UNITED STATES
SECURITY AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20849
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD
COMMISSION FILE NUMBER 0-50237
VSB Bancorp, Inc.
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(Name of Small Business Issuer in its charter)
New York
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(State or other jurisdiction of incorporation or organization)
11 - 3680128
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(I. R. S. Employer Identification No.)
3155 Amboy Road, Staten Island, New York 10306
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(Address of principal executive offices)
(718) 979-1100
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Issuer's telephone number
Common Stock
----------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
Transitional small business disclosure format: Yes [ ] No [X]
The Registrant had 1,891,759 common shares outstanding as of October 27, 2006.
CROSS REFERENCE INDEX
PART I
Page
----
Item 1 Consolidated Statements of Financial Condition as of September 30, 2006 and
December 31, 2005 (unaudited). 4
Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2006 and 2005 (unaudited). 5
Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended
September 30, 2006 and the Year Ended December 31, 2005 (unaudited). 6
Consolidated Statements of Cash Flows for the Three and Nine Months Ended
September 30, 2006 and 2005 (unaudited). 7
Notes to Consolidated Financial Statements for the Three and Nine Months Ended
September 30, 2006 and 2005 (unaudited). 8 to 16
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 to 25
Item 3 Control and Procedures 25 to 26
PART II
Item 1 Legal Proceedings 26
Signature Page 27
Exhibit 31.1, 31.2, 32.1, 32.2 28 to 31
2
Forward-Looking Statements
When used in this periodic report, or in any written or oral statement
made by us or our officers, directors or employees, the words and phrases "will
result," "expect," "will continue," "anticipate," "estimate," "project," or
similar terms are intended to identify "forward-looking statements." A variety
of factors could cause our actual results and experiences to differ materially
from the anticipated results or other expectations expressed in any
forward-looking statements. Some of the risks and uncertainties that may affect
our operations, performance, development and results, the interest rate
sensitivity of our assets and liabilities, and the adequacy of our loan loss
allowance, include, but are not limited to:
o deterioration in local, regional, national or global economic
conditions which could result in, among other things, an increase
in loan delinquencies, a decrease in property values, or a change
in the real estate turnover rate;
o changes in market interest rates or changes in the speed at which
market interest rates change;
o changes in laws and regulations affecting the financial service
industry;
o changes in competition; and
o changes in consumer preferences by our customers or the customers
of our business borrowers.
Please do not place undue reliance on any forward-looking statement,
which speaks only as of the date made. There are many factors, including those
described above, that could affect our future business activities or financial
performance and could cause our actual future results or circumstances to differ
materially from those we anticipate or project. We do not undertake any
obligation to update any forward-looking statement after it is made.
3
VSB Bancorp, Inc.
Consolidated Statements of Financial Condition
(unaudited)
September 30, December 31,
2006 2005
------------- -------------
Assets:
Cash and due from banks $ 36,054,385 $ 31,324,147
Investment securities, available for sale 113,888,922 106,023,293
Loans receivable 66,171,876 73,944,105
Allowance for loan loss (1,193,024) (1,153,298)
------------- -------------
Loans receivable, net 64,978,852 72,790,807
Bank premises and equipment, net 1,641,558 1,441,087
Accrued interest receivable 821,129 728,627
Deferred taxes 2,268,664 2,298,195
Other assets 2,219,179 1,169,556
------------- -------------
Total assets $ 221,872,689 $ 215,775,712
============= =============
Liabilities and stockholders' equity:
Liabilities:
Deposits:
Demand and checking $ 72,944,352 $ 66,692,436
NOW 20,433,030 23,574,056
Money market 16,743,027 20,177,240
Savings 13,208,697 14,809,010
Time 73,690,729 67,731,273
------------- -------------
Total Deposits 197,019,835 192,984,015
Escrow deposits 371,654 267,144
Subordinated debt 5,155,000 5,155,000
Accounts payable and accrued expenses 2,533,909 2,553,208
------------- -------------
Total liabilities 205,080,398 200,959,367
------------- -------------
Employee Stock Ownership Plan Repurchase Obligation 259,532 284,411
Stockholders' equity:
Common stock, ($.0001 par value, 3,000,000 shares
authorized, 1,891,759 issued and outstanding at
September 30, 2006 and 1,509,822 issued and
outstanding at December 31, 2005) 189 151
Additional paid in capital 8,812,500 8,743,200
Retained earnings 10,443,503 8,621,693
Unallocated ESOP Shares (1,282,175) (1,408,983)
Accumulated other comprehensive loss,
net of taxes of $1,257,222 and $1,242,278,
respectively (1,441,258) (1,424,127)
------------- -------------
Total stockholders' equity 16,532,759 14,531,934
------------- -------------
Total liabilities and stockholders'
equity $ 221,872,689 $ 215,775,712
============= =============
See notes to consolidated financial statements.
4
VSB Bancorp, Inc.
Consolidated Statements of Operations
(unaudited)
Three months Three months Nine months Nine months
ended ended ended ended
Sep. 30, 2006 Sep. 30, 2005 Sep. 30, 2006 Sep. 30, 2005
------------- ------------- ------------- -------------
Interest and dividend income:
Loans receivable $ 1,794,879 $ 1,540,973 $ 5,301,788 $ 4,193,942
Investment securities 1,336,087 1,160,153 3,862,518 3,715,401
Other interest earning assets 282,049 171,029 594,676 316,289
------------- ------------- ------------- -------------
Total interest income 3,413,015 2,872,155 9,758,982 8,225,632
Interest expense:
NOW 27,867 28,455 77,512 78,351
Money market 85,246 55,768 264,909 161,768
Savings 23,607 20,897 62,985 59,235
Subordinated debt 89,040 89,040 267,119 267,119
Time 662,769 330,917 1,647,723 781,303
Other interest expense 1,112 -- 1,112 --
------------- ------------- ------------- -------------
Total interest expense 889,641 525,077 2,321,360 1,347,776
Net interest income 2,523,374 2,347,078 7,437,622 6,877,856
Provision (credit) for loan loss (25,000) (15,000) -- (90,000)
------------- ------------- ------------- -------------
Net interest income
after provision for loan loss 2,548,374 2,362,078 7,437,622 6,967,856
------------- ------------- ------------- -------------
Non-interest income:
Loan fees 16,973 22,914 57,273 80,008
Service charges on deposits 366,716 450,172 1,143,444 1,294,779
Net rental income 1,083 149,129 7,832 170,734
Other income 62,151 49,259 200,395 103,752
------------- ------------- ------------- -------------
Total non-interest income 446,923 671,474 1,408,944 1,649,273
------------- ------------- ------------- -------------
Non-interest expenses:
Salaries and benefits 909,308 958,331 2,911,028 2,832,081
Occupancy expenses 275,324 238,295 814,374 725,037
Legal expense 117,258 84,057 279,579 117,432
Professional fees 46,000 51,000 136,000 177,000
Computer expense 69,611 62,045 192,236 176,995
Directors' fees 53,950 39,900 167,400 126,825
Other expenses 317,875 368,568 934,915 863,216
------------- ------------- ------------- -------------
Total non-interest expenses 1,789,326 1,802,196 5,435,532 5,018,586
------------- ------------- ------------- -------------
Income before income taxes 1,205,971 1,231,356 3,411,034 3,598,543
Provision/(benefit) for income taxes:
Current 515,262 580,100 1,544,749 1,664,840
Deferred 46,580 (6,318) 44,475 11,876
------------- ------------- ------------- -------------
Total provision for income taxes 561,842 573,782 1,589,224 1,676,716
------------- ------------- ------------- -------------
Net income $ 644,129 $ 657,574 $ 1,821,810 $ 1,921,827
============= ============= ============= =============
Basic income per common share $ 0.35 $ 0.36 $ 1.00 $ 1.07
============= ============= ============= =============
Diluted net income per share $ 0.34 $ 0.35 $ 0.98 $ 1.03
============= ============= ============= =============
Comprehensive income $ 1,606,183 $ 75,955 $ 1,804,679 $ 1,249,898
============= ============= ============= =============
Book value per common share $ 8.88 $ 7.63 $ 8.88 $ 7.63
============= ============= ============= =============
All per share data has been adjusted for the 5 for 4 stock split, in the form of
a 25% stock dividend, paid on May 18, 2006. See notes to consolidated financial
statements.
5
VSB Bancorp, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Year Ended December 31, 2005 and Nine Months Ended September 30, 2006
(unaudited)
Accumulated
Number of Additional Unallocated Other Total
Common Common Paid-In Retained ESOP Comprehensive Stockholders'
Shares Stock Capital Earnings Shares Loss Equity
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 1,505,022 $ 150 $ 8,818,313 $ 6,054,264 $ (1,578,061) $ (465,045) $ 12,829,621
Exercise of stock option 4,800 1 63,731 63,732
Amortization of earned
portion of ESOP
common stock 169,078 169,078
Amortization of excess fair
value over cost - ESOP 18,742 18,742
Transfer from ESOP
repurchase obligation (157,586) (157,586)
Comprehensive income:
Net income 2,567,429 2,567,429
Other comprehensive
income, net:
Unrealized holding
loss arising
during the year -- -- -- -- -- (959,082) (959,082)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total comprehensive income 1,608,347
Balance at December 31, 2005 1,509,822 $ 151 $ 8,743,200 $ 8,621,693 $ (1,408,983) $ (1,424,127) $ 14,531,934
------------ ------------ ------------ ------------ ------------ ------------ ------------
Exercise of stock option 3,750 46,232 46,232
Amortization of earned
portion of ESOP
common stock 126,808 126,808
5 for 4 stock split and
purchase of fractional
shares 378,187 38 (367) (329)
Amortization of excess fair
value over cost - ESOP (1,444) (1,444)
Transfer from ESOP repurchase
obligation 24,879 24,879
Comprehensive income:
Net income 1,821,810 1,821,810
Other comprehensive
income, net:
Unrealized holding
loss arising
during the year -- -- -- -- -- (17,131) (17,131)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total comprehensive income 1,804,679
Balance at September 30, 2006 1,891,759 $ 189 $ 8,812,500 $ 10,443,503 $ (1,282,175) $ (1,441,258) $ 16,532,759
============ ============ ============ ============ ============ ============ ============
All per share data has been adjusted for the 5 for 4 stock split, in the form of
a 25% stock dividend, paid on May 18, 2006. See notes to consolidated financial
statements.
6
VSB Bancorp, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Three months Three months Nine months Nine months
ended ended ended ended
Sep. 30, 2006 Sep. 30, 2005 Sep. 30, 2006 Sep. 30, 2005
------------- ------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 644,129 $ 657,574 $ 1,821,810 $ 1,921,827
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 112,586 110,658 330,144 339,741
Accretion of income, net of amortization of premium (66,629) (48,290) (254,021) (86,650)
ESOP compensation expense 41,344 41,222 125,364 128,759
Provision/(credit) for loan losses (25,000) (15,000) -- (90,000)
Increase in prepaid and other assets (722,076) (79,202) (1,049,623) (397,755)
Decrease/(increase) in accrued interest receivable 9,338 30,375 (92,502) 32,616
Decrease/(increase) in deferred income taxes 46,580 (6,318) 44,475 11,876
Increase/(decrease) in accrued expenses and other liabilities 338,455 899,019 (19,299) 1,103,580
------------- ------------- ------------- -------------
Net cash provided by operating activities 378,727 1,590,038 906,348 2,963,994
------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease/(increase) in loan receivable 5,808,450 202,071 8,081,181 (7,685,867)
Proceeds from repayment of investment securities,
available for sale 5,909,777 7,784,233 16,031,264 21,705,177
Purchases of investment securities, afs -- -- (23,944,173) --
Purchases of premises and equipment (41,271) (22,137) (530,615) (45,533)
------------- ------------- ------------- -------------
Net cash provided by/(used in) investing activities 11,676,956 7,964,167 (362,343) 13,973,777
------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease)/increase in deposits (3,834,277) 8,253,655 4,140,330 (10,230,968)
Exercise stock option 4,062 22,956 46,232 63,732
5 for 4 stock split and the purchase of fractional shares -- -- (329) --
------------- ------------- ------------- -------------
Net cash (used in)/provided by financing activities (3,830,215) 8,276,611 4,186,233 (10,167,236)
------------- ------------- ------------- -------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 8,225,468 17,830,816 4,730,238 6,770,535
------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 27,828,917 24,598,792 31,324,147 35,659,073
------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 36,054,385 $ 42,429,608 $ 36,054,385 $ 42,429,608
============= ============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 731,263 $ 734,962 $ 2,172,489 $ 1,506,811
============= ============= ============= =============
Taxes $ 450,000 $ 554,897 $ 1,676,059 $ 1,831,784
============= ============= ============= =============
See notes to consolidated financial statements.
7
VSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)
--------------------------------------------------------------------------------
1. GENERAL
VSB Bancorp, Inc. ("Bancorp" or "Company") became the holding company for
Victory State Bank ("Bank"), a New York State chartered commercial bank on May
30, 2003 as the result of a reorganization of the Bank into the holding company
form of organization. Through the Bank, the Company is primarily engaged in the
business of commercial banking, and to a lesser extent retail banking, in Staten
Island New York. The stockholders of the Bank became the stockholders of VSB
Bancorp, Inc. as a result of the reorganization, receiving three shares of VSB
Bancorp, Inc. stock for each two shares of Victory State Bank stock. Each
stockholder owned the same percentage interest in VSB Bancorp immediately after
the reorganization that the stockholder owned in the Bank immediately before the
reorganization, subject to immaterial differences due to adjustments for cash in
lieu of fractional shares. VSB Bancorp now owns 100% of the capital stock of the
Bank. No stockholders of the Bank exercised dissenter's rights to receive cash
instead of shares of the Company. The transaction between these entities under
common control was accounted for at historical cost on an "as if pooled basis".
Through the Bank, the Company is primarily engaged in the business of
commercial banking, and to a lesser extent retail banking. The Bank gathers
deposits from individuals and businesses primarily in Staten Island, New York
and makes loans throughout that community. The Bank invests funds that are not
used for lending primarily in government securities, mortgage backed securities
and collateralized mortgage obligations. Customer deposits are insured, up to
the applicable limit, by the Federal Deposit Insurance Corporation ("FDIC"). The
Bank is supervised by the New York State Banking Department and the FDIC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting and reporting
policies followed in preparing and presenting the accompanying consolidated
financial statements. These policies conform with accounting principles
generally accepted in the United States of America ("GAAP").
Principles of Consolidation - The consolidated financial statements of the
Company include the accounts of the Company, including its subsidiary Victory
State Bank. All significant inter-company accounts and transactions between the
Company and Bank have been eliminated in consolidation.
Interim Financial Reporting - The unaudited condensed consolidated
financial statements of the Company have been prepared pursuant to the rules and
regulations for report on Form 10-QSB. Accordingly, certain information and
notes required by accounting principles generally accepted in the United States
of America ("GAAP") for annual financial statements are not included herein. The
interim statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Form 10-KSB for the year
ended December 31, 2005.
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.
8
Reclassifications - Some items in the prior year financial statements were
reclassified to conform to the current presentation.
Cash and Cash Equivalents - Cash and cash equivalents consists of cash on
hand, due from banks and interest-bearing deposits. Net cash flows are reported
for customer loan and deposit transactions and interest-bearing deposits.
Regulation D of the Board of Governors of the Federal Reserve system requires
that Victory State Bank maintain non-interest-bearing deposits or cash on hand
as reserves against its demand deposits. The amount of reserves which Victory
State Bank is required to maintain depends upon its level of transaction
accounts. During the fourteen day period from September 28, 2006 through October
11, 2006, Victory State Bank was required to maintain reserves, after deducting
vault cash, of $3,778,000. Reserves are required to be maintained on a fourteen
day basis, so, from time to time, Victory State Bank may use available cash
reserves on a day to day basis, so long as the fourteen day average reserves
satisfy Regulation D requirements. Victory State Bank is required to report
transaction account levels to the Federal Reserve on a weekly basis.
Interest-bearing bank balances - Interest-bearing bank balances mature
overnight and are carried at cost.
Investment Securities, Available for Sale - Investment securities,
available for sale, are to be held for an unspecified period of time and include
securities that management intends to use as part of its asset/liability
strategy. These securities may be sold in response to changes in interest rates,
prepayments or other factors and are carried at estimated fair value. Gains or
losses on the sale of such securities are determined by the specific
identification method. Interest income includes amortization of purchase premium
and accretion of purchase discount. Premiums and discounts are recognized in
interest income using a method that approximates the level yield method without
anticipating prepayments, except for mortgage-backed securities where
prepayments are estimated. Unrealized holding gains or losses, net of deferred
income taxes, are excluded from earnings and reported as other comprehensive
income in a separate component of stockholders' equity until realized. Declines
in the fair value of securities below their cost that are other than temporary
are reflected as realized losses. In estimating other-than-temporary losses,
management considers: (1) the length of time and extent that fair value has been
less than cost, (2) the financial condition and near term prospects of the
issuer, and (3) the Company's ability and intent to hold the security for a
period sufficient to allow for any anticipated recovery in fair value.
The Company invests primarily in agency Collateralized Mortgage-Backed
Obligations ("CMOs") with estimated average lives primarily under 4.5 years and
Mortgage-Backed Securities. These securities are primarily issued by the Federal
National Mortgage Association ("FNMA"), the Government National Mortgage
Association ("GNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") and
are primarily comprised of mortgage pools guaranteed by FNMA, GNMA or FHLMC. The
Company also invests in whole loan CMOs, all of which are AAA rated. These
securities expose the Company to risks such as interest rate, prepayment and
credit risk and thus pay a higher rate of return than comparable treasury
issues.
Loans Receivable - Loans receivable, that management has the intent and
ability to hold for the foreseeable future or until maturity or payoff, are
stated at unpaid principal balances, adjusted for deferred net origination and
commitment fees and the allowance for loan losses. Interest income on loans is
credited as earned.
It is the policy of the Company to provide a valuation allowance for
probable incurred losses on loans based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations which
may affect the borrower's ability to repay, estimated value of underlying
collateral and current economic conditions in the Company's lending area. The
allowance is increased by provisions for loan losses charged to earnings and is
reduced by charge-offs, net of recoveries. While management uses available
information to estimate losses on loans, future additions to the allowance may
be necessary based upon the expected growth of the loan portfolio and any
changes in economic conditions beyond management's control. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on judgments
different from those of management. Management believes, based upon all relevant
and available information, that the allowance for loan losses is adequate.
9
The Company has a policy that all loans 90 days past due are placed on
non-accrual status. It is the Company's policy to cease the accrual of interest
on loans to borrowers past due less than 90 days where a probable loss is
estimated and to reverse out of income all interest that is due. The Company
applies payments received on non-accrual loans to the outstanding principal
balance due. On a limited basis, the Company may apply a payment to interest on
a non-accrual loan if there is no impairment or no estimatible loss on this
asset. The Company continues to accrue interest on construction loans that are
90 days past contractual maturity date if the loan is expected to be paid in
full in the next 60 days and all interest is paid up to date.
Loan origination fees and certain direct loan origination costs are
deferred and the net amount recognized over the contractual loan terms using the
level-yield method, adjusted for periodic prepayments in certain circumstances.
The Company considers a loan to be impaired when, based on current
information, it is probable that the Company will be unable to collect all
principal and interest payments due according to the contractual terms of the
loan agreement. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Impairment is measured on a
loan by loan basis for commercial and construction loans. Impaired loans are
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral. The fair value of
the collateral, as reduced by costs to sell, is utilized if a loan is collateral
dependent. Large groups of smaller balance homogeneous loans, such as consumer
loans and residential loans, are collectively evaluated for impairment.
Long-Lived Assets - The Company periodically evaluates the recoverability
of long-lived assets, such as premises and equipment, to ensure the carrying
value has not been impaired. In performing the review for recoverability, the
Company would estimate the future cash flows expected to result from the use of
the asset. If the sum of the expected future cash flows is less than the
carrying amount an impairment will be recognized. The Company reports these
assets at the lower of the carrying value or fair value.
Subordinated Debt - In August of 2003, the Company formed VSB Capital Trust
I (the "Trust"). The Trust is a statutory business trust organized under
Delaware law and the Company owns all of its common securities. The Trust issued
$5.0 million of Trust Preferred Capital Securities to an independent investor
and $155,000 of common securities to the Company. The Company issued a $5.16
million subordinated debenture to the Trust. The subordinated debenture is the
sole asset of the Trust. The subordinated debenture and the Trust Preferred
Capital Securities pay interest and dividends, respectively, on a quarterly
basis, at a rate of 6.909%, for the first five years. They mature thirty years
after the issuance of the securities and are non-callable for five years. After
the first five years, the Trust Preferred Securities may be called by the
Company at any quarterly interest payment date at par and the rate of interest
that fluctuates quarterly based upon 300 basis points over the 90 day LIBOR
rate. The Trust is not consolidated with the Company.
Premises and Equipment - Premises, leasehold improvements, and furniture
and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization are accumulated by the straight-line method over
the estimated useful lives of the respective assets, which range from three to
ten years. Leasehold improvements are amortized at the lesser of their useful
life or the term of the lease.
Federal Home Loan Bank (FHLB) Stock - The Bank is a member of the FHLB
system. Members are required to own a certain amount of stock based on the level
of borrowings and other factors, and may invest in additional amounts. FHLB
stock is carried at cost, classified as a restricted security, and periodically
evaluated for impairment. Because this stock is viewed as a long term
investment, impairment is based on ultimate recovery of par value. Both cash and
stock dividends are reported as income.
Income Taxes - The Company utilizes the liability method to account for
income taxes. Under this method, deferred tax assets and liabilities are
determined on differences between financial reporting and the tax bases of
10
assets and liabilities and are measured using the enacted tax rates and laws
expected to be in effect when the differences are expected to reverse. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
Financial Instruments - In the ordinary course of business, the Company has
entered into off-balance sheet financial instruments, primarily consisting of
commitments to extend credit.
Basic and Diluted Net Income Per Common Share - Basic net income per share
of common stock is based on 1,821,357 shares and 1,805,362 shares, the weighted
average number of common shares outstanding for the three months ended September
30, 2006 and 2005, respectively. Diluted net income per share of common stock is
based on 1,868,460 and 1,861,308, the weighted average number of common shares
and potentially dilutive common shares outstanding for the three months ended
September 30, 2006 and 2005, respectively. The weighted average number of
potentially dilutive common shares excluded in calculating diluted net income
per common share due to the anti-dilutive effect is 85,397 and 72,645 shares for
the three months ended September 30, 2006 and 2005, respectively. Common stock
equivalents were calculated using the treasury stock method. All per share data
throughout this report has been adjusted to reflect, retroactively, a 5-for-4
stock split, in the form of a 25% stock dividend, that was declared by the Board
of Directors to stockholders of record on May 3, 2006.
Basic net income per share of common stock is based on 1,816,840 shares and
1,800,512 shares, the weighted average number of common shares outstanding for
the nine months ended September 30, 2006 and 2005, respectively. Diluted net
income per share of common stock is based on 1,865,575 and 1,860,815, the
weighted average number of common shares and potentially dilutive common shares
outstanding for the nine months ended September 30, 2006 and 2005, respectively.
The weighted average number of potentially dilutive common shares excluded in
calculating diluted net income per common share due to the anti-dilutive effect
is 84,070 and 71,190 shares for the nine months ended September 30, 2006 and
2005, respectively. Common stock equivalents were calculated using the treasury
stock method. All per share data throughout this report has been adjusted to
reflect, retroactively, a 5-for-4 stock split, in the form of a 25% stock
dividend that was declared by the Board of Directors to stockholders of record
on May 3, 2006.
The reconciliation of the numerators and the denominators of the basic and
diluted per share computations for the three and nine months ended September 30,
are as follows:
11
Reconciliation of EPS Three Months Ended Three Months Ended
--------------------- September 30, 2006 September 30, 2005
------------------------------------------ ------------------------------------------
Weighted Weighted
Net Average Per Share Net Average Per Share
Income Shares Amount Income Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Basic income per
common share
----------------
Net income available to
common stockholders $ 644,129 1,821,357 $ 0.35 $ 657,574 1,805,362 $ 0.36
============ ============
Effect of dilutive shares
-------------------------
Weighted average
shares, if converted 47,103 55,946
------------ ------------
Diluted net income per
common share
----------------------
Net income available to
common stockholders $ 644,129 1,868,460 $ 0.34 $ 657,574 1,861,308 $ 0.35
============ ============ ============ ============ ============ ============
Reconciliation of EPS Nine Months Ended Nine Months Ended
--------------------- September 30, 2006 September 30, 2005
------------------------------------------ ------------------------------------------
Weighted Weighted
Net Average Per Share Net Average Per Share
Income Shares Amount Income Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Basic income per
common share
----------------
Net income available to
common stockholders $ 1,821,810 1,816,840 $ 1.00 $ 1,921,827 1,800,512 $ 1.07
============ ============
Effect of dilutive shares
-------------------------
Weighted average
shares, if converted 48,735 60,303
------------ ------------
Diluted net income per
common share
----------------------
Net income available to
common stockholders $ 1,821,810 1,865,575 $ 0.98 $ 1,921,827 1,860,815 $ 1.03
============ ============ ============ ============ ============ ============
All per share data has been adjusted for the 5 for 4 stock split, in the form of
a 25% stock dividend, paid on May 18, 2006.
Stock Based Compensation - FAS 123, Revised, required companies to record
compensation expense for stock options provided to employees in return for
employment service. The cost is measured at the fair value of the options when
granted, and this cost is expensed over the employment service period, which is
normally the vesting period of the options. This applies to awards granted or
modified in fiscal years beginning in 2006. Compensation cost will also be
recorded for prior option grants that vest after the date of adoption. The
effect of result on operations will depend on the level of future option grants
and the calculation of the fair value of the options granted at such future
date, as well as the vesting periods provided, and so cannot currently be
predicted. In December 2005, the Board authorized the acceleration of the
vesting of all outstanding stock options issued to both employees and directors.
The decision to accelerate the vesting of these options, which the Company
believes is in the best interest of its stockholders, was made primarily to
12
reduce non-cash compensation expense, approximately $169,000 of future
compensation expense, net of taxes, that would have been recorded in its income
statement in future periods upon the adoption of Financial Accounting Standards
Board Statement No. 123R (Share-Based Payment) in January 2006.
If compensation cost for awards had been measured based on the fair value of the
stock options awarded at the grant dates, net income and basic and diluted
earnings per common share would have been reduced to the pro-forma amounts on
the table below for the three and nine months ended September 30, 2005:
Three Months Nine Months
Ended Ended
Sep. 30, 2005 Sep. 30, 2005
-------------- --------------
Net Income
As reported $ 657,574 $ 1,921,827
Less: Total stock-based compensation expense
determined under the fair value method for
all awards, net of related tax effects 13,513 40,539
-------------- --------------
Pro-forma $ 644,061 $ 1,881,288
============== ==============
Three Months Nine Months
Ended Ended
Sep. 30, 2005 Sep. 30, 2005
-------------- --------------
Basic earnings per common share
As reported $ 0.36 $ 1.07
Less: Total stock-based compensation expense
determined under the fair value method for
all awards, net of related tax effects -- 0.03
-------------- --------------
Pro-forma $ 0.36 $ 1.04
============== ==============
Three Months Nine Months
Ended Ended
Sep. 30, 2005 Sep. 30, 2005
-------------- --------------
Diluted earnings per common share
As reported $ 0.35 $ 1.03
Less: Total stock-based compensation expense
determined under the fair value method for
all awards, net of related tax effects -- 0.02
-------------- --------------
Pro-forma $ 0.35 $ 1.01
============== ==============
All per share data throughout this report has been adjusted to reflect,
retroactively, a 5 for 4 stock split, in the form of a 25% stock dividend,
that was declared by the Board of Directors to stockholders of record on
May 3, 2006.
Stock Options
Options to buy stock are granted to directors, officers and employees under
the VSB Bancorp, Inc. 2000 Incentive Plan, the 1998 Incentive Plan, the 2004
Directors' Plan, the 2000 Directors' Plan and the 1998 Directors' Plan which, in
the aggregate, provide for issue up to 243,750 options. Exercise price is the
market price at the date of grant, and compensation expense will be recognized
in the income statement in accordance with FAS 123, Revised. The maximum option
term is ten years, and the options vesting period is up to five years.
13
As of December 31, 2005 the Board accelerated the vesting on all
outstanding options so that they became immediately exercisable. By accelerating
the vesting of these options, we estimated that approximately $169,000 of future
compensation expense, net of taxes, was eliminated.
There were no stock option grants in 2006 and 2005.
The stock option components of the 2000 Incentive Plan, the 1998 Incentive
Plan and the 2004 Directors' Plan, the 2000 Directors' Plan and the 1998
Directors' Plan, as of September 30, 2006, and changes during the nine months
ended, consist of the following:
2006
------------------------------------------
Weighted
Average Aggregate
Exercise Intrinsic
Shares (2) Price (2) Value (1)
------------ ------------ ------------
Options outstanding 182,498 $ 10.31
at the beginning of the year
Granted -- --
Canceled -- --
Exercised 4,500 6.24
------------
Options outstanding at September 30, 2006 177,998 $ 10.36 $ 817,011
============ ============ ============
Options exercisable at September 30, 2006 177,998 $ 10.36 $ 817,011
============ ============ ============
Weighted average remaining contractual life of
options outstanding at September 30, 2006 5.0 Years
(1) The aggregate intrinsic value is determined by taking the difference
between the closing price at September 30, 2006 ($14.95, as adjusted
for the 5 for 4 stock split) and the weighted average exercise price
and then multiplying the result by the options outstanding at
September 30, 2006.
(2) All share and per share data throughout this report has been adjusted
to reflect, retroactively, a 5 for 4 stock split, in the form of a 25%
stock dividend, that was declared by the Board of Directors to
stockholders of record on May 3, 2006.
Described below is the range of exercise prices for options granted under
the following option plans as of September 30, 2006:
Range of Number of Weighted Average Weighted Average
Plan Description Exercise Prices Exercisable Shares Exercise Price Contractual Life
------------------------------------- --------------------- ------------------ -------------- ----------------
1998 Director Stock Option Plan From $4.90 to $6.40 23,750 $ 6.13 2.36
1998 Incentive Stock Option Plan From $4.75 to $6.40 32,500 5.76 2.29
2000 Director Stock Option Plan $4.75 25,000 4.39 3.65
2000 Incentive Stock Option Plan $4.75 and $15.60 41,748 10.40 5.58
2004 Director Stock Option Plan $17.60 55,000 17.60 7.75
------------------ -------------- ----------------
All Plans 177,998 $ 10.36 4.95
================== ============== ================
All share and per share data throughout this report has been adjusted to
reflect, retroactively, a 5 for 4 stock split, in the form of a 25% stock
dividend, that was declared by the Board of Directors to stockholders of
record on May 3, 2006.
Employee Stock Ownership Plan ("ESOP") - The cost of shares issued to the
ESOP, but not yet allocated to participants, is shown as a reduction of
stockholders' equity. Compensation expense is based on the market price of
shares as they are committed to be released to participant accounts. Cash
dividends on allocated ESOP shares reduce retained earnings; cash dividends on
unearned ESOP shares reduce debt and accrued interest. As participants may put
14
their ESOP shares back to the Company upon termination, an amount of equity
equal to these shares times the current market price is reclassified out of
stockholders' equity.
Comprehensive Income - Comprehensive income consists of net income and
other comprehensive income. Other comprehensive income includes unrealized gains
and losses, net of taxes, on securities available for sale which are also
recognized as separate components of equity.
Recently-Issued Accounting Standards - In September 2006, the Securities
and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 108 (SAB
108). SAB 108 provides interpretive guidance on how the effects of the carryover
or reversal of prior year misstatements should be considered in quantifying a
potential current year misstatement. Prior to SAB 108, companies might evaluate
the materiality of financial statement misstatements using either the income
statement or balance sheet approach, with the income statement approach focusing
on new misstatements added in the current year, and the balance sheet approach
focusing on the cumulative amount of misstatement present in a company's balance
sheet. Misstatements that would be material under one approach could be viewed
as immaterial under another approach, and not be corrected. SAB 108 now requires
that companies view financial statement misstatements as material if they are
material according to either the income statement or balance sheet approach.
This statement is effective as of the end of the fiscal year ending after
December 15, 2006. The Company is currently evaluating the impact of adopting
SAB 108 on the consolidated financial statements.
In June 2006, Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. ("FIN") 48, Accounting for Uncertainty in Income Taxes. This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This Interpretation also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. This Interpretation is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
impact of adopting FIN 48 on the consolidated financial statements.
In February 2006, FASB issued Statement of Financial Accounting Standards
No. 155, Accounting for Certain Hybrid Instruments. This standard amended the
guidance in FASB Statements No. 133, Accounting for Derivative Instruments and
Hedging Activities, and No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. Statement 155 permits fair
value re-measurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation and clarifies which
interest-only and principal-only strips are not subject to the requirements of
Statement 133. Statement 155 is effective for all financial instruments acquired
or issued after the beginning of an entity's first fiscal year that begins after
September 15, 2006. The adoption of this standard is not expected to have a
material impact on the Company's financial statements.
In March 2006, FASB issued Statement No. 156, Accounting for Servicing of
Financial Assets - An Amendment of FASB Statement No. 140. This standard amends
the guidance in Statement No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities with respect to the
accounting for separately recognized servicing assets and servicing liabilities.
Among other requirements, Statement 156 requires an entity to recognize a
servicing asset or servicing liability each time it undertakes an obligation to
service a financial asset by entering into a servicing contract in certain
situations, including a transfer of the servicing loans that meets the
requirements for sale accounting. Statement 156 is effective as of the beginning
of an entity's first fiscal year that begins after September 15, 2006. The
adoption of this standard is not expected to have a material impact on the
Company's financial statements.
In September 2006, FASB issued Statement No. 157, Fair Value Measurements.
This Statement defines fair value, establishes a framework for measuring fair
value in GAAP, and expands disclosures about fair value measurements. This
15
Statement applies under other accounting pronouncements that require or permit
fair value measurements, the Board having previously concluded in those
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
However, for some entities, the application of this Statement will change
current practice. This Statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. The adoption of this standard is not expected to have a
material impact on the Company's financial statements.
Item 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Financial Condition at September 30, 2006
Total assets were $221,872,689 at September 30, 2006, an increase of
$6,096,977 or, 2.8%, from December 31, 2005. The increase was due to the
investment of the proceeds of a $10 million New York State jumbo CD deposit and
a $10 million New York City jumbo CD deposit we received in connection with the
opening of our Rosebank branch under the state's and city's Bank Development
District programs. There is a non-binding commitment from the municipalities to
renew these CDs for two years and the interest rates are adjusted periodically
during that time. The deposit increase from these two CDs was partially offset
by the reduction in the balance of jumbo CDs that were opened in conjunction
with the establishment of various IRS Section 1031 exchange trusts, which have a
maximum maturity of 6 months. The net increase in deposits provided funds for us
to invest. We invested these funds, together with funds resulting from a
$7,811,955 decrease in net loans receivable, primarily in investment securities
available for sale, which increased by $7,865,629. We purchased investment
securities, in part, to offset the decline in loans and to increase investment
collateral available to pledge for the municipal CD deposits.
Our deposits (including escrow deposits) were $197,391,489 at September
30, 2006, an increase of $4,140,330, or 2.1%, from December 31, 2005. The
increase in deposits resulted from increases of $6,356,426 in non-interest
demand deposits and $5,959,456 in time deposits, partially offset by decreases
of $3,141,026 in NOW accounts, $1,600,313 in savings accounts and $3,434,213 in
money market accounts. The net increase in time deposits was primarily
attributed to the $20 million in municipal CDs, partially offset by the decline
in IRS Section 1031 exchange trust deposits, as discussed above. These trusts
are created by attorneys in real estate transactions. The deposits have a
maximum term of six months and cannot be renewed. Our ability to attract these
deposits tends to fluctuate with activity in the real estate markets and
competitive pressures, so the volume of these deposits tends to fluctuate from
period to period more dramatically than other types of deposits.
Total stockholders' equity was $16,532,759 at September 30, 2006, an
increase of $2,000,825 from December 31, 2005. The increase reflected net income
of $1,821,810 for the nine months ended September 30, 2006, reduced by an
increase of $17,131 in other comprehensive loss, due to an increase in the
unrealized loss in securities available for sale during the first nine months of
2006. The unrealized loss increased due to the increase in market interest
rates, which reduced the market value of our fixed rate bond portfolio. This
unrealized loss is excluded from the calculation of regulatory capital.
Management does not anticipate selling securities in this portfolio, but changes
in market interest rates or in the demand for funds may change management's
plans with respect to the securities portfolio. If there is a material increase
in interest rates, the market value of the available for sale portfolio may
decline further. Management believes that the principal and interest payments on
this portfolio, combined with the existing liquidity, will be sufficient to fund
potential loan growth and deposit outflow.
16
The change in stockholders' equity also included an increase of $69,300 in
additional paid in capital primarily due to the receipt of $46,232 upon the
exercise of stock options under our stock option plans and a $24,879 decrease in
the magnitude of our statutorily mandated ESOP repurchase obligation caused by a
decrease in our stock price and the distribution of ESOP shares to eligible
participants. We also reported a decrease in unearned ESOP shares of $126,808
reflecting the effect of the gradual payment of the loan we made to fund the
ESOP's purchase of our stock.
For financial statement reporting purposes, we record the compensation
expense related to the ESOP when shares are committed to be released from the
security interest for the loan. The amount of the compensation expense is based
upon the fair market value of the shares at that time, not the original purchase
price. The initial sale of shares to the ESOP did not increase our capital by
the amount of the purchase price because the purchase price was paid by the loan
we made to the ESOP. Instead, capital increases as the shares are allocated or
committed to be allocated to employee accounts (i.e., as the ESOP loan is
gradually repaid), based upon the fair market value of the shares at that time.
When we calculate earnings per share, only shares allocated or committed to be
allocated to employee accounts are considered to be outstanding. However, all
shares that the ESOP owns are legally outstanding, so they have voting rights
and, if we pay dividends, dividends will be paid on all ESOP shares.
Results of Operations for the Three Months Ended September 30, 2006 and
September 30, 2005
Our results of operations are dependent primarily on net interest
income, which is the difference between the income we earn on our loan and
investment portfolios and our cost of funds, consisting primarily of interest we
pay on customer deposits. Our operating expenses principally consist of employee
compensation and benefits, occupancy expenses, professional fees, advertising
and marketing expenses and other general and administrative expenses. Our
results of operations are significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities.
General. We had net income of $644,129 for the quarter ended September
30, 2006, compared to net income of $657,574 for the comparable quarter in 2005.
The principal categories which make up the 2006 net income are:
o Interest income of $3,413,015
o Reduced by interest expense of $889,641
o Increased by a credit to the provision for loan losses of $25,000
o Increased by non-interest income of $446,923
o Reduced by non-interest expense of $1,789,326
o Reduced by $561,842 in income tax expense
We discuss each of these categories individually and the reasons for
the differences between the quarters ended September 30, 2006 and 2005 in the
following paragraphs.
Interest Income. Interest income was $3,413,015 for the quarter ended
September 30, 2006, compared to $2,872,155 for the quarter ended September 30,
2005, an increase of $540,860, or 18.83%. We accomplished the increase in
interest income principally because of increases in the yields on our
prime-based loans, which make up most of our loan portfolio, and to a lesser
degree the increase in yield on our investment securities and other
interest-earning assets. An increase in total average interest-earning assets of
$2,140,344, or 1.0%, also added additional interest income. The increase in
average interest-earning assets was composed of an increase in average balances
of $5,573,185 in the investment securities portfolio and $1,660,947 in other
interest earning assets, offset by a decrease in average balance of the loan
portfolio of $5,093,788.
17
The yields on all principal asset categories increased as the Fed Funds
rate increased, causing increases in other interest rate indexes, such as the
prime rate, and market interest rates generally. The yields on our loan
portfolio and our other interest earning assets, principally short term liquid
assets, increased more rapidly than the yield on our investment securities. This
occurred because most of our loans and liquid assets tend to have interest rates
that adjust more quickly as market interest rates change while the rates we earn
on our investment securities are primarily either fixed rates or rates that
adjust at less frequent intervals than our the rates on our loans.
The average balance of our loans decreased to $69,220,537 for the
quarter ended September 30, 2006 from $74,314,325, or 6.85%, during the 2005
quarter. The decrease in average balance reflects the volatility inherent in the
shorter maturity loans coupled with the increase in competition for such loans
and the general softening of the real estate market. The average yield on loans
increased by 200 basis points, from 8.19% to 10.19%, as the prime rate rose. The
interest rates on all of our prime-based loans are above their interest rate
floors and will generally re-price upwards in the event of future increases in
the prime rate, but a decline in the prime rate will also now result in a
decline in loan yields until loan rates drop to the interest rate floors. The
effect of the increase in yield, partially offset by the effect of the decline
in average balance, was a $253,906 increase in interest income from our loan
portfolio.
The average yield on our investment securities portfolio increased 40
basis points, from 4.16% to 4.56%, also due to increases in market interest
rates. The yield on investment securities increased more slowly than the yield
on loans because our loans tend to have significantly shorter average terms to
maturity or repricing than the bonds in our investment portfolio. The average
balance of our investment portfolio increased by $5,573,185, or 5.04%, between
the periods. We purchased additional investment securities because we needed
more collateral to pledge against deposits. The increase in yield and volume
resulted in an overall $175,934 increase in interest income from investment
securities. The investment securities portfolio represented 83.9% of average
non-loan interest earning assets in the 2006 period compared to 84.3% in the
2005 period.
Finally, we had an $111,020 increase in income from overnight funds and
other interest earning assets due to the higher market rates on short term and
overnight investments. The yield on these investments increased 173 basis points
from the third quarter of 2005 to the third quarter of 2006, reflecting the rise
in the federal funds rate. We increased the average balance of overnight
investments because they provide us with greater reinvestment flexibility and
the gap between the rates on those investments versus the rates on investment
securities narrowed as short-term market rates rose while longer term rates
remained more steady.
Interest Expense. Interest expense was $889,641 for the quarter ended
September 30, 2006, compared to $525,077 for the quarter ended September 30,
2005, an increase of 69.4%. The increase was primarily the result of an increase
in the rates we paid on deposits, coupled with increases in the average balance
of interest-bearing deposits, primarily time deposits. The average balance of
time deposits increased more rapidly than other interest-bearing deposits
because it includes the $20 million of municipal CDs that we received in
connection with the opening of our Rosebank branch. The increase caused by those
municipal deposits was offset by the reduction in the average balance of large
balance time deposit accounts for like-kind exchange trusts.
Our average cost of funds increased from 1.61% to 2.62% between the two
periods, primarily due to an increase of 138 basis points in the average rate we
paid on time deposits from 2.11% to 3.48%. In addition, time deposits, our
highest cost deposits, increased from 47.9% of average interest bearing
liabilities in the 2005 quarter to 56.2% in the 2006 quarter. Competition and
the increase in prevailing market interest rates required an increase in the
rates we offered on both new and renewing time deposits. While we were able to
impose greater limits on interest rate increases in other deposit categories as
market interest rates rose, further increases in market rates, if they occur,
can be expected to compel increases in the rates we offer on these deposit
categories to maintain our competitive posture. Any further increase in
competition may accelerate the increase in our cost of funds resulting from
increases in market interest rates as more banks compete for customer deposits.
18
Net Interest Income Before Provision for Loan Losses. Net interest
income before the provision for loan losses was $2,523,374 for the quarter ended
September 30, 2006, an increase of $176,296, or 7.5% over the $2,347,078 in the
comparable 2005 quarter. The increase was driven primarily by an increase in our
yield on loans, and to a lesser extent the increase in the yields on other
interest earning asset categories. These were partially offset by the increase
in our cost of funds. Our net interest margin increased to 4.79% in the third
quarter of 2006 compared to 4.52% in the third quarter of 2005, while our net
interest spread decreased to 3.87% in the third quarter of 2006 compared to
3.92% in the third quarter of 2005, respectively. On the asset side, the average
yield on earning assets in the 2006 period increased to 6.49% from 5.53% in the
September 2005 period, or an increase of 96 basis points. On the liability side,
there was an increase in our cost of funds of 101 basis points from 2005. In
2006, we were able to invest the monies generated by our demand deposit
portfolio at higher yields than the yield available in 2005. This also helped to
increase our net interest income and our net interest margin in 2006.
Our non-interest checking accounts, which represent a no-cost funding
source, have declined recently. Management seeks to maintain a high level of
non-interest checking accounts through developing relationships with local
businesses. Maintaining a high percentage of non-interest checking accounts is
particularly advantageous in a rising rate environment because these no-cost
funds can be invested at the higher yields. However, increases in market
interest rates make interest-bearing deposit products more attractive to
customers and may cause funds to shift from non-interest checking into
interest-bearing deposit products.
Provision for Loan Losses. For the quarter ended September 30, 2006, we
took a $25,000 credit to the provision for loan losses, compared to a $15,000
credit to the provision for loan losses for the quarter ended September 30,
2005. The credit to the provision for loan losses was due to the decline the
loan portfolio balance and the level of recoveries on loans previously
charged-off, which are added to the allowance for loan loss. The provision for
loan losses in any period depends upon the amount necessary to bring the
allowance for loan losses to the level management believes is adequate, after
taking into account charge offs and recoveries. Our allowance for loan losses is
based on management's evaluation of the risks inherent in our loan portfolio and
the general economy. Management periodically evaluates both broad categories of
performing loans and problem loans individually to assess the appropriate level
of the allowance.
Although management uses available information to assess the adequacy
of the allowance on a quarterly basis in consultation with outside advisors and
the board of directors, changes in national or local economic conditions, the
circumstances of individual borrowers, or other factors, may change, increasing
the level of problem loans and requiring an increase in the level of the
allowance. The allowance for loan loss represented 1.80% of total loans at
September 30, 2006, but there can be no assurance that a higher level, or a
higher provision for loan losses, will not be necessary in the future.
Non-interest Income. Non-interest income was $446,923 for the three
months ended September 30, 2006, compared to $671,474 during the same period
last year. The $224,551, or 33.4%, decrease in non-interest income was a direct
result of a $12,892 increase in other income offset by a $148,046 decrease in
net rental income and an $83,456 decrease in service charges on deposits
(primarily non-sufficient fund fees). The increase in other income is a direct
result of the Bank taking on a select, limited group of licensed consumer check
cashing companies as deposit customers. These companies generate fee income
through per item charges on their deposits. The decrease in net rental income
was a direct result of a one-time buyout in 2005 of a sublease by one of the
Bank's subtenants. Service fees on deposit accounts, principally non-sufficient
funds fees, declined from 2005 to 2006 as customers reduced the frequency with
which they overdrew their deposit accounts
Non-interest Expense. Non-interest expense was $1,789,326 for the
quarter ended September 30, 2006, compared to $1,802,196 for the quarter ended
September 30, 2005. The principal causes of the $12,870 decrease were:
19
o $49,023 decrease in salaries and benefits expense, due to a reduction
in compensation expense related to Stock Appreciation Rights, offset
by normal salary increases, a slight increase in staffing to support
growth and higher benefit costs.
o $37,029 in higher occupancy expenses due to the opening of our fifth
branch and the costs involved in the renting of our sixth branch
location.
o $33,201 increase in legal expenses incurred in connection with a
number of pending lawsuits involving a former customer of the Bank and
other collection expenses.
o $50,693 decrease of "other expenses" primarily due to a $100,000
expense that occurred in 2005 for the establishment of a reserve for
an unasserted claim, which was partially offset by 2006 pre-opening
expenses for our planned sixth branch, which we expect to open in
early 2007.
Income Tax Expense. Income tax expense was $561,842 for the quarter
ended September 30, 2006, compared to income tax expense of $573,782 for the
quarter ended September 30, 2005. The reduction in income tax expense was due to
the $25,385 decrease in income before income taxes in the 2006 quarter. Our
effective tax rate remained the same for the quarters ended September 30, 2006
and 2005 at 46.6%.
Results of Operations for the Nine Months Ended September 30, 2006 and September
30, 2005
General. We had net income of $1,821,810 for the nine months ended
September 30, 2006, compared to net income of $1,921,827 for the comparable
period in 2005. The principal categories which make up the 2006 net income are:
o Interest income of $9,758,982
o Reduced by interest expense of $2,321,360
o Increased by non-interest income of $1,408,944
o Reduced by non-interest expense of $5,435,532
o Reduced by $1,589,224 in income tax expense
We discuss each of these categories individually and the reasons for
the differences between the periods ended September 30, 2006 and 2005 in the
following paragraphs.
Interest Income. Interest income was $9,758,982 for the nine months
ended September 30, 2006, compared to $8,225,632 for the nine months ended
September 30, 2005, an increase of $1,533,350, or 18.64%. We accomplished the
increase in interest income, despite a decrease in total average
interest-earning assets of $977,957, or 0.48%, principally because of increases
in the yields on our prime-based loans, which make up most of our loan
portfolio, and to a more limited extent, the increase in yield on investment
securities and other interest earning assets. The decrease in average
interest-earning assets was composed of a decrease in the average balance of
investment securities of $3,983,079, partially offset by a $636,495 increase in
the average balance of the loan portfolio and a $2,368,627 increase in other
interest-earning assets.
The yields on all principal asset categories increased as the Fed Funds
rate increased, causing increases in other interest rate indexes, such as the
prime rate, and market interest rates generally. The yields on our loan
portfolio and our other interest earning assets, principally short term liquid
assets, increased more rapidly than the yield on our investment securities. This
occurred because most of our loans and liquid assets tend to have interest rates
that adjust more quickly as market interest rates change while the rates we earn
on our investment securities are primarily either fixed rates or rates that
adjust at less frequent intervals than the rates on our loans.
The average balance of our loans increased to $71,136,492 for the nine
months ended September 30, 2006 from $70,499,997, or 0.90%, during the 2005
period. This slight increase generated a slight increase in interest income. The
increase in average yield on loans was more significant, as loan yield increased
by 198 basis points, from 7.93% to 9.91%, due to the prime rate increases in
conjunction with the increases in the Fed Funds rate. The interest rates on all
20
of our prime-based loans have risen above their interest rate floors and have
been adjusting as the prime rate adjusts. The combined effect of the increase in
yield and the increase in average volume was a $1,107,846 increase in interest
income from our loan portfolio.
The average yield on our investment securities portfolio increased 32
basis points, from 4.23% to 4.55%, also due to increases in market interest
rates, while the average balance of our investment portfolio declined by
$3,983,079, or 3.39%, between the periods. The overall effect of the decline in
volume coupled with the increase in yield resulted in a $147,117 increase in
interest income from investment securities. The investment securities portfolio
represented 86.9% of average non-loan interest earning assets in the first nine
months of 2006 compared to 88.8% in the first nine months of 2005.
Finally, we had a $278,387 increase in income from overnight funds and
other interest earning assets due to the higher market rates on short term and
overnight investments. The yield on these investments increased 178 basis points
from the first nine months of 2005 to the first nine months of 2006, reflecting
the rise in the federal funds rate, and the average balance of increased
$2,368,627, or 16.0%. We increased the average balance of overnight investments
because they provide us with greater reinvestment flexibility and the gap
between the rates on those investments versus the rates on investment securities
narrowed as short-term market rates rose to a larger degree while longer-term
rates rose at a more moderated pace.
Interest Expense. Interest expense was $2,321,360 for the nine months
ended September 30, 2006, compared to $1,347,776 for the nine months ended
September 30, 2005, an increase of 72.2%. The increase was primarily the result
of an increase in the rates we paid on deposits, coupled with increases in the
average balance of interest-bearing deposits, primarily time deposits. The
average balance of time deposits increased more rapidly than other
interest-bearing deposits because of the $20 million of municipal CDs, partially
offset by the reduction in IRS Section 1031 like-kind exchange time deposits,
both as discussed above.
Our average cost of funds increased from 1.45% to 2.39% between the two
periods, primarily due to the effect of time deposits, our highest cost deposit
category, on our overall cost of funds. Time deposits increased from 46.2% of
average interest bearing liabilities in the 2005 period to 53.8% in the 2006
period. The average rate on these deposits increased 133 basis points from 1.83%
in the 2005 period to 3.16% in the 2006 period. The increase in the rates we
paid on deposits was caused by the combined effect of increases in market
interest rates and increases in local competitive pressures. Competition and the
increase in prevailing market interest rates required an increase in the rates
we offered on both new and renewing time deposits and, to a lesser degree, the
rates we paid on other deposit categories. We do not have and we do not seek
brokered time deposits.
Net Interest Income Before Provision for Loan Losses. Net interest
income before the provision for loan losses was $7,437,622 for the nine months
ended September 30, 2006, an increase of $559,766, or 8.1% over the $6,877,856
in the comparable 2005 period. The increase was driven primarily by an increase
in our yields on loans, investment securities and other interest earning assets,
partially offset by an increase in our cost of funds. Our interest rate spread
and net interest margin increased to 4.05% and 4.91% in the first nine months of
2006 compared to 3.96% and 4.53% in the first nine months of 2005, respectively.
On the asset side, the average yield of earning assets in the 2006 period
increased to 6.44% from 5.41% in the September 2005 period, or an increase of
103 basis points. On the liability side, there was an increase in our cost of
funds of 94 basis points. The resulting 9 basis point improvement in spread was
the result of the combined effect of increased market interest rates.
Our non-interest checking accounts have declined recently. Management
seeks to maintain a high level of non-interest checking accounts through
developing relationships with local businesses. Maintaining a high percentage of
non-interest checking accounts is particularly advantageous in a rising rate
environment because these no-cost funds can be invested at the higher yields.
However, an increase in market interest rates may make interest-bearing deposit
products more attractive to customers and cause funds to shift from non-interest
checking into interest-bearing deposit products.
21
Provision for Loan Losses. There was no provision for loan losses for
the nine months ended September 30, 2006, compared to $90,000 credit to the
provision for loan losses for the nine months ended September 30, 2005. The
increase in the provision was primarily due to an increase in loan delinquencies
at the beginning of the first nine months of 2006 but the charge to the
provision was mitigated later in the period when the recovery of loans
previously charged-off increased our allowance for loan losses. The provision
for loan losses in any period depends upon the amount necessary to bring the
allowance for loan losses to the level management believes is adequate, after
taking into account charge offs and recoveries. Our allowance for loan losses is
based on management's evaluation of the risks inherent in our loan portfolio and
the general economy. Management periodically evaluates both broad categories of
performing loans and problem loans individually to assess the appropriate level
of the allowance.
Although management uses available information to assess the adequacy
of the allowance on a quarterly basis in consultation with outside advisors and
the board of directors, changes in national or local economic conditions, the
circumstances of individual borrowers, or other factors, may change, increasing
the level of problem loans and requiring an increase in the level of the
allowance. The allowance for loan losses represented 1.80% of total loans at
September 30, 2006, but there can be no assurance that a higher level, or a
higher provision for loan losses, will not be necessary in the future.
Non-interest Income. Non-interest income was $1,408,944 for the nine
months ended September 30, 2006, compared to $1,649,273 during the same period
last year. The $240,329, or 14.6%, decrease in non-interest income was a direct
result of a $96,643 increase in other income offset by a $151,335 decrease in
service charges on deposits (primarily non-sufficient fund fees) and a $162,902
decrease in net rental income. The increase in other income is a direct result
of per item charges on a limited group of licensed consumer check cashing
companies we have recently added as deposit customers. Service fees on deposit
accounts declined from 2005 to 2006 as the volume of deposit account
transactions generating fee income declined. Service fees on deposit accounts,
principally non-sufficient funds fees, declined from 2005 to 2006 as customers
reduced the frequency with which they overdrew their deposit accounts. The
decrease in net rental income was a result of a one-time buyout in 2005 of a
sublease by one of the Bank's subtenants.
Non-interest Expense. Non-interest expense was $5,435,532 for the nine
months ended September 30, 2006, compared to $5,018,586 for the nine months
ended September 30, 2005. The principal causes of the $416,946 increase were:
o $78,947 in higher salary and benefits costs due to normal salary
increases, an increase in staffing to support branch expansion and
higher benefit costs.
o $89,337 in higher occupancy expenses due to the opening of our fifth
branch and the rental expense of our planned sixth branch.
o $162,147 increase in higher legal expenses incurred in connection with
a number of pending lawsuits involving a former customer of the Bank
and increased collection expenses.
o $71,699 more of "other expenses," primarily opening expenses for our
fifth branch and pre-opening expenses of our sixth branch.
Income Tax Expense. Income tax expense was $1,589,224 for the nine
months ended September 30, 2006, compared to income tax expense of $1,676,716
for the nine months ended September 30, 2005. The reduction in income tax
expense was due to the $187,509 decrease in income before income taxes in the
2006 period. Our effective tax rate remained the same for the periods ended
September 30, 2006 and 2005 at 46.6%.
22
VSB Bancorp, Inc.
Consolidated Average Balance Sheets
(unaudited)
Three Three
Months Ended Months Ended
September 30, 2006 September 30, 2005
------------------------------------------- -------------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------------ ------------ ------------ ------------ ------------ ------------
Assets:
Interest-earning assets:
Loans receivable $ 69,220,537 $ 1,794,879 10.19% $ 74,314,325 $ 1,540,973 8.19%
Investment securities, afs 116,174,628 1,336,087 4.56 110,601,443 1,160,153 4.16
Other interest-earning assets 22,297,337 282,049 5.02 20,636,390 171,029 3.29
------------ ------------ ------------ ------------
Total interest-earning assets 207,692,502 3,413,015 6.49 205,552,158 2,872,155 5.53
Non-interest earning assets 13,956,539 13,034,084
------------ ------------
Total assets $221,649,041 $218,586,242
============ ============
Liabilities and equity:
Interest-bearing liabilities:
Savings accounts $ 13,372,021 23,607 0.70 $ 16,605,006 20,897 0.50
Time accounts 75,616,485 662,769 3.48 62,123,134 330,917 2.11
Money market accounts 18,211,593 85,246 1.86 19,599,583 55,768 1.13
Now accounts 22,036,471 27,867 0.50 26,224,204 28,455 0.43
Short Term Borrowings 76,087 1,112 5.80 -- -- --
Subordinated debt 5,155,000 89,040 6.91 5,155,000 89,040 6.91
------------ ------------ ------------ ------------
Total interest-bearing liabilities 134,467,657 889,641 2.62 129,706,927 525,077 1.61
Checking accounts 68,859,364 71,722,399
------------ ------------
Total deposits and subordinated debt 203,327,021 201,429,326
Other liabilities 2,452,036 2,659,775
------------ ------------
Total liabilities 205,779,057 204,089,101
Equity 15,869,984 14,497,141
------------ ------------
Total liabilities and equity $221,649,041 $218,586,242
============ ============
Net interest income/net interest
rate spread $ 2,523,374 3.87% $ 2,347,078 3.92%
============ ============ ============ ============
Net interest earning assets/net
interest margin $ 73,224,845 4.79% $ 75,845,231 4.52%
============ ============ ============ ============
Ratio of interest-earning assets
to interest-bearing liabilities 1.54x 1.58x
============ ============
Return on Average Assets (1) 1.14% 1.19%
============ ============
Return on Average Equity (1) 15.87% 18.00%
============ ============
Tangible Equity to Total Assets 7.45% 6.26%
============ ============
Nine Nine
Months Ended Months Ended
September 30, 2006 September 30, 2005
------------------------------------------- -------------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------------ ------------ ------------ ------------ ------------ ------------
Assets:
Interest-earning assets:
Loans receivable $ 71,136,492 $ 5,301,788 9.91% $ 70,499,997 $ 4,193,942 7.93%
Investment securities, afs 113,578,686 3,862,518 4.55 117,561,765 3,715,401 4.23
Other interest-earning assets 17,183,553 594,676 4.63 14,814,926 316,289 2.85
------------ ------------ ------------ ------------
Total interest-earning assets 201,898,731 9,758,982 6.44 202,876,688 8,225,632 5.41
Non-interest earning assets 14,067,821 12,967,008
------------ ------------
Total assets $215,966,552 $215,843,696
============ ============
Liabilities and equity:
Interest-bearing liabilities:
Savings accounts $ 13,679,963 62,985 0.62 $ 15,768,637 59,235 0.50
Time accounts 69,745,174 1,647,723 3.16 57,234,501 781,303 1.83
Money market accounts 19,631,360 264,909 1.80 21,229,835 161,768 1.02
Now accounts 21,470,419 77,512 0.48 24,602,818 78,351 0.43
Short Term Borrowings 25,641 1,112 5.80 -- -- --
Subordinated debt 5,155,000 267,119 6.91 5,155,000 267,119 6.91
------------ ------------ ------------ ------------
Total interest-bearing liabilities 129,707,557 2,321,360 2.39 123,990,791 1,347,776 1.45
Checking accounts 68,457,394 75,572,525
------------ ------------
Total deposits and subordinated debt 198,164,951 199,563,316
Other liabilities 2,458,242 2,494,712
------------ ------------
Total liabilities 200,623,193 202,058,028
Equity 15,343,359 13,785,668
------------ ------------
Total liabilities and equity $215,966,552 $215,843,696
============ ============
Net interest income/net interest
rate spread $ 7,437,622 4.05% $ 6,877,856 3.96%
============ ============ ============ ============
Net interest earning assets/net
interest margin $ 72,191,174 4.91% $ 78,885,897 4.53%
============ ============ ============ ============
Ratio of interest-earning assets
to interest-bearing liabilities 1.56x 1.64x
============ ============
Return on Average Assets (1) 1.12% 1.19%
============ ============
Return on Average Equity (1) 15.75% 18.60%
============ ============
Tangible Equity to Total Assets 7.45% 6.26%
============ ============
(1) Ratios have been annualized.
23
Liquidity and Capital Resources
Our primary sources of funds are increases in deposits and proceeds
from the repayment of investment securities. We use these funds principally to
purchase new investment securities and to fund new and renewing loans in our
loan portfolio.
During the nine months ended September 30, 2006, our retail banking
activities generated a net increase in deposits of $4,140,330 and we had a net
decrease in loans receivable of $8,081,181, which combined to generate
$12,221,511 in cash. In addition, we received proceeds from repayment of
investment securities of $16,031,264. We used $23,944,173 of available funds to
purchase new investment securities, resulting in an overall increase in cash and
cash equivalents of $4,730,238. We applied available funds principally to
purchase the $23,944,173 of investment securities to increase investment
collateral available to pledge for the $20 million in municipal CDs that we
received in the second quarter of 2006 in connection with our opening of our
Rosebank branch.
In contrast, during the nine months ended September 30, 2005, we had a
net decrease in deposits of $10,230,968 and proceeds from repayment of
investment securities totaled $23,066,398. We used the resulting net increase in
funds primarily to finance $8,075,805 in new and renewing loans, with
substantially all of the remainder being used to fund an increase in overnight
investments and other short-term interest-earning assets.
The Bank satisfied all capital ratio requirements of the Federal
Deposit Insurance Corporation at September 30, 2006, with a Tier I Leverage
Capital ratio of 10.13%, a ratio of Tier I Capital to Risk-Weighted Assets ratio
of 23.28%, and a Total Capital to Risk-Weighted Assets ratio of 24.52%.
VSB Bancorp, Inc. satisfied all capital ratio requirements of the
Federal Reserve at September 30, 2006, with a Tier I Leverage Capital ratio of
10.48%, a ratio of Tier I Capital to Risk-Weighted Assets ratio of 24.04%, and a
Total Capital to Risk-Weighted Assets ratio of 25.27%.
In the first nine months of 2006, we experienced a $4,730,238 increase
in cash and cash equivalents compared to a $6,770,535 decrease in cash and cash
equivalents during the first nine months of 2005. Total cash and cash
equivalents at September 30, 2006 were $36,054,385. One of the important tasks
facing management in upcoming periods is to seek appropriate opportunities to
invest such liquid assets into higher yielding assets such as loans and
investment securities.
The following table sets forth our contractual obligations and
commitments for future lease payments, time deposit maturities and loan
commitments.
24
Contractual Obligations and Commitments at September 30, 2006
Contractual Obligations Payment due by Period
------------------------------------------------------------------------
Less than One to three Four to five After Total Amounts
One Year years years five years committed
------------ ------------ ------------ ------------ ------------
Minimum annual rental payments under
non-cancelable operating leases $ 420,960 $ 791,034 $ 814,209 $ 2,741,317 $ 4,767,520
Remaining contractual maturities of time
deposits 41,499,223 29,048,702 1,078,841 2,063,963 73,690,729
------------ ------------ ------------ ------------ ------------
Total contractual cash obligations $ 41,920,183 $ 29,839,736 $ 1,893,050 $ 4,805,280 $ 78,458,249
============ ============ ============ ============ ============
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 $ 19,959,700 $ 5,181,260 $ 200,000 $ -- $ 25,340,960
============ ============ ============ ============ ============
Our loan commitments shown in the above table represent both
commitments to make new loans and obligations to make additional advances on
existing loans, such as construction loans in process and lines of credit.
Substantially all of these commitments involve loans with fluctuating interest
rates, so the outstanding commitments do not expose us to interest rate risk
upon fluctuation in market rates. We consider the amount of outstanding
commitments when we assess our allowance for loan losses.
Critical Accounting Policies and Judgments
We are required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the amounts
of revenues and expenses during the reporting period. The allowance for loan
losses, prepayment estimates on the mortgage-backed securities and
Collateralized Mortgage Obligation portfolios, contingencies and fair values of
financial instruments are particularly subject to change and to management's
estimates. Actual results can differ from those estimates and may have an impact
on our financial statements.
Item 3 - Controls and Procedures
Evaluation of Disclosure Controls and Procedures: As of September 30,
2006, we undertook an evaluation of our disclosure controls and procedures under
the supervision and with the participation of Merton Corn, President and CEO,
and Raffaele M. Branca, Executive Vice President and CFO. Disclosure controls
are the systems and procedures we use that are designed to ensure that
information we are required to disclose in the reports we file or submit under
the Securities Exchange Act of 1934 (such as annual reports on Form 10-KSB and
quarterly periodic reports on Form 10-QSB) is recorded, processed, summarized
and reported, in a manner which will allow senior management to make timely
decisions on the public disclosure of that information. Messrs. Corn and Branca
concluded that our current disclosure controls and procedures are effective in
ensuring that such information is (i) collected and communicated to senior
management in a timely manner, and (ii) recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms. Since
our last evaluation of our disclosure controls, we have not made any significant
changes in, or corrective actions taken regarding, either our internal controls
or other factors that could significantly affect those controls.
We intend to continually review and evaluate the design and
effectiveness of our disclosure controls and procedures and to correct any
deficiencies that we may discover. Our goal is to ensure that senior management
has timely access to all material financial and non-financial information
concerning our business so that they can evaluate that information and make
determinations as to the nature and timing of disclosure of that information.
25
While we believe the present design of our disclosure controls and procedures is
effective to achieve this goal, future events may cause us to modify our
disclosure controls and procedures.
Part II
Item 1 - Legal Proceedings
The Bank is a defendant in an action pending in Supreme Court, Richmond County,
commenced by IndyMac Bank, F.S.B. against the Bank, LaMattina & Associates, Inc.
("LAI") and various individuals and entities alleged to be officers, directors
or otherwise to have relationships with LAI. LAI was a deposit customer of the
Bank engaged in the business of providing real estate settlement services to
lenders making residential mortgage loans. The plaintiff alleges that it was
such a lender and that it had provided funds to LAI by wiring those funds to an
account of LAI at the Bank to use to fund mortgage loans to be made by the
plaintiff, only to have LAI not use those funds for their intended purpose. The
action was commenced in August 2005. In November 2005, the plaintiff amended its
complaint to add the Bank as a defendant. The Plaintiff has served a third
amended complaint asserting claims against the Bank based upon alleged
negligence, misappropriation and deceptive business practices under the New York
General Business Law and requesting monetary damages against the Bank of
$1,817,041 plus recovery of attorney's fees. The Bank intends to defend
aggressively the amended claims and has made a motion to dismiss the third
amended complaint. Oral argument on the motion is scheduled for November 2006,
after which the motion will be submitted to the court for a decision. The Bank
has referred the litigation to its insurance carrier, which has indicated that
at least some of the claims are covered by insurance.
26
Signature Page
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
VSB Bancorp, Inc.
Date: November 14, 2006 /s/ MERTON CORN
---------------------------------------
Merton Corn
President and Chief Executive Officer
Date: November 14, 2006 /s/ RAFFAELE M. BRANCA
---------------------------------------
Raffaele M. Branca
Executive Vice President and Chief
Financial Officer
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------ ----------------------
31.1 Rule 13A-14(a)/15D-14(a) Certification of Chief Executive Officer
31.2 Rule 13A-14(a)/15D-14(a) Certification of Chief Financial Officer
32.1 Certification by CEO pursuant to 18 U.S.C. 1350.
32.2 Certification by CFO pursuant to 18 U.S.C. 1350.
-----------------------------------
Item 6 - Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
31.1 Rule 13A-14(a)/15D-14(a) Certification of Chief Executive Officer
31.2 Rule 13A-14(a)/15D-14(a) Certification of Chief Financial Officer
32.1 Certification by CEO pursuant to 18 U.S.C. 1350.
32.2 Certification by CFO pursuant to 18 U.S.C. 1350.
27