VSB Bancorp, Inc. First Quarter 2009 Results of Operations

VSB Bancorp, Inc. (NASDAQ: VSBN), the holding company for Victory State Bank, reported net income of $373,051 for the first quarter of 2009, a 3.1% increase from the first quarter of 2008. The following unaudited figures were released today. Pre-tax income was $692,824 in the first quarter of 2009, as compared to $673,041 for the first quarter of 2008, an increase of $19,783, or 2.9%. Net income for the 2009 quarter was $373,051, or basic income of $0.21 per common share, as compared to a net income of $361,945, or $0.20 basic income per common share, for the quarter ended March 31, 2008.

The $11,106 increase in net income for the first quarter of 2009 was attributable primarily to a more rapid decline in our cost of funds than the decline in our asset yields as market interest rates declined. We experienced a decrease in interest expense of $344,844, the most significant components of which were a $208,895 decrease in interest on time deposits and an $89,040 decrease in interest on subordinated debt because we repaid the subordinated debt on August 8, 2008. In contrast, interest income declined by only $13,015 as a $97,552 decline in interest income from other interest earning assets (principally overnight investments) was partially offset by $88,805 of interest income representing interest owed for a prior period that was paid during the first quarter of 2009 on a non-accrual loan that was reinstated to accrual status. We also had an increase in the provision for loan losses of $245,000 due to a higher level of charge-offs -- $350,023 for the 2009 quarter as compared to $93,730 in the same period in 2008 -- and a further deterioration of the real estate market and local economy. We are aggressively collecting these charged-off loans in an effort to recover these amounts.

Without the benefit of the interest received in connection with the non-accrual loan reinstatement, interest income on loans remained stable. The average yield declined 33 basis points due to the decline of the prime rate, but that was partially offset by a $4.9 million increase in average loan balances. The prime rate declined from 7.25% to 5.25% during the first quarter of 2008 and continued to decline throughout the rest of 2008 so that the prime rate was at 3.25% at year end 2008 and stayed at that level throughout the first quarter of 2009. The reductions in the prime rate have caused our prime based loans to reach their interest rate floors. These floors have helped to stabilize the interest income from the loan portfolio and were a significant contributor to moderating the decline in interest income. Our investment securities portfolio had similar income stability as our loans, as the 14 basis point reduction in average yield was offset by the $4.4 million increase in average balance in the 2009 quarter.

Comparing the first quarter of 2009 with the same quarter in 2008, non-interest expense increased by $114,313, totaling $2.0 million for the 2009 quarter. The principal increase was a $29,000 increase in FDIC insurance premiums due to an increase in FDIC assessment rates. The FDIC increased its insurance premium rates to banks in 2009 due to losses to the FDIC insurance fund as a result of bank failures during 2008, coupled with additional losses that the FDIC projected in 2009 due to additional bank failures. Recently, the FDIC proposed a 20 basis point special assessment, based on June 30, 2009 deposits, payable on September 30, 2009. If fully implemented, our special assessment would be almost $400,000. The other categories of non-interest expenses increased for various business reasons including increased utility costs, increased costs of collection, and the implementation of an advertising campaign.

Non-interest income increased $47,267 to $613,169 in the first quarter of 2009 due in part to the increase in the per item charge for insufficient fund transactions that went into effect in March 2008.

Total assets increased to $222.7 million at March 31, 2009, an increase of $10.0 million, or 4.7%, from December 31, 2008. Total deposits, including escrow deposits, increased to $197.0 million, an increase of $8.9 million, or 4.7%. The mix of our deposits also changed as NOW increased by $16.8 million and time deposits decreased by $11.8 million from year end 2008. The Bancorp's Tier 1 capital ratio was 10.51% at March 31, 2009.

Average interest-earning assets and average loans increased by $14.0 million and $4.9 million, respectively, from the first quarter of 2008 to the first quarter of 2009. Average demand deposits, an interest free source of funds for the Bancorp to invest, decreased by $3.8 million from the first quarter of 2008 to approximately 31% of average total deposits for the first quarter of 2009. Average interest-bearing deposits increased by $13.8 million, resulting in an overall $10.0 million increase in total deposits from the first quarter of 2008 to the first quarter of 2009. Average interest-bearing liabilities increased by $8.6 million, which included the decrease in liabilities caused by repaying $5.2 million in subordinated debt in August 2008. The Company's interest rate spread and interest rate margin were 3.89% and 4.37%, respectively, for the quarter ended March 31, 2009 as compared to 3.13% and 4.07%, respectively, for the quarter ended March 31, 2008. Although a significant part of this improvement was due to the reinstatement of the loan to accruing status as discussed above, our spread and margin were also helped by the effect of interest rate floors on our loans that helped maintain yields when our cost of funds was declining due to lower market interest rates.