VSB Bancorp reported net income of $295,285 for the second quarter of 2015, relatively stable from Q2 2014. Pre-tax income was $682,452, an increase of $135,809 or 24.8%, as compared to $546,643 for Q2 2014.
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Net income for the quarter was $295,285, or basic income of $0.17 per common share, compared to a net income of $296,535, or $0.17 basic income per common share, for the quarter ended June 30, 2014.
Return on average assets remained at 0.41% in the second quarter of 2014 and in the second quarter of 2015, while return on average equity decreased slightly from 4.21% to 4.19%.
VSB Bancorp is implementing a strategy to increase interest income while not taking excessive interest rate risk in the event that market interest rates increase.
These strategies have begun to bear fruit during the second quarter of 2015, as the company experienced a 24.8% increase in pretax income from the first quarter of 2014 to the first quarter of 2015.
Unfortunately, this improvement was offset by a one-time change in New York City tax laws, which required a $155,266 allowance against company's New York City deferred tax asset.
The $1,250 decrease in net income was due to an increase in non-interest expense of $311,938 and an increase in the provision for income taxes of $137,059 partially offset by an increase in net interest income of $344,078 and an increase in non-interest income of $103,669.
The increase in the provision for income taxes was a direct result of a $155,266 valuation allowance recorded against the New York City portion of company's existing net deferred tax asset. The valuation allowance was established due to a change in New York City tax laws in April 2015.
The $344,078 increase in net interest income for the second quarter of 2015 occurred primarily because company's interest income increased by $353,261, while company's cost of funds increased by $9,183.
The rise in interest income resulted from a $375,499 increase in income from loans, due to a $24.0 million increase in average balance between the periods, $116,681 of which was due to a recovery of interest income on a previously non-performing loan, partially offset by a 50 basis point decrease in yield, as the company have booked new loans at lower rates due to the more competitive environment.
The rise in interest income on loans was partially offset by a $17,534 decrease in interest income from other earning assets (principally overnight investments) due to a $32.1 million decrease in the average balance partially offset by a 2 basis point increase in yield from the second quarter of 2014 to the second quarter of 2015.
Overall, average interest-earning assets increased by $2.3 million from the second quarter of 2014 to the second quarter of 2015.
Interest expense increased by $9,183, or 5.3%, from $173,796 in the 2014 quarter to $182,979 in the 2015 quarter due principally to a slight (3.2%) increase in the average volume of interest bearing liabilities and the fact that the increase was represented entirely by an increase in money market accounts, which are currently company's highest cost deposit category.
Average demand deposits, an interest free source of funds for us to invest, increased $549,117 from the second quarter of 2014, representing approximately 38% of average total deposits for the second quarter of 2015. Average interest-bearing deposits increased by $5.1 million, resulting in an overall $5.8 million increase in average total deposits from the second quarter of 2014 to the second quarter of 2015.
The average yield on earning assets rose by 34 basis points while the average cost of funds rose by 1 basis point. The increase in the yield on assets was principally due to the change in asset mix from other interest earning assets to loans and investment securities as the company actively sought to increase company's loan portfolio and reduce company's level of low-yielding overnight deposits.
The rise in the cost of funds was driven principally by the 4 basis points increase in the cost of money market account deposits partially offset by the 2 basis points drop in the cost of saving deposits. company's interest rate margin increased by 33 basis point from 2.72% to 3.05% when comparing the second quarter of 2015 to the same quarter in 2014, while company's interest rate spread increased by 33 basis points from 2.53% to 2.86%.
The spread and margin both increased because of the combined effect of the rise in earnings the company were able to obtain on the average balance of company's loans and investments securities and the decreased average balance of low yielding other interest-earning assets.
These increases were supported by the cost of deposits because the rates the company paid on deposits were low due to low markets rates.
Non-interest income increased to $765,499 in the second quarter of 2015, from $661,830 in the same quarter in 2014.
The increase was a direct result of $68,718 in non-interest income recorded upon the settlement of pending litigation, a $32,826 increase in other income due to the purchase of $5 million in Bank Owned Life Insurance (BOLI) in July 2014 and an $11,613 increase in loan fees due to the reversal of late fees on a loan that went non-accrual in the 2014 period.
This was partially offset by a $35,721 drop in service charges on deposits, which consist mainly of fees on items being presented for payment against insufficient funds, which are inherently volatile.
Comparing the second quarter of 2015 with the same quarter in 2014, non-interest expense increased by $311,938, totaling $2.3 million for the second quarter of 2015.
Total assets increased to $290.3 million at June 30, 2015, an increase of $9.3 million, or 3.3%, from December 31, 2014. The significant component of this increase was a $27.2 million increase in loans partially offset by a $12.5 million decrease in investment securities and a $5.0 million decrease in cash and other liquid assets. ■