no longer has a negative balance. The Dodd-Frank Act requires that the FDIC must increase the ratio of the FDIC insurance fund to estimated total insured deposits to 1.35% by September 30, 2020. The FDIC believes that most banks will pay a lower total assessment under the new system than under the former system, and Victory State Bank has paid lower premiums under the new system than under the former system. However, if bank failures in the future exceed FDIC estimates, or other estimates that the FDIC makes turn out to be incorrect, and the losses to the insurance fund increase, the FDIC could be forced to increase insurance premiums. Such an increase would increase our non-interest expense.
As a result of the Dodd-Frank Act, non-interest bearing demand deposits, together with certain attorney trust account deposits commonly known in New York as IOLA accounts, will have the benefit of unlimited federal deposit insurance until December 31, 2012. Since the Dodd-Frank Act also authorized banks to pay interest on commercial demand deposits beginning in July 2011, commercial depositors will have to choose between earning interest on their demand deposits or having the benefit of unlimited deposit insurance coverage. In addition, the increase in the general FDIC insurance limit from $100,000 to $250,000 was made permanent.
The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that would result in termination of the Bank’s deposit insurance.
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 5 years.
Results of Operations for the Three Months Ended September 30, 2011 and September 30, 2010
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 $422,288 for the quarter ended September 30, 2011, compared to net income of $506,861 for the comparable quarter in 2010. The principal categories which make up the 2011 net income are:
| |
●
|
Interest income of $2,494,086
|
| |
●
|
Reduced by interest expense of $210,382
|
| |
●
|
Reduced by a provision for loan losses of $90,000
|
| |
●
|
Increased by non-interest income of $602,505
|
| |
●
|
Reduced by non-interest expense of $2,017,676
|
| |
●
|
Reduced by income tax expense of $356,245
|
We discuss each of these categories individually and the reasons for the differences between the quarters ended September 30, 2011 and 2010 in the following paragraphs.
Interest Income. Interest income was $2,494,086 for the quarter ended September 30, 2011, compared to $2,598,016 for the quarter ended September 30, 2010, a decrease of $103,930, or 4.0%. The main reason for the decline was a 57 basis point decrease in the yield on investment securities, partially offset by a $1,989,150 increase in average balance of investment securities between the periods, which combined to cause a $149,851 decline in interest income on investment securities. Interest income on loans increased by $45,392, due to the collection of interest of $103,881 on a non-accrual loan, partially offset by a reversal of $40,438 of accrued but uncollected interest income on loans that we categorized as non-accrual in the third quarter and a 38 basis point decrease in average yield from the third quarter of 2010 to the third quarter of 2011.
We had a $3,025,521 increase in average balance of loans, which partially offset a 38 basis point decrease in the average yield, on loans, from 7.43% to 7.05%, from the quarter ended September 30, 2010 to the quarter ended September 30, 2011. The increase in the average balance was the result of our efforts to increase our loan portfolio. The average balance of non-accrual loans increased by $1.3 million from the third quarter of 2010 to the third quarter of 2011, the balance of non-accrual loans for which we received interest and recognized it on a cash basis decreased by $2.4 million in that period. This shift in non-accrual loans was the principal cause to the 38 basis point drop in our average loan yield. Substantially all of the new non-accrual loans are secured by mortgages on real estate located on Staten Island. 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 57 basis point decrease in the average yield on our investment securities portfolio, from 3.75% to 3.18%. The average balance of our investment portfolio increased by $1,989,150, or 1.7%, between the periods. The investment securities portfolio represented 75.7% of average non-loan interest earning assets in the 2011 period compared to 73.8% in the 2010 period.
The average yield on other interest earning assets (principally overnight investments) increased 2 basis points from 0.16% for the quarter ended September 30, 2010 to 0.18% for the quarter ended September 30, 2011, partially offset by a decrease in average balance of other interest earning assets of $3,366,167 from the quarter ended September 30, 2010 to the quarter ended September 30, 2011.
Interest Expense. Interest expense was $210,382 for the quarter ended September 30, 2011, compared to $249,476 for the quarter ended September 30, 2010, a decrease of $39,094 or 15.7%. The decrease was primarily the result of a reduction in the rates we paid on deposits, principally on NOW and time account deposits. There was a 19 basis point decrease in the cost of NOW account deposits between the periods, and an 8 basis point decrease in the cost of time 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 0.61% from 0.68% between the periods.
Net Interest Income Before Provision for Loan Losses. Net interest income before the provision for loan losses was $2,283,704 for the quarter ended September 30, 2011, compared to $2,348,540 for the quarter ended September 30, 2010, a decrease of $64,836, or 2.7%. 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, 2011 to the same period ended 2010. The average yield on interest earning assets declined by 32 basis points, while the average cost of funds declined by 7 basis points. The decline in average yield resulted when we were required to reinvest the proceeds from payments on investment securities at lower rates because of the continuation of low market interest rates. Also contributing to the decline in average yield was the 38 basis point decrease in the average yield on loans, our highest earning asset, as we experienced an increase in non-performing loans. Interest rate floors on our loans have helped to stabilize interest income from the loan portfolio, but these floors also have the effect of limiting increases in our income when market rates increase until the prime rate rises above 6%. The 7 basis point decline in the cost of funds was driven principally by the 19 basis point drop in the cost of NOW account deposits and the 8 basis point drop in the cost of time deposits. Overall, our interest rate spread declined 25 basis points, from 3.69% to 3.44% between the periods.
Our net interest margin decreased to 3.70% for the quarter ended September 30, 2011 from 3.95% in the same period of 2010. The interest rate margin decreased for substantially the same reasons as the decrease in our interest rate spread. The margin is higher than the spread because it takes into account the effect of interest free demand deposits and capital.
Provision for Loan Losses. We took a provision for loan losses of $90,000 for the quarter ended September 30, 2011 compared to a provision for loan losses of $15,000 for the quarter ended September 30, 2010. The $75,000 increase in the provision was a result of our evaluation of our loan portfolio. We use the following framework to evaluate the appropriateness of our allowance for loan losses. We conduct a loan by loan evaluation of inherent losses in all non-performing or classified loans and we conduct a collective analysis of homogenous groups of performing loans to estimate inherent 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 an increase of $2,046,085 in non-performing loans from $6,459,626 at September 30, 2010 to $8,505,711 at September 30, 2011. Most of those loans are secured by real estate. We individually evaluated the non-performing mortgage loans based primarily upon updated appraisals as part of our analysis of the appropriate level of our allowance for loan and lease losses. We had charge-offs of $1,942 for the quarter ended September 30, 2011 as compared to $6,426 for the quarter ended September 30, 2010. We also had recoveries (which are added back to the allowance for loan losses) of $31,877 for the quarter ended September 30, 2011 as compared to $23,484 in the third quarter of 2010. After increasing the provision for loan losses in the third quarter of 2011 compared to the third quarter of 2010, and considering other matters that increased or decreased the allowance, we determined that the level of our allowance at September 30, 2011 was appropriate to address inherent 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.
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. 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. Overall, our allowance for loan losses increased from $1,246,245 or 1.57% of total loans, at September 30, 2010 to $1,312,575 or 1.59% of total loans, at September 30, 2011. 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 $602,505 for the quarter ended September 30, 2011, compared to $635,875 during the same period last year. The $33,370, or 5.3%, decrease in non-interest income was primarily the result of a $26,472 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 $2,017,676 for the quarter ended September 30, 2011, compared to $2,035,025 for the quarter ended September 30, 2010, a decrease of $17,349 or 0.9%. The principal shifts in the individual categories were:
| |
●
|
a $50,500 decrease in FDIC and NYSBD assessments due to the reduction in the FDIC assessment rate;
|
| |
●
|
a $30,245 decrease in salaries and benefits due to a slight reduction in staff, partially offset by;
|
| |
●
|
a $44,932 increase in occupancy expenses due to remediation costs at a branch that flooded during Hurricane Irene and
|
| |
●
|
a $15,019 increase in other expenses due to increased costs.
|
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 $356,245 for the quarter ended September 30, 2011, compared to income tax expense of $427,529 for the same period ended 2010. Our effective tax rate for the quarter ended September 30, 2011 was 45.8% and for the quarter ended September 30, 2010 was 45.8%.
Results of Operations for the Nine Months Ended September 30, 2011 and September 30, 2010
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 $1,281,783 for the nine months ended September 30, 2011, compared to net income of $1,401,459 for the comparable period in 2010. The principal categories which make up the 2011 net income are:
| |
●
|
Interest income of $7,349,585
|
| |
●
|
Reduced by interest expense of $653,499
|
| |
●
|
Reduced by a provision for loan losses of $145,000
|
| |
●
|
Increased by non-interest income of $1,833,501
|
| |
●
|
Reduced by non-interest expense of $6,021,744
|
| |
●
|
Reduced by income tax expense of $1,081,060
|
We discuss each of these categories individually and the reasons for the differences between the nine months ended September 30, 2011 and 2010 in the following paragraphs.
Interest Income. Interest income was $7,349,585 for the nine months ended September 30, 2011, compared to $7,748,647 for the nine months ended September 30, 2010, a decrease of $399,062, or 5.2%. The main reason for the decline was a 60 basis point decrease in the yield on investment securities, partially offset by a $3,601,685 increase in average balance between the periods, which combined to cause a $425,666 decline in interest income on investment securities. Interest income on loans increased by $24,224.
The $24,224 increase in interest income from loans was a result of a $2.7 million increase in the average loan balance, an increase of $123,588 in interest income on loans categorized as non-accrual but which was collected on a cash basis, partially offset by a 25 basis point decrease in the average loan yield. The increase in the average balance was the result of our efforts to increase our loan portfolio. The interest rate floors on 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 60 basis point decrease in the average yield on our investment securities portfolio, from 3.93% to 3.33%, due to the purchase of new investment securities at lower market rates than the yields on the principal paydowns we received. The average balance of our investment portfolio increased by $3,601,685, or 3.1%, between the periods. The investment securities portfolio represented 77.9% of average non-loan interest earning assets in the 2011 period compared to 75.2% in the 2010 period as we were able to purchase additional investment securities with available cash.
The average yield on other interest earning assets (principally overnight investments) increased 3 basis points from 0.14% for the nine months ended September 30, 2010 to 0.17% for the nine months ended September 30, 2011, partially offset by a decrease in average balance of other interest earning assets of $4,345,236 from the nine months ended September 30, 2010 to the nine months ended September 30, 2011 as we elected to invest available funds in higher yielding loans and investment securities.
Interest Expense. Interest expense was $653,499 for the nine months ended September 30, 2011, compared to $787,179 for the nine months ended September 30, 2010, a decrease of $133,680 or 17.0%. The decrease was primarily the result of a reduction in the rates we paid on deposits, principally on time deposits, reflecting a 15 basis point decrease in the cost of time deposits and a 13 basis point drop in the cost of now account deposits between the periods, due to the continuing low market interest rates. With market rates remaining at very low levels, customer time deposits continue to be renewed or replaced with new deposits at lower rates. As a result, our average cost of funds, excluding the effect of interest-free demand deposits, decreased to 0.63% from 0.73% between the periods.
Net Interest Income Before Provision for Loan Losses. Net interest income before the provision for loan losses was $6,696,086 for the nine months ended September 30, 2011, compared to $6,961,468 for the nine months ended September 30, 2010, a decrease of $265,382, or 3.8%. 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, 2011 to the same period ended 2010. The average yield on interest earning assets declined by 28 basis points, while the average cost of funds declined by 10 basis points. The reduction in the yield on assets was principally due to the 60 basis point drop in the yield on investment securities, as new securities were purchased at market rates significantly below the rates on securities repaid or matured and a 38 basis point drop in the yield on loans, as average non-performing loans increased between the periods. The decline in the cost of funds was driven principally by the 15 basis point drop in the cost of time deposits and a 13 basis point drop in the cost of NOW account deposits. Overall, our interest rate spread declined 18 basis points, from 3.74% to 3.56% between the periods.
Our net interest margin decreased to 3.81% for the nine months ended September 30, 2011 from 4.01% in the same period of 2010. The interest rate margin decreased when we reinvested the proceeds from payments on investment securities at lower rates because of the continued decline in market interest rates. The margin is higher than the spread because it takes into account the effect of interest free demand deposits and capital.
Provision for Loan Losses. We took a provision for loan losses of $145,000 for the nine months ended September 30, 2011 compared to a provision for loan losses of $125,000 for the nine months ended September 30, 2010. The $20,000 increase in the provision was a result of our evaluation of our loan portfolio. We use the following framework to evaluate the appropriateness of our allowance for loan losses. We conduct a loan by loan evaluation of inherent losses in all non-performing or classified loans and we conduct a collective analysis of homogenous groups of performing loans to estimate inherent 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 an increase of $2,046,085 in non-performing loans from $6,459,626 at September 30, 2010 to $8,505,711 at September 30, 2011. Most of those loans are secured by real estate. We individually evaluated the non-performing mortgage loans based primarily upon updated appraisals as part of our analysis of the appropriate level of our allowance for loan and lease losses. We had charge-offs of $186,997 for the nine months ended September 30, 2011 as compared to charge-offs of $22,712 for the nine months ended September 30, 2010. We also had recoveries (which are added back to the allowance for loan losses) of $77,352 for the nine months ended September 30, 2011 as compared to $80,503 in the same period of 2010. After increasing the provision for loan losses in the first nine months of third quarter of 2011 compared to the same period in 2010, and considering other matters that increased or decreased the allowance, we determined that the level of our allowance at September 30, 2011 was appropriate to address inherent 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.
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. 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. Overall, our allowance for loan losses increased from $1,246,245 or 1.57% of total loans, at September 30, 2010 to $1,312,575 or 1.59% of total loans, at September 30, 2011. 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 $1,833,501 for the nine months ended September 30, 2011, compared to $1,859,060 during the same period last year. The $25,559, or 1.4%, decrease in non-interest income was a direct result of a $59,807 decrease in service charges on deposits, partially offset by a $30,509 increase in other income. 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 $6,021,744 for the nine months ended September 30, 2011, compared to $6,112,081 for the nine months ended September 30, 2010, a decrease of $90,337 or 1.5%. The principal shifts in the individual categories were:
| |
●
|
a $110,00 decrease in FDIC and NYSBD assessments due to the reduction in the FDIC assessment rate;
|
| |
●
|
a $73,229 decrease in legal expense due to a recovery of legal fees previously expensed on a settled lawsuit, partially offset by
|
| |
●
|
a $57,764 increase in occupancy expenses due to remediation costs at a branch that flooded during Hurricane Irene, and
|
| |
●
|
a $23,551 increase in professional fees due to use of an independent contractor.
|
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 $1,081,060 for the nine months ended September 30, 2011, compared to income tax expense of $1,181,988 for the same period ended 2010. Our effective tax rate for the nine months ended September 30, 2011 was 45.8% and for the nine months ended September 30, 2010 was 45.8%.
VSB Bancorp, Inc.
Consolidated Average Balance Sheets
(unaudited)
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|
Three
Months Ended
September 30, 2011 |
|
|
Three
Months Ended
September 30, 2010
|
|
|
Nine
Months Ended
September 30, 2011
|
|
|
Nine
Months Ended
September 30, 2010
|
|
| |
|
Average
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
| |
|
Balance
|
|
Interest
|
|
|
Cost
|
|
|
Balance
|
|
Interest
|
|
|
Cost
|
|
|
Balance
|
|
Interest
|
|
|
Cost
|
|
|
Balance
|
|
|
Interest
|
|
|
Cost
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$ |
82,317,334 |
|
$ |
1,537,598 |
|
|
|
7.05 |
% |
|
$ |
79,291,813 |
|
$ |
1,492,206 |
|
|
|
7.43 |
% |
|
$ |
81,769,965 |
|
$ |
4,357,917 |
|
|
|
7.07 |
% |
|
$ |
79,090,898 |
|
|
$ |
4,333,693 |
|
|
|
7.32 |
% |
|
Investment securities, afs
|
|
|
117,174,800 |
|
|
939,250 |
|
|
|
3.18 |
|
|
|
115,185,650 |
|
|
1,089,101 |
|
|
|
3.75 |
|
|
|
118,329,680 |
|
|
2,949,689 |
|
|
|
3.33 |
|
|
|
114,727,995 |
|
|
|
3,375,355 |
|
|
|
3.93 |
|
|
Other interest-earning assets
|
|
|
37,525,965 |
|
|
17,238 |
|
|
|
0.18 |
|
|
|
40,892,132 |
|
|
16,709 |
|
|
|
0.16 |
|
|
|
33,600,969 |
|
|
41,979 |
|
|
|
0.17 |
|
|
|
37,946,205 |
|
|
|
39,599 |
|
|
|
0.14 |
|
|
Total interest-earning assets
|
|
|
237,018,099 |
|
|
2,494,086 |
|
|
|
4.05 |
|
|
|
235,369,595 |
|
|
2,598,016 |
|
|
|
4.37 |
|
|
|
233,700,614 |
|
|
7,349,585 |
|
|
|
4.19 |
|
|
|
231,765,098 |
|
|
|
7,748,647 |
|
|
|
4.47 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest earning assets
|
|
|
6,523,333 |
|
|
|
|
|
|
|
|
|
|
8,373,191 |
|
|
|
|
|
|
|
|
|
|
6,809,926 |
|
|
|
|
|
|
|
|
|
|
8,752,172 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
243,541,432 |
|
|
|
|
|
|
|
|
|
$ |
243,742,786 |
|
|
|
|
|
|
|
|
|
$ |
240,510,540 |
|
|
|
|
|
|
|
|
|
$ |
240,517,270 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$ |
17,213,314 |
|
|
11,508 |
|
|
|
0.27 |
|
|
$ |
15,380,086 |
|
|
11,978 |
|
|
|
0.31 |
|
|
$ |
16,788,227 |
|
|
37,482 |
|
|
|
0.30 |
|
|
$ |
15,337,351 |
|
|
|
35,567 |
|
|
|
0.31 |
|
|
Time accounts
|
|
|
63,961,120 |
|
|
120,669 |
|
|
|
0.75 |
|
|
|
65,295,545 |
|
|
136,333 |
|
|
|
0.83 |
|
|
|
63,709,504 |
|
|
361,060 |
|
|
|
0.76 |
|
|
|
65,229,271 |
|
|
|
444,343 |
|
|
|
0.91 |
|
|
Money market accounts
|
|
|
27,948,058 |
|
|
59,240 |
|
|
|
0.84 |
|
|
|
26,947,870 |
|
|
58,250 |
|
|
|
0.86 |
|
|
|
28,178,819 |
|
|
179,720 |
|
|
|
0.85 |
|
|
|
28,254,099 |
|
|
|
183,754 |
|
|
|
0.87 |
|
|
Now accounts
|
|
|
27,625,974 |
|
|
18,965 |
|
|
|
0.27 |
|
|
|
37,233,822 |
|
|
42,915 |
|
|
|
0.46 |
|
|
|
29,526,174 |
|
|
75,237 |
|
|
|
0.34 |
|
|
|
35,182,199 |
|
|
|
123,515 |
|
|
|
0.47 |
|
|
Total interest-bearing liabilities
|
|
|
136,748,466 |
|
|
210,382 |
|
|
|
0.61 |
|
|
|
144,857,323 |
|
|
249,476 |
|
|
|
0.68 |
|
|
|
138,202,724 |
|
|
653,499 |
|
|
|
0.63 |
|
|
|
144,002,920 |
|
|
|
787,179 |
|
|
|
0.73 |
|
|
Checking accounts
|
|
|
77,104,389 |
|
|
|
|
|
|
|
|
|
|
69,702,483 |
|
|
|
|
|
|
|
|
|
|
73,334,580 |
|
|
|
|
|
|
|
|
|
|
68,288,162 |
|
|
|
|
|
|
|
|
|
|
Escrow deposits
|
|
|
326,038 |
|
|
|
|
|
|
|
|
|
|
375,319 |
|
|
|
|
|
|
|
|
|
|
366,416 |
|
|
|
|
|
|
|
|
|
|
424,378 |
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
214,178,893 |
|
|
|
|
|
|
|
|
|
|
214,935,125 |
|
|
|
|
|
|
|
|
|
|
211,903,720 |
|
|
|
|
|
|
|
|
|
|
212,715,460 |
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
1,860,120 |
|
|
|
|
|
|
|
|
|
|
2,338,998 |
|
|
|
|
|
|
|
|
|
|
1,827,782 |
|
|
|
|
|
|
|
|
|
|
2,092,069 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
216,039,013 |
|
|
|
|
|
|
|
|
|
|
217,274,123 |
|
|
|
|
|
|
|
|
|
|
213,731,502 |
|
|
|
|
|
|
|
|
|
|
214,807,529 |
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
27,502,419 |
|
|
|
|
|
|
|
|
|
|
26,468,663 |
|
|
|
|
|
|
|
|
|
|
26,779,038 |
|
|
|
|
|
|
|
|
|
|
25,709,741 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$ |
243,541,432 |
|
|
|
|
|
|
|
|
|
$ |
243,742,786 |
|
|
|
|
|
|
|
|
|
$ |
240,510,540 |
|
|
|
|
|
|
|
|
|
$ |
240,517,270 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest rate spread
|
|
|
|
|
$ |
2,283,704 |
|
|
|
3.44 |
% |
|
|
|
|
$ |
2,348,540 |
|
|
|
3.69 |
% |
|
|
|
|
$ |
6,696,086 |
|
|
|
3.56 |
% |
|
|
|
|
|
$ |
6,961,468 |
|
|
|
3.74 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest earning assets/net interest margin
|
|
$ |
100,269,633 |
|
|
|
|
|
|
3.70 |
% |
|
$ |
90,512,272 |
|
|
|
|
|
|
3.95 |
% |
|
$ |
95,497,890 |
|
|
|
|
|
|
3.81 |
% |
|
$ |
87,762,178 |
|
|
|
|
|
|
|
4.01 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of interest-earning assets to interest-bearing liabilities
|
|
|
1.73 |
x |
|
|
|
|
|
|
|
|
|
1.62 |
x |
|
|
|
|
|
|
|
|
|
1.69 |
x |
|
|
|
|
|
|
|
|
|
1.61 |
x |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Assets (1)
|
|
|
0.62 |
% |
|
|
|
|
|
|
|
|
|
0.82 |
% |
|
|
|
|
|
|
|
|
|
0.70 |
% |
|
|
|
|
|
|
|
|
|
0.78 |
% |
|
|
|
|
|
|
|
|
|
Return on Average Equity (1)
|
|
|
5.50 |
% |
|
|
|
|
|
|
|
|
|
7.54 |
% |
|
|
|
|
|
|
|
|
|
6.32 |
% |
|
|
|
|
|
|
|
|
|
7.28 |
% |
|
|
|
|
|
|
|
|
|
Tangible Equity to Total Assets
|
|
|
11.27 |
% |
|
|
|
|
|
|
|
|
|
10.91 |
% |
|
|
|
|
|
|
|
|
|
11.27 |
% |
|
|
|
|
|
|
|
|
|
10.91 |
% |
|
|
|
|
|
|
|
|
(1) Ratios have been annualized.
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 to purchase new investment securities and to fund new and renewing loans in our loan portfolio. Remaining funds are invested in short-term liquid assets such as overnight federal funds loans and bank deposits.
During the nine months ended September 30, 2011, we had a net increase in total deposits of $8,455,879 due to increases of $11,815,602 in non-interest demand deposits, $2,125,408 in savings accounts, $1,134,206 in time deposits, $446,903 in money market accounts, and $107,611 in escrow deposits partially offset by a decrease of $7,173,851 in NOW accounts. These are all what are commonly known as “retail” deposits that we obtain through the efforts of our branch network rather than “wholesale” deposits that some banks obtain from deposit brokers. We also received proceeds from repayment of investment securities of $24,605,813. We used $15,614,398 of available funds to purchase new investment securities and we had a net loan increase of $543,300. These changes resulted in an overall increase in cash and cash equivalents of $18,449,677.
In contrast, during the nine months ended September 30, 2010, we had a net increase in total deposits of $2,753,616 due to increases of $4,033,721 in NOW accounts, $797,600 in time deposits, $211,767 in savings accounts, $39,482 in escrow deposits and $7,908 in non-interest demand deposits, partially offset by a decrease of $2,336,862 in money market accounts. These are all “retail” deposits rather than “wholesale” deposits. We also received proceeds from repayment of investment securities of $27,560,762. We used $24,633,330 of available funds to purchase new investment securities and we had a net loan decrease of $21,852. These changes resulted in an overall increase in cash and cash equivalents of $8,455,330.
At September 30, 2011, cash and cash equivalents represented 19.2% of total assets. We have increased our cash and cash equivalents to help buffer the adverse effects of potential, future rising interest rates. We anticipate, based upon historical experience that these funds, combined with cash inflows we anticipate from payments on our loan and investment securities portfolios, will be sufficient to fund loan growth and unanticipated deposit outflows. As noted above, the federal legal prohibition on paying interest on demand deposit accounts has been repealed effective July 2011. Depending upon competitive pressures, we may need to implement interest-paying business checking in order to maintain demand deposits at historical levels or to increase such deposits.
As a secondary source of liquidity, at September 30, 2011 we had $113.0 million of investment securities classified available for sale. The disposition of these securities prior to maturity is an option available to us in the event, which we believe is unlikely, that our primary sources of liquidity and expected cash flows are insufficient to meet our need for funds. Additionally, we have the ability to borrow funds at the Federal Home Loan Bank of New York and the Federal Reserve Bank of New York using securities in our investment portfolio as collateral if the need arises. Based upon our assets size and the amount of our securities portfolio that qualifies as eligible collateral, we had more than $73.8 million of unused borrowing capability from the FHLBNY at September 30, 2011. Victory State Bank also has a $2 million unsecured credit facility with Atlantic Central Bankers Bank, which the Bank has not drawn upon. We do not anticipate a need for additional capital resources and do not expect to raise funds through a stock offering in the near future. We have sufficient resources to allow us to continue to make loans as appropriate opportunities arise without having to rely on government funds to support our lending activities.
Victory State Bank satisfied all capital ratio requirements of the Federal Deposit Insurance Corporation at September 30, 2011, with a Tier I Leverage Capital ratio of 10.45%, a Tier I Capital to Risk-Weighted Assets ratio of 27.12%, and a Total Capital to Risk-Weighted Assets ratio of 28.38%.
VSB Bancorp, Inc. satisfied all capital ratio requirements of the Federal Reserve at September 30, 2011, with a Tier I Leverage Capital ratio of 10.56%, a Tier I Capital to Risk-Weighted Assets ratio of 27.48%, and a Total Capital to Risk-Weighted Assets ratio of 28.73%.
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 September 30, 2011
|
|
| |
|
|
|
|
Contractual Obligations
|
|
Payment due by Period |
|
| |
|
Less than
|
|
|
One to three
|
|
|
Four to five
|
|
|
After
|
|
|
Total Amounts
|
|
| |
|
One Year
|
|
|
years
|
|
|
years
|
|
|
five years
|
|
|
committed
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum annual rental payments under non-cancelable operating leases
|
|
$ |
418,810 |
|
|
$ |
823,409 |
|
|
$ |
693,472 |
|
|
$ |
8 05,626 |
|
|
$ |
2,741,317 |
|
|
Remaining contractual maturities of time deposits
|
|
|
57,773,408 |
|
|
|
2,756,578 |
|
|
|
4,249,183 |
|
|
|
— |
|
|
|
64,779,169 |
|
|
Total contractual cash obligations
|
|
$ |
58,192,218 |
|
|
$ |
3,579,987 |
|
|
$ |
4,942,655 |
|
|
$ |
8 05,626 |
|
|
$ |
67,520,486 |
|
|
Other commitments
|
|
Amount of Commitment Expiration by Period |
|
| |
|
Less than
|
|
|
One to three
|
|
|
Four to five
|
|
|
After
|
|
|
Total Amounts
|
|
| |
|
One Year
|
|
|
years
|
|
|
years
|
|
|
five years
|
|
|
committed
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan commitments
|
|
$ |
19,168,587 |
|
|
$ |
2,767,350 |
|
|
$ |
115,000 |
|
|
$ |
— |
|
|
$ |
22,050,937 |
|
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.
Non-Performing Loans
Management closely monitors non-performing loans and other assets with potential problems on a regular basis. We had twenty five non-performing loans, totaling $8,505,711 at September 30, 2011, compared to seventeen non-performing loans, totaling $6,378,293 at December 31, 2010. Non-performing loans totaled 10.33% of total loans at September 30, 2011 compared to7.80% at December 31, 2010. We believe that the increase in non-performing loans during the first nine months of 2011 results from continuing weaknesses in the local economy that have increased the financial stress on some of our borrowers. We have always followed a hands-on approach to dealing with our past due borrowers that we believe is sufficiently aggressive to maximize recovery.
As noted in the discussion below regarding specific loans, many of our non-performing loans are secured by real estate, and thus we expect substantial if not complete recovery of the loan amount. However, it is inevitable that we will experience some charge-offs of non-performing loans. All of the loans discussed individually below were evaluated separately for impairment under ASC 310 and we have included a component of our allowance for loan and lease losses representing our measurement of the impairment on those loans. However, the process by which we estimate the potential loss on those loans is necessarily imprecise and subject to changing future events, facts that may be unknown to us, and other uncertainties. Thus, although we believe that our allowance for loan losses is appropriate to address the weaknesses in those loans, we may be required to increase our provision for loan losses in the future if actual impairment exceeds our expectations.
The following is information about the fourteen largest non-performing loan relationships, totaling $7,201,716, or 84.7% of our non-performing loans, by outstanding principal balance at September 30, 2011. Management believes it has taken appropriate steps with a view towards maximizing recovery and minimizing loss, if any, on these loans.
| |
●
|
$2,200,000 in two residential mortgage loans. We previously had a modified repayment arrangements with the borrowers, which expired, and we have confessions of judgment. The loan is secured by a first mortgage and second mortgage on a residential property and first mortgages on two commercial properties, all in Staten Island. We commenced foreclosure proceedings and then entered into an agreement with the borrower pursuant to which the borrower made a substantial upfront payment and is now making monthly payments. The foreclosure action remains pending but is held in abeyance.
|
| |
●
|
$1,679,921 in two commercial real estate loans, one co-op loan and one personal loan. The real estate loans are secured by a first mortgage and second mortgage on property in Staten Island and Queens. The loans are guaranteed personally by the principals of the borrower. The loans have been sent to our attorney to commence collection and foreclosure proceedings.
|
| |
●
|
$1,408,537 in two commercial real estate loans. The loans are secured by a first mortgage and second mortgage on two pieces of real estate in Staten Island. The loans are guaranteed by the principal and we also have a security interest in the medical business that occupies one of the properties. We are pursuing collection efforts and have received progress payments from the borrower, so legal action has not been commenced.
|
| |
●
|
$672,500 in two commercial real estate loans and a construction loan to a local business. The loans are secured by a first, second and third mortgage on real estate collateral. The loans are guaranteed by the principal. We have commenced foreclosure proceedings. There is a contract of sale for part of the mortgaged property, which is scheduled to close in early 2012. If the sale closes, the net proceeds are expected to repay substantially all of the loans, leaving us with the remaining real estate collateral for what we expect to be a loan balance of less than $100,000.
|
| |
●
|
$499,000 in a loan to a local restaurant, which is secured by a first mortgage and a second mortgage on commercial real estate collateral. The loan is also secured by the personal guaranties of the principals and we have a security interest in the business. We have commenced foreclosure proceedings.
|
| |
●
|
$400,000 in a construction loan to a local business. Due to disagreements among the partners, the loan was not repaid at maturity and was not timely extended. Prior to the end of the quarter, the borrower agreed to the terms of an extension, but since the loan was then 90 days past maturity, we categorized it as non-accrual and non-performing. The borrower had continued to make monthly payments as though the loan had been extended and the extension documents were signed after September 30, 2011.
|
| |
●
|
$341,758 in a loan to a local business in which we are a participant in the loan with another bank. We are not the lead lender. The loan was secured by a first mortgage on a commercial building in New Jersey, a security interest in the business, and the personal guaranties of the principals. The lead lender commenced a foreclosure action. A foreclosure sale was scheduled for October 12, 2011. After the end of the third quarter, the lead lender bought in the property at the sale for itself and for us as a participant. The property is being marketed for sale.
|
From time to time, the Bank will enter into agreements with borrowers to modify the terms of their loans when we believe that a modification will maximize our recovery. In most cases, we do not agree to reduce the rate of interest or forgive the repayment of principal when we agree to loan modification, and we did not do so in any of the modifications described above. Instead, we seek to modify terms on an interim basis to allow the borrower to reduce payments for a short duration and thus give the borrower an opportunity to get back on its feet. We prefer to develop repayment plans for our borrowers that provide them with cash flow relief while requiring that they ultimately pay all amounts that they owe. However, we are not adverse to commencing legal action to foreclose on mortgages or obtain personal judgments against obligors when we perceive that as the appropriate strategy. Unfortunately, in recent years, many courts have taken a very pro-borrower stance in foreclosure actions, which has resulted in delays in our ability to realize upon real estate collateral.
If loans with modifications are on non-accrual status when they are modified, we do not immediately restore them to accruing status. For those loans, as well as other loans on non-accrual status when the borrower makes payments, we initially record payments received either as a reduction of principal or as interest received on a cash basis. The choice between those alternatives depends upon the magnitude of the concessions, if any, we have given to the borrower, the nature of the collateral and the related loan to value ratio, and other factors affecting the likelihood that we will continue to receive regular payments. After a period of consistent on-time performance, the loan may be restored to accruing status. The length of on-time performance required to restore a loan to accruing status varies from a minimum of six months on loans with minor modifications or less-severe weaknesses to as long as a year or more on loans for which we have granted more significant concessions to the borrower or which otherwise have more significant weaknesses.
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.
Evaluation of Disclosure Controls and Procedures: As of September 30, 2011, we undertook an evaluation of our disclosure controls and procedures under the supervision and with the participation of Raffaele M. Branca, President and CEO and Jonathan B. Lipschitz, Vice President and Controller. 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-K and quarterly periodic reports on Form 10-Q) 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. Mr. Branca and Mr. Lipschitz 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 taken corrective actions 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.
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.
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: November 8, 2011
|
|
/s/ Raffaele M. Branca
|
| |
|
Raffaele M. Branca
|
| |
|
President, CEO and Principal Executive Officer
|
| |
|
|
|
Date: November 8, 2011
|
|
/s/ Jonathan B. Lipschitz
|
| |
|
Jonathan B. Lipschitz,
|
| |
|
Vice President, Controller and Principal
|
| |
|
Accounting 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 Principal Accounting Officer
|
|
32.1
|
|
Certification by CEO pursuant to 18 U.S.C. 1350.
|
|
32.2
|
|
Certification by Principal Accounting Officer pursuant to 18 U.S.C. 1350.
|
|
101.INS
|
|
XBRL Instance Document (furnished herewith)
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document (furnished herewith)
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith)
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document (furnished herewith)
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document (furnished herewith)
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith)
|
--------------------------------------------
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 Principal Accounting Officer
|
|
32.1
|
|
Certification by CEO pursuant to 18 U.S.C. 1350.
|
|
32.2
|
|
Certification by Principal Accounting Officer pursuant to 18 U.S.C. 1350.
|
|
101.INS
|
|
XBRL Instance Document (furnished herewith)
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document (furnished herewith)
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith)
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document (furnished herewith)
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document (furnished herewith)
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith)
|