STATEN ISLAND, NY / ACCESSWIRE / April 28, 2020 / VSB Bancorp, Inc. (OTCQX:VSBN) reported net income of $518,412 for the first quarter of 2020, a decrease of $121,589, or 19.0%, from the first quarter of 2019.
The Covid-19 Pandemic
We need hardly say that the COVID-19 Pandemic that has gripped the entire world for the past few months has had a major adverse effect on the economy in general and on our primary market, Staten Island, in particular. Many people are out of work, businesses have either closed or are operating at substantially reduced capacity, and new business activity is almost nonexistent. This creates substantial challenges for our company and its subsidiary bank, Victory State Bank.
Many of our borrowers have asked for loan forbearances. Although we do not generally hold a large portfolio of the types of loans for which forbearance is mandatory under state or federal law, we believe that the prudent course is to offer forbearance opportunity to those customers who show an ability to survive with a bit of help. However, it is impossible to predict the future and some of our customers may be unable to recover from the economic stress that they now face.
Regulatory guidance at the federal level generally allows us to grant prudent forbearances without treating a loan as past due, in default or as a troubled debt restructuring. We have the right to continue accruing interest on these loans during the forbearance periods. However, if the loans continue in default after the forbearance expires, not only will we have to stop accruing future interest, we will have to reverse the accrued but unpaid interest that has become uncollectible, which may have an additional adverse effect on reported income.
On the liability side of the balance sheet, we anticipate that the reduction in business activity may reduce deposits for many reasons. For example, out of work customers will not be receiving paychecks to deposit, but instead they will be spending their savings for necessities. We cannot predict with any degree of certainty whether this will result in a substantial net deposit outflow.
We are taking actions we deem appropriate to mitigate the adverse effects of the pandemic on our bank. We have reduced the number of branches we have open from six to five, and at times only two branches, but we have not reduced our work force. We have obtained approval from the Small Business Administration to participate in the Paycheck Protection Program and we have $30 million of loans, for 332 business customers, under the program. Although the yields on these loans are very low, we anticipate that they will provide assistance to our customers to see them through these troubled times while also providing a short-term vehicle for investing available cash at an interest yield that is higher than the overnight funds rate. These loans also provide us with a source of fee income represented by origination fees paid to us by the SBA.
The following unaudited figures were released today. Pre-tax income was $691,506 in the first quarter of 2020, compared to $827,397 for the first quarter of 2019. Net income for the quarter was $518,412, or basic income of $0.28 per common share, compared to a net income of $640,001, or $0.36 basic income per common share, for the quarter ended March 31, 2019. Return on average assets decreased from 0.68% in the first quarter of 2019 to 0.48% in the first quarter of 2020, while return on average equity decreased from 7.35% to 4.51%.
The $121,589 decrease in net income was due to an increase in non-interest expenses of $111,136, a decrease in net interest income of $20,901 and an increase in the provision for loan loss of $50,000, partially offset by an increase in non-interest income of $46,146, and a decrease in the provision for income taxes of $14,302.
The $20,901 decrease in net interest income for the first quarter of 2020 occurred primarily because our interest income decreased by $12,239 and our cost of funds increased by $8,662. The drop in interest income was principally the result of a decline of 26 basis points in the average yield on loans, which for the first time is our largest asset category. This was the result of the deliberate actions of management to increase loans as a percentage of total assets as a strategy to increase earnings. Although the average yield on loans declined, it still, at 5.66%, far exceeded the average yield on investment securities of 2.50% and the average yield on other interest-earning assets, principally overnight investments, of 1.26%.
Also contributing to the decline in interest income was a $22.3 million decrease in average interest-earning assets between the quarters, with the $26.2 million increase in average loans and a $9.4 million increase in average other interest earning assets being more than offset by a $57.8 million decrease in average investment securities. Income from loans increased by $300,524 due to the increase in volume, despite a 26 basis point decrease in average yield, while income from investment securities decreased by $251,463, driven by the $57.8 million decrease average balance. The average yield was relatively steady, increasing by only 1 basis point.
Interest income from other interest earning assets (principally overnight investments) decreased by $61,300 due a 118 basis point decrease in the yield partially offset by to a $9.4 million increase in the average balance. This average yield decrease corresponded to the Federal Reserve's rapid decrease in the target federal funds rate in the latter half of 2019 and continuing into 2020. We elected not to invest additional available liquid assets in investment securities during the first quarter of 2020 as uncertainties caused by the Covid-19 pandemic drove down the yields on investment securities. We do not know when yields will rebound to acceptable levels. We have maintained a higher level of liquid assets as we navigate the current economic and pandemic turmoil. It is also difficult during the pandemic to originate new loans and increase our level of interest-earning assets for multiple reasons, including everything from stress on the real estate markets due to tenants not paying rents to mandatory business shutdowns to the logistic difficulties of closing loans promptly while maintaining social distancing. Overall, average interest-earning assets decreased by $22.3 million from the first quarter of 2019 to the first quarter of 2020 while the overall average yield increased by 8 basis points due to the shift in mix in favor of loans.
The increase in interest expense was principally due to a $8,802 increase in interest on time accounts, as the average balance between periods decreased by $1.6 million while the average cost increased by 9 basis points, and an $8,586 increase in the cost of NOW accounts, as the average balance between periods increased by $325,241 and the average cost increased by 4 basis points. These increases were partially offset by a $9,261 decrease in the cost of money market accounts, due to a 5 basis point decrease in average cost and an $2.5 million decrease in the average balance.
Average interest-bearing deposits decreased by $4.8 million. However, overall average total deposits decreased by $24.5 million from the first quarter of 2019 to the first quarter of 2020, due primarily to a $19.7 million decrease in the average balance of demand deposits. Our overall average cost of interest-bearing liabilities increased by 4 basis points due to the shift of our deposit mix toward higher costing time accounts and NOW accounts and away from money market accounts. The Federal Reserve decreased the benchmark federal funds rate by 150 basis points in the first quarter of 2020 in a direct effort to ameliorate the negative economic impact of the coronavirus pandemic and the shutdown of the economy in general. However, since these decreases occurred in March 2020, we will not experience the full effect of the decreases until upcoming quarters as deposits reprice or mature. Just as we cannot predict the course of the pandemic, we cannot predict how long the Federal Reserve will maintain interest rates at such historically low levels.
Average demand deposits, an interest free source of funds for us to invest, which represents approximately 45% of average total deposits, decreased $19.7 million from the first quarter of 2019, to the first quarter of 2020. This decrease in demand deposits was primarily due to the withdrawal of approximately $40 million of demand deposits at the end of June 2019, as previously reported, due to the merger of a major depositor with an out-of market institution.
The average yield on earning assets rose by 8 basis points while the average cost of funds grew by 4 basis points. The increase in the yield on assets was principally due to the change in asset mix as we increased our average balance of loans with higher yields and financed that increase with the reduction of investment securities. Our interest rate margin increased by 5 basis points from 3.31% to 3.36% when comparing the first quarter of 2019 to the same quarter in 2020, while our interest rate spread increased by 4 basis points from 2.88% to 2.92%.
We expect that overall net interest spread and margin are expected to compress in the current economic market as we struggle to emerge from the global coronavirus pandemic that is currently raging through our country. We have already experienced the beginning of a decline in our ability to originate or acquire loans, other than SBA guaranteed Paycheck Protection Plan (PPP) loans, due to local economic difficulties. We were able to receive SBA approval to make PPP loans and then originate approximately $30 million of such loans at the beginning of the second quarter of 2020. These loans are at 1% interest rates for relatively short terms and although the yield on these loans are low, they present a better investment alternative than overnight investments. The ability and the timing of the US to restart the economy will directly affect our net income, as loan generation at pre-coronavirus levels may not be achievable in the near future. If a significant volume of satisfactory loan opportunities develops in excess of our available cash, we have the ability to obtain additional funds by borrowing, on a nonrecourse basis, from the Federal Reserve as part of its PPP Liquidity Facility.
Non-interest income increased by $46,146 to $544,407 in the first quarter of 2020, compared to $498,261 in the same quarter in 2019. The increase resulted from an $18,971 increase in loan fees and a $12,242 increase in net rental income and a $10,212 increase in other fees. New York Governor Cuomo issued an executive order eliminating certain bank fees for customers suffering from financial hardship due to the pandemic and the executive order has been implemented through emergency regulations issued by the Department of Financial Services. As a result, these fee limitations, combined with the general slowdown in business activity due to the current economic environment, may cause non-interest income to decrease as we do not expect to be collecting as many fees as we had in previous quarters.
Comparing the first quarter of 2020 with the same quarter in 2019, non-interest expense increased by $111,136, totaling $2.8 million for the first quarter of 2020. Non-interest expense increased for various business reasons including a $123,303 increase in legal fees due to the payment of merger related costs and additional litigation expenses, and a $63,640 increase in occupancy expenses due principally to the adoption of the new ASC 842 lease accounting standard for our new bank branch and increased occupancy expenses for our new branch in Meiers Corners. These increases were partially offset by a $29,670 decrease in salary and benefit costs due to a smaller staff of business development officers, a $31,423 decrease in other expenses due principally to decreased franchise tax and ATM fees, and a $26,000 decrease in FDIC assessments because we received a small bank assessment credit as the FDIC insurance fund reserve ratio exceeded 1.35% in 2020.
Total assets decreased to $363.1 million at March 31, 2020, a decrease of $5.3 million, or 1.4%, from December 31, 2019. The significant component of this decrease was a $13.9 million net decrease in investment securities due to paydowns in the portfolio partially offset by the $9.3 million increase in overnight investments. Our non-performing loans increased to $1.5 million at March 31, 2020 from $1.3 million at year end 2019, due the migration of one loan relationship to non-accrual. We owned no OREO at March 31, 2020. Total deposits, including escrow deposits, decreased to $316.9 million, a decrease of $5.8 million, or 1.9%, during 2020. The decrease was primarily attributable to decreases of $5.0 million in demand and checking deposits and $3.4 million in NOW accounts, partially offset by a $1.1 million increase in money market accounts, a $612,812 increase in time deposits and a $509,693 increase in saving accounts
Our total stockholders' equity increased by $446,373, from year end 2019, principally due to $241,066 increase in retained earnings, $134,575 in additional paid in capital due primarily to the exercise of stock options by officers and directors, $45,700 increase in other comprehensive income, due to the change in market interest rates, and $25,031 of amortization of our ESOP loan. VSB Bancorp's Tier 1 capital ratio was 10.69% at March 31, 2020. Book value per common share increased from $20.81 at year end 2019 to $21.02 at March 31, 2020.
Raffaele (Ralph) M. Branca, VSB Bancorp, Inc.'s President and CEO, stated, "We are in the midst of a tumultuous period, both economically and health related. The coronavirus pandemic has hit Staten Island and New York City hard. We became an approved lender under the SBA's Payment Protection Program, and we have made over 332 loans, totaling approximately $30 million, in the first two rounds of appropriations, bolstering our small business community." Joseph J. LiBassi, VSB Bancorp, Inc.'s Chairman, stated, "Our book price per share has grown to $21.02, as our capital base continues to increase. We paid our fiftieth consecutive dividend to our stockholders. We stand in support with our Staten Island community."
VSB Bancorp, Inc. is the one-bank holding company for Victory State Bank. Victory State Bank, a
FORWARD LOOKING STATEMENTS
This release contains forward-looking statements that are subject to risks and uncertainties. Such risks and uncertainties may include but are not necessarily limited to adverse changes in local, regional or national economic conditions, fluctuations in market interest rates, changes in laws or government regulations, weaknesses of other financial institutions, changes in customer preferences, and changes in competition within our market area. When used in this release or in any other written or oral statements by the Company or its directors, officers or employees, words or phrases such as "will result in," "management expects that," "will continue," "is anticipated," "estimate," "projected," or similar expressions, and other terms used to describe future events, are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). Readers should not place undue reliance on the forward-looking statements, which reflect management's view only as of the date of the statement. Furthermore, any forward-looking statements contained in this release are subject to uncertainties regarding the proposed merger transaction with Northfield Bancorp including, without limitation, the requirements for regulatory approval and approval by the Company's stockholders.
The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. This statement is included for the express purpose of protecting the Company under the PSLRA's safe harbor provisions.
Contact Name:
Ralph M. Branca
President & CEO
(718) 979-1100
VSB Bancorp, Inc.
Consolidated Statements of Financial Condition
March 31, 2020
(unaudited)
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
Assets: | ||||||||
Cash and cash equivalents | $ | 49,864,830 | $ | 40,608,998 | ||||
Investment securities, available for sale | 27,905,213 | 29,863,312 | ||||||
Investment securities, held to maturity | 109,828,722 | 121,736,935 | ||||||
Loans receivable | 159,779,299 | 160,020,731 | ||||||
Allowance for loan loss | (1,705,058 | ) | (1,612,967 | ) | ||||
Loans receivable, net | 158,074,241 | 158,407,764 | ||||||
Bank premises and equipment, net | 3,586,255 | 3,726,726 | ||||||
Right of use asset | 4,526,154 | 4,667,218 | ||||||
Accrued interest receivable | 843,747 | 889,157 | ||||||
Bank owned life insurance | 5,684,485 | 5,656,866 | ||||||
Other assets | 2,762,660 | 2,824,103 | ||||||
Total assets | $ | 363,076,307 | $ | 368,381,079 | ||||
Liabilities and stockholders' equity: | ||||||||
Liabilities: | ||||||||
Deposits: | ||||||||
Demand and checking | $ | 141,853,764 | $ | 146,809,596 | ||||
NOW | 61,347,136 | 64,797,211 | ||||||
Money market | 35,311,443 | 34,220,288 | ||||||
Savings | 23,006,741 | 22,497,048 | ||||||
Time | 54,581,552 | 53,968,740 | ||||||
Total Deposits | 316,100,636 | 322,292,883 | ||||||
Escrow deposits | 794,382 | 355,768 | ||||||
Lease liability | 4,786,234 | 4,904,241 | ||||||
Accounts payable and accrued expenses | 2,158,636 | 2,038,141 | ||||||
Total liabilities | 323,839,888 | 329,591,033 | ||||||
Stockholders' equity: | ||||||||
Common stock, ($.0001 par value, 10,000,000 shares authorized | ||||||||
2,130,476 issued, 1,867,015 outstanding at March 31, 2020 | ||||||||
and 2,127,426 issued, 1,863,965 outstanding at December 31, 2019) | 214 | 213 | ||||||
Additional paid in capital | 11,481,505 | 11,346,930 | ||||||
Retained earnings | 30,940,262 | 30,699,196 | ||||||
Treasury stock, at cost (263,461 shares at March 31, 2020\ | ||||||||
and at December 31, 2019) | (2,813,653 | ) | (2,813,653 | ) | ||||
Unearned ESOP shares | (408,844 | ) | (433,875 | ) | ||||
Accumulated other comprehensive income/(loss), net of tax expense/ | ||||||||
(benefit) of $12,024 and $(2,472), respectively | 36,935 | (8,765 | ) | |||||
Total stockholders' equity | 39,236,419 | 38,790,046 | ||||||
Total liabilities and stockholders' | ||||||||
equity | $ | 363,076,307 | $ | 368,381,079 | ||||
VSB Bancorp, Inc.
Consolidated Statements of Operations
March 31, 2020
(unaudited)
| Three months | Three months | |||||||
| ended | ended | |||||||
| March 31, 2020 | March 31, 2019 | |||||||
Interest and dividend income: | ||||||||
Loans receivable | $ | 2,247,936 | $ | 1,947,412 | ||||
Investment securities | 1,023,319 | 1,274,782 | ||||||
Other interest earning assets | 128,343 | 189,643 | ||||||
Total interest income | 3,399,598 | 3,411,837 | ||||||
Interest expense: | ||||||||
NOW | 143,058 | 134,472 | ||||||
Money market | 51,879 | 61,140 | ||||||
Savings | 12,348 | 11,813 | ||||||
Time | 181,753 | 172,951 | ||||||
Total interest expense | 389,038 | 380,376 | ||||||
Net interest income | 3,010,560 | 3,031,461 | ||||||
Provision for loan loss | 100,000 | 50,000 | ||||||
Net interest income | ||||||||
after provision for loan loss | 2,910,560 | 2,981,461 | ||||||
Non-interest income: | ||||||||
Loan fees | 13,701 | (5,270 | ) | |||||
Service charges on deposits | 431,119 | 426,398 | ||||||
Net rental income (loss) | 1,863 | (10,379 | ) | |||||
Other income | 97,724 | 87,512 | ||||||
Total non-interest income | 544,407 | 498,261 | ||||||
Non-interest expenses: | ||||||||
Salaries and benefits | 1,366,179 | 1,395,849 | ||||||
Occupancy expenses | 551,892 | 488,252 | ||||||
Professional fees | 110,395 | 109,925 | ||||||
Legal expenses | 204,303 | 81,000 | ||||||
Computer expense | 175,940 | 170,639 | ||||||
Director fees | 74,175 | 68,660 | ||||||
FDIC and NYSBD assessments | 12,000 | 38,000 | ||||||
Other expenses | 268,577 | 300,000 | ||||||
Total non-interest expenses | 2,763,461 | 2,652,325 | ||||||
Income before income taxes | 691,506 | 827,397 | ||||||
Provision (benefit) for income taxes: | ||||||||
Current | 244,234 | 199,544 | ||||||
Deferred | (71,140 | ) | (12,148 | ) | ||||
Total provision for income taxes | 173,094 | 187,396 | ||||||
Net income | $ | 518,412 | $ | 640,001 | ||||
Basic income per common share | $ | 0.28 | $ | 0.36 | ||||
Diluted net income per share | $ | 0.28 | $ | 0.35 | ||||
Book value per common share | $ | 21.02 | $ | 19.56 | ||||
SOURCE: VSB Bancorp, Inc.
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