UNITED STATESSECURITY AND EXCHANGE COMMISSIONWASHINGTON, 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 ENDEDJUNE 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 has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).Yes o  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

Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act):
     Yes o   No x

Par Value: $0.0001 Class of
Common Stock

The Registrant had 1,850,491
common shares outstanding as of August 5, 2009.

---



CROSS REFERENCE
INDEX

|               |                                                                                                                                                      |    |         
|-------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | -- | --------
|               |                                                                                                                                                      |    | Page    
|               |                                                                                                                                                      |    |         
|PART
 I        |                                                                                                                                                      |   
|              
|Item 1         | Consolidated
 Statements of Financial Condition as of June 30, 2009 and December 31, 2008
 (unaudited)                                               |    | 4       
|               | Consolidated
 Statements of Operations for the Three and Six Months Ended June 30, 2009 and
 2008 (unaudited)                                        |    | 5       
|               | Consolidated
 Statements of Changes in Stockholders Equity for the Six Months Ended June
 30, 2009 and the Year Ended December 31, 2008 (unaudited) |    | 6       
|               | Consolidated
 Statements of Cash Flows for the Three and Six Months Ended June 30, 2009 and
 2008 (unaudited)                                        |    | 7       
|               | Notes to
 Consolidated Financial Statements for the Three and Six Months Ended June 30,
 2009 and 2008 (unaudited)                                   |    | 8 to 20 
|               |                                                                                                                                                      |    |         
|Item 2         | Managements
 Discussion and Analysis of Financial Condition and Results of Operations                                                               |    | 20 to 30
|Item 3         | Control and
 Procedures                                                                                                                              |    | 31      
|PART II        |                                                                                                                                                      |   
|               |                                                                                                                                                      |    |         
|Item 1         | Legal
 Proceedings                                                                                                                                   |    | 31      
|               |                                                                                                                                                      |    |         
|Signature Page |                                                                                                                                                      | 32
|               |                                                                                                                                                      |   
|               | Exhibit 31.1, 31.2, 32.1, 32.2                                                                                                                       |    | 33 to 36

2

---



Forward-Looking
Statements

When
used in this periodic report, or in any written or oral statement made by us or
our officers, directors or employees, the words and phrases will result,
expect, will continue, anticipate, estimate, project, or similar terms
are intended to identify forward-looking statements. A variety of factors
could cause our actual results and experiences to differ materially from the
anticipated results or other expectations expressed in any forward-looking
statements. Some of the risks and uncertainties that may affect our operations,
performance, development and results, the interest rate sensitivity of our
assets and liabilities, and the adequacy of our loan loss allowance, include,
but are not limited to:

| |   |                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | 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

---



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

|                                                                                                                                                                                            |  |                |             |                    |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | ------------------ | - | ----------- | -
|                                                                                                                                                                                            |  | June
 30, 2009 |             | December
 31, 2008 |  
|                                                                                                                                                                                            |  |                |             |                    |  
|                                                                                                                                                                                            |  |                |             |                    |   |             |  
|Assets:                                                                                                                                                                                     |  |                |             |                    |   |             |  
|Cash and due
 from banks                                                                                                                                                                    |  | $              | 37,386,551  |                    | $ | 21,240,223  |  
|Investment
 securities, available for sale                                                                                                                                                  |  |                | 115,350,244 |                    |   | 120,288,588 |  
|Loans receivable                                                                                                                                                                            |  |                | 69,306,455  |                    |   | 66,246,652  |  
|Allowance for
 loan loss                                                                                                                                                                    |  |                | (928,064    | )                  |   | (987,876    | )
|                                                                                                                                                                                            |  |                |             |                    |   |             |  
|Loans
 receivable, net                                                                                                                                                                      |  |                | 68,378,391  |                    |   | 65,258,776  |  
|Bank premises
 and equipment, net                                                                                                                                                           |  |                | 3,461,215   |                    |   | 3,695,822   |  
|Accrued interest
 receivable                                                                                                                                                                |  |                | 710,936     |                    |   | 723,473     |  
|Deferred taxes                                                                                                                                                                              |  |                |            |                    |   | 525,839     |  
|Other assets                                                                                                                                                                                |  |                | 642,598     |                    |   | 925,007     |  
|                                                                                                                                                                                            |  |                |             |                    |   |             |  
|Total
 assets                                                                                                                                                                               |  | $              | 225,929,935 |                    | $ | 212,657,728 |  
|                                                                                                                                                                                            |  |                |             |                    |   |             |  
|Liabilities
 and stockholders equity:                                                                                                                                                      |  |                |             |                    |   |             |  
|Liabilities:                                                                                                                                                                                |  |                |             |                    |   |             |  
|Deposits:                                                                                                                                                                                   |  |                |             |                    |   |             |  
|Demand and
 checking                                                                                                                                                                        |  | $              | 65,288,402  |                    | $ | 58,598,579  |  
|NOW                                                                                                                                                                                         |  |                | 34,622,620  |                    |   | 17,636,154  |  
|Money market                                                                                                                                                                                |  |                | 23,909,746  |                    |   | 22,829,789  |  
|Savings                                                                                                                                                                                     |  |                | 13,534,421  |                    |   | 12,412,561  |  
|Time                                                                                                                                                                                        |  |                | 62,106,445  |                    |   | 76,323,494  |  
|                                                                                                                                                                                            |  |                |             |                    |   |             |  
|Total Deposits                                                                                                                                                                              |  |                | 199,461,634 |                    |   | 187,800,577 |  
|Escrow deposits                                                                                                                                                                             |  |                | 361,965     |                    |   | 308,872     |  
|Accounts payable
 and accrued expenses                                                                                                                                                      |  |                | 1,681,182   |                    |   | 1,344,512   |  
|                                                                                                                                                                                            |  |                |             |                    |   |             |  
|Total
 liabilities                                                                                                                                                                          |  |                | 201,504,781 |                    |   | 189,453,961 |  
|                                                                                                                                                                                            |  |                |             |                    |   |             |  
|                                                                                                                                                                                            |  |                |             |                    |   |             |  
|Stockholders
 equity:                                                                                                                                                                      |  |                |             |                    |   |             |  
|Common stock,
 ($.0001 par value, 3,000,000 shares authorized, 1,945,134 issued, 1,850,491
 outstanding at June 30, 2009 and 1,923,884 issued, 1,882,461 outstanding at
 December 31, 2008) |  |                | 195         |                    |   | 192         |  
|Additional paid
 in capital                                                                                                                                                                 |  |                | 9,276,908   |                    |   | 9,200,010   |  
|Retained
 earnings                                                                                                                                                                          |  |                | 15,331,339  |                    |   | 14,714,143  |  
|Treasury stock,
 at cost (94,643 shares at June 30, 2009 and 41,423 shares at December 31,
 2008)                                                                                           |  |                | (858,863    | )                  |   | (395,891    | )
|Unearned
 Employee Stock Ownership Plan shares                                                                                                                                              |  |                | (817,211    | )                  |   | (901,750    | )
|Accumulated
 other comprehensive gain, net of taxes of $1,258,894 and $488,735,
 respectively                                                                                               |  |                | 1,492,786   |                    |   | 587,063     |  
|                                                                                                                                                                                            |  |                |             |                    |   |             |  
|                                                                                                                                                                                            |  |                |             |                    |   |             |  
|Total
 stockholders equity                                                                                                                                                                 |  |                | 24,425,154  |                    |   | 23,203,767  |  
|                                                                                                                                                                                            |  |                |             |                    |   |             |  
|                                                                                                                                                                                            |  |                |             |                    |   |             |  
|Total
 liabilities and stockholders equity                                                                                                                                                 |  | $              | 225,929,935 |                    | $ | 212,657,728 |  
|                                                                                                                                                                                            |  |                |             |                    |   |             |  

See notes to consolidated financial statements.

4

---



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

|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|------------------------------------------------- |  | --------------------------------- | --------- | --------------------------------- | - | ------------------------------- | - | ------------------------------- | --------- | - | - | --------- | -
|                                                  |  | Three months ended
 June 30, 2009 |           | Three months ended
 June 30, 2008 |   | Six months ended
 June 30, 2009 |   | Six months ended
 June 30, 2008 |          
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |          
|Interest and dividend income:                     |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Loans receivable                                  |  | $                                 | 1,323,189 |                                   | $ | 1,172,917                       |   | $                               | 2,653,895 |   | $ | 2,417,408 |  
|Investment securities                             |  |                                   | 1,314,667 |                                   |   | 1,431,362                       |   |                                 | 2,697,286 |   |   | 2,815,659 |  
|Other interest earning assets                     |  |                                   | 5,693     |                                   |   | 74,552                          |   |                                 | 10,434    |   |   | 176,845   |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Total interest income                             |  |                                   | 2,643,549 |                                   |   | 2,678,831                       |   |                                 | 5,361,615 |   |   | 5,409,912 |  
|Interest expense:                                 |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|NOW                                               |  |                                   | 35,990    |                                   |   | 32,702                          |   |                                 | 62,773    |   |   | 64,933    |  
|Money market                                      |  |                                   | 62,944    |                                   |   | 72,509                          |   |                                 | 123,455   |   |   | 168,601   |  
|Savings                                           |  |                                   | 13,219    |                                   |   | 18,191                          |   |                                 | 26,321    |   |   | 37,173    |  
|Subordinated debt                                 |  |                                   |          |                                   |   | 89,039                          |   |                                 |          |   |   | 178,079   |  
|Time                                              |  |                                   | 220,765   |                                   |   | 380,380                         |   |                                 | 531,317   |   |   | 899,827   |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Total interest expense                            |  |                                   | 332,918   |                                   |   | 592,821                         |   |                                 | 743,866   |   |   | 1,348,613 |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Net interest income                               |  |                                   | 2,310,631 |                                   |   | 2,086,010                       |   |                                 | 4,617,749 |   |   | 4,061,299 |  
|Provision for loan loss                           |  |                                   | 100,000   |                                   |   | 55,000                          |   |                                 | 375,000   |   |   | 85,000    |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Net interest income after provision for loan loss |  |                                   | 2,210,631 |                                   |   | 2,031,010                       |   |                                 | 4,242,749 |   |   | 3,976,299 |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Non-interest income:                              |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Loan fees                                         |  |                                   | 24,773    |                                   |   | 21,285                          |   |                                 | 50,524    |   |   | 43,508    |  
|Service charges on deposits                       |  |                                   | 538,187   |                                   |   | 545,902                         |   |                                 | 1,084,049 |   |   | 1,025,517 |  
|Net rental income                                 |  |                                   | 12,567    |                                   |   | 11,103                          |   |                                 | 24,084    |   |   | 10,092    |  
|Other income                                      |  |                                   | 39,556    |                                   |   | 45,944                          |   |                                 | 69,595    |   |   | 111,019   |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Total non-interest income                         |  |                                   | 615,083   |                                   |   | 624,234                         |   |                                 | 1,228,252 |   |   | 1,190,136 |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Non-interest expenses:                            |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Salaries and benefits                             |  |                                   | 911,745   |                                   |   | 868,263                         |   |                                 | 1,823,728 |   |   | 1,778,671 |  
|Occupancy expenses                                |  |                                   | 373,242   |                                   |   | 358,466                         |   |                                 | 752,323   |   |   | 716,190   |  
|Legal expense                                     |  |                                   | 59,847    |                                   |   | 65,700                          |   |                                 | 134,496   |   |   | 119,786   |  
|Professional fees                                 |  |                                   | 75,500    |                                   |   | 62,100                          |   |                                 | 152,500   |   |   | 123,500   |  
|Computer expense                                  |  |                                   | 70,896    |                                   |   | 57,198                          |   |                                 | 137,696   |   |   | 112,304   |  
|Directors fees                                   |  |                                   | 60,675    |                                   |   | 57,700                          |   |                                 | 111,775   |   |   | 114,950   |  
|FDIC and NYSBD assessments                        |  |                                   | 101,500   |                                   |   | 46,500                          |   |                                 | 177,000   |   |   | 93,000    |  
|Other expenses                                    |  |                                   | 319,268   |                                   |   | 346,250                         |   |                                 | 635,618   |   |   | 641,926   |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Total non-interest expenses                       |  |                                   | 1,972,673 |                                   |   | 1,862,177                       |   |                                 | 3,925,136 |   |   | 3,700,327 |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Income
 before income taxes                       |  |                                   | 853,041   |                                   |   | 793,067                         |   |                                 | 1,545,865 |   |   | 1,466,108 |  
|Provision/(benefit) for income taxes:             |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Current                                           |  |                                   | 450,353   |                                   |   | 400,690                         |   |                                 | 876,203   |   |   | 733,590   |  
|Deferred                                          |  |                                   | (56,609   | )                                 |   | (33,898                         | ) |                                 | (162,686  | ) |   | (55,702   | )
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Total provision for income taxes                  |  |                                   | 393,744   |                                   |   | 366,792                         |   |                                 | 713,517   |   |   | 677,888   |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Net income                                        |  | $                                 | 459,297   |                                   | $ | 426,275                         |   | $                               | 832,348   |   | $ | 788,220   |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Earnings per share:                               |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Basic                                             |  | $                                 | 0.26      |                                   | $ | 0.23                            |   | $                               | 0.46      |   | $ | 0.43      |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Diluted                                           |  | $                                 | 0.25      |                                   | $ | 0.23                            |   | $                               | 0.46      |   | $ | 0.42      |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Comprehensive income/(loss)                       |  | $                                 | 463,129   |                                   | $ | (585,163                        | ) | $                               | 1,738,071 |   | $ | 820,213   |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  
|Book value per common share                       |  | $                                 | 13.20     |                                   | $ | 11.31                           |   | $                               | 13.20     |   | $ | 11.31     |  
|                                                  |  |                                   |           |                                   |   |                                 |   |                                 |           |   |   |           |  

See notes to consolidated financial statements.

5

---



VSB Bancorp, Inc.Consolidated Statements of Changes in Stockholders Equity
Year Ended December 31, 2008 and Six Months Ended June 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                                                        |  |                           |           |               |   |                              |  |                    | 639       |                           |   |                        |   |                                                 |          |                              |   |            |   |   |           |   |   | 639        |  
|Amortization of earned portion of ESOP common stock                             |  |                           |           |               |   |                              |  |                    |           |                           |   |                        |   |                                                 |          |                              |   | 84,539     |   |   |           |   |   | 84,539     |  
|Amortization of cost over fair value - ESOP                                     |  |                           |           |               |   |                              |  |                    | (42,365   | )                         |   |                        |   |                                                 |          |                              |   |            |   |   |           |   |   | (42,365    | )
|Cash dividends declared ($0.12 per share)                                       |  |                           |           |               |   |                              |  |                    |           |                           |   | (215,152               | ) |                                                 |          |                              |   |            |   |   |           |   |   | (215,152   | )
|Purchase of treasury stock, at cost                                             |  |                           | (53,220   | )             |   |                              |  |                    |           |                           |   |                        |   |                                                 | (462,972 | )                            |   |            |   |   |           |   |   | (462,972   | )
|Comprehensive income:                                                           |  |                           |           |               |   |                              |  |                    |           |                           |   |                        |   |                                                 |          |                              |   |            |   |   |           |   |   |            |  
|Net income                                                                      |  |                           |           |               |   |                              |  |                    |           |                           |   | 832,348                |   |                                                 |          |                              |   |            |   |   |           |   |   | 832,348    |  
|Other comprehensive income, net:                                                |  |                           |           |               |   |                              |  |                    |           |                           |   |                        |   |                                                 |          |                              |   |            |   |   |           |   |   |            |  
|Change in unrealized gain on securities available for sale, net of tax
 effects |  |                           |          |               |   |                             |  |                    |          |                           |   |                       |   |                                                 |         |                              |   |           |   |   | 905,723   |   |   | 905,723    |  
|                                                                                |  |                           |           |               |   |                              |  |                    |           |                           |   |                        |   |                                                 |          |                              |   |            |   |   |           |   |   |            |  
|Total comprehensive income                                                      |  |                           |           |               |   |                              |  |                    |           |                           |   |                        |   |                                                 |          |                              |   |            |   |   |           |   |   | 1,738,071  |  
|                                                                                |  |                           |           |               |   |                              |  |                    |           |                           |   |                        |   |                                                 |          |                              |   |            |   |   |           |   |   |            |  
|Balance at June 30, 2009                                                        |  |                           | 1,850,491 |               | $ | 195                          |  | $                  | 9,276,908 |                           | $ | 15,331,339             |   | $                                               | (858,863 | )                            | $ | (817,211   | ) | $ | 1,492,786 |   | $ | 24,425,154 |  
|                                                                                |  |                           |           |               |   |                              |  |                    |           |                           |   |                        |   |                                                 |          |                              |   |            |   |   |           |   |   |            |  

See notes to consolidated financial statements.

6

---



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

|                                                                                  |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|--------------------------------------------------------------------------------- |  | ---------------------------------- | ---------- | ---------------------------------- | - | -------------------------------- | - | -------------------------------- | ----------- | - | - | ----------- | -
|                                                                                  |  | Three months
 ended
 June 30, 2009 |            | Three months
 ended
 June 30, 2008 |   | Six months
 ended
 June 30, 2009 |   | Six months
 ended
 June 30, 2008 |            
|                                                                                  |  |                                    |            |                                    |   |                                  |   |                                  |            
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|Net income                                                                        |  | $                                  | 459,297    |                                    | $ | 426,275                          |   | $                                | 832,348     |   | $ | 788,220     |  
|Adjustments to reconcile net income to net cash provided by operating
 activities |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|Depreciation and amortization                                                     |  |                                    | 168,227    |                                    |   | 153,602                          |   |                                  | 338,781     |   |   | 304,596     |  
|Accretion of income, net of amortization of premium                               |  |                                    | 826        |                                    |   | (57,913                          | ) |                                  | (14,521     | ) |   | (111,312    | )
|ESOP compensation expense                                                         |  |                                    | 22,470     |                                    |   | 23,380                           |   |                                  | 42,174      |   |   | 49,577      |  
|Stock-based compensation expense                                                  |  |                                    | 319        |                                    |   | 319                              |   |                                  | 639         |   |   | 639         |  
|Provision for loan losses                                                         |  |                                    | 100,000    |                                    |   | 55,000                           |   |                                  | 375,000     |   |   | 85,000      |  
|Decrease in prepaid and other assets                                              |  |                                    | 42,259     |                                    |   | 36,899                           |   |                                  | 282,409     |   |   | 38,599      |  
|Decrease/(increase) in accrued interest receivable                                |  |                                    | 9,254      |                                    |   | (22,807                          | ) |                                  | 12,537      |   |   | 67,205      |  
|Increase in deferred income taxes                                                 |  |                                    | (3,234     | )                                  |   | (208,572                         | ) |                                  | (244,320    | ) |   | (230,376    | )
|(Decrease)/increase in accrued expenses and other liabilities                     |  |                                    | (29,769    | )                                  |   | 185,747                          |   |                                  | 336,670     |   |   | (30,768     | )
|                                                                                  |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|Net cash provided by operating activities                                         |  |                                    | 769,649    |                                    |   | 591,930                          |   |                                  | 1,961,717   |   |   | 961,380     |  
|                                                                                  |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|                                                                                  |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|Net increase in loan receivable                                                   |  |                                    | (658,774   | )                                  |   | (1,853,016                       | ) |                                  | (3,439,003  | ) |   | (821,792    | )
|Proceeds from repayment of investment securities, available for sale              |  |                                    | 11,005,945 |                                    |   | 6,995,036                        |   |                                  | 18,349,346  |   |   | 14,402,118  |  
|Purchases of investment securities, available for sale                            |  |                                    | (5,976,388 | )                                  |   | (12,113,438                      | ) |                                  | (11,776,211 | ) |   | (21,612,383 | )
|Purchases of premises and equipment                                               |  |                                    | (45,213    | )                                  |   | (124,358                         | ) |                                  | (104,174    | ) |   | (167,884    | )
|                                                                                  |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|Net cash provided by/(used in) investing activities                               |  |                                    | 4,325,570  |                                    |   | (7,095,776                       | ) |                                  | 3,029,958   |   |   | (8,199,941  | )
|                                                                                  |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|                                                                                  |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|Net increase in deposits                                                          |  |                                    | 2,791,047  |                                    |   | 7,411,671                        |   |                                  | 11,714,150  |   |   | 12,726,092  |  
|Exercise of stock options                                                         |  |                                    | 118,627    |                                    |   | 52,000                           |   |                                  | 118,627     |   |   | 52,000      |  
|Purchase of treasury stock, at cost                                               |  |                                    |           |                                    |   |                                 |   |                                  | (462,972    | ) |   |            |  
|Cash dividends paid                                                               |  |                                    | (108,285   | )                                  |   | (114,518                         | ) |                                  | (215,152    | ) |   | (228,549    | )
|                                                                                  |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|Net cash provided by financing activities                                         |  |                                    | 2,801,389  |                                    |   | 7,349,153                        |   |                                  | 11,154,653  |   |   | 12,549,543  |  
|                                                                                  |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|                                                                                  |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                         |  |                                    | 7,896,608  |                                    |   | 845,307                          |   |                                  | 16,146,328  |   |   | 5,310,982   |  
|                                                                                  |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|                                                                                  |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                    |  |                                    | 29,489,943 |                                    |   | 22,162,554                       |   |                                  | 21,240,223  |   |   | 17,696,879  |  
|                                                                                  |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|                                                                                  |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                          |  | $                                  | 37,386,551 |                                    | $ | 23,007,861                       |   | $                                | 37,386,551  |   | $ | 23,007,861  |  
|                                                                                  |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|                                                                                  |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                 |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|Cash paid during the period for:                                                  |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|Interest                                                                          |  | $                                  | 326,212    |                                    | $ | 574,367                          |   | $                                | 882,111     |   | $ | 1,636,236   |  
|                                                                                  |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  
|Taxes                                                                             |  | $                                  | 457,002    |                                    | $ | 405,326                          |   | $                                | 525,852     |   | $ | 727,326     |  
|                                                                                  |  |                                    |            |                                    |   |                                  |   |                                  |             |   |   |             |  

See notes to consolidated financial statements.

7

---



VSB BANCORP, INC.

|                                                                                                      
|------------------------------------------------------------------------------------------------------
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 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.

Management
evaluated events and transactions that occurred through August 11, 2009, the
date these financial statements were issued, for potential recognition or
disclosure, in accordance with the requirements of Statement of Financial
Accounting Standards No. 165.

|   |                                            
|-- | -------------------------------------------
|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 June 18, 2009 through
July 1, 2009, Victory State Bank was required to maintain reserves, after
deducting vault cash, of $4,172,000. 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.

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.

9

---



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.

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.

The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (FIN 48), as of
January 1, 2007. 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.

10

---



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 1,792,629 shares and
1,849,448 shares, the weighted average number of common shares outstanding for
the three months ended June 30, 2009 and 2008, respectively. Diluted net income
per share of common stock is based on 1,809,660 and 1,880,697, the weighted
average number of common shares and potentially dilutive common shares
outstanding for the three months ended June 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 56,677 and 55,843 shares for the three months ended June 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 1,800,264 shares and 1,847,272 shares, the weighted average number of
common shares outstanding for the six months ended June 30, 2009 and 2008, respectively.
Diluted net income per share of common stock is based on 1,816,269 and
1,880,409, the weighted average number of common shares and potentially
dilutive common shares outstanding for the six months ended June 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 65,532 and 48,349 shares for the six months years ended
June 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
six months ended June 30, are as follows:

|                                             |  |                                   |         |                                   |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|-------------------------------------------- |  | --------------------------------- | ------- | --------------------------------- |  | ----------------- |  | ----------- | ---- | ------------------------- | - | ----------------- |  |  | --------- |  | - | ---- | 
|Reconciliation of EPS                        |  | Three months ended
 June 30, 2009 |         | Three months ended
 June 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 |  | $                                 | 459,297 |                                   |  | 1,792,629         |  | $           | 0.26 |                           | $ | 426,575           |  |  | 1,849,448 |  | $ | 0.23 | 
|                                             |  |                                   |         |                                   |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|                                             |  |                                   |         |                                   |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|Effect of
 dilutive shares                   |  |                                   |         |                                   |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|Weighted average
 shares, if converted       |  |                                   |         |                                   |  | 17,031            |  |             |      |                           |   |                   |  |  | 31,249    |  |   |      | 
|                                             |  |                                   |         |                                   |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|                                             |  |                                   |         |                                   |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|Diluted earnings
 per common share           |  |                                   |         |                                   |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|Net income
 available to common stockholders |  | $                                 | 459,297 |                                   |  | 1,809,660         |  | $           | 0.25 |                           | $ | 426,575           |  |  | 1,880,697 |  | $ | 0.23 | 
|                                             |  |                                   |         |                                   |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 

11

---



|                                             |  |                                 |         |                                 |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|-------------------------------------------- |  | ------------------------------- | ------- | ------------------------------- |  | ----------------- |  | ----------- | ---- | ------------------------- | - | ----------------- |  |  | --------- |  | - | ---- | 
|Reconciliation of EPS                        |  | Six months ended
 June 30, 2009 |         | Six months ended
 June 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 |  | $                               | 832,348 |                                 |  | 1,800,264         |  | $           | 0.46 |                           | $ | 788,220           |  |  | 1,847,272 |  | $ | 0.43 | 
|                                             |  |                                 |         |                                 |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|                                             |  |                                 |         |                                 |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|Effect of
 dilutive shares                   |  |                                 |         |                                 |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|Weighted average
 shares, if converted       |  |                                 |         |                                 |  | 16,005            |  |             |      |                           |   |                   |  |  | 33,137    |  |   |      | 
|                                             |  |                                 |         |                                 |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|                                             |  |                                 |         |                                 |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|Diluted earnings
 per common share           |  |                                 |         |                                 |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|Net income
 available to common stockholders |  | $                               | 832,348 |                                 |  | 1,816,269         |  | $           | 0.46 |                           | $ | 788,220           |  |  | 1,880,409 |  | $ | 0.42 | 
|                                             |  |                                 |         |                                 |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 

Stock
Based Compensation - FAS
123, Revised, requires companies to record compensation expense for stock
options provided to employees in return for employment service. The cost is
measured at the fair value of the options when granted, and this cost is
expensed over the employment service period, which is normally the vesting
period of the options. This applies to awards granted or modified in fiscal
years beginning in 2006.

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.

Fair Value
Option and Fair Value Measurement - In September 2006, the FASB issued Statement No. 157, Fair Value
Measurements. This Statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. This Statement establishes a fair value hierarchy about the
assumptions used to measure fair value and clarifies assumptions about risk and
the effect of a restriction on the sale or use of an asset. The standard is
effective for fiscal years beginning after November 15, 2007. In February 2008,
the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157.
This FSP delayed the effective date of FAS 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value on a recurring basis (at least annually) until 2009. The impact of
adoption was not material.

12

---



Recently-Adopted Accounting Standards - In December 2007, the FASB issued FAS No.
141 (revised 2007), Business Combinations (FAS 141(R)), which establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any non-controlling interest in an acquiree, including the recognition and
measurement of goodwill acquired in a business combination. FAS No. 141(R) is
effective for fiscal years beginning on or after December 15, 2008. Earlier
adoption is prohibited. The adoption of this standard did not have a material
effect on the Companys results of operations or financial position.

In December 2007, the FASB issued SFAS No.
160,Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51
(SFAS No. 160), which changed the accounting and reporting for minority
interests, which will be re-characterized as non-controlling interests and
classified as a component of equity within the consolidated balance sheets. FAS
No. 160 was effective as of the beginning of the first fiscal year beginning on
or after December 15, 2008. Earlier adoption is prohibited. The adoption of FAS
No. 160 did not have a significant impact on Companys results of operations or
financial position.

In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities, an amendment
of SFAS No. 133. FAS No. 161 amends and expands the disclosure requirements of
SFAS No. 133 for derivative instruments and hedging activities. FAS No. 161
requires qualitative disclosure about objectives and strategies for using
derivative and hedging instruments, quantitative disclosures about fair value
amounts of the instruments and gains and losses on such instruments, as well as
disclosures about credit-risk features in derivative agreements. FAS No. 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. 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. 115-2 and No.
124-2, Recognition and Presentation of
Other-Than-Temporary Impairments,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.

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. 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.

13

---



In April 2009, the FASB issued Staff Position (FSP) No. 107-1 and APB 28-1,
Interim Disclosures about Fair Value of
Financial Instruments. 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 June 2008, the FASB issued Staff Position (FSP) EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. This
FSP addresses whether instruments granted in share-based payment transactions
are participating securities prior to vesting and, therefore, need to be
included in the earnings allocation in computing earnings per share (EPS) under
the two-class method described in paragraphs 60 and 61 of FASB Statement No.
128, Earnings per Share.FSP EITF
03-6-1 is effective for years beginning after December 15, 2008 and interim
periods within those years. Adoption of this FSP in 2009 did not have a
material impact to the Companys financial statements or earnings per share
calculation.

In May 2009, the FASB issued SFAS No. 165
Subsequent Events. 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 over
operations or financial position.

Recently Issued but Not Yet Effective Standards

On June 12, 2009, the FASB issued Statements No. 166, Accounting for Transfers of Financial Assets,
and No. 167, Amendments to FASB
Interpretation No. 46(R). Statement No. 166 is a revision to FASB
Statement No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,
and will require more information about transfers of financial assets,
including securitization transactions, and where entities have continuing
exposure to the risks related to transferred financial assets. It eliminates
the concept of a qualifying special-purpose entity, changes the requirements
for derecognizing financial assets, and requires additional disclosures.
Statement No. 167 amends FIN 46(R) to replace the quantitative-based risks and
rewards calculation for determining which enterprise, if any, has a controlling
financial interest in a variable interest entity with a qualitative approach
focused on identifying which enterprise has the power to direct the activities
of a variable interest entity (VIE) that most significantly impact the entitys
economic performance and (1) the obligation to absorb losses of the entity or
(2) the right to receive benefits from the entity. Unlike FIN 46 (R), this
Statement requires ongoing reconsideration of whether (1) an entity is a VIE
and (2) an enterprise is the primary beneficiary of a VIE. Statement Nos. 166
and 167 will be effective at the start of the first fiscal year beginning after
November 15, 2009. The adoption of these standards are not expected to impact
the Companys consolidated financial statements.

On June 29, 2009, the FASB issued FASB
Statement No. 168, The FASB
Accounting Standards Codificationand the
Hierarchy of Generally Accepted Accounting Principles  A Replacement of FASB
Statement No. 162. With the issuance of this statement, the FASB Accounting Standards CodificationTM
(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 is not expected
to impact the Companys consolidated financial statements.

14

---



The SECs Office of the Chief Accountant published Staff Accounting
Bulletin (SAB) No. 112. SAB 112 which was effective June 10, 2009 and amends or
rescinds portions of the interpretive guidance included in the Staff Accounting
Bulletin Series to make the relevant interpretive guidance consistent with
current authoritative accounting and auditing guidance and SEC rules and
regulations. Specifically, SAB 112 aims to bring existing guidance into
conformity with recent pronouncements by the FASB, including FASB Statement No.
141 (Revised December 2007), Business
Combinations, and FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements.The
adoption of this bulletin is not expected to impact the Companys consolidated
financial statements.

|   |                                           
|-- | ------------------------------------------
|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 June 30, 2009 and December 31, 2008 and the
corresponding amounts of unrealized gains and losses therein:

|                                    |  |                 |             |                   |   |                    |  |             |          |   |   |             | 
|----------------------------------- |  | --------------- | ----------- | ----------------- | - | ------------------ |  | ----------- | -------- | - | - | ----------- | 
|                                    |  | June 30, 2009   |            
|                                    |  |                 |            
|                                    |  | Amortized
 Cost |             | Unrealized
 Gains |   | Unrealized
 Losses |  | Fair
 Value |         
|                                    |  |                 |             |                   |   |                    |  |             |         
|                                    |  |                 |             |                   |   |                    |  |             |          |   |   |             | 
|US Government Agency                |  | $               |            |                   | $ |                   |  | $           |         |   | $ |            | 
|FNMA MBS - Residential              |  |                 | 5,559,196   |                   |   | 151,028            |  |             |         |   |   | 5,710,224   | 
|FHLMC MBS - Residential             |  |                 |            |                   |   |                   |  |             |         |   |   |            | 
|GNMA MBS - Residential              |  |                 | 1,446,549   |                   |   | 58,959             |  |             |         |   |   | 1,505,508   | 
|Whole Loan MBS - Residential        |  |                 | 2,227,302   |                   |   |                   |  |             | (37,571  | ) |   | 2,189,731   | 
|Collateralized mortgage obligations |  |                 | 103,365,517 |                   |   | 2,916,533          |  |             | (337,269 | ) |   | 105,944,781 | 
|                                    |  |                 |             |                   |   |                    |  |             |          |   |   |             | 
|                                    |  | $               | 112,598,564 |                   | $ | 3,126,520          |  | $           | (374,840 | ) | $ | 115,350,244 | 
|                                    |  |                 |             |                   |   |                    |  |             |          |   |   |             | 

|                                    |  |                   |             |                   |   |                    |  |             |          |   |   |             | 
|----------------------------------- |  | ----------------- | ----------- | ----------------- | - | ------------------ |  | ----------- | -------- | - | - | ----------- | 
|                                    |  | December 31, 2008 |            
|                                    |  |                   |            
|                                    |  | Amortized
 Cost   |             | Unrealized
 Gains |   | Unrealized
 Losses |  | 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 if borrowers have the right
to call or prepay obligations with or without call or prepayment penalties.

15

---



|                                                  |  |                 |             |             |   |             | 
|------------------------------------------------- |  | --------------- | ----------- | ----------- | - | ----------- | 
|                                                  |  | June 30, 2009   |            
|                                                  |  |                 |            
|Securities, Available for Sale
 Expected Maturity |  | Amortized
 Cost |             | Fair
 Value |  
|                                                  |  |                 |             |             |  
|                                                  |  |                 |             |             |   |             | 
|Less than one
 year                               |  | $               |            |             | $ |            | 
|Due after one
 year through five years            |  |                 | 3,400,114   |             |   | 3,502,293   | 
|Due after five
 years through ten years           |  |                 | 49,020,943  |             |   | 50,585,938  | 
|Due after ten
 years                              |  |                 | 60,177,507  |             |   | 61,262,013  | 
|                                                  |  |                 |             |             |   |             | 
|                                                  |  | $               | 112,598,564 |             | $ | 115,350,244 | 
|                                                  |  |                 |             |             |   |             | 

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

|                                    |  |                      |            |                      |   |             |   |                  |           |             |   |                  |   |   |            |  |   |          |  
|----------------------------------- |  | -------------------- | ---------- | -------------------- | - | ----------- | - | ---------------- | --------- | ----------- | - | ---------------- | - | - | ---------- |  | - | -------- | -
|June 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                      |  |                      |           |                      |   |            |   |                  | 2,189,731 |             |   | (37,571          | ) |   | 2,189,731  |  |   | (37,571  | )
|Collateralized mortgage obligations |  |                      | 13,490,796 |                      |   | (223,016    | ) |                  | 2,635,291 |             |   | (114,253         | ) |   | 16,126,087 |  |   | (337,269 | )
|                                    |  |                      |            |                      |   |             |   |                  |           |             |   |                  |   |   |            |  |   |          |  
|                                    |  | $                    | 13,490,796 |                      | $ | (223,016    | ) | $                | 4,825,022 |             | $ | (151,824         | ) | $ | 18,315,818 |  | $ | (374,840 | )
|                                    |  |                      |            |                      |   |             |   |                  |           |             |   |                  |   |   |            |  |   |          |  

|                                    |  |                      |            |                      |   |             |   |                  |            |             |   |                  |   |   |            |  |   |          |  
|----------------------------------- |  | -------------------- | ---------- | -------------------- | - | ----------- | - | ---------------- | ---------- | ----------- | - | ---------------- | - | - | ---------- |  | - | -------- | -
|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.

16

---



At
June 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
June 30, 2009, there were two 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 six months ended June 30, 2009
and 2008.

|   |                                    
|-- | -----------------------------------
|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 SFAS No. 107, Disclosures about Fair Value of
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.                                                                                                                                                                                                                                                                                                                                   

17

---



In
accordance with FSP FAS 107-1, the carrying amounts and estimated fair values
of financial instruments, at June 30, 2009 and December 31, 2008 are as
follows:

|                                          |  |                  |             |                   |   |                  |  |             |             |  |   |             | 
|----------------------------------------- |  | ---------------- | ----------- | ----------------- | - | ---------------- |  | ----------- | ----------- |  | - | ----------- | 
|                                          |  | June 30, 2009    |             | December 31, 2008 |  
|                                          |  |                  |             |                   |  
|                                          |  | Carrying
 Amount |             | Fair
 Value       |   | Carrying
 Amount |  | Fair
 Value |            
|                                          |  |                  |             |                   |   |                  |  |             |            
|Financial Assets:                         |  |                  |             |                   |   |                  |  |             |             |  |   |             | 
|Cash and cash equivalents                 |  | $                | 37,386,551  |                   | $ | 37,386,551       |  | $           | 21,240,223  |  | $ | 21,240,223  | 
|Investment securities, available for sale |  |                  | 115,350,244 |                   |   | 115,350,244      |  |             | 120,288,588 |  |   | 120,288,588 | 
|Loans receivable                          |  |                  | 69,306,455  |                   |   | 67,574,143       |  |             | 65,258,776  |  |   | 63,767,118  | 
|Other financial assets                    |  |                  | 710,936     |                   |   | 710,936          |  |             | 723,473     |  |   | 723,473     | 
|                                          |  |                  |             |                   |   |                  |  |             |             |  |   |             | 
|                                          |  |                  |             |                   |   |                  |  |             |             |  |   |             | 
|Total Financial Assets                    |  | $                | 222,754,186 |                   | $ | 221,021,874      |  | $           | 207,511,060 |  | $ | 206,019,402 | 
|                                          |  |                  |             |                   |   |                  |  |             |             |  |   |             | 
|                                          |  |                  |             |                   |   |                  |  |             |             |  |   |             | 
|Financial Liabilities:                    |  |                  |             |                   |   |                  |  |             |             |  |   |             | 
|Non-interest bearing deposits             |  | $                | 65,650,367  |                   | $ | 65,650,367       |  | $           | 58,907,451  |  | $ | 58,907,451  | 
|Interest bearing deposits                 |  |                  | 134,173,232 |                   |   | 133,955,678      |  |             | 129,201,998 |  |   | 129,096,378 | 
|Other liabilities                         |  |                  | 27,231      |                   |   | 27,231           |  |             | 162,731     |  |   | 162,731     | 
|                                          |  |                  |             |                   |   |                  |  |             |             |  |   |             | 
|                                          |  |                  |             |                   |   |                  |  |             |             |  |   |             | 
|Total Financial Liabilities               |  | $                | 199,850,830 |                   | $ | 199,633,276      |  | $           | 188,272,180 |  | $ | 188,166,560 | 
|                                          |  |                  |             |                   |   |                  |  |             |             |  |   |             | 

Statement 157 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).

18

---



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 June 30, 2009 Using |            
|                                    |  |                                                 |            
|                                    |  | June
 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              |  | $                                               | 5,710,224   |                                                                    | $ |                                                  |  | $                                            | 5,710,224   |  | $ |  | 
|                                    |  |                                                 |             |                                                                    |   |                                                   |  |                                              |             |  |   |   | 
|GNMA MBS - Residential              |  |                                                 | 1,505,508   |                                                                    |   |                                                  |  |                                              | 1,505,508   |  |   |  | 
|Whole Loan MBS - Residential        |  |                                                 | 2,189,731   |                                                                    |   |                                                  |  |                                              | 2,189,731   |  |   |  | 
|Collateralized mortgage obligations |  |                                                 | 105,944,781 |                                                                    |   |                                                  |  |                                              | 105,944,781 |  |   |  | 
|                                    |  |                                                 |             |                                                                    |   |                                                   |  |                                              |             |  |   |   | 
|Total Available for sale Securities |  | $                                               | 115,350,244 |                                                                    | $ |                                                  |  | $                                            | 115,350,244 |  | $ |  | 
|                                    |  |                                                 |             |                                                                    |   |                                                   |  |                                              |             |  |   |   | 

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 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 |  | $ |  | 
|                                    |  |                                                     |             |                                                                    |   |                                                   |  |                                              |             |  |   |   | 

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. As of June 30, 2009, we did not
have any impaired loans that were collateral dependent.

19

---



Assets and
Liabilities Measured on a Non-Recurring Basis

There were no assets and liabilities measured at fair
value on a non-recurring basis as of June 30, 2009.

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

|               |  |                                                     |        |                                                                    |  |                                                   |  |                                              |   |  |   |        | 
|-------------- |  | --------------------------------------------------- | ------ | ------------------------------------------------------------------ |  | ------------------------------------------------- |  | -------------------------------------------- | - |  | - | ------ | 
|               |  | 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 December 31, 2008, we had one impaired loan 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,
resulting in 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). Financial
assets and financial liabilities measured at fair value on a non-recurring
basis were not significant at June 30, 2009.

Item 2Managements
Discussion and Analysis of Financial Condition and Results of OperationsFinancial
Condition at June 30, 2009

Total
assets were $225,929,935 at June 30, 2009, an increase of $13,272,207 or, 6.2%,
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 $16,146,328 net increase
 in cash and cash equivalents and           
| | · | A $3,119,615 net increase
 in net loans receivable, partially offset by
| | · | A $4,938,344 net decrease
 in investment securities available for sale.

The
decrease in investment securities was the result of a deliberate decision by
management not to purchase investment securities during the first half of 2009
due to the extremely low yields that were available. Although the yields on
cash equivalent liquid investments, such as overnight federal funds sold, were even
lower, we elected to use funds from our increase in deposits to increase cash
and cash equivalents so as to avoid locking those funds into low yielding
securities investments with longer terms to maturity.

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

20

---



Our
deposits (including escrow deposits) were $199,823,599 at June 30, 2009, an
increase of $11,714,150 or 6.2%, from December 31, 2008. The increase in
deposits resulted from increases of $16,986,466 in NOW accounts, $6,742,916 in
non-interest demand deposits, $1,121,860 in savings accounts and $1,079,957 in
money market accounts, partially offset by a decrease of $14,217,049 in time
deposits. The decrease in time deposits, and the primary increase in NOW
accounts, was primarily due to the conversion of a $10 million municipal
certificate of deposit into a NOW account. This deposit had been made in
conjunction with the Bank Development District program.

Total
stockholders equity was $24,425,154 at June 30, 2009, an increase of
$1,221,387 from December 31, 2008. The increase reflected (i) net income of
$832,348 for the six months ended June 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 $905,723 and (iv) a reduction of $84,539 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 $215,152 of
dividends paid, representing the first and second quarters $0.06 per share 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.

The Current
Economic Turmoil

The
economy in the United States, including the economy in Staten Island, is in a
recession and 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 the recession
continues, 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 June 30, 2009, the percentage
had declined to 14.6%. 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.

21

---



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 has imposed a 5 basis point special assessment, based on June 30, 2009
total assets net of Tier 1 capital, payable on September 30, 2009. The special
assessment amounts to $100,000. The FDIC has also announced a probable second
special assessment of 5 basis points coming in the second half of 2009. These assessments will significantly increase
our deposit insurance expense in 2009.

Results of Operations for the Three Months Ended June 30,
2009 and June 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 $459,297 for the quarter ended June 30, 2009, compared to
net income of $426,275 for the comparable quarter in 2008. The principal
categories which make up the 2009 net income are:

| |   |                                                   
| | - | --------------------------------------------------
| | · | Interest income of $2,643,549                     
| | · | Reduced by interest expense of $332,918           
| | · | Reduced by a provision for loan losses of $100,000
| | · | Increased by non-interest income of $615,083      
| | · | Reduced by non-interest expense of $1,972,673     
| | · | Reduced by income tax expense of $339,744         

We
discuss each of these categories individually and the reasons for the
differences between the quarters ended June 30, 2009 and 2008 in the following
paragraphs. In general, the principal reason for the increase in net income
when comparing the second quarter of 2009 with the same quarter in 2008 was an
improvement in our interest rate spread and margin coupled with the increase in
average assets, partially offset by the increase in provision for loan losses
and an increase in FDIC and NYSBD assessments.

22

---



Interest
Income.Interest
income was $2,643,549 for the quarter ended June 30, 2009, compared to $2,678,831
for the quarter ended June 30, 2008, a decrease of $35,282, or 1.3%. Interest
income on loans increased by $150,272 in the second quarter of 2009. We had a
$7.9 million increase in the average loan balances for the second quarter of
2009 compared to the second quarter of 2008 as management sought to deploy
funds in loans, our highest yielding major asset category. The volume increase
was the principal reason for the increase in interest income. However, the
volume increase was partially offset by a 10 basis point decrease in loan yield
due to the decline of the prime rate. 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 second quarter of 2009 included $47,793 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.

The
increase in interest income on loans was partially offset by a $68,859 decline
in interest income on cash and due from banks (other interest earning assets),
which resulted from a 195 basis point decrease in the yield on those assets
(principally overnight investments) due to lower market interest rates.
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 38 basis point decrease in the average yield on our
investment securities portfolio, from 4.75% to 4.37%, 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 $552,926, or 0.5%, between the periods. The decrease in volume and
the decrease in yield resulted in an overall $116,695 decrease in interest
income from investment securities. The investment securities portfolio
represented 82.2% of average non-loan interest earning assets in the 2009
period compared to 89.2% in the 2008 period as we deliberately limited our investment of available
funds in investment securities due to the loan yields available to us in the
first half of 2009.

Interest
Expense. Interest expense was $332,918 for the quarter ended
June 30, 2009, compared to $592,821 for the quarter ended June 30, 2008, a
decrease of 43.8%. The decrease was primarily the result of a decrease in the rates we paid on deposits,
principally on time deposits (an 81 basis point decrease) and money market
accounts (a 34 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 1.01% from 1.90% 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 $2,310,631 for the quarter ended June 30,
2009, an increase of $224,621, or 10.8% over the $2,086,010 in the comparable
2008 quarter. The increase in net interest income before the provision for loan
losses was primarily due to the reduced interest cost of deposits and
subordinated debt. Our interest rate spread increased to 3.82% in the second
quarter of 2009 from 3.50% in the second quarter 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 and 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. Our net interest margin increased to 4.21% in the
second quarter of 2009 from 4.20% in the second quarter 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.

23

---



Provision
for Loan Losses.We
took a provision for loan losses of $100,000 for the quarter ended June 30,
2009 compared to a provision for loan losses of $55,000 for the quarter ended
June 30, 2008. The $45,000 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 1.34% of total loans at
June 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 $615,083 for the quarter
ended June 30, 2009, compared to
$624,234 during the same period last year. The $9,151, or 1.5%, 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.

Non-interest
Expense. Non-interest expense was $1,972,673 for the quarter
ended June 30, 2009, compared to $1,862,177 for the quarter ended June 30,
2008, an increase of $110,496. The shifts in the individual categories were:

| |   |                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | $55,000 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;
| | · | $43,482 increased in salaries and benefits due to
 additional staff and higher related benefit costs;                                                                                                                                                   
| | · | $14,776 increase in
 occupancy expenses due to higher utility bills.                                                                                                                                                                                    

Income
Tax Expense. Income tax expense was $393,744 for the quarter ended
June 30, 2009, compared to income tax expense of $366,792 for the quarter ended
June 30, 2008. The increase in income tax expense was due to the $59,974
increase in income before income taxes in the 2009 quarter. Our effective tax
rate for the quarter ended June 30, 2009 was 46.2%, the same as for the quarter
ended June 30, 2008.

Results of Operations for the Six Months Ended June 30, 2009
and June 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.

24

---



General.
We had net income of $832,348 for the six months ended June 30, 2009, compared
to net income of $788,220 for the comparable period in 2008. The principal
categories which make up the 2009 net income are:

| |   |                                                   
| | - | --------------------------------------------------
| | · | Interest income of $5,361,615                     
| | · | Reduced by interest expense of $743,866           
| | · | Reduced by a provision for loan losses of $375,000
| | · | Increased by non-interest income of $1,228,252    
| | · | Reduced by non-interest expense of $3,925,136     
| | · | Reduced by income tax expense of $713,517         

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

Interest
Income.Interest
income was $5,361,615 for the six months ended June 30, 2009, compared to
$5,409,912 for the six months ended June 30, 2008, a decrease of $48,297, or
0.9%. The principal reason for the decline was a decline in market interest
rates, which was the primary cause of $166,411 decline in interest income from
other interest earning assets (principally overnight investments) and a
$118,373 decline in interest income on investment securities. On the positive
side, interest income on loans increased by $236,487.

The
average yield on other interest earning assets (principally overnight
investments) declined 241 basis points from 2.5% in the first six months of
2008 to 0.09% in the first six 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 26 basis point decrease in the average yield on our
investment securities portfolio, from 4.75% to 4.49%, 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
increased by $1,940,172, or 1.63%, between the periods. The increase in volume
was moderated by our decision, discussed above, to limit the purchases of
investment securities to avoid locking in the very low rates at which they were
available during the first half of 2009. The investment securities portfolio
represented 84.4% of average non-loan interest earning assets in the 2009
period compared to 89.4% in the 2008 period.

There
were three principal causes of the $236,487 increase in interest on loans.
First, we received $136,598 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 $6,394,523 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 24 basis points, from 7.70% to
7.56%.

Interest
Expense. Interest expense was $743,866 for the six months ended June
30, 2009, compared to $1,348,613 for the six months ended June 30, 2008, a
decrease of $604,747 or 44.8%. The decrease was primarily the result of a decrease in the rates we paid on deposits,
principally on time deposits (a 115 basis point decrease) and money market
accounts (a 53 basis point decrease), combined with the reduction in interest
expense caused by our repayment of the subordinated debt in August 2008, which
had previously had an interest cost of 6.91%. As a result, our average cost of
funds, excluding the effect of interest-free demand deposits, decreased to
1.15% from 2.20% between the periods due to the decline in market interest
rates and the repayment of the subordinated debt.

25

---



Net Interest
Income Before Provision for Loan Losses. Net interest income before
the provision for loan losses was $4,617,749 for the six months ended June 30,
2009, an increase of $556,450, or 13.7% over the $4,061,299 in the comparable
2008 period. Our interest rate spread increased to 3.87% in the first six
months of 2009 from 3.33% 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 increased to 4.32% in the first six months of
2009 from 4.15% 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 $375,000 for the six months ended June 30,
2009 compared to a provision for loan losses of $85,000 for the six months
ended June 30, 2008. The $290,000 increase in the provision was due to a higher
level of charge-offs, $466,893 for the first six months of 2009 as compared to
$251,716 in the same period in 2008, and continuing deterioration 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.

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 1.34% of total loans at
June 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 $1,228,252 for the six months
ended June 30, 2009, compared to
$1,190,136 during the same period last year. The $38,116, or 3.2%, 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, and an increase in net rental income because the Bank was able to
sublease a portion of a leased property that was previously vacant. 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 $3,925,136 for the six
months ended June 30, 2009, compared to $3,700,327 for the six months ended
June 30, 2008. The shifts in the individual categories were:

| |   |                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | $84,000 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;              
| | · | $45,057 increased in salaries and benefits due to
 additional staff and higher related benefit costs;                                                                                                                                                                 
| | · | $36,133 increase in
 occupancy expenses due to higher utility bills;                                                                                                                                                                                                  
| | · | $29,000 increase in
 professional fees primarily due the costs of initial compliance with Section
 404 of the Sarbanes-Oxley Act, which requires management and the independent
 accountant to report on the companys internal control over financial
 reporting; and
| | · | $25,392 increase in computer expenses primarily due to increased fees
 associated with our disaster recovery program.                                                                                                                                                 

26

---



Income
Tax Expense. Income tax expense was $713,517 for the six
months ended June 30, 2009, compared to income tax expense of $677,888 for the
same period ended June 30, 2008. The increase in income tax expense was due to
the $79,757 increase in income before income taxes in the 2009 period. Our
effective tax rate for the first six months ended June 30, 2009 was 46.2%, the
same as for the same period ended June 30, 2008.

27

---



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

|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|----------------------------------------------------------------- |  | ---------------------------------- | ----------- | ---------------------------------- | - | -------------------------------- |  | ---------------- | -------------------------------- | -------- | - | ------------ | - | ---------------- | --------- | -------- | ---- | ------------ |  | - | ---------------- | - | -------- | --------- | ------------ | ---- | - |  |  | - | ----------- | - | - | --------- |  | ---- | -
|                                                                  |  | Three
 Months Ended
 June 30, 2009 |             | Three
 Months Ended
 June 30, 2008 |   | Six
 Months Ended
 June 30, 2009 |  |                  | Six
 Months Ended
 June 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                                                  |  | $                                  | 70,088,567  |                                    | $ | 1,323,189                        |  | 7.37             | %                                |          | $ | 62,185,996   |   | $                | 1,172,917 |          | 7.47 | %            |  | $ | 68,979,199       |   | $        | 2,653,895 |              | 7.56 | % |  |  | $ | 62,584,676  |   | $ | 2,417,408 |  | 7.70 | %
|Investment securities, afs                                        |  |                                    | 120,536,100 |                                    |   | 1,314,667                        |  | 4.37             |                                  |          |   | 121,089,026  |   |                  | 1,431,362 |          | 4.75 |              |  |   | 121,134,122      |   |          | 2,697,286 |              | 4.49 |   |  |  |   | 119,193,950 |   |   | 2,815,659 |  | 4.75 |  
|Other interest-earning assets                                     |  |                                    | 26,117,641  |                                    |   | 5,693                            |  | 0.09             |                                  |          |   | 14,704,057   |   |                  | 74,552    |          | 2.04 |              |  |   | 22,313,262       |   |          | 10,434    |              | 0.09 |   |  |  |   | 14,209,342  |   |   | 176,845   |  | 2.50 |  
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|Total interest-earning assets                                     |  |                                    | 216,742,308 |                                    |   | 2,643,549                        |  | 4.83             |                                  |          |   | 197,979,079  |   |                  | 2,678,831 |          | 5.40 |              |  |   | 212,426,583      |   |          | 5,361,615 |              | 5.02 |   |  |  |   | 195,987,968 |   |   | 5,409,912 |  | 5.53 |  
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|Non-interest earning assets                                       |  |                                    | 4,940,609   |                                    |   |                                  |  |                  |                                  |          |   | 12,990,338   |   |                  |           |          |      |              |  |   | 5,230,752        |   |          |           |              |      |   |  |  |   | 13,071,773  |   |   |           |  |      |  
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|Total assets                                                      |  | $                                  | 221,682,917 |                                    |   |                                  |  |                  |                                  |          | $ | 210,969,417  |   |                  |           |          |      |              |  | $ | 217,657,335      |   |          |           |              |      |   |  |  | $ | 209,059,741 |   |   |           |  |      |  
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|Liabilities and equity:                                           |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|Interest-bearing liabilities:                                     |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|Savings accounts                                                  |  | $                                  | 13,245,440  |                                    |   | 13,219                           |  | 0.40             |                                  |          | $ | 11,816,546   |   |                  | 18,191    |          | 0.62 |              |  | $ | 12,980,502       |   |          | 26,321    |              | 0.41 |   |  |  | $ | 11,402,990  |   |   | 37,173    |  | 0.66 |  
|Time accounts                                                     |  |                                    | 63,005,008  |                                    |   | 220,765                          |  | 1.41             |                                  |          |   | 69,021,801   |   |                  | 380,380   |          | 2.22 |              |  |   | 69,006,358       |   |          | 531,317   |              | 1.55 |   |  |  |   | 67,104,083  |   |   | 899,827   |  | 2.70 |  
|Money market accounts                                             |  |                                    | 24,109,694  |                                    |   | 62,944                           |  | 1.05             |                                  |          |   | 20,940,525   |   |                  | 72,509    |          | 1.39 |              |  |   | 23,778,459       |   |          | 123,455   |              | 1.05 |   |  |  |   | 21,399,289  |   |   | 168,601   |  | 1.58 |  
|Now accounts                                                      |  |                                    | 31,570,563  |                                    |   | 35,990                           |  | 0.46             |                                  |          |   | 18,385,134   |   |                  | 32,702    |          | 0.72 |              |  |   | 25,069,622       |   |          | 62,773    |              | 0.50 |   |  |  |   | 18,129,757  |   |   | 64,933    |  | 0.72 |  
|Subordinated debt                                                 |  |                                    |            |                                    |   |                                 |  |                 |                                  |          |   | 5,155,000    |   |                  | 89,039    |          | 6.91 |              |  |   |                 |   |          |          |              |     |   |  |  |   | 5,155,000   |   |   | 178,079   |  | 6.91 |  
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|Total interest-bearing liabilities                                |  |                                    | 131,930,705 |                                    |   | 332,918                          |  | 1.01             |                                  |          |   | 125,319,006  |   |                  | 592,821   |          | 1.90 |              |  |   | 130,834,941      |   |          | 743,866   |              | 1.15 |   |  |  |   | 123,191,119 |   |   | 1,348,613 |  | 2.20 |  
|Checking accounts                                                 |  |                                    | 63,715,256  |                                    |   |                                  |  |                  |                                  |          |   | 62,800,182   |   |                  |           |          |      |              |  |   | 61,481,194       |   |          |           |              |      |   |  |  |   | 62,906,868  |   |   |           |  |      |  
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|Total deposits and subordinated debt                              |  |                                    | 195,645,961 |                                    |   |                                  |  |                  |                                  |          |   | 188,119,188  |   |                  |           |          |      |              |  |   | 192,316,135      |   |          |           |              |      |   |  |  |   | 186,097,987 |   |   |           |  |      |  
|Other liabilities                                                 |  |                                    | 1,658,579   |                                    |   |                                  |  |                  |                                  |          |   | 968,801      |   |                  |           |          |      |              |  |   | 1,469,923        |   |          |           |              |      |   |  |  |   | 1,160,933   |   |   |           |  |      |  
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|Total liabilities                                                 |  |                                    | 197,304,540 |                                    |   |                                  |  |                  |                                  |          |   | 189,087,989  |   |                  |           |          |      |              |  |   | 193,786,058      |   |          |           |              |      |   |  |  |   | 187,258,920 |   |   |           |  |      |  
|Equity                                                            |  |                                    | 24,378,377  |                                    |   |                                  |  |                  |                                  |          |   | 21,881,428   |   |                  |           |          |      |              |  |   | 23,871,277       |   |          |           |              |      |   |  |  |   | 21,800,821  |   |   |           |  |      |  
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|Total liabilities and equity                                      |  | $                                  | 221,682,917 |                                    |   |                                  |  |                  |                                  |          | $ | 210,969,417  |   |                  |           |          |      |              |  | $ | 217,657,335      |   |          |           |              |      |   |  |  | $ | 209,059,741 |   |   |           |  |      |  
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|Net interest income/net interest rate spread                      |  |                                    |             |                                    | $ | 2,310,631                        |  | 3.82             | %                                |          |   |              |   | $                | 2,086,010 |          | 3.50 | %            |  |   |                  |   | $        | 4,617,749 |              | 3.87 | % |  |  |   |             |   | $ | 4,061,299 |  | 3.33 | %
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|Net interest earning assets/net interest margin                   |  | $                                  | 84,811,603  |                                    |   |                                  |  | 4.21             | %                                |          | $ | 72,660,073   |   |                  |           |          | 4.20 | %            |  | $ | 81,591,642       |   |          |           |              | 4.32 | % |  |  | $ | 72,796,849  |   |   |           |  | 4.15 | %
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|Ratio of interest-earning assets to interest-bearing
 liabilities |  |                                    | 1.64        | x                                  |   |                                  |  |                  |                                  |          |   | 1.58         | x |                  |           |          |      |              |  |   | 1.62             | x |          |           |              |      |   |  |  |   | 1.59        | x |   |           |  |      |  
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|Return on Average Assets (1)                                      |  |                                    | 0.80        | %                                  |   |                                  |  |                  |                                  |          |   | 0.79         | % |                  |           |          |      |              |  |   | 0.74             | % |          |           |              |      |   |  |  |   | 0.75        | % |   |           |  |      |  
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|Return on Average Equity (1)                                      |  |                                    | 7.24        | %                                  |   |                                  |  |                  |                                  |          |   | 7.65         | % |                  |           |          |      |              |  |   | 6.72             | % |          |           |              |      |   |  |  |   | 7.17        | % |   |           |  |      |  
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  
|Tangible Equity to Total Assets                                   |  |                                    | 10.81       | %                                  |   |                                  |  |                  |                                  |          |   | 9.94         | % |                  |           |          |      |              |  |   | 10.81            | % |          |           |              |      |   |  |  |   | 9.94        | % |   |           |  |      |  
|                                                                  |  |                                    |             |                                    |   |                                  |  |                  |                                  |          |   |              |   |                  |           |          |      |              |  |   |                  |   |          |           |              |      |   |  |  |   |             |   |   |           |  |      |  

(1) Ratios have been annualized.

28

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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 six months ended June 30, 2009, we had a net increase in total deposits of
$11,714,150 due to increases of $16,986,466 in NOW accounts, $6,742,916
in non-interest demand deposits, $1,121,860 in savings accounts and $1,079,957
in money market accounts, partially offset by a decrease of $14,217,049 in time
deposits. We also received
proceeds from repayment of investment securities of $18,349,346. We used
$11,776,211 of available funds to purchase new investment securities and we had
a net loan increase of $3,439,003. These changes resulted in an overall
increase in cash and cash equivalents of $16,146,328 because we elected not to
use those funds to purchase investment securities, as discussed above.

In
contrast, during the six months ended June 30, 2008, we had a net increase in
total deposits of $12,726,092 due to increases of $5,584,881 in time deposits,
$3,928,274 in non-interest demand deposits, $2,198,478 in NOW accounts and
$1,134,606 in savings accounts, partially offset by a decrease of $120,147 in
money market accounts. We also received proceeds from repayment of investment
securities of $14,402,118. We used $21,612,383 of available funds to purchase
new investment securities and we had a net loan increase of $821,792. These
changes resulted in an overall increase in cash and cash equivalents of
$5,310,982.

At
June 30, 2009, cash and cash equivalents represented 17% 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 June 30, 2009 we had in excess
of $115 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. 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 June 30, 2009, with a Tier I Leverage Capital ratio of
10.13%, a ratio of Tier I Capital to Risk-Weighted Assets ratio of 24.09%, and
a Total Capital to Risk-Weighted Assets ratio of 25.08%.

VSB
Bancorp, Inc. satisfied all capital ratio requirements of the Federal Reserve
at June 30, 2009, with a Tier I Leverage Capital ratio of 10.34%, a ratio of
Tier I Capital to Risk-Weighted Assets ratio of 24.11%, and a Total Capital to
Risk-Weighted Assets ratio of 25.08%.

29

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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 June 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 |  | $                      | 401,591    |                      | $ | 825,690              |  | $                 | 831,224   |                           | $ | 1,597,147 |  | $ | 3,655,652  | 
|Remaining contractual maturities of time deposits                    |  |                        | 58,321,701 |                      |   | 1,131,238            |  |                   | 2,653,506 |                           |   |          |  |   | 62,106,445 | 
|                                                                     |  |                        |            |                      |   |                      |  |                   |           |                           |   |           |  |   |            | 
|Total contractual cash obligations                                   |  | $                      | 58,723,292 |                      | $ | 1,956,928            |  | $                 | 3,484,730 |                           | $ | 1,597,147 |  | $ | 65,762,097 | 
|                                                                     |  |                        |            |                      |   |                      |  |                   |           |                           |   |           |  |   |            | 

|                  |  |                                            |            |                      |   |                      |  |                   |   |                           |   |   |  |   |            | 
|----------------- |  | ------------------------------------------ | ---------- | -------------------- | - | -------------------- |  | ----------------- | - | ------------------------- | - | - |  | - | ---------- | 
|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  |  | $                                          | 41,666,591 |                      | $ | 4,189,382            |  | $                 |  |                           | $ |  |  | $ | 45,855,973 | 
|                  |  |                                            |            |                      |   |                      |  |                   |   |                           |   |   |  |   |            | 

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 eight non-performing loans, totaling $2,005,654, at
June 30, 2009, compared to thirteen non-performing loans, totaling $2,279,067,
at December 31, 2008. The following is information about the five largest
non-performing loans, totaling $1,385,096 in outstanding principal balance at
June 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. A motion to appoint a referee to calculate the amount owed on the
 loans, which is a predicate to an actual foreclosure sale, was submitted and
 we are awaiting the courts decision on that motion.
| | · | $510,095 in a loan to a
 local business. The loan is in arrears but the borrower continues to make
 partial payments. The loan is secured by a first mortgage on a commercial
 building, a third mortgage on the borrowers personal residence, a security
 interest in the business, and the personal guaranties of the principals. This
 loan was repaid in full in July 2009.                                                                                             
| | · | $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 has
 commenced 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.

30

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Item 3
 Controls and Procedures

Evaluation
of Disclosure Controls and Procedures: As of June 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.
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. The
litigation is in the discovery phase and depositions of former officers and
employees of Old IndyMac, the first depositions in the case, began in April
2009, but have not concluded.

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.

31

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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:
 August 11, 2009 | /s/
 Raffaele M. Branca               
| |                        |                                       
| |                        | Raffaele
 M. Branca                   
| |                        | President
 and Chief Executive Officer

EXHIBIT
INDEX

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

Item 6 - Exhibits

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

32

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