**UNITED STATES        SECURITY AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20849**

**FORM 10-Q**

|                                         |                                                                                    |
|----------------------------------------------|-----------------------------------------------------------------------------------------|
| x                                            | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| FOR THE QUARTER ENDED **SEPTEMBER 30, 2009** |
|                                         |                                                                                    |
| o                                            | TRANSITION REPORT PURSUANT TO SECTION 13 OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD  |
|                                         |                                                                                    |
| COMMISSION FILE NUMBER 0-50237               |

|                                                           |
|----------------------------------------------------------------|
| **VSB Bancorp, Inc.**                                          |
|                                                                |
| (Exact name of registrant as specified in its charter)         |
|                                                           |
| New York                                                       |
|                                                                |
| (State or other jurisdiction of incorporation or organization) |
|                                                           |
| 11 - 3680128                                                   |
|                                                                |
| (I. R. S. Employer Identification No.)                         |
|                                                           |
| 4142 Hylan Boulevard, Staten Island, New York 10308            |
|                                                                |
| (Address of principal executive offices)                       |
|                                                           |
| (718) 979-1100                                                 |
|                                                                |
| Registrant’s telephone number                            |
|                                                           |
| Common Stock                                                   |
|                                                                |
| (Title of Class)                                               |

Indicate by check mark whether the registrant (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 o

Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

|                    |   |              |   |                  |   |                      |   |
|-------------------------|--------|-------------------|--------|-----------------------|--------|---------------------------|--------|
| Large Accelerated Filer | o      | Accelerated Filer | o      | Non-Accelerated Filer | o      | Smaller Reporting Company | x      |

Par Value: $0.0001 Class of Common Stock

The Registrant had 1,768,991 common shares outstanding as of November 9, 2009.

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**CROSS REFERENCE INDEX**

|           |   |                                                                                                                                                           |   |     |
|----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|
| PART I         |
|           |   |                                                                                                                                                           |   | Page     |
|           |   |                                                                                                                                                           |   |     |
| Item 1         |        | Consolidated Statements of Financial Condition as of September 30, 2009 and December 31, 2008 (unaudited)                                                      |        | 4        |
|                |        | Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008 (unaudited)                                              |        | 5        |
|                |        | Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2009 and the Year Ended December 31, 2008 (unaudited) |        | 6        |
|                |        | Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2009 and 2008 (unaudited)                                              |        | 7        |
|                |        | Notes to Consolidated Financial Statements for the Three and Nine Months Ended September 30, 2009 and 2008 (unaudited)                                         |        | 8 to 19  |
|           |   |                                                                                                                                                           |   |     |
| Item 2         |        | Management’s Discussion and Analysis of Financial Condition and Results of Operations                                                                    |        | 20 to 29 |
| Item 3         |        | Control and Procedures                                                                                                                                         |        | 30       |
| PART II        |        |                                                                                                                                                           |
| Item 1         |        | Legal Proceedings                                                                                                                                              |        | 30       |
|           |   |                                                                                                                                                           |   |     |
| Signature Page |        | 31                                                                                                                                                             |
|           |   |                                                                                                                                                           |
|           |   | Exhibit 31.1, 31.2, 32.1, 32.2                                                                                                                                 |   | 32 to 35 |

2

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**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:

|   |     |                                                                                                                                                                                                                                |
|--------|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | 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; |
|   | · | changes in market interest rates or changes in the speed at which market interest rates change;                                                                                                                                     |
|   | · | changes in laws and regulations affecting the financial service industry;                                                                                                                                                           |
|   | · | changes in competition; and                                                                                                                                                                                                         |
|   | · | 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

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**VSB Bancorp, Inc.Consolidated Statements of Financial Condition**(unaudited)

|                                                                                                                                                                                         |   |                                      |        |                                     |   |        |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|-------------|------------------------------------------|--------|-------------|--------|
|                                                                                                                                                                                         |   | **September 30,                    2009** |        | **December 31,                    2008** |   |
|                                                                                                                                                                                         |   |                                      |        |                                     |   |
|                                                                                                                                                                                         |   |                                      |        |                                     |   |        |   |
| **Assets:**                                                                                                                                                                                  |   |                                      |        |                                     |   |        |   |
| Cash and due from banks                                                                                                                                                                      |   | $                                         | 37,037,519  |                                     | $      | 21,240,223  |   |
| Investment securities, available for sale                                                                                                                                                    |   |                                      | 116,543,013 |                                     |   | 120,288,588 |   |
| Loans receivable                                                                                                                                                                             |   |                                      | 72,805,540  |                                     |   | 66,246,652  |   |
| Allowance for loan loss                                                                                                                                                                      |   |                                      | (1,024,025  | )                                        |   | (987,876    | )      |
|                                                                                                                                                                                         |   |                                      |        |                                     |   |        |   |
| Loans receivable, net                                                                                                                                                                        |   |                                      | 71,781,515  |                                     |   | 65,258,776  |   |
| Bank premises and equipment, net                                                                                                                                                             |   |                                      | 3,351,744   |                                     |   | 3,695,822   |   |
| Accrued interest receivable                                                                                                                                                                  |   |                                      | 705,461     |                                     |   | 723,473     |   |
| Deferred taxes                                                                                                                                                                               |   |                                      | —     |                                     |   | 525,839     |   |
| Other assets                                                                                                                                                                                 |   |                                      | 603,760     |                                     |   | 925,007     |   |
|                                                                                                                                                                                         |   |                                      |        |                                     |   |        |   |
| **Total assets**                                                                                                                                                                             |   | $                                         | 230,023,012 |                                     | $      | 212,657,728 |   |
|                                                                                                                                                                                         |   |                                      |        |                                     |   |        |   |
| **Liabilities and stockholders’ equity:**                                                                                                                                              |   |                                      |        |                                     |   |        |   |
| Liabilities:                                                                                                                                                                                 |   |                                      |        |                                     |   |        |   |
| Deposits:                                                                                                                                                                                    |   |                                      |        |                                     |   |        |   |
| Demand and checking                                                                                                                                                                          |   | $                                         | 65,072,578  |                                     | $      | 58,598,579  |   |
| NOW                                                                                                                                                                                          |   |                                      | 32,039,390  |                                     |   | 17,636,154  |   |
| Money market                                                                                                                                                                                 |   |                                      | 26,826,811  |                                     |   | 22,829,789  |   |
| Savings                                                                                                                                                                                      |   |                                      | 14,079,651  |                                     |   | 12,412,561  |   |
| Time                                                                                                                                                                                         |   |                                      | 64,168,043  |                                     |   | 76,323,494  |   |
|                                                                                                                                                                                         |   |                                      |        |                                     |   |        |   |
| Total deposits                                                                                                                                                                               |   |                                      | 202,186,473 |                                     |   | 187,800,577 |   |
| Escrow deposits                                                                                                                                                                              |   |                                      | 380,719     |                                     |   | 308,872     |   |
| Accounts payable and accrued expenses                                                                                                                                                        |   |                                      | 2,123,057   |                                     |   | 1,344,512   |   |
|                                                                                                                                                                                         |   |                                      |        |                                     |   |        |   |
| **Total liabilities**                                                                                                                                                                        |   |                                      | 204,690,249 |                                     |   | 189,453,961 |   |
|                                                                                                                                                                                         |   |                                      |        |                                     |   |        |   |
|                                                                                                                                                                                         |   |                                      |        |                                     |   |        |   |
|                                                                                                                                                                                         |   |                                      |        |                                     |   |        |   |
| **Stockholders’ equity:**                                                                                                                                                              |   |                                      |        |                                     |   |        |   |
| Common stock, ($.0001 par value, 3,000,000 shares authorized, 1,945,134 issued, 1,850,491 outstanding at September 30, 2009 and 1,923,884 issued, 1,882,461outstanding at December 31, 2008) |   |                                      | 195         |                                     |   | 192         |   |
| Additional paid in capital                                                                                                                                                                   |   |                                      | 9,261,479   |                                     |   | 9,200,010   |   |
| Retained earnings                                                                                                                                                                            |   |                                      | 15,697,522  |                                     |   | 14,714,143  |   |
| Treasury stock, at cost (94,643 shares at September 30, 2009and 41,423 shares at December 31, 2008)                                                                                          |   |                                      | (858,863    | )                                        |   | (395,891    | )      |
| Unearned Employee Stock Ownership Plan shares                                                                                                                                                |   |                                      | (774,941    | )                                        |   | (901,750    | )      |
| Accumulated other comprehensive gain, net of taxes of $1,692,852 and $488,735, respectively                                                                                                  |   |                                      | 2,007,371   |                                     |   | 587,063     |   |
|                                                                                                                                                                                         |   |                                      |        |                                     |   |        |   |
| **Total stockholders’ equity**                                                                                                                                                         |   |                                      | 25,332,763  |                                     |   | 23,203,767  |   |
|                                                                                                                                                                                         |   |                                      |        |                                     |   |        |   |
| **Total liabilities and stockholders’equity**                                                                                                                                          |   | $                                         | 230,023,012 |                                     | $      | 212,657,728 |   |
|                                                                                                                                                                                         |   |                                      |        |                                     |   |        |   |

See notes to consolidated financial statements.

4

----

**VSB Bancorp, Inc.Consolidated Statements of Operations        (unaudited)**

|                                              |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
|---------------------------------------------------|--------|-----------------------------------------------------------------------------|-----------|-----------------------------------------------------------------------------|--------|----------------------------------------------------------------------------|--------|----------------------------------------------------------------------------|-----------|--------|--------|-----------|--------|
|                                              |   | **Three months                    ended                    Sept. 30, 2009** |      | **Three months                    ended                    Sept. 30, 2008** |   | **Nine months                    ended                    Sept. 30, 2009** |   | **Nine months                    ended                    Sept. 30, 2008** |      |
|                                              |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |
| Interest and dividend income:                     |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| Loans receivable                                  |   | $                                                                           | 1,360,529 |                                                                        | $      | 1,276,288                                                                  |   | $                                                                          | 4,014,424 |   | $      | 3,693,696 |   |
| Investment securities                             |   |                                                                        | 1,252,213 |                                                                        |   | 1,474,099                                                                  |   |                                                                       | 3,949,499 |   |   | 4,289,758 |   |
| Other interest earning assets                     |   |                                                                        | 11,199    |                                                                        |   | 48,314                                                                     |   |                                                                       | 21,633    |   |   | 225,159   |   |
|                                              |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| Total interest income                             |   |                                                                        | 2,623,941 |                                                                        |   | 2,798,701                                                                  |   |                                                                       | 7,985,556 |   |   | 8,208,613 |   |
| Interest expense:                                 |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| NOW                                               |   |                                                                        | 37,685    |                                                                        |   | 31,612                                                                     |   |                                                                       | 100,458   |   |   | 96,545    |   |
| Money market                                      |   |                                                                        | 63,044    |                                                                        |   | 64,094                                                                     |   |                                                                       | 186,499   |   |   | 232,695   |   |
| Savings                                           |   |                                                                        | 12,186    |                                                                        |   | 19,754                                                                     |   |                                                                       | 38,507    |   |   | 56,927    |   |
| Subordinated debt                                 |   |                                                                        | —   |                                                                        |   | 36,606                                                                     |   |                                                                       | —   |   |   | 214,685   |   |
| Time                                              |   |                                                                        | 202,074   |                                                                        |   | 365,462                                                                    |   |                                                                       | 733,391   |   |   | 1,265,289 |   |
|                                              |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| Total interest expense                            |   |                                                                        | 314,989   |                                                                        |   | 517,528                                                                    |   |                                                                       | 1,058,855 |   |   | 1,866,141 |   |
| Net interest income                               |   |                                                                        | 2,308,952 |                                                                        |   | 2,281,173                                                                  |   |                                                                       | 6,926,701 |   |   | 6,342,472 |   |
| Provision for loan loss                           |   |                                                                        | 75,000    |                                                                        |   | 40,000                                                                     |   |                                                                       | 450,000   |   |   | 125,000   |   |
|                                              |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| Net interest income after provision for loan loss |   |                                                                        | 2,233,952 |                                                                        |   | 2,241,173                                                                  |   |                                                                       | 6,476,701 |   |   | 6,217,472 |   |
|                                              |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| Non-interest income:                              |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| Loan fees                                         |   |                                                                        | 19,359    |                                                                        |   | 11,778                                                                     |   |                                                                       | 69,883    |   |   | 55,286    |   |
| Service charges on deposits                       |   |                                                                        | 528,203   |                                                                        |   | 544,686                                                                    |   |                                                                       | 1,612,252 |   |   | 1,570,203 |   |
| Net rental income                                 |   |                                                                        | 13,965    |                                                                        |   | 13,796                                                                     |   |                                                                       | 38,049    |   |   | 23,888    |   |
| Other income                                      |   |                                                                        | 35,557    |                                                                        |   | 33,705                                                                     |   |                                                                       | 105,152   |   |   | 144,724   |   |
|                                              |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| Total non-interest income                         |   |                                                                        | 597,084   |                                                                        |   | 603,965                                                                    |   |                                                                       | 1,825,336 |   |   | 1,794,101 |   |
|                                              |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| Non-interest expenses:                            |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| Salaries and benefits                             |   |                                                                        | 920,478   |                                                                        |   | 866,644                                                                    |   |                                                                       | 2,744,206 |   |   | 2,645,315 |   |
| Occupancy expenses                                |   |                                                                        | 372,965   |                                                                        |   | 376,699                                                                    |   |                                                                       | 1,125,288 |   |   | 1,092,889 |   |
| Legal expense                                     |   |                                                                        | 47,164    |                                                                        |   | 67,939                                                                     |   |                                                                       | 181,660   |   |   | 187,725   |   |
| Professional fees                                 |   |                                                                        | 78,000    |                                                                        |   | 62,900                                                                     |   |                                                                       | 230,500   |   |   | 186,400   |   |
| Computer expense                                  |   |                                                                        | 70,046    |                                                                        |   | 63,772                                                                     |   |                                                                       | 207,742   |   |   | 176,076   |   |
| Directors’ fees                             |   |                                                                        | 55,500    |                                                                        |   | 54,200                                                                     |   |                                                                       | 167,275   |   |   | 169,150   |   |
| FDIC and NYSBD assessments                        |   |                                                                        | 102,000   |                                                                        |   | 44,500                                                                     |   |                                                                       | 279,000   |   |   | 137,500   |   |
| Other expenses                                    |   |                                                                        | 303,661   |                                                                        |   | 299,076                                                                    |   |                                                                       | 939,279   |   |   | 941,002   |   |
|                                              |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| Total non-interest expenses                       |   |                                                                        | 1,949,814 |                                                                        |   | 1,835,730                                                                  |   |                                                                       | 5,874,950 |   |   | 5,536,057 |   |
|                                              |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| Income before income taxes                        |   |                                                                        | 881,222   |                                                                        |   | 1,009,408                                                                  |   |                                                                       | 2,427,087 |   |   | 2,475,516 |   |
| Provision/(benefit) for income taxes:             |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| Current                                           |   |                                                                        | 407,432   |                                                                        |   | 777,900                                                                    |   |                                                                       | 1,283,635 |   |   | 1,511,490 |   |
| Deferred                                          |   |                                                                        | (679      | )                                                                           |   | (311,196                                                                   | )      |                                                                       | (163,365  | )      |   | (366,898  | )      |
|                                              |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| Total provision for income taxes                  |   |                                                                        | 406,753   |                                                                        |   | 466,704                                                                    |   |                                                                       | 1,120,270 |   |   | 1,144,592 |   |
|                                              |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| Net income                                        |   | $                                                                           | 474,469   |                                                                        | $      | 542,704                                                                    |   | $                                                                          | 1,306,817 |   | $      | 1,330,924 |   |
|                                              |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| Earnings per share:                               |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| Basic                                             |   | $                                                                           | 0.26      |                                                                        | $      | 0.29                                                                       |   | $                                                                          | 0.72      |   | $      | 0.72      |   |
|                                              |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| Diluted                                           |   | $                                                                           | 0.26      |                                                                        | $      | 0.29                                                                       |   | $                                                                          | 0.72      |   | $      | 0.71      |   |
|                                              |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| Comprehensive income                              |   | $                                                                           | 989,054   |                                                                        | $      | 576,720                                                                    |   | $                                                                          | 2,727,125 |   | $      | 1,396,933 |   |
|                                              |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |
| Book value per common share                       |   | $                                                                           | 13.69     |                                                                        | $      | 11.53                                                                      |   | $                                                                          | 13.69     |   | $      | 11.53     |   |
|                                              |   |                                                                        |      |                                                                        |   |                                                                       |   |                                                                       |      |   |   |      |   |

See notes to consolidated financial statements.

5

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**VSB Bancorp, Inc.Consolidated Statements of Changes in Stockholders’ Equity        Year Ended December 31, 2008 and Nine Months Ended September 30, 2009        (unaudited)**

|                                                                           |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   |       |   |
|--------------------------------------------------------------------------------|--------|-------------------------------------------------------------------|-----------|-------------------------------------|--------|----------------------------------------------------------------------|--------|------------------------------------------|-----------|-------------------------------------------------------------------|--------|----------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------|----------|----------------------------------------------------------------------------|--------|------------|--------|--------|-----------|--------|--------|------------|--------|
|                                                                           |   | **Number of                    Common                    Shares** |      | **Common                    Stock** |   | **Additional                    Paid-In                    Capital** |   | **Retained                    Earnings** |      | **Treasury                    Stock,                    at cost** |   | **Unearned                    ESOP                    Shares** |   | **Accumulated                    Other                    Comprehensive                    Income(Loss)** |     | **Total                    Stockholders’                    Equity** |   |
|                                                                           |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |
|                                                                           |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   |       |   |
| **Balance at January 1, 2008**                                                 |   |                                                              | 1,900,509 |                                | $      | 190                                                                  |   | $                                        | 9,107,119 |                                                              | $      | 13,226,395                                                     |   | $                                                                                                         | —  |                                                                       | $      | (1,070,827 | )      | $      | (379,072  | )      | $      | 20,883,805 |   |
|                                                                           |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   |       |   |
| Exercise of stock option, including tax benefit                                |   |                                                              | 23,375    |                                |   | 2                                                                    |   |                                     | 164,857   |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   | 164,859    |   |
| Stock-based compensation                                                       |   |                                                              |      |                                |   |                                                                 |   |                                     | 1,278     |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   | 1,278      |   |
| Amortization of earned portion of ESOP common stock                            |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   | 169,077    |   |   |      |   |   | 169,077    |   |
| Amortization of cost over fair value - ESOP                                    |   |                                                              |      |                                |   |                                                                 |   |                                     | (73,244   | )                                                                 |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   | (73,244    | )      |
| Transfer from ESOP repurchase obligation                                       |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   | —    |   |
| Cash dividends declared ($0.24 per share)                                      |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   | (443,996                                                       | )      |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   | (443,996   | )      |
| Purchase of treasury stock, at cost                                            |   |                                                              | (41,423   | )                                   |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      | (395,891 | )                                                                          |   |       |   |   |      |   |   | (395,891   | )      |
| Comprehensive income:                                                          |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   |       |   |
| Net income                                                                     |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   | 1,931,744                                                      |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   | 1,931,744  |   |
| Other comprehensive income, net:                                               |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   |       |   |
| Change in unrealized loss on securities available for sale, net of tax effects |   |                                                              | —   |                                |   | —                                                              |   |                                     | —   |                                                              |   | —                                                        |   |                                                                                                      | —  |                                                                       |   | —    |   |   | 966,135   |   |   | 966,135    |   |
|                                                                           |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   |       |   |
| Total comprehensive income                                                     |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   | 2,897,879  |   |
|                                                                           |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   |       |   |
| **Balance at December 31, 2008**                                               |   |                                                              | 1,882,461 |                                | $      | 192                                                                  |   | $                                        | 9,200,010 |                                                              | $      | 14,714,143                                                     |   | $                                                                                                         | (395,891 | )                                                                          | $      | (901,750   | )      | $      | 587,063   |   | $      | 23,203,767 |   |
|                                                                           |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   |       |   |
|                                                                           |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   |       |   |
| Exercise of stock option, including tax benefit                                |   |                                                              | 21,250    |                                |   | 3                                                                    |   |                                     | 118,624   |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   | 118,627    |   |
| Stock-based compensation                                                       |   |                                                              |      |                                |   |                                                                 |   |                                     | 959       |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   | 959        |   |
| Amortization of earned portion of ESOP common stock                            |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   | 126,809    |   |   |      |   |   | 126,809    |   |
| Amortization of cost over fair value - ESOP                                    |   |                                                              |      |                                |   |                                                                 |   |                                     | (58,114   | )                                                                 |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   | (58,114    | )      |
| Cash dividends declared ($0.18 per share)                                      |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   | (323,438                                                       | )      |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   | (323,438   | )      |
| Purchase of treasury stock, at cost                                            |   |                                                              | (53,220   | )                                   |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      | (462,972 | )                                                                          |   |       |   |   |      |   |   | (462,972   | )      |
| Comprehensive income:                                                          |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   |       |   |
| Net income                                                                     |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   | 1,306,817                                                      |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   | 1,306,817  |   |
| Other comprehensive income, net:                                               |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   |       |   |
| Change in unrealized gain on securities available for sale, net of tax effects |   |                                                              | —   |                                |   | —                                                              |   |                                     | —   |                                                              |   | —                                                        |   |                                                                                                      | —  |                                                                       |   | —    |   |   | 1,420,308 |   |   | 1,420,308  |   |
|                                                                           |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   |       |   |
| Total comprehensive income                                                     |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   | 2,727,125  |   |
|                                                                           |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   |       |   |
| **Balance at September 30, 2009**                                              |   |                                                              | 1,850,491 |                                | $      | 195                                                                  |   | $                                        | 9,261,479 |                                                              | $      | 15,697,522                                                     |   | $                                                                                                         | (858,863 | )                                                                          | $      | (774,941   | )      | $      | 2,007,371 |   | $      | 25,332,763 |   |
|                                                                           |   |                                                              |      |                                |   |                                                                 |   |                                     |      |                                                              |   |                                                           |   |                                                                                                      |     |                                                                       |   |       |   |   |      |   |   |       |   |

See notes to consolidated financial statements.

6

----

**VSB Bancorp, Inc.Consolidated Statements of Cash Flows        (unaudited)**

|                                                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
|----------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|-------------|-----------------------------------------------------------------------------|--------|----------------------------------------------------------------------------|--------|----------------------------------------------------------------------------|-------------|--------|--------|-------------|--------|
|                                                                             |   | **Three months                    ended                    Sept. 30, 2009** |        | **Three months                    ended                    Sept. 30, 2008** |   | **Nine months                    ended                    Sept. 30, 2009** |   | **Nine months                    ended                    Sept. 30, 2008** |        |
|                                                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                            |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
| Net income                                                                       |   | $                                                                           | 474,469     |                                                                        | $      | 542,704                                                                    |   | $                                                                          | 1,306,817   |   | $      | 1,330,924   |   |
| Adjustments to reconcile net income to net cash provided by operating activities |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
| Depreciation and amortization                                                    |   |                                                                        | 163,910     |                                                                        |   | 161,329                                                                    |   |                                                                       | 502,691     |   |   | 465,925     |   |
| Accretion of income, net of amortization of premium                              |   |                                                                        | (1,422      | )                                                                           |   | (51,907                                                                    | )      |                                                                       | (15,943     | )      |   | (163,219    | )      |
| ESOP compensation expense                                                        |   |                                                                        | 26,521      |                                                                        |   | 23,680                                                                     |   |                                                                       | 68,695      |   |   | 73,257      |   |
| Stock-based compensation expense                                                 |   |                                                                        | 320         |                                                                        |   | 320                                                                        |   |                                                                       | 959         |   |   | 959         |   |
| Provision for loan losses                                                        |   |                                                                        | 75,000      |                                                                        |   | 40,000                                                                     |   |                                                                       | 450,000     |   |   | 125,000     |   |
| Decrease in prepaid and other assets                                             |   |                                                                        | 38,838      |                                                                        |   | 353,431                                                                    |   |                                                                       | 321,247     |   |   | 392,030     |   |
| Decrease/(increase) in accrued interest receivable                               |   |                                                                        | 5,475       |                                                                        |   | (33,296                                                                    | )      |                                                                       | 18,012      |   |   | 33,909      |   |
| Increase in deferred income taxes                                                |   |                                                                        | (433,958    | )                                                                           |   | (136,522                                                                   | )      |                                                                       | (678,278    | )      |   | (366,898    | )      |
| Increase in accrued expenses and other liabilities                               |   |                                                                        | 441,875     |                                                                        |   | 68,249                                                                     |   |                                                                       | 778,545     |   |   | 37,481      |   |
|                                                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
| Net cash provided by operating activities                                        |   |                                                                        | 791,028     |                                                                        |   | 967,988                                                                    |   |                                                                       | 2,752,745   |   |   | 1,929,368   |   |
|                                                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
|                                                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                            |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
| Net increase in loan receivable                                                  |   |                                                                        | (3,444,888  | )                                                                           |   | (1,741,617                                                                 | )      |                                                                       | (6,883,891  | )      |   | (2,563,409  | )      |
| Proceeds from repayment of investment securities, available for sale             |   |                                                                        | 10,362,372  |                                                                        |   | 6,021,304                                                                  |   |                                                                       | 28,711,718  |   |   | 20,423,422  |   |
| Purchases of investment securities, available for sale                           |   |                                                                        | (10,638,412 | )                                                                           |   | (1,547,630                                                                 | )      |                                                                       | (22,414,623 | )      |   | (23,160,013 | )      |
| Purchases of premises and equipment                                              |   |                                                                        | (54,439     | )                                                                           |   | (153,994                                                                   | )      |                                                                       | (158,613    | )      |   | (321,878    | )      |
|                                                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
| Net (used in)/cash provided by investing activities                              |   |                                                                        | (3,775,367  | )                                                                           |   | 2,578,063                                                                  |   |                                                                       | (745,409    | )      |   | (5,621,878  | )      |
|                                                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
|                                                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                            |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
| Net increase/(decrease) in deposits                                              |   |                                                                        | 2,743,593   |                                                                        |   | (5,787,118                                                                 | )      |                                                                       | 14,457,743  |   |   | 6,938,974   |   |
| Payment of Subordinated Debt                                                     |   |                                                                        | —     |                                                                        |   | (5,155,000                                                                 | )      |                                                                       | —     |   |   | (5,155,000  | )      |
| Exercise of stock options                                                        |   |                                                                        | —     |                                                                        |   | 112,859                                                                    |   |                                                                       | 118,627     |   |   | 164,859     |   |
| Purchase of treasury stock, at cost                                              |   |                                                                        | —     |                                                                        |   | —                                                                    |   |                                                                       | (462,972    | )      |   | —     |   |
| Cash dividends paid                                                              |   |                                                                        | (108,286    | )                                                                           |   | (115,433                                                                   | )      |                                                                       | (323,438    | )      |   | (343,982    | )      |
|                                                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
| Net cash provided by/(used in) financing activities                              |   |                                                                        | 2,635,307   |                                                                        |   | (10,944,692                                                                | )      |                                                                       | 13,789,960  |   |   | 1,604,851   |   |
|                                                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
|                                                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
| NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS                             |   |                                                                        | (349,032    | )                                                                           |   | (7,398,641                                                                 | )      |                                                                       | 15,797,296  |   |   | (2,087,659  | )      |
|                                                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
|                                                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                   |   |                                                                        | 37,386,551  |                                                                        |   | 23,007,861                                                                 |   |                                                                       | 21,240,223  |   |   | 17,696,879  |   |
|                                                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
|                                                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                         |   | $                                                                           | 37,037,519  |                                                                        | $      | 15,609,220                                                                 |   | $                                                                          | 37,037,519  |   | $      | 15,609,220  |   |
|                                                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
|                                                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
| Cash paid during the period for:                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
| Interest                                                                         |   | $                                                                           | 305,803     |                                                                        | $      | 517,965                                                                    |   | $                                                                          | 1,187,914   |   | $      | 2,154,201   |   |
|                                                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |
| Taxes                                                                            |   | $                                                                           | 343,542     |                                                                        | $      | 522,933                                                                    |   | $                                                                          | 869,394     |   | $      | 1,250,259   |   |
|                                                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |        |   |   |        |   |

See notes to consolidated financial statements.

7

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**VSB BANCORP, INC.**

|                                                                                                           |
|----------------------------------------------------------------------------------------------------------------|
| **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008** |
|                                                                                                           |

**1.       GENERAL**

          VSB Bancorp, Inc. (referred to using terms such as “we,” “us,” or the “Company”) became the holding company for Victory State Bank (the “Bank”), a New York chartered commercial bank, upon the completion of a reorganization of the Bank into the holding company form of organization. The reorganization was effective in May 2003. All the outstanding stock of Victory        State Bank was exchanged for stock of VSB Bancorp, Inc. on a three for two basis so that the stockholders of Victory State Bank became the owners of VSB Bancorp, Inc. and VSB Bancorp, Inc. owns all the stock of Victory State Bank. The common stock we issued in the transaction qualifies as exempt securities under Section 3(a)(12) of the Securities Act of 1933. Our primary business is owning all of the issued and outstanding stock of the Bank. Our common stock is listed on the NASDAQ        Global Market, effective on August 4, 2008. We continue to trade under the symbol “VSBN”.

          Through the Bank, the Company is primarily engaged in the business of commercial banking, and to a lesser extent retail banking. The Bank gathers deposits from individuals and businesses primarily in Staten Island, New York and makes loans throughout that community. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the local Staten Island economic and real estate        markets. The Bank invests funds that are not used for lending primarily in government securities, mortgage backed securities and collateralized mortgage obligations. Customer deposits are insured, up to the applicable limit, by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is supervised by the New York State Banking Department and the FDIC. 

          The consolidated financial information included herein as of and for the periods ended September 30, 2009 and 2008 is unaudited. However, such information reflects all adjustments, which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The accompanying consolidated financial statements should be read in conjunction with the Company’s annual report on        Form 10-K for the year ended December 31, 2008.

          Management evaluated events and transactions that occurred through the time of filing of these financial statements on November 10, 2009, for potential recognition or disclosure, in accordance with the requirements of FASB ASC 855, "Subsequent Events".

**2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

          The following is a description of the significant accounting and reporting policies followed in preparing and presenting the accompanying consolidated financial statements. These policies conform with accounting principles generally accepted in the United States of America (“GAAP”).

          ***Principles of Consolidation*** - The consolidated financial statements of the Company include the accounts of the Company, including its subsidiary Victory State Bank. All significant inter-company accounts and transactions between the Company and Bank have been eliminated in consolidation. 

          ***Use of Estimates*** - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses during the reporting period. Actual results can differ from those        estimates. The allowance for loan losses, prepayment estimates on the mortgage-backed securities and Collateralized Mortgage Obligation portfolios, contingencies and fair values of financial instruments are particularly subject to change.

          ***Reclassifications –*** Some items in the prior year financial statements were reclassified to conform to the current presentation. 

8

----

          ***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 with original maturities of 90 days or less. 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 24, 2009 through October 7, 2009, Victory State Bank was required to maintain reserves, after deducting vault cash, of $4,922,000. 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 intent and probability of being        required to sell the securities before recovery of the amortized cost basis less any current-period loss.

          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 appropriate.

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 before applying        any amount to interest, until the loan is restored to an accruing status. On a limited basis, the Company may apply a payment to interest on a non-accrual loan if there is no impairment or no estimated loss on this asset. The Company continues to accrue interest on construction loans that are 90 days past contractual maturity date if the loan is expected to be paid in full in the next 60 days and all interest is paid up to date.

          Loan origination fees and certain direct loan origination costs are deferred and the net amount recognized over the contractual loan terms using the level-yield method, adjusted for periodic prepayments in certain circumstances.

          The Company considers a loan to be impaired when, based on current information, it is probable that the Company will be unable to collect all principal and interest payments due according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Impairment is measured on a loan by loan basis for commercial        and construction loans. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral. The fair value of the collateral, as reduced by costs to sell, is utilized if a loan is collateral dependent. 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 was the sole asset of the Trust. On August 8, 2008, the Company repaid the subordinated debenture in full at par, received payment of $155,000 on account of its common securities of the Trust, and all the outstanding Trust Preferred Capital Securities were likewise redeemed, thereby ending the entire arrangement. The Trust was 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 fifteen years. Leasehold improvements are amortized at the lesser of their useful life        or the term of the lease.

          ***Federal Home Loan Bank (FHLB) Stock*** - The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment. Because this stock is viewed as a long term investment,        impairment is based on ultimate recovery of par value, which is the price the Bank pays for the FHLB Stock. Both cash and stock dividends are reported as income.

10

----

          ***Income Taxes*** - The Company utilizes the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined on differences between financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws expected to be in effect when the differences are expected to reverse. As changes in tax laws or rates        are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. As such, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely        than not” test, no tax benefit is recorded. The adoption had no affect on the Company’s financial statements. 

          The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

          ***Financial Instruments*** - In the ordinary course of business, the Company has entered into off-balance sheet financial instruments, primarily consisting of commitments to extend credit.

          ***Basic and Diluted Net Income Per Common Share*** - Basic net income per share of common stock is based on 1,809,218 shares and 1,871,845 shares, the weighted average number of common shares outstanding for the three months ended September 30, 2009 and 2008, respectively. Diluted net income per share of common stock is based on 1,828,638 and 1,898,437, the weighted average number of common shares and        potentially dilutive common shares outstanding for the three months ended September 30, 2009 and 2008, 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 36,082 and 54,758 shares for the three months ended September 30, 2009 and 2008, respectively. Common stock equivalents were calculated using the treasury stock method. 

          Basic net income per share of common stock is based on 1,803,281 shares and 1,855,523 shares, the weighted average number of common shares outstanding for the nine months ended September 30, 2009 and 2008, respectively. Diluted net income per share of common stock is based on 1,820,612 and 1,882,966, the weighted average number of common shares and potentially dilutive common shares outstanding for the nine        months ended September 30, 2009 and 2008, 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 54,094 and 50,207 shares for the nine months years ended September 30, 2009 and 2008, respectively. Common stock equivalents were calculated using the treasury stock method. 

          The reconciliation of the numerators and the denominators of the basic and diluted per share computations for the three and nine months ended September 30, are as follows:

Reconciliation of EPS

|                                        |   |                                                     |    |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |
|---------------------------------------------|--------|----------------------------------------------------------|---------|---------------------------------------------------------------|--------|-------------------------------------|--------|-------------------------------|--------|---------------------------------------------------------------|--------|-------------------------------------|--------|--------|-----------|--------|--------|--------|--------|
|                                        |   | Three months ended                    September 30, 2009 |    | Three months ended                    September 30, 2008      |   |
|                                        |   |                                                     |    |                                                          |   |
|                                        |   | Net                    Income                            |    | Weighted                    Average                    Shares |   | Per Share                    Amount |   | Net                    Income |   | Weighted                    Average                    Shares |   | Per Share                    Amount |   |
|                                        |   |                                                     |    |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |
|                                        |   |                                                     |    |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |
| Basic earnings per common share             |   |                                                     |    |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |
| Net income available to common stockholders |   | $                                                        | 474,469 |                                                          |   | 1,809,218                           |   | $                             | 0.26   |                                                          | $      | 542,704                             |   |   | 1,871,845 |   | $      | 0.29   |   |
|                                        |   |                                                     |    |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |
|                                        |   |                                                     |    |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |
| Effect of dilutive shares                   |   |                                                     |    |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |
| Weighted average shares, if converted       |   |                                                     |    |                                                          |   | 19,420                              |   |                          |   |                                                          |   |                                |   |   | 26,592    |   |   |   |   |
|                                        |   |                                                     |    |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |
|                                        |   |                                                     |    |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |
| Diluted earnings per common share           |   |                                                     |    |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |
| Net income available to common stockholders |   | $                                                        | 474,469 |                                                          |   | 1,828,638                           |   | $                             | 0.26   |                                                          | $      | 542,704                             |   |   | 1,898,437 |   | $      | 0.29   |   |
|                                        |   |                                                     |    |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |

11

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Reconciliation of EPS

|                                        |   |                                                    |      |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |
|---------------------------------------------|--------|---------------------------------------------------------|-----------|---------------------------------------------------------------|--------|-------------------------------------|--------|-------------------------------|--------|---------------------------------------------------------------|--------|-------------------------------------|--------|--------|-----------|--------|--------|--------|--------|
|                                        |   | Nine months ended                    September 30, 2009 |      | Nine months ended                    September 30, 2008       |   |
|                                        |   |                                                    |      |                                                          |   |
|                                        |   | Net                    Income                           |      | Weighted                    Average                    Shares |   | Per Share                    Amount |   | Net                    Income |   | Weighted                    Average                    Shares |   | Per Share                    Amount |   |
|                                        |   |                                                    |      |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |
|                                        |   |                                                    |      |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |
| Basic earnings per common share             |   |                                                    |      |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |
| Net income available to common stockholders |   | $                                                       | 1,306,817 |                                                          |   | 1,803,281                           |   | $                             | 0.72   |                                                          | $      | 1,330,924                           |   |   | 1,855,523 |   | $      | 0.72   |   |
|                                        |   |                                                    |      |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |
|                                        |   |                                                    |      |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |
| Effect of dilutive shares                   |   |                                                    |      |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |
| Weighted average shares, if converted       |   |                                                    |      |                                                          |   | 17,331                              |   |                          |   |                                                          |   |                                |   |   | 27,443    |   |   |   |   |
|                                        |   |                                                    |      |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |
|                                        |   |                                                    |      |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |
| Diluted earnings per common share           |   |                                                    |      |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |
| Net income available to common stockholders |   | $                                                       | 1,306,817 |                                                          |   | 1,820,612                           |   | $                             | 0.72   |                                                          | $      | 1,330,924                           |   |   | 1,882,966 |   | $      | 0.71   |   |
|                                        |   |                                                    |      |                                                          |   |                                |   |                          |   |                                                          |   |                                |   |   |      |   |   |   |   |

          ***Stock Based Compensation*** - The Company records compensation expense for stock options provided to employees in return for employment service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employment service period, which is normally the vesting period of the options. This applies to awards granted or modified in fiscal years beginning in        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 of August 4, 2008, the Company listed its common stock on the NASDAQ Global Market. 

          ***Stock Repurchase Program****–* On September 8, 2008, the Company announced that its Board of Directors had authorized a Rule 10b5-1 stock repurchase program for the repurchase of up to 100,000 shares of the Company’s common stock. On April 21, 2009, Company announced that its Board of Directors had authorized a second Rule 10b5-1 stock repurchase program for the repurchase of up to        an additional 100,000 shares of the Company’s common stock and also announced that the Company had repurchased 94,643 shares of its common stock under the first stock repurchase program as of the date of the announcement. Stock repurchases under the program have and will be accounted for using the cost method, in which the Company will reflect the entire cost of repurchased shares as a separate reduction of stockholders’ equity on its balance sheet.

          ***Comprehensive Income****-* Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses, net of taxes, on securities available for sale which are also recognized as separate components of equity.

          ***Recently-Adopted Accounting Standards*** - In April 2009, the FASB issued Staff Position (FSP) No. 115-2 and No. 124-2, *Recognition and Presentation of Other-Than-Temporary Impairments, which now falls under ASC 320,* which amends existing guidance for determining whether impairment is other-than-temporary for debt securities. The FSP requires an entity to assess whether it intends to sell, or        it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in        other comprehensive income. Additionally, the FSP expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. This FSP is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have a material effect on the Company’s results of operations or financial position.

12

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          In April 2009, the FASB issued Staff Position (FSP) No. 157-4, *Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which now falls under ASC 820*. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value        measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. The FSP provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted        prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. The FSP also requires increased disclosures. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. The adoption of this standard did not have a material effect on the Company’s results of operations or financial position.

          In April 2009, the FASB issued Staff Position (FSP) No. 107-1 and APB 28-1, *Interim Disclosures about Fair Value of Financial Instruments, which now falls under ASC 825*. This FSP amends FASB Statement No. 107, *Disclosures about Fair Value of Financial Instruments*, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies that were        previously only required in annual financial statements. This FSP is effective for interim reporting periods ending after June 15, 2009. The Company adopted this FSP in the second quarter of 2009, which resulted in additional disclosures but no impact to the financial statements. 

          In May 2009, the FASB issued SFAS No. 165 “Subsequent Events”, which now falls under ASC 855. The objective of this statement is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statement are issued or available to be issued. The Statement is effective for interim and annual financial periods ending after June 15,        2009. The adoption this quarter resulted in additional disclosure, but no material impact to the results of operations or financial position.

          On June 29, 2009, the FASB issued FASB Statement No. 168, *The* FASB Accounting Standards Codification *and the Hierarchy of Generally Accepted Accounting Principles – A Replacement of FASB Statement No. 162, which is now ASC 105.* With the issuance of this statement, the *FASB Accounting Standards Codification*TM (Codification) became the source of authoritative U.S. generally        accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in        the Codification became nonauthoritative. The issuance of the Codification is not intended to change GAAP. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this standard did not have a material impact to the Company’s consolidated financial statements.

**Recently Issued but Not Yet Effective Standards**

          In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-05, “Measuring Liabilities at Fair Value”, as subset of Topic 820 – “Fair Value Measurements and Disclosure”. Among other clarifying points, ASU 2009-05 provides clarification that in circumstance in which a quoted price in an active market for the identical liability is not available, a reporting entity is        required to measure fair value using one or more of the following techniques: (1) The quoted price of the identical liability when traded as an asset, (2) Quoted prices for similar liabilities or similar liabilities when traded as assets, or (3) Another valuation technique that is consistent with the principles of Topic 820 such as an income approach or market approach. The ASU is effective as of September 30, 2009. The adoption of the ASU did not have a material impact on the        Company’s consolidated financial statements.

13

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**3.       INVESTMENT SECURITIES, AVAILABLE FOR SALE**

          The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolio at September 30, 2009 and December 31, 2008 and the corresponding amounts of unrealized gains and losses therein:

|                                |   |                              |        |                                |   |                                |   |                          |    |   |   |        |   |
|-------------------------------------|--------|-----------------------------------|-------------|-------------------------------------|--------|-------------------------------------|--------|-------------------------------|---------|--------|--------|-------------|--------|
|                                |   | **September 30, 2009**            |        |
|                                |   |                              |        |
|                                |   | Amortized                    Cost |        | Unrealized                    Gains |   | Unrealized                    Gains |   | Fair                    Value |    |
|                                |   |                              |        |                                |   |                                |   |                          |    |
|                                |   |                              |        |                                |   |                                |   |                          |    |   |   |        |   |
| US Government Agency                |   | $                                 | —     |                                | $      | —                             |   | $                             | — |   | $      | —     |   |
| FNMA MBS - Residential              |   |                              | 5,194,909   |                                |   | 199,274                             |   |                          | — |   |   | 5,394,183   |   |
| FHLMC MBS - Residential             |   |                              | —     |                                |   | —                             |   |                          | — |   |   | —     |   |
| GNMA MBS - Residential              |   |                              | 1,329,897   |                                |   | 72,874                              |   |                          | — |   |   | 1,402,771   |   |
| Whole Loan MBS - Residential        |   |                              | 2,113,389   |                                |   | 51,366                              |   |                          | (18,504 | )      |   | 2,146,251   |   |
| Collateralized mortgage obligations |   |                              | 104,204,595 |                                |   | 3,474,241                           |   |                          | (79,028 | )      |   | 107,599,808 |   |
|                                |   |                              |        |                                |   |                                |   |                          |    |   |   |        |   |
|                                |   | $                                 | 112,842,790 |                                | $      | 3,797,755                           |   | $                             | (97,532 | )      | $      | 116,543,013 |   |
|                                |   |                              |        |                                |   |                                |   |                          |    |   |   |        |   |

|                                |   |                              |        |                                |   |                                |   |                          |     |   |   |        |   |
|-------------------------------------|--------|-----------------------------------|-------------|-------------------------------------|--------|-------------------------------------|--------|-------------------------------|----------|--------|--------|-------------|--------|
|                                |   | **December 31, 2008**             |        |
|                                |   |                              |        |
|                                |   | Amortized                    Cost |        | Unrealized                    Gains |   | Unrealized                    Gains |   | Fair                    Value |     |
|                                |   |                              |        |                                |   |                                |   |                          |     |
|                                |   |                              |        |                                |   |                                |   |                          |     |   |   |        |   |
| US Government Agency                |   | $                                 | —     |                                | $      | —                             |   | $                             | —  |   | $      | —     |   |
| FNMA MBS - Residential              |   |                              | 6,646,322   |                                |   | 82,351                              |   |                          | (38,079  | )      |   | 6,690,594   |   |
| FHLMC MBS - Residential             |   |                              | 37,410      |                                |   | 232                                 |   |                          | —  |   |   | 37,642      |   |
| GNMA MBS - Residential              |   |                              | 1,576,764   |                                |   | 56,026                              |   |                          | —  |   |   | 1,632,790   |   |
| Whole Loan MBS - Residential        |   |                              | 2,620,965   |                                |   | —                             |   |                          | (61,928  | )      |   | 2,559,037   |   |
| Collateralized mortgage obligations |   |                              | 108,331,329 |                                |   | 1,477,051                           |   |                          | (439,855 | )      |   | 109,368,525 |   |
|                                |   |                              |        |                                |   |                                |   |                          |     |   |   |        |   |
|                                |   | $                                 | 119,212,790 |                                | $      | 1,615,660                           |   | $                             | (539,862 | )      | $      | 120,288,588 |   |
|                                |   |                              |        |                                |   |                                |   |                          |     |   |   |        |   |

          The amortized cost and fair value of the investment securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities, especially for collateralized mortgage obligations, if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

|                                                 |   |                              |        |                          |   |        |   |
|------------------------------------------------------|--------|-----------------------------------|-------------|-------------------------------|--------|-------------|--------|
|                                                 |   | September 30, 2009                |        |
|                                                 |   |                              |        |
|                                                 |   | Amortized                    Cost |        | Fair                    Value |   |
|                                                 |   |                              |        |                          |   |
|                                                 |   |                              |        |                          |   |        |   |
| **Securities, Available for Sale Expected Maturity** |   |                              |        |                          |   |        |   |
| Less than one year                                   |   | $                                 | —     |                          | $      | —     |   |
| Due after one year through five years                |   |                              | 3,076,927   |                          |   | 3,186,320   |   |
| Due after five years through ten years               |   |                              | 45,658,330  |                          |   | 47,501,493  |   |
| Due after ten years                                  |   |                              | 64,107,533  |                          |   | 65,855,200  |   |
|                                                 |   |                              |        |                          |   |        |   |
|                                                 |   | $                                 | 112,842,790 |                          | $      | 116,543,013 |   |
|                                                 |   |                              |        |                          |   |        |   |

14

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          The following table summarizes the investment securities with unrealized losses at September 30, 2009 and December 31, 2008 by aggregated major security type and length of time in a continuous unrealized loss position:

September 30, 2009

|                                |   |                          |      |                               |   |                          |   |                               |      |                          |   |                               |   |   |      |   |   |    |   |
|-------------------------------------|--------|-------------------------------|-----------|------------------------------------|--------|-------------------------------|--------|------------------------------------|-----------|-------------------------------|--------|------------------------------------|--------|--------|-----------|--------|--------|---------|--------|
|                                |   | Less than 12 months           |      | More than 12 months                |   | Total                         |   |
|                                |   |                          |      |                               |   |                          |   |
|                                |   | Fair                    Value |      | Unrealized                    Loss |   | Fair                    Value |   | Unrealized                    Loss |      | Fair                    Value |   | Unrealized                    Loss |   |
|                                |   |                          |      |                               |   |                          |   |                               |      |                          |   |                               |   |
|                                |   |                          |      |                               |   |                          |   |                               |      |                          |   |                               |   |   |      |   |   |    |   |
| US Government Agency                |   | $                             | —   |                               | $      | —                       |   | $                                  | —   |                          | $      | —                            |   | $      | —   |   | $      | — |   |
| FHLMC MBS                           |   |                          | —   |                               |   | —                       |   |                               | —   |                          |   | —                            |   |   | —   |   |   | — |   |
| FNMA MBS                            |   |                          | —   |                               |   | —                       |   |                               | —   |                          |   | —                            |   |   | —   |   |   | — |   |
| GNMA MBS                            |   |                          | —   |                               |   | —                       |   |                               | —   |                          |   | —                            |   |   | —   |   |   | — |   |
| Whole Loan MBS                      |   |                          | —   |                               |   | —                       |   |                               | 471,266   |                          |   | (18,504                            | )      |   | 471,266   |   |   | (18,504 | )      |
| Collateralized mortgage obligations |   |                          | 6,246,670 |                               |   | (17,070                       | )      |                               | 2,111,121 |                          |   | (61,958                            | )      |   | 8,357,791 |   |   | (79,028 | )      |
|                                |   |                          |      |                               |   |                          |   |                               |      |                          |   |                               |   |   |      |   |   |    |   |
|                                |   | $                             | 6,246,670 |                               | $      | (17,070                       | )      | $                                  | 2,582,387 |                          | $      | (80,462                            | )      | $      | 8,829,057 |   | $      | (97,532 | )      |
|                                |   |                          |      |                               |   |                          |   |                               |      |                          |   |                               |   |   |      |   |   |    |   |

December 31, 2008

|                                |   |                          |       |                               |   |                          |   |                               |       |                          |   |                               |   |   |       |   |   |     |   |
|-------------------------------------|--------|-------------------------------|------------|------------------------------------|--------|-------------------------------|--------|------------------------------------|------------|-------------------------------|--------|------------------------------------|--------|--------|------------|--------|--------|----------|--------|
|                                |   | Less than 12 months           |       | More than 12 months                |   | Total                         |   |
|                                |   |                          |       |                               |   |                          |   |
|                                |   | Fair                    Value |       | Unrealized                    Loss |   | Fair                    Value |   | Unrealized                    Loss |       | Fair                    Value |   | Unrealized                    Loss |   |
|                                |   |                          |       |                               |   |                          |   |                               |       |                          |   |                               |   |
|                                |   |                          |       |                               |   |                          |   |                               |       |                          |   |                               |   |   |       |   |   |     |   |
| US Government Agency                |   | $                             | —    |                               | $      | —                       |   | $                                  | —    |                          | $      | —                            |   | $      | —    |   | $      | —  |   |
| FHLMC MBS                           |   |                          | —    |                               |   | —                       |   |                               | —    |                          |   | —                            |   |   | —    |   |   | —  |   |
| FNMA MBS                            |   |                          | 3,674,817  |                               |   | (34,814                       | )      |                               | 251,470    |                          |   | (3,265                             | )      |   | 3,926,287  |   |   | (38,079  | )      |
| GNMA MBS                            |   |                          | —    |                               |   | —                       |   |                               | —    |                          |   | —                            |   |   | —    |   |   | —  |   |
| Whole Loan MBS                      |   |                          | 1,451,015  |                               |   | (54,787                       | )      |                               | 1,108,022  |                          |   | (7,141                             | )      |   | 2,559,037  |   |   | (61,928  | )      |
| Collateralized mortgage obligations |   |                          | 13,662,143 |                               |   | (76,957                       | )      |                               | 8,808,164  |                          |   | (362,898                           | )      |   | 22,470,307 |   |   | (439,855 | )      |
|                                |   |                          |       |                               |   |                          |   |                               |       |                          |   |                               |   |   |       |   |   |     |   |
|                                |   | $                             | 18,787,975 |                               | $      | (166,558                      | )      | $                                  | 10,167,656 |                          | $      | (373,304                           | )      | $      | 28,955,631 |   | $      | (539,862 | )      |
|                                |   |                          |       |                               |   |                          |   |                               |       |                          |   |                               |   |   |       |   |   |     |   |

          The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its        investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

          At September 30, 2009, the unrealized loss on investment securities was caused by interest rate increases. We expect that these securities, at maturity, will not be settled for less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is not more        likely than not the Company will be required to sell the securities before recovery of the amortized cost basis less any current-period loss, these investments are not considered other-than-temporarily impaired. At September 30, 2009, there were no debt securities with unrealized losses with aggregate depreciation of 5% or more from the Company’s amortized cost basis. As the market value decline of these securities is caused by interest rate increases and management has the        ability to hold these securities until maturity, or for the foreseeable future, if classified as available for sale, these securities are not deemed to be other-than-temporarily impaired.

          There were no sales of investment securities for the nine months ended September 30, 2009 and 2008.

15

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**4.       FAIR VALUE OF FINANCIAL INSTRUMENTS**

          The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of FASB ASC 825, “Financial Instruments”. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop        the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

          The following methods and assumptions were used by the Company in estimating fair values of financial instruments:

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | *Interest-bearing Bank Balances*– Interest-bearing bank balances mature within one year and are carried at cost which are estimated to be reasonably close to fair value.                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | *Money Market Investments*– The fair value of these securities approximates their carrying value due to the relatively short time to maturity                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | *Investment Securities, Available For Sale*– The estimated fair value of these securities is determined by using available market information and appropriate valuation methodologies. The estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | *Loans Receivable*- The fair value of commercial and construction loans are approximated by the carrying value as the loans are tied directly to the Prime Rate and are subject to change on a daily basis. The fair value of the remainder of the portfolio is determined by discounting the future cash flows of the loans using the appropriate discount rate.                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | *Other Financial Assets*- The fair value of these assets, principally accrued interest receivable, approximates their carrying value due to their short maturity.                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | *Non-Interest Bearing and Interest Bearing Deposits* - The fair value disclosed for non-interest bearing deposits is equal to the amount payable on demand at the reporting date. The fair value of interest bearing deposits is based upon the current rates for instruments of the same remaining maturity. Interest bearing deposits with a maturity of greater than one year are estimated using a discounted cash flow approach that applies interest rates                    currently being offered. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | *Other Liabilities* - The estimated fair value of other liabilities, which primarily include accrued interest payable, approximates their carrying amount.                                                                                                                                                                                                                                                                                                                                                   |

16

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|   |                                                                                                                                                                  |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | In accordance with FASB ASC 825, the carrying amounts and estimated fair values of financial instruments, at September 30, 2009 and December 31, 2008 are as follows: |

|                                      |   |                                   |        |                              |   |                                   |   |                              |        |   |   |        |   |
|-------------------------------------------|--------|----------------------------------------|-------------|-----------------------------------|--------|----------------------------------------|--------|-----------------------------------|-------------|--------|--------|-------------|--------|
|                                      |   | **September 30, 2009**                 |        | **December 31, 2008**             |   |
|                                      |   |                                   |        |                              |   |
|                                      |   | **Carrying                    Amount** |        | **Fair                    Value** |   | **Carrying                    Amount** |   | **Fair                    Value** |        |
|                                      |   |                                   |        |                              |   |                                   |   |                              |        |
|                                      |   |                                   |        |                              |   |                                   |   |                              |        |   |   |        |   |
| Financial Assets:                         |   |                                   |        |                              |   |                                   |   |                              |        |   |   |        |   |
| Cash and cash equivalents                 |   | $                                      | 37,037,519  |                              | $      | 37,037,519                             |   | $                                 | 21,240,223  |   | $      | 21,240,223  |   |
| Investment securities, available for sale |   |                                   | 116,543,013 |                              |   | 116,543,013                            |   |                              | 120,288,588 |   |   | 120,288,588 |   |
| Loans receivable                          |   |                                   | 71,781,515  |                              |   | 72,406,994                             |   |                              | 65,258,776  |   |   | 63,767,118  |   |
| Other financial assets                    |   |                                   | 705,461     |                              |   | 705,461                                |   |                              | 723,473     |   |   | 723,473     |   |
|                                      |   |                                   |        |                              |   |                                   |   |                              |        |   |   |        |   |
|                                      |   |                                   |        |                              |   |                                   |   |                              |        |   |   |        |   |
| Total Financial Assets                    |   | $                                      | 226,067,508 |                              | $      | 226,692,987                            |   | $                                 | 207,511,060 |   | $      | 206,019,402 |   |
|                                      |   |                                   |        |                              |   |                                   |   |                              |        |   |   |        |   |
|                                      |   |                                   |        |                              |   |                                   |   |                              |        |   |   |        |   |
| Financial Liabilities:                    |   |                                   |        |                              |   |                                   |   |                              |        |   |   |        |   |
| Non-interest bearing deposits             |   | $                                      | 65,453,297  |                              | $      | 65,453,297                             |   | $                                 | 58,907,451  |   | $      | 58,907,451  |   |
| Interest bearing deposits                 |   |                                   | 137,113,895 |                              |   | 136,921,053                            |   |                              | 129,201,998 |   |   | 129,096,378 |   |
| Other liabilities                         |   |                                   | 37,514      |                              |   | 37,514                                 |   |                              | 162,731     |   |   | 162,731     |   |
|                                      |   |                                   |        |                              |   |                                   |   |                              |        |   |   |        |   |
|                                      |   |                                   |        |                              |   |                                   |   |                              |        |   |   |        |   |
| Total Financial Liabilities               |   | $                                      | 202,604,706 |                              | $      | 202,411,864                            |   | $                                 | 188,272,180 |   | $      | 188,166,560 |   |
|                                      |   |                                   |        |                              |   |                                   |   |                              |        |   |   |        |   |

ASC 825 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

|   |                                                                                                                                                                                                                                                                |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.                                                                                                     |
|   |                                                                                                                                                                                                                                                                |
|   | Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
|   |                                                                                                                                                                                                                                                                |
|   | Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing and asset or liability.                                                                        |

The fair value of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used to in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

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Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

|                                |   |                                                |        |                                                                              |   |                                                             |   |                                                         |        |   |   |    |   |
|-------------------------------------|--------|-----------------------------------------------------|-------------|-----------------------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|--------------------------------------------------------------|-------------|--------|--------|---------|--------|
|                                |   | Fair Value Measurements at September 30, 2009 Using |        |
|                                |   |                                                |        |
|                                |   | September 30, 2009                                  |        | Quoted Prices in Active Markets for Identical Assets                    (Level 1) |   | Significant Other Observable Inputs                    (Level 2) |   | Significant Unobservable Inputs                    (Level 3) |        |
|                                |   |                                                |        |                                                                              |   |                                                             |   |                                                         |        |
| Assets:                             |   |                                                |        |                                                                              |   |                                                             |   |                                                         |        |   |   |    |   |
| FNMA MBS - Residential              |   | $                                                   | 5,394,183   |                                                                              | $      | —                                                          |   | $                                                            | 5,394,183   |   | $      | — |   |
|                                |   |                                                |        |                                                                              |   |                                                             |   |                                                         |        |   |   |    |   |
| GNMA MBS - Residential              |   |                                                | 1,402,771   |                                                                              |   | —                                                          |   |                                                         | 1,402,771   |   |   | — |   |
| Whole Loan MBS - Residential        |   |                                                | 2,146,251   |                                                                              |   | —                                                          |   |                                                         | 2,146,251   |   |   | — |   |
| Collateralized mortgage obligations |   |                                                | 107,599,808 |                                                                              |   | —                                                          |   |                                                         | 107,599,808 |   |   | — |   |
|                                |   |                                                |        |                                                                              |   |                                                             |   |                                                         |        |   |   |    |   |
| Total Available for sale Securities |   | $                                                   | 116,543,013 |                                                                              | $      | —                                                          |   | $                                                            | 116,543,013 |   | $      | — |   |
|                                |   |                                                |        |                                                                              |   |                                                             |   |                                                         |        |   |   |    |   |

|                                |   |                                               |        |                                                                              |   |                                                             |   |                                                         |        |   |   |    |   |
|-------------------------------------|--------|----------------------------------------------------|-------------|-----------------------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|--------------------------------------------------------------|-------------|--------|--------|---------|--------|
|                                |   | Fair Value Measurements at December 31, 2008 Using |        |
|                                |   |                                               |        |
|                                |   | December 31, 2008                                  |        | Quoted Prices in Active Markets for Identical Assets                    (Level 1) |   | Significant Other Observable Inputs                    (Level 2) |   | Significant Unobservable Inputs                    (Level 3) |        |
|                                |   |                                               |        |                                                                              |   |                                                             |   |                                                         |        |
| Assets:                             |   |                                               |        |                                                                              |   |                                                             |   |                                                         |        |   |   |    |   |
| FNMA MBS - Residential              |   | $                                                  | 6,690,594   |                                                                              | $      | —                                                          |   | $                                                            | 6,690,594   |   | $      | — |   |
| FHLMC MBS - Residential             |   |                                               | 37,642      |                                                                              |   | —                                                          |   |                                                         | 37,642      |   |   | — |   |
| GNMA MBS - Residential              |   |                                               | 1,632,790   |                                                                              |   | —                                                          |   |                                                         | 1,632,790   |   |   | — |   |
| Whole Loan MBS - Residential        |   |                                               | 2,559,037   |                                                                              |   | —                                                          |   |                                                         | 2,559,037   |   |   | — |   |
| Collateralized mortgage obligations |   |                                               | 109,368,525 |                                                                              |   | —                                                          |   |                                                         | 109,368,525 |   |   | — |   |
|                                |   |                                               |        |                                                                              |   |                                                             |   |                                                         |        |   |   |    |   |
| Total Available for sale Securities |   | $                                                  | 120,288,588 |                                                                              | $      | —                                                          |   | $                                                            | 120,288,588 |   | $      | — |   |
|                                |   |                                               |        |                                                                              |   |                                                             |   |                                                         |        |   |   |    |   |

18

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Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on internally customized discounting criteria.

|           |   |                                                |   |                                                                              |   |                                                             |   |                                                         |    |   |   |   |   |
|----------------|--------|-----------------------------------------------------|--------|-----------------------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|--------------------------------------------------------------|---------|--------|--------|--------|--------|
|           |   | Fair Value Measurements at September 30, 2009 Using |   |
|           |   |                                                |   |
|           |   | September 30, 2009                                  |   | Quoted Prices in Active Markets for Identical Assets                    (Level 1) |   | Significant Other Observable Inputs                    (Level 2) |   | Significant Unobservable Inputs                    (Level 3) |    |
|           |   |                                                |   |                                                                              |   |                                                             |   |                                                         |    |
| Assets:        |   |                                                |   |                                                                              |   |                                                             |   |                                                         |    |   |   |   |   |
| Impaired loans |   | $                                                   | 50,000 |                                                                              |   | —                                                          |   |                                                         | — |   | $      | 50,000 |   |

|           |   |                                               |   |                                                                              |   |                                                             |   |                                                         |    |   |   |   |   |
|----------------|--------|----------------------------------------------------|--------|-----------------------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|--------------------------------------------------------------|---------|--------|--------|--------|--------|
|           |   | Fair Value Measurements at December 31, 2008 Using |   |
|           |   |                                               |   |
|           |   | December 31, 2008                                  |   | Quoted Prices in Active Markets for Identical Assets                    (Level 1) |   | Significant Other Observable Inputs                    (Level 2) |   | Significant Unobservable Inputs                    (Level 3) |    |
|           |   |                                               |   |                                                                              |   |                                                             |   |                                                         |    |
| Assets:        |   |                                               |   |                                                                              |   |                                                             |   |                                                         |    |   |   |   |   |
| Impaired loans |   | $                                                  | 85,000 |                                                                              |   | —                                                          |   |                                                         | — |   | $      | 85,000 |   |

          As of September 30, 2009, we had one impaired loan with a specific reserve that was collateral dependent. Collateral dependent impaired loans, which are measured for impairment using the fair value of the collateral, had a carrying amount of $50,000, with a valuation allowance of $50,000, causing an additional provision for loan losses of $20,000 for the period.

          As of December 31, 2008, we had one impaired loan with a specific reserve that was collateral dependent. Collateral dependent impaired loans, which are measured for impairment using the fair value of the collateral, had a carrying amount of $85,000, with a valuation allowance of $60,241, causing an additional provision for loan losses of $40,000 for the period.

          Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). 

19

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**Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**Financial Condition at September 30, 2009**

          Total assets were $230,023,012 at September 30, 2009, an increase of $17,365,284 or, 8.2%, from December 31, 2008. The increase resulted from the investment of funds available to us as the result of an increase in deposits. The deposit increase was caused generally by our efforts to grow our franchise and specifically by the deposit increases at our branch offices. We invested these funds primarily in cash and        cash equivalents, and in loans. The net increase in assets can be summarized as follows:

|   |     |                                                                   |
|--------|----------|------------------------------------------------------------------------|
|   | · | A $15,797,296 net increase in cash and cash equivalents and            |
|   | · | A $6,522,739 net increase in net loans receivable, partially offset by |
|   | · | A $3,745,575 net decrease in investment securities available for sale. |

          In addition to these changes in major asset categories, we also experienced changes in other asset categories due to normal fluctuations in operations.

          Our deposits (including escrow deposits) were $202,567,192 at September 30, 2009, an increase of $14,457,743 or 7.7%, from December 31, 2008. The increase in deposits resulted from increases of $14,403,236 in NOW accounts, $6,545,846 in non-interest demand deposits, $1,667,090 in savings accounts and $3,997,022 in money market accounts, partially offset by a decrease of $12,155,451 in time deposits. The        decrease in time deposits, and the primary increase in NOW accounts were primarily due to the conversion by the depositor of a $10 million municipal time deposit into a NOW account. This deposit had been made as part of the state’s Banking Development District program.

          Total stockholders’ equity was $25,332,763 at September 30, 2009, an increase of $2,128,996 from December 31, 2008. The increase reflected (i) net income of $1,306,817 for the nine months ended September 30, 2009, (ii) an increase of additional paid in capital of $118,624 due to the exercise by officers and directors of options to purchase 21,250 shares of common stock, (iii) an increase in the net        unrealized gain on securities available for sale of $1,420,308 reflecting the positive effect of low market interest rates on the fair value of our securities portfolio and (iv) a reduction of $126,809 in Unearned ESOP shares reflecting the gradual payment of the loan we made to fund the ESOP’s purchase of our stock. These increases were partially offset by $323,438 of dividends paid, representing the three $0.06 per share quarterly cash dividends in 2009, and $462,972        representing the cost of 53,220 shares of common stock we repurchased in the first quarter of 2009 under our Company’s previously announced stock repurchase plans.

          The unrealized gain on securities available for sale is excluded from the calculation of regulatory capital. Management does not anticipate selling securities in this portfolio, but changes in market interest rates or in the demand for funds may change management’s plans with respect to the securities portfolio. If there is a material increase in interest rates, the market value of the available for sale        portfolio may decline. Management believes that the principal and interest payments on this portfolio, combined with the existing liquidity, will be sufficient to fund loan growth and potential deposit outflow. 

          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.

20

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**The Current Economic Turmoil**

          The economy in the United States, including the economy in Staten Island, was and may still be in a recession. There is substantial stress on many financial institutions and financial products. The federal government has intervened by making hundreds of billions of dollars in capital contributions to the banking industry. We draw a substantial portion of our customer base from local businesses, especially        those in the building trades and related industries. Our customers are already being adversely affected by the economic downturn, and if adverse conditions in the local economy continue, it will become more difficult for us to conduct prudent and profitable business in our community.

          Making permanent residential mortgage loans is not a material part of our business, and our investments in mortgage-backed securities and collateralized mortgage obligations have been made with a view towards avoiding the types of securities that are backed by low quality mortgage-related assets. However, one of the primary focuses of our local business is receiving deposits from, and making loans to,        businesses involved in the construction and building trades industry on Staten Island. Construction loans represented a significant component of our loan portfolio, reaching 39.8% of total loans at year end 2005. As we monitored the economy and the strength of the local construction industry, we elected to reduce our portfolio of construction loans. By September 30, 2009, the percentage had declined to 16.8%. However, developers and builders provide not only a source of loans, but they        also provide us with deposits and other business. If the weakness in the economy continues or worsens, then that could have a substantial adverse effect on our customers and potential customers, making it more difficult for us to find satisfactory loan opportunities and low-cost deposits. This could compel us to invest in lower yielding securities instead of higher-yielding loans and could also reduce low cost funding sources such as checking accounts and require that we replace them        with higher cost deposits such as time deposits. Either or both of those shifts could reduce our net income.

**Changes in FDIC Assessment Rates**

          In the past year, there have been many failures and near-failures among financial institutions. The number of FDIC-insured banks that have failed has increased, and the FDIC insurance fund reserve ratio, representing the ratio of the fund to the level of insured deposits, has declined due to losses caused by bank failures. As a result, the FDIC has increased its deposit insurance premiums on remaining        institutions, including well-capitalized institutions like Victory State Bank, in order to replenish the insurance fund. If bank failures continue to occur, and more so if the level of failures increases, the FDIC insurance fund will further decline, and the FDIC is likely to continue to impose higher premiums on healthy banks. Thus, despite the prudent steps we may take to avoid the mistakes made by other banks, our costs of operations may increase as a result of those mistakes by        others.

          Our FDIC insurance premium was $122,869 in 2008. In 2009, the FDIC announced an increase in deposit insurance premiums so institutions like our Bank, even though we are in the lowest regulatory risk category, will be subject to an assessment rate between seven (7) and twelve (12) basis points per annum, which is higher than the assessment rate in 2008 of from five (5) to seven (7) basis points. Additionally,        the FDIC imposed a 5 basis point special assessment, based on June 30, 2009 total assets net of Tier 1 capital, that we paid on September 30, 2009. The special assessment amounted to $101,950 and we accrued it prior to the quarter in which it was paid because it was based upon assets at June 30. The increase in the assessment rate and the special assessment have significantly increased our deposit insurance expense in 2009. The FDIC has also proposed that FDIC-insured banks prepay, in a        lump sum to be paid by the end of 2009, their entire projected FDIC premium assessment through the end of 2012. The prepaid amount would be expensed for financial reporting purposes gradually each quarter during the prepayment period. If our actual FDIC assessment during that period is less than the amount we prepay, the excess prepayment will be applied to future premiums we owe, and any excess prepayment remaining on December 31, 2104 would be refunded to us. Although the prepayment        should have no direct income statement effect when made, it will reduce the funds we have available for investment in interest-earning assets because the FDIC will not pay interest on the prepayment.

21

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**Results of Operations for the Three Months Ended September 30, 2009 and September 30, 2008**

          Our results of operations depend primarily on net interest income, which is the difference between the income we earn on our loan and investment portfolios and our cost of funds, consisting primarily of interest we pay on customer deposits. Our operating expenses principally consist of employee compensation and benefits, occupancy expenses, professional fees, advertising and marketing expenses and other        general and administrative expenses. Our results of operations are significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities.

          *General*. We had net income of $474,469 for the quarter ended September 30, 2009, compared to net income of $542,704 for the comparable quarter in 2008. The principal categories which make up the 2009 net income are: 

|   |     |                                              |
|--------|----------|---------------------------------------------------|
|   | · | Interest income of $2,623,941                     |
|   | · | Reduced by interest expense of $314,989           |
|   | · | Reduced by a provision for loan losses of $75,000 |
|   | · | Increased by non-interest income of $597,084      |
|   | · | Reduced by non-interest expense of $1,949,814     |
|   | · | Reduced by income tax expense of $406,753         |

          We discuss each of these categories individually and the reasons for the differences between the quarters ended September 30, 2009 and 2008 in the following paragraphs. In general, the principal reason for the decrease in net income when comparing the third quarter of 2009 with the same quarter in 2008 was an increase in the provision for loan losses and an increase in FDIC and NYSBD assessments, partially        offset by the positive effect on net interest income of an increase in average assets.. 

*          Interest Income.* Interest income was $2,623,941 for the quarter ended September 30, 2009, compared to $2,798,701 for the quarter ended September 30, 2008, a decrease of $174,760, or 6.2%. Interest income on loans increased by $84,241 in the third quarter of 2009. We generated a $7.0 million increase in the average loan balances for the third quarter of 2009 compared to the third quarter of 2008 as        management sought to deploy funds in loans, our highest yielding major asset category. This volume increase was the principal reason for the increase in interest income on loans. However, the volume increase was partially offset by a 13 basis point decrease in loan yield as new loans were originated at slightly lower rates than the yields we were earning on existing loans being repaid. The decline in yields on loans was less than the decline in yields on overnight investments because we        have introduced interest rate floors on most of our loans that limit the decrease in yield when market interest rates are declining. In addition, interest income on loans during the third quarter of 2009 included $28,110 of interest paid in 2009 on a loan that was classified as non-accrual in 2008 but restored to performing and accrual status in 2009, compared to $68,070 of such prior year interest that we recognized in the 2008 quarter.

          The increase in interest income on loans was partially offset by a $37,115 decline in interest income on cash and due from banks (other interest earning assets), which resulted from a 169 basis point decrease in the yield on those assets (principally overnight investments), corresponding to a 175 basis point decline in the average target federal funds rate between the two periods. Beginning October 9, 2008,        average other interest-earning assets included the deposit balances held at the Federal Reserve Bank of New York (“FRBNY”) because the FRBNY started paying interest on deposit balances. Previously, the deposits held at the FRBNY were categorized as non-interest earning assets. This change represented more than one-quarter of the increase in average other interest earning assets and almost all of the corresponding decrease in average non-interest earning assets.

22

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          We also experienced a 49 basis point decrease in the average yield on our investment securities portfolio, from 4.75% to 4.26%, because declining market rates caused us to purchase new investment securities at lower market rates than the yields on the principal paydowns we received. The average balance of our investment portfolio decreased by $6,704,305, or 5.4%, between the periods. The decrease in volume and        the decrease in yield resulted in an overall $221,886 decrease in interest income from investment securities. The investment securities portfolio represented 74.5% of average non-loan interest earning assets in the 2009 period compared to 92.0% in the 2008 period. We elected to limit our purchases of new investment securities because the yields available were low and we did not want to lock in those low rates for the estimated terms to maturity or repricing that applied.

*          Interest Expense.* Interest expense was $314,989 for the quarter ended September 30, 2009, compared to $517,528 for the quarter ended September 30, 2008, a decrease of 39.1%. The decrease was primarily the result of a decrease in the rates we paid on deposits, principally on time deposits (a 78 basis point decrease) and money market accounts (a 43 basis point decrease), combined with the reduction in        interest expense caused by our repayment of the subordinated debt in August 2008. Our average cost of funds, excluding the effect of interest-free demand deposits, decreased to 0.91% from 1.68% between the periods, due to the decline in market interest rates. We also note, however, that our interest rate spread and net interest margin may come under pressure in future periods if market interest rates rise. The yields on some of our loans may not adjust as rapidly as our cost of funds        because those yields will not begin to adjust upwards until the prime rate rises sufficiently so that the yields exceed the interest rate floors.

          *Net Interest Income Before Provision for Loan Losses.* Net interest income before the provision for loan losses was $2,308,952 for the quarter ended September 30, 2009, an increase of $27,779, or 1.2% over the $2,281,173 in the comparable 2008 quarter. The increase in net interest income before the provision for loan losses was primarily due to an increase in the volume of interest earning assets as the        result of management’s efforts to grow the size of our bank and reduced interest cost of deposits and subordinated debt. Our interest rate spread decreased to 3.62% in the third quarter of 2009 from 3.84% in the third quarter of 2008. Our net interest margin decreased to 3.98% in the third quarter of 2009 from 4.48% in the third quarter of 2008. The interest spread and margin decreased because the proceeds from payments on investment securities were reinvested at lower rates and        overnight investment yields declined, both because of the dramatic decline in market interest rates. The margin is higher than the spread because it takes into account the effect of interest free demand deposits and capital. 

*          Provision for Loan Losses.* We took a provision for loan losses of $75,000 for the quarter ended September 30, 2009 compared to a provision for loan losses of $40,000 for the quarter ended September 30, 2008. The $35,000 increase in the provision was due to an increase in loan delinquencies and continuing deterioration of the real estate market and local economy. We are aggressively collecting        charged-off loans in an effort to recover amounts charged off. The provision for loan losses in any period depends upon the amount necessary to bring the allowance for loan losses to the level management believes is appropriate, after taking into account charge offs and recoveries. Our allowance for loan losses is based on management’s evaluation of the risks inherent in our loan portfolio and the general economy. Management periodically evaluates both broad categories of        performing loans and problem loans individually to assess the appropriate level of the allowance.

          Although management uses available information to assess the appropriateness of the allowance on a quarterly basis in consultation with outside advisors and the board of directors, changes in national or local economic conditions, the circumstances of individual borrowers, or other factors, may change, increasing the level of problem loans and requiring an increase in the level of the allowance. The allowance        for loan losses represented 1.41% of total loans at September 30, 2009. 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 $597,084 for the quarter ended September 30, 2009, compared to $603,965 during the same period last year. The $6,881, or 1.1%, decrease in non-interest income was a direct result of normal fluctuations in fee based customer transactions such as non-sufficient funds charges, the purchase of money orders, late charges on loans and similar retail banking        transactions.

23

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*          Non-interest Expense.* Non-interest expense was $1,949,814 for the quarter ended September 30, 2009, compared to $1,835,730 for the quarter ended September 30, 2008, an increase of $114,084. The shifts in the individual categories were:

|   |     |                                                                                                                                                                                                         |
|--------|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | $57,500 increase in FDIC and NYSBD assessments due to an increase in the FDIC assessment rate to help replenish the FDIC insurance fund which has been substantially depleted by many current bank failures; |
|   | · | $53,834 increase in salaries and benefits due to additional staff and higher related benefit costs;                                                                                                          |
|   | · | $15,100 increase in professional fees primarily due to the costs of initial compliance with Section 404 of the Sarbanes-Oxley Act; partially offset by a                                                |
|   | · | $20,775 decrease in legal expense due to reduced collection costs due to the previous disposition of higher costing collections.                                                                             |

*          Income Tax Expense.* Income tax expense was $406,753 for the quarter ended September 30, 2009, compared to income tax expense of $466,704 for the quarter ended September 30, 2008. The decrease in income tax expense was due to the $128,186 decrease in income before income taxes in the 2009 quarter. Our effective tax rate for the quarter ended September 30, 2009 was 46.2%, the same as for the quarter ended        September 30, 2008.

**Results of Operations for the Nine Months Ended September 30, 2009 and September 30, 2008**

          Our results of operations depend primarily on net interest income, which is the difference between the income we earn on our loan and investment portfolios and our cost of funds, consisting primarily of interest we pay on customer deposits. Our operating expenses principally consist of employee compensation and benefits, occupancy expenses, professional fees, advertising and marketing expenses and other        general and administrative expenses. Our results of operations are significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities.

          *General*. We had net income of $1,306,817 for the nine months ended September 30, 2009, compared to net income of $1,330,924 for the comparable period in 2008. The principal categories which make up the 2009 net income are: 

|   |     |                                               |
|--------|----------|----------------------------------------------------|
|   | · | Interest income of $7,985,556                      |
|   | · | Reduced by interest expense of $1,056,855          |
|   | · | Reduced by a provision for loan losses of $450,000 |
|   | · | Increased by non-interest income of $1,825,336     |
|   | · | Reduced by non-interest expense of $5,874,950      |
|   | · | Reduced by income tax expense of $1,120,270        |

          We discuss each of these categories individually and the reasons for the differences between the nine months ended September 30, 2009 and 2008 in the following paragraphs. In general, the principal reason for the decrease in net income when comparing the first nine months of 2009 with the same period in 2008 was an increase in provision for loan losses and an increase in FDIC and NYSBD assessments which was        almost entirely offset by an improvement in our interest rate spread and an increase in average assets available for investment.

*          Interest Income.* Interest income was $7,985,556 for the nine months ended September 30, 2009, compared to $8,208,613 for the nine months ended September 30, 2008, a decrease of $223,057, or 2.7%. The principal reason for the decline was a decline in market interest rates, which was the primary cause of $203,526 decline in interest income from other interest earning assets (principally overnight        investments) and a $340,259 decline in interest income on investment securities. On the positive side, interest income on loans increased by $320,728.

24

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          The average yield on other interest earning assets (principally overnight investments) declined 221 basis points from 2.31% in the first nine months of 2008 to 0.10% in the first nine months of 2009 as the target federal funds rate declined from 4.25% at the beginning of 2008 to its current level of a range from 0.00% to 0.25%. Beginning October 9, 2008, average other interest-earning assets included the        deposit balances held at the Federal Reserve Bank of New York (“FRBNY”) because the FRBNY started paying interest on deposit balances. Previously, the deposits held at the FRBNY were categorized as non-interest earning assets. This change represented more than half of the increase in average other interest earning assets and more than half of the corresponding decrease in average non-interest earning assets. 

          We also experienced a 34 basis point decrease in the average yield on our investment securities portfolio, from 4.75% to 4.41%, due to the purchase of new investment securities at lower market rates than the yields on the principal paydowns we received. The average balance of our investment portfolio decreased by $967,770, or 0.80%, between the periods. The investment securities portfolio represented 80.9% of        average non-loan interest earning assets in the 2009 period compared to 90.3% in the 2008 period as we deliberately limited our investment of available funds in investment securities due to the low yields available to us in the first nine months of 2009 and our desire to avoid locking in those low yields for long periods.

          There were three principal causes of the $320,728 increase in interest on loans. First, we received $164,708 of interest due in 2008 but not paid or accrued on various loans. That interest was paid in 2009 and included in 2009 interest income. Second, we experienced a $6,592,714 increase in the average balance of loans as the result of management’s efforts to increase the volume of loans, our highest        yielding major asset category. Third, the interest rate floors on many of our prime-based loans buffered the effect of the declining prime rate so that our average yield on loans decline only 15 basis points, from 7.77% to 7.62%.

*          Interest Expense.* Interest expense was $1,058,855 for the nine months ended September 30, 2009, compared to $1,866,141 for the nine months ended September 30, 2008, a decrease of $807,286 or 43.3%. The decrease was primarily the result of a decrease in the rates we paid on deposits, principally on time deposits (a 101 basis point decrease) and money market accounts (a 51 basis point decrease), due to a        decline in market interest rates. In addition our repayment of the subordinated debt in August 2008, which had previously had an interest cost of 6.91%, also reduced interest expense. As a result, our average cost of funds, excluding the effect of interest-free demand deposits, decreased to 1.06% from 2.03% between the periods due to the decline in market interest rates and the repayment of the subordinated debt.

          *Net Interest Income Before Provision for Loan Losses.* Net interest income before the provision for loan losses was $6,926,701 for the nine months ended September 30, 2009, an increase of $584,229, or 9.2% over the $6,342,472 in the comparable 2008 period. The increase was primarily due to the combined effect of an increase in average assets, as management sought to increase assets available for        investment, and an increase in spread. Our interest rate spread increased to 3.82% in the first nine months of 2009 from 3.53% in the same period of 2008. We were able to increase the spread due principally to the combined effect of the interest rate floors on most of our loans; our purchases of investment securities during 2008 prior to the most recent series of market rate declines that began in the fourth quarter of 2008; and the repayment of the relatively high cost subordinated        debt. Our net interest margin decreased to 4.23% in the first nine months of 2009 from 4.29% in the same period of 2008. The margin is higher than the spread because it takes into account the effect of interest free demand deposits and capital, but the improvement in margin is less than the improvement in spread because those interest-free funding sources are less valuable during periods of lower market interest rates. 

*          Provision for Loan Losses.* We took a provision for loan losses of $450,000 for the nine months ended September 30, 2009 compared to a provision for loan losses of $125,000 for the nine months ended September 30, 2008. The $325,000 increase in the provision was due to a higher level of charge-offs, $467,336 for the first nine months of 2009 as compared to $301,731 in the same period in 2008, and the        uncertainty in the condition of the real estate market and local economy. We are aggressively collecting these charged-off loans in an effort to recover the amounts charged off. The provision for loan losses in any period depends upon the amount necessary to bring the allowance for loan losses to the level management believes is appropriate, after taking into account charge offs and recoveries. Our allowance for loan losses is based on management’s evaluation of the risks inherent        in our loan portfolio and the general economy. Management periodically evaluates both broad categories of performing loans and problem loans individually to assess the appropriate level of the allowance.

25

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          Although management uses available information to assess the appropriateness of the allowance on a quarterly basis in consultation with outside advisors and the board of directors, changes in national or local economic conditions, the circumstances of individual borrowers, or other factors, may change, increasing the level of problem loans and requiring an increase in the level of the allowance. The allowance        for loan losses represented 1.41% of total loans at September 30, 2009. 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 $1,825,336 for the nine months ended September 30, 2009, compared to $1,794,101 during the same period last year. The $31,235, or 1.7%, increase in non-interest income was a direct result of normal fluctuations in retail banking transactions and the fees derived from them, such as insufficient funds fees, an increase in net rental income because the Bank was        able to sublease a portion of a leased property that was previously vacant; and an increase in loan fees due to the higher level of originations in 2009. Other non-interest income declined because we lost a licensed check cashing company as a customer, which had previously generated substantial transaction fees, in the first quarter of 2008.

*          Non-interest Expense.* Non-interest expense was $5,874,950 for the nine months ended September 30, 2009, compared to $5,536,057 for the nine months ended September 30, 2008, an increase of $338,893 or 6.1%. The shifts in the individual categories were:

|   |     |                                                                                                                                                                                                                                                   |
|--------|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | $141,500 increase in FDIC and NYSBD assessments due to an increase in the FDIC assessment rate and the imposition of a special assessment to help replenish the FDIC insurance fund which has be substantially depleted by many current bank failures; |
|   | · | $98,891 increase in salaries and benefits due to additional staff and higher related benefit costs;                                                                                                                                                    |
|   | · | $32,399 increase in occupancy expenses due to higher building repairs and higher depreciation due to the acquisition of new equipment;                                                                                                                 |
|   | · | $44,100 increase in professional fees primarily due the costs of preparing for initial compliance with Section 404 of the Sarbanes-Oxley Act; and                                                                                                      |
|   | · | $31,666 increase in computer expenses primarily due to increased depreciation associated with the purchase and upgrade of software and fees associated with our disaster recovery program.                                                             |

          *Income Tax Expense.* Income tax expense was $1,120,270 for the nine months ended September 30, 2009, compared to income tax expense of $1,144,592 for the same period ended September 30, 2008. The decrease in income tax expense was due to the $48,429 decrease in income before income taxes in the 2009 period. Our effective tax rate for the first nine months ended September 30, 2009 was 46.2%, the same as        for the same period ended September 30, 2008.

26

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**VSB Bancorp, Inc.        Consolidated Average Balance Sheets        (unaudited)**

|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
|----------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|-------------|-----------------------------------------------------------------------------|--------|----------------------------------------------------------------------------|--------|----------------------------------------------------------------------------|---------|----------|--------|--------------------------------|--------|------------------------------------|-----------|----------|--------|--------------------------------|--------|------------------------------------|-------------|----------|--------|--------------------------------|--------|--------|---------|--------|--------|-------------|--------|--------|-----------|--------|--------|--------|--------|
|                                                                 |   | Three                    Months Ended                    September 30, 2009 |        | Three                    Months Ended                    September 30, 2008 |   | Nine                    Months Ended                    September 30, 2009 |   | Nine                    Months Ended                    September 30, 2008 |    |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |
|                                                                 |   | Average                    Balance                                          |        | Interest                                                                    |   | Yield/                    Cost                                             |   | Average                    Balance                                         |    | Interest |   | Yield/                    Cost |   | Average                    Balance |      | Interest |   | Yield/                    Cost |   | Average                    Balance |        | Interest |   | Yield/                    Cost |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
| **Assets:**                                                          |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
| Interest-earning assets:                                             |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
| Loans receivable                                                     |   | $                                                                           | 71,009,578  |                                                                        | $      | 1,360,529                                                                  |   |                                                                       | 7.48    | %        | $      | 64,032,229                     |   | $                                  | 1,276,288 |     |   | 7.61                           | %      | $                                  | 69,663,430  |     | $      | 4,014,424                      |   |   | 7.62    | %      | $      | 63,070,716  |   | $      | 3,693,696 |   |   | 7.77   | %      |
| Investment securities, afs                                           |   |                                                                        | 116,730,348 |                                                                        |   | 1,252,213                                                                  |   |                                                                       | 4.26    |     |   | 123,434,653                    |   |                               | 1,474,099 |     |   | 4.75                           |   |                               | 119,650,066 |     |   | 3,949,499                      |   |   | 4.41    |   |   | 120,617,836 |   |   | 4,289,758 |   |   | 4.75   |   |
| Other interest-earning assets                                        |   |                                                                        | 40,052,255  |                                                                        |   | 11,199                                                                     |   |                                                                       | 0.11    |     |   | 10,683,945                     |   |                               | 48,314    |     |   | 1.80                           |   |                               | 28,291,238  |     |   | 21,633                         |   |   | 0.10    |   |   | 13,025,631  |   |   | 225,159   |   |   | 2.31   |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
| Total interest-earning assets                                        |   |                                                                        | 227,792,181 |                                                                        |   | 2,623,941                                                                  |   |                                                                       | 4.53    |     |   | 198,150,827                    |   |                               | 2,798,701 |     |   | 5.52                           |   |                               | 217,604,734 |     |   | 7,985,556                      |   |   | 4.88    |   |   | 196,714,183 |   |   | 8,208,613 |   |   | 5.56   |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
| Non-interest earning assets                                          |   |                                                                        | 4,451,999   |                                                                        |   |                                                                       |   |                                                                       |    |     |   | 12,807,546                     |   |                               |      |     |   |                           |   |                               | 4,968,315   |     |   |                           |   |   |    |   |   | 12,983,052  |   |   |      |   |   |   |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
| Total assets                                                         |   | $                                                                           | 232,244,180 |                                                                        |   |                                                                       |   |                                                                       |    |     | $      | 210,958,373                    |   |                               |      |     |   |                           |   | $                                  | 222,573,049 |     |   |                           |   |   |    |   | $      | 209,697,235 |   |   |      |   |   |   |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
| **Liabilities and equity:**                                          |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
| Interest-bearing liabilities:                                        |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
| Savings accounts                                                     |   | $                                                                           | 14,382,492  |                                                                        |   | 12,186                                                                     |   |                                                                       | 0.34    |     | $      | 12,625,903                     |   |                               | 19,754    |     |   | 0.62                           |   | $                                  | 13,452,968  |     |   | 38,507                         |   |   | 0.38    |   | $      | 11,813,603  |   |   | 56,927    |   |   | 0.64   |   |
| Time accounts                                                        |   |                                                                        | 63,615,847  |                                                                        |   | 202,074                                                                    |   |                                                                       | 1.26    |     |   | 71,347,390                     |   |                               | 365,462   |     |   | 2.04                           |   |                               | 67,189,776  |     |   | 733,391                        |   |   | 1.46    |   |   | 68,528,843  |   |   | 1,265,289 |   |   | 2.47   |   |
| Money market accounts                                                |   |                                                                        | 27,410,656  |                                                                        |   | 63,044                                                                     |   |                                                                       | 0.91    |     |   | 19,020,866                     |   |                               | 64,094    |     |   | 1.34                           |   |                               | 25,002,496  |     |   | 186,499                        |   |   | 1.00    |   |   | 20,600,694  |   |   | 232,695   |   |   | 1.51   |   |
| Now accounts                                                         |   |                                                                        | 32,539,332  |                                                                        |   | 37,685                                                                     |   |                                                                       | 0.46    |     |   | 17,695,783                     |   |                               | 31,612    |     |   | 0.71                           |   |                               | 27,586,887  |     |   | 100,458                        |   |   | 0.49    |   |   | 17,984,043  |   |   | 96,545    |   |   | 0.72   |   |
| Subordinated debt                                                    |   |                                                                        | —     |                                                                        |   | —                                                                    |   |                                                                       | — |     |   | 2,129,239                      |   |                               | 36,606    |     |   | 6.91                           |   |                               | —     |     |   | —                        |   |   | — |   |   | 4,139,051   |   |   | 214,685   |   |   | 6.91   |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
| Total interest-bearing liabilities                                   |   |                                                                        | 137,948,327 |                                                                        |   | 314,989                                                                    |   |                                                                       | 0.91    |     |   | 122,819,181                    |   |                               | 517,528   |     |   | 1.68                           |   |                               | 133,232,127 |     |   | 1,058,855                      |   |   | 1.06    |   |   | 123,066,234 |   |   | 1,866,141 |   |   | 2.03   |   |
| Checking accounts                                                    |   |                                                                        | 67,722,359  |                                                                        |   |                                                                       |   |                                                                       |    |     |   | 65,085,696                     |   |                               |      |     |   |                           |   |                               | 63,584,444  |     |   |                           |   |   |    |   |   | 63,638,445  |   |   |      |   |   |   |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
| Total deposits and subordinated debt                                 |   |                                                                        | 205,670,686 |                                                                        |   |                                                                       |   |                                                                       |    |     |   | 187,904,877                    |   |                               |      |     |   |                           |   |                               | 196,816,571 |     |   |                           |   |   |    |   |   | 186,704,679 |   |   |      |   |   |   |   |
| Other liabilities                                                    |   |                                                                        | 1,793,925   |                                                                        |   |                                                                       |   |                                                                       |    |     |   | 1,254,024                      |   |                               |      |     |   |                           |   |                               | 1,579,111   |     |   |                           |   |   |    |   |   | 1,192,190   |   |   |      |   |   |   |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
| Total liabilities                                                    |   |                                                                        | 207,464,611 |                                                                        |   |                                                                       |   |                                                                       |    |     |   | 189,158,901                    |   |                               |      |     |   |                           |   |                               | 198,395,682 |     |   |                           |   |   |    |   |   | 187,896,869 |   |   |      |   |   |   |   |
| Equity                                                               |   |                                                                        | 24,779,569  |                                                                        |   |                                                                       |   |                                                                       |    |     |   | 21,799,472                     |   |                               |      |     |   |                           |   |                               | 24,177,367  |     |   |                           |   |   |    |   |   | 21,800,366  |   |   |      |   |   |   |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
| Total liabilities and equity                                         |   | $                                                                           | 232,244,180 |                                                                        |   |                                                                       |   |                                                                       |    |     | $      | 210,958,373                    |   |                               |      |     |   |                           |   | $                                  | 222,573,049 |     |   |                           |   |   |    |   | $      | 209,697,235 |   |   |      |   |   |   |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
| **Net interest income/net interest rate spread**                     |   |                                                                        |        |                                                                        | $      | 2,308,952                                                                  |   |                                                                       | 3.62    | %        |   |                           |   | $                                  | 2,281,173 |     |   | 3.84                           | %      |                               |        |     | $      | 6,926,701                      |   |   | 3.82    | %      |   |        |   | $      | 6,342,472 |   |   | 3.53   | %      |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
| **Net interest earning assets/net interest margin**                  |   | $                                                                           | 89,843,854  |                                                                        |   |                                                                       |   |                                                                       | 3.98    | %        | $      | 75,331,646                     |   |                               |      |     |   | 4.48                           | %      | $                                  | 84,372,607  |     |   |                           |   |   | 4.23    | %      | $      | 73,647,949  |   |   |      |   |   | 4.29   | %      |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
| **Ratio of interest-earning assets to interest-bearing liabilities** |   |                                                                        | 1.65        | x                                                                           |   |                                                                       |   |                                                                       |    |     |   | 1.61                           | x      |                               |      |     |   |                           |   |                               | 1.63        | x        |   |                           |   |   |    |   |   | 1.60        | x      |   |      |   |   |   |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
| Return on Average Assets (1)                                    |   |                                                                        | 0.79        | %                                                                           |   |                                                                       |   |                                                                       |    |     |   | 0.97                           | %      |                               |      |     |   |                           |   |                               | 0.77        | %        |   |                           |   |   |    |   |   | 0.84        | %      |   |      |   |   |   |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
| Return on Average Equity (1)                                         |   |                                                                        | 7.42        | %                                                                           |   |                                                                       |   |                                                                       |    |     |   | 9.40                           | %      |                               |      |     |   |                           |   |                               | 7.10        | %        |   |                           |   |   |    |   |   | 8.07        | %      |   |      |   |   |   |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |
| Tangible Equity to Total Assets                                      |   |                                                                        | 11.01       | %                                                                           |   |                                                                       |   |                                                                       |    |     |   | 10.72                          | %      |                               |      |     |   |                           |   |                               | 11.01       | %        |   |                           |   |   |    |   |   | 10.72       | %      |   |      |   |   |   |   |
|                                                                 |   |                                                                        |        |                                                                        |   |                                                                       |   |                                                                       |    |     |   |                           |   |                               |      |     |   |                           |   |                               |        |     |   |                           |   |   |    |   |   |        |   |   |      |   |   |   |   |

(1) Ratios have been annualized.

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**Liquidity and Capital Resources**

          Our primary sources of funds are increases in deposits, proceeds from the repayment of investment securities, and the repayment of loans. We use these funds to purchase new investment securities and to fund new and renewing loans in our loan portfolio. Remaining funds are invested in short-term liquid assets such as overnight federal funds loans and bank deposits.

          During the nine months ended September 30, 2009, we had a net increase in total deposits of $14,457,743 due to increases of $14,403,236 in NOW accounts, $6,545,846 in non-interest demand deposits, $3,997,022 in money market accounts and $1,667,090 in savings accounts, partially offset by a decrease of $12,155,451 in time deposits. We also received proceeds from repayment of investment securities of        $28,711,718. We used $22,414,623 of available funds to purchase new investment securities and we had a net loan increase of $6,883,891. These changes resulted in an overall increase in cash and cash equivalents of $15,797,296 because we elected not to use those funds to purchase investment securities, as discussed above.

          In contrast, during the nine months ended September 30, 2008, we had a net increase in total deposits of $6,938,974 due to increases of $6,172,292 in time deposits, $1,779,352 in savings accounts and $1,030,746 in NOW, partially offset by a decrease of $1,496,449 in non-interest demand deposits and a $546,967 decrease in money market accounts. We also received proceeds from repayment of investment securities        of $20,423,422. We used $23,160,013 of available funds to purchase new investment securities, $5,155,000 to repay our subordinated debt and we had a net loan increase of $2,563,409. These changes resulted in an overall decrease in cash and cash equivalents of $2,087,659.

          At September 30, 2009, cash and cash equivalents represented 16% of total assets. We anticipate, based upon historical experience that these funds, combined with cash inflows we anticipate from payments on our loan and investment securities portfolios, will be sufficient to fund loan growth and unanticipated deposit outflows. As a secondary source of liquidity, at September 30, 2009 we had $117 million of        investment securities classified available for sale. The disposition of these securities prior to maturity is an option available to us in the event, which we believe is unlikely, that our primary sources of liquidity and expected cash flows are insufficient to meet our need for funds. Additionally, we have the ability to borrow funds at the Federal Home Loan Bank of New York using securities in our investment portfolio as collateral if the need arises. Based upon our assets size and        the amount of our securities portfolio that qualifies as eligible collateral, we had more than $57.6 million of unused borrowing capability from the FHLBNY at September 30, 2009. Victory State Bank also has a $2 million unsecured credit facility with Atlantic Central Bankers Bank, which the Bank has not drawn upon. We do not anticipate a need for additional capital resources and do not expect to raise funds through a stock offering in the near future. As a result of our strong capital        resources and available liquidity, we did not participate in the Treasury Departments TARP Capital Purchase Program. We have sufficient resources to allow us to continue to make loans as appropriate opportunities arise without having to rely on government funds to support our lending activities.

          Victory State Bank satisfied all capital ratio requirements of the Federal Deposit Insurance Corporation at September 30, 2009, with a Tier I Leverage Capital ratio of 9.88%, a ratio of Tier I Capital to Risk-Weighted Assets ratio of 23.89%, and a Total Capital to Risk-Weighted Assets ratio of 24.96%.

          VSB Bancorp, Inc. satisfied all capital ratio requirements of the Federal Reserve at September 30, 2009, with a Tier I Leverage Capital ratio of 10.04%, a ratio of Tier I Capital to Risk-Weighted Assets ratio of 23.71%, and a Total Capital to Risk-Weighted Assets ratio of 24.75%.

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          The following table sets forth our contractual obligations and commitments for future lease payments, time deposit maturities and loan commitments.

**Contractual Obligations and Commitments at September 30, 2009**

|                                                                 |   |                                  |       |                                  |   |                                  |   |                                |      |                                       |   |      |   |   |       |   |
|----------------------------------------------------------------------|--------|---------------------------------------|------------|---------------------------------------|--------|---------------------------------------|--------|-------------------------------------|-----------|--------------------------------------------|--------|-----------|--------|--------|------------|--------|
| Contractual Obligations                                              |   | Payment due by Period                 |       |
|                                                                 |   |                                  |       |
|                                                                 |   | Less than                    One Year |       | One to three                    years |   | Four to five                    years |   | After                    five years |      | Total Amounts                    committed |   |
|                                                                 |   |                                  |       |                                  |   |                                  |   |                                |      |                                       |   |
|                                                                 |   |                                  |       |                                  |   |                                  |   |                                |      |                                       |   |      |   |   |       |   |
| Minimum annual rental payments under non-cancelable operating leases |   | $                                     | 403,154    |                                  | $      | 829,865                               |   | $                                   | 823,409   |                                       | $      | 1,499,098 |   | $      | 3,555,526  |   |
| Remaining contractual maturities of time deposits                    |   |                                  | 60,417,592 |                                  |   | 1,175,012                             |   |                                | 2,575,439 |                                       |   | —   |   |   | 64,168,043 |   |
|                                                                 |   |                                  |       |                                  |   |                                  |   |                                |      |                                       |   |      |   |   |       |   |
| Total contractual cash obligations                                   |   | $                                     | 60,820,746 |                                  | $      | 2,004,877                             |   | $                                   | 3,398,848 |                                       | $      | 1,499,098 |   | $      | 67,723,569 |   |
|                                                                 |   |                                  |       |                                  |   |                                  |   |                                |      |                                       |   |      |   |   |       |   |

|              |   |                                      |       |                                  |   |                                  |   |                                |    |                                       |   |    |   |   |       |   |
|-------------------|--------|-------------------------------------------|------------|---------------------------------------|--------|---------------------------------------|--------|-------------------------------------|---------|--------------------------------------------|--------|---------|--------|--------|------------|--------|
| Other commitments |   | Amount of commitment Expiration by Period |       |
|              |   |                                      |       |
|              |   | Less than                    One Year     |       | One to three                    years |   | Four to five                    years |   | After                    five years |    | Total Amounts                    committed |   |
|              |   |                                      |       |                                  |   |                                  |   |                                |    |                                       |   |
|              |   |                                      |       |                                  |   |                                  |   |                                |    |                                       |   |    |   |   |       |   |
|              |   |                                      |       |                                  |   |                                  |   |                                |    |                                       |   |    |   |   |       |   |
| Loan commitments  |   | $                                         | 28,919,983 |                                  | $      | 2,474,151                             |   | $                                   | — |                                       | $      | — |   | $      | 31,394,134 |   |
|              |   |                                      |       |                                  |   |                                  |   |                                |    |                                       |   |    |   |   |       |   |

          Our loan commitments shown in the above table represent both commitments to make new loans and obligations to make additional advances on existing loans, such as construction loans in process and lines of credit. Substantially all of these commitments involve loans with fluctuating interest rates, so the outstanding commitments do not expose us to interest rate risk upon fluctuation in market rates.

**Non-Performing Loans**

          Management closely monitors non-performing loans and other assets with potential problems on a regular basis. We had twelve non-performing loans, totaling $1,755,994, at September 30, 2009, compared to thirteen non-performing loans, totaling $2,279,067, at December 31, 2008. The following is information about the four largest non-performing loans, totaling $1,256,964 in outstanding principal balance at        September 30, 2009. Management believes it has taken appropriate steps with a view towards maximizing recovery and minimizing loss on these loans.

|   |     |                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | $859,968 in three construction loans to a builder secured and cross-collateralized by first mortgage liens on three lots in Staten Island on which single family houses are near completion. The loans are past maturity and we have commenced foreclosure actions. The judge has signed the Judgment of Foreclosure and Sale and we will be proceeding with the foreclosure sale as soon as practicable. |
|   |
|   | · | $396,996 in a loan to a local business in which we are a participant in the loan with another bank. We are not the lead lender. The loan is in arrears and the lead lender is commencing a foreclosure action. The loan is secured by a first mortgage on a commercial building, a security interest in the business, and the personal guaranties of the principals.                                      |

**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.

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**Item 4 – Controls and Procedures**

          Evaluation of Disclosure Controls and Procedures: As of September 30, 2009, we undertook an evaluation of our disclosure controls and procedures under the supervision and with the participation of Raffaele M. Branca, President, CEO and CFO and Jonathan B. Lipschitz, Vice President and Controller. Disclosure controls are the systems and procedures we use that are designed to ensure that information we        are required to disclose in the reports we file or submit under the Securities Exchange Act of 1934 (such as annual reports on Form 10-K and quarterly periodic reports on Form 10-Q) is recorded, processed, summarized and reported, in a manner which will allow senior management to make timely decisions on the public disclosure of that information. Mr. Branca concluded that our current disclosure controls and procedures are effective in ensuring that such information is (i) collected and        communicated to senior management in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Since our last evaluation of our disclosure controls, we have not made any significant changes in, or taken corrective actions regarding, either our internal controls or other factors that could significantly affect those controls.

          We intend to continually review and evaluate the design and effectiveness of our disclosure controls and procedures and to correct any deficiencies that we may discover. Our goal is to ensure that senior management has timely access to all material financial and non-financial information concerning our business so that they can evaluate that information and make determinations as to the nature and timing of        disclosure of that information. While we believe the present design of our disclosure controls and procedures is effective to achieve this goal, future events may cause us to modify our disclosure controls and procedures.

**Part II**

**Item 1 – Legal Proceedings**

          There have been no material developments in the legal action pending in Supreme Court, Richmond County, commenced by IndyMac Bank, F.S.B. against the Bank, LaMattina & Associates, Inc. and others which was described in the report on Form 10-Q for the company for the quarter ended March 31, 2009. Discovery has recently completed and the attorneys for the Bank expect to be making a motion for summary        judgment

          VSB Bancorp, Inc. is not involved in any pending legal proceedings. The Bank, from time to time, is involved in routine collection proceedings in the ordinary course of business on loans in default. Management believes that such other routine legal proceedings in the aggregate are immaterial to our financial condition or results of operations.

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**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 10, 2009 |   | /s/ Raffaele M. Branca                   |
|                    |   |                                     |
|                    |   | Raffaele M. Branca, President & CEO  |
|                    |   | and Principal Executive Officer and      |
|                    |   |                                     |
| Date: November 10, 2009 |   | /s/ Jonathan B. Lipschitz                |
|                    |   |                                     |
|                    |   | Jonathan B. Lipschitz,                   |
|                    |   | Vice President, Controller and Principal |
|                    |   | Accounting Officer                       |

**EXHIBIT INDEX**

|                              |   |                                                                      |
|-----------------------------------|--------|---------------------------------------------------------------------------|
| Exhibit                    Number |   | Description of Exhibit                                                    |
|                              |   |                                                                      |
| 31.1                              |   | Rule 13A-14(a)/15D-14(a) Certification of Chief Executive Officer         |
| 31.2                              |   | Rule 13A-14(a)/15D-14(a) Certification of Principal Accounting Officer    |
| 32.1                              |   | Certification by CEO pursuant to 18 U.S.C. 1350.                          |
| 32.2                              |   | Certification by Principal Accounting Officer pursuant to 18 U.S.C. 1350. |
|                              |   |                                                                      |
|                              |   |

**Item 6 - Exhibits**

|                              |   |                                                                      |
|-----------------------------------|--------|---------------------------------------------------------------------------|
| Exhibit                    Number |   | Description of Exhibit                                                    |
|                              |   |                                                                      |
| 31.1                              |   | Rule 13A-14(a)/15D-14(a) Certification of Chief Executive Officer         |
| 31.2                              |   | Rule 13A-14(a)/15D-14(a) Certification of Principal Accounting Officer    |
| 32.1                              |   | Certification by CEO pursuant to 18 U.S.C. 1350.                          |
| 32.2                              |   | Certification by Principal Accounting Officer pursuant to 18 U.S.C. 1350. |

31

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