UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20849

                                   FORM 10-KSB


[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE YEAR ENDED DECEMBER 31, 2005

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF THE EXCHANGE ACT
                            FOR THE TRANSITION PERIOD

                         COMMISSION FILE NUMBER 0-50237

                                VSB Bancorp, Inc.
                 ----------------------------------------------
                 (Name of Small Business Issuer in its charter)

                                    New York
         --------------------------------------------------------------
         (State or other jurisdiction of incorporation or organization)

                                  11 - 3680128
                     --------------------------------------
                     (I. R. S. Employer Identification No.)

                 3155 Amboy Road, Staten Island, New York 10306
                 ----------------------------------------------
                    (Address of principal executive offices)

                                 (718) 979-1100
                            -------------------------
                            Issuer's telephone number

                                  Common Stock
                                ----------------
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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. [X] Yes [ ] No.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB/A or any amendment to
this Form 10-KSB/A. [ ].

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No

Indicate by check mark if accelerated filer. [ ] Yes  [X] No.

State Issuer's revenues for the most recent fiscal year:  $13,402,125.

The aggregate market value of the voting stock held by non-affiliates of the
registrant at June 30, 2005 was $20,232,755.

The registrant had 1,509,822 common shares outstanding as of March 13, 2006.
<PAGE>

Documents incorporated by reference:

Portions of the registrant's definitive proxy statement filed on or about March
27, 2006 into Part III of this Form 10-KSB.


                           Forward-Looking Statements

         When used in this Form 10-KSB, or in any written or oral statement made
by us or our officers, directors or employees, the words and phrases "will
result," "expect," "will continue," "anticipate," "estimate," "project," or
similar terms are intended to identify "forward-looking statements." A variety
of factors could cause our actual results and experiences to differ materially
from the anticipated results or other expectations expressed in any
forward-looking statements. Some of the risks and uncertainties that may affect
our operations, performance, development and results, the interest rate
sensitivity of our assets and liabilities, and the adequacy of our loan loss
allowance, include, but are not limited to:

         o    deterioration in local, regional, national or global economic
              conditions which could result in, among other things, an increase
              in loan delinquencies, a decrease in property values, or a change
              in the real estate turnover rate;
         o    changes in market interest rates or changes in the speed at which
              market interest rates change;
         o    changes in laws and regulations affecting the financial service
              industry;
         o    changes in competition; and
         o    changes in consumer preferences by our customers or the customers
              of our business borrowers.

         Please do not place undue reliance on any forward-looking statement,
which speaks only as of the date made. There are many factors, including those
described above, that could affect our future business activities or financial
performance and could cause our actual future results or circumstances to differ
materially from those we anticipate or project. We do not undertake any
obligation to update any forward-looking statement after it is made.

<PAGE>

                                     PART I

Item 1. Description of Business.

                          Business of VSB Bancorp, Inc.

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.

The main office of the Company and the Bank is at 3155 Amboy Road, Staten
Island, New York 10306, telephone (718) 979-1100. We maintain an Internet web
site at www.victorystatebank.com.

We also own all of the common stock of VSB Capital Trust I, a special purpose
trust established to issue $5 million of trust preferred securities in August
2003. Under Federal Reserve Regulations, provided that certain conditions are
met, up to 25% of our Tier I capital requirement may be satisfied through funds
raised by the sale of trust preferred securities. We used the proceeds from the
sale of the trust preferred securities to continue to satisfy our regulatory
capital requirements. We contributed $4.2 million of the proceeds from the sale
of those securities to Victory State Bank as capital, thus providing the Bank
with capital to support future growth. Trust preferred securities are long-term
debt securities in which interest paid to the owner of the security is tax
deductible to the holding company, in contrast to dividends paid by the holding
company, which do not provide a tax benefit to the company that pays the
dividends. The tax deductibility of the interest payments means that trust
preferred securities can be a low-cost source of capital.

Victory State Bank

Victory State Bank's principal business has been and continues to be attracting
commercial deposits from primarily the general public and investing those
deposits, together with funds generated from operations and repayments on
existing investments, primarily in loans for business purposes and investment
securities. The Bank's revenues are derived principally from interest on our
commercial loan and investment securities portfolios. The Bank's primary sources
of funds are deposits and principal and interest payments on loans and
investment securities.

Victory State Bank serves its primary market of Staten Island, New York through
its four banking offices. The Bank opened its main office in the Oakwood section
of Staten Island in November 1997; its first branch was opened in the West
Brighton section of Staten Island in June 1999; its second branch in the St.
George section of Staten Island in January 2000; and its third branch in the
Dongan Hills section of Staten Island in December 2002. In 2006, the Bank
anticipates that it will open its fifth branch location in the Rosebank section
of Staten Island and a sixth branch location in the Great Kills section of
Staten Island. The Bank's deposits are insured by the Bank Insurance Fund of the
Federal Deposit Insurance Corporation up to the maximum amounts permitted by
law. Victory State Bank also serves its customers through its website,
www.victorystatebank.com.

Market Area and Competition

Victory State Bank has been, and continues to be, a community-oriented,
state-chartered commercial bank offering a variety of traditional financial
services to meet the needs of the communities in which it operates. Management
considers our reputation for customer service as its major competitive advantage
in attracting and retaining customers in its market area.

                                       1
<PAGE>

Our primary market area is concentrated in the neighborhoods surrounding our
branches in the New York City Borough of Staten Island. Management believes that
our branch offices are located in communities that can generally be
characterized as stable, residential neighborhoods of predominantly one- to
four-family residences and middle income families.

From 1990 to 2000, Staten Island's population grew to 443,728 from 378,977, or a
17% increase. There was a modest shift from the 20 to 44 year age group to the
45 to 64 year age group. As a percentage of population, the 45 to 64 year age
group increased from 19.8% to 23.4% during the decade. The largest age group
continues to be the 20 to 44 age group, currently at 37.0% of total population.

Median household income increased to $55,039 from $50,064 during the decade of
the 90's. Per capita income in 1999 was $23,905 in Staten Island, slightly
higher than $23,389, the per capita income of New York State. One third of the
households in Staten Island had household income of more than $75,000 in 1999.
These income levels compare favorably with the national household median of
$41,994 and the national per capita median of $21,587. The income levels in
Staten Island provide satisfactory support for personal home ownership, in turn
supporting the home building industry, which is a major industry focus for
Victory State Bank.

As the population grew, the total number of households increased to 156,341 from
130,519. Total housing units stood at 163,993 in 2000, as compared to 139,726 in
1990. Owner occupied housing units represented 63.8% of total housing units in
2000, which was consistent with the 63.7% level in 1990. This reflects an
increase of approximately 15,600 owner-occupied housing units during the decade
and demonstrates the importance of the housing market, especially people
purchasing homes for their personal use, to the local economy.

The New York City metropolitan area has a high density of financial
institutions, many of which are significantly larger and have greater financial
resources than we have, and all of which are our competitors to varying degrees.
Our competition for loans comes principally from commercial banks, savings banks
and insurance companies. Our most direct competition for deposits has come from
commercial banks and savings banks. In addition, we face increasing competition
for deposits from non-bank institutions such as brokerage firms and insurance
companies in such areas as short-term money market funds, corporate and
government securities funds, mutual funds and annuities.

RISK FACTORS

Bank lending is an inherently risky business. A substantial portion of our
assets are invested in loans, and loans necessarily present many risks. We must
first rely on our borrowers to repay their loans, and if they are unable to do
so, we must rely on the value of the collateral, if any, for the loan. Changing
business conditions, increases in unemployment, personal problems that a
borrower may experience, changes in the regulations that apply to a borrower's
business, changes in the political climate or in public policy, and many other
factors outside our control, could adversely affect the ability of our borrowers
to repay their loans or the value of the collateral we have received. Although
we seek to reduce these risks through underwriting procedures that we believe
are prudent, it is impossible for a bank to completely eliminate the risks which
arise from making loans except by eliminating our lending operations.

Fluctuations in interest rates could have an adverse affect on our
profitability. Our principal source of income is the difference between the
interest income we earn on interest-earning assets, such as loans and
securities, and our cost of funds, principally interest paid on deposits. These
rates of interest change from time to time, depending upon a number of factors,
including general market interest rates. However, the frequency of the changes
varies among different types of assets and liabilities. For example, for a
five-year loan with an interest rate based upon the prime rate, the interest
rate may change every time the prime rate changes. In contrast, the rate of
interest we pay on a five-year certificate of deposit adjusts only every five
years, based upon changes in market interest rates.

In general, the interest rates we pay on deposits adjust more slowly than the
interest rates we earn on loans because the largest part of our loan portfolio
consist of loans with interest rates that fluctuate based upon the prime rate.

                                       2
<PAGE>

In contrast, although many of our deposit categories have interest rates that
could adjust immediately, such as interest checking accounts and savings
accounts, changes in the interest rates on those accounts are at our discretion
and tend to occur more slowly. As a result, increases in market interest rates
could increase our net interest income because our cost of deposits would
probably increase more slowly than the yields on our loans. However, customer
preferences and competitive pressures may negate this positive effect because
customers may choose to move funds into higher-earning deposit types as higher
interest rates make them more attractive, or competitors offer premium rates to
attract deposits. We also have a substantial portfolio of investment securities
with fixed rates of interest, most of which are mortgage-backed securities with
an estimated average life of not more than 5 years.

There is no active trading market for our common stock. There is no active
trading market for our common stock. Our common stock is not listed on any
exchange nor is it quoted on the NASDAQ Stock Market. It is quoted on the OTC
Bulletin Board, but does not trade every day. the twelve months ended March 1,
2006, there were trades were reported on only 74 out of 253 trading days, or
less than one out of every three trading days. We currently have approximately
200 stockholders of record and we believe based upon reports we have received
from broker/dealers, that there are approximately an additional 100 stockholders
who own their shares in street name. This relatively small number of
stockholders reduces the likelihood that an active trading market for our common
stock will develop and makes it difficult for us to have our stock listed or
quoted on any but the least active exchanges or quotation systems.

The geographic concentration of our loans increases the risk that adverse
economic conditions could affect our net income. Substantially all of our loans
are mortgage loans on property located in Staten Island, New York, or loans to
residents of Staten Island. Staten Island has experienced an economic down turn
in recent years. A continued economic slow-down or decline in the local economy
could have an adverse effect on us for a number of reasons. Adverse economic
conditions could hurt the ability of our borrowers to repay their loans. If real
estate values decline, reductions in the value of real estate collateral could
make it more difficult for us to recover the full amount due on loans which go
into default. Furthermore, economic difficulties can also increase deposit
outflows as customers must use savings to pay bills. This could increase our
cost of funds because of the need to replace the deposit outflow. All of these
factors might combine to reduce significantly our net income.

Our loans are concentrated in the residential building trades industry, and thus
a downturn in the local housing market could adversely affect our net income.
The largest segment of our loan portfolio is represented by loans to home
builders and others involved in the home building industry, such as equipment
and material suppliers. At December 31, 2005, 39.8% of our loans were
construction mortgage loans, primarily for the construction of residential
properties. Our non-mortgage commercial loans, totaling an additional 17.0% of
our loan portfolio were also concentrated in companies involved in the
construction industry and some of our other loans also involved companies in
related industries. As a result, a down turn in the housing market in our Staten
Island lending area could have a significant negative impact on both our loan
portfolio and our level of deposits. Not only could such a down turn adversely
affect the ability of our borrowers to repay their loans, but it could also
reduce our ability to generate new loans that satisfy our underwriting criteria.
Furthermore, businesses in the home building industry are a source of deposits
as well as loans, and if their businesses suffer, they are likely to reduce the
level of deposits they maintain at with us.

Changes in the federal or state regulation of financial institutions could have
an adverse effect on future operations. Federal and New York State banking laws
and regulations exert substantial control over our operations. Federal and state
regulatory authorities have extensive discretion in connection with their
supervision of Victory State Bank, such as the right to impose restrictions on
operations and the insistence that we increase our allowance for loan losses.
Furthermore, federal and state laws affecting banks are constantly being
revised, often imposing new restrictions or increasing competitive pressures
through de-regulation. Any change in the regulatory structure or statutes or
regulations applicable to banks, bank holding companies, or their competitors,
whether by the Congress, the FDIC, the Federal Reserve System, the New York
State legislature, the New York State Banking Department or any other regulator,
could have a material impact on our operations and profitability.

                                       3
<PAGE>

We operate in an extremely competitive environment. We operate in one of the
most competitive environments for financial products in the world. Many of the
world's largest financial institutions have offices in our local communities,
and they have far greater financial resources than we have. We seek to
distinguish ourselves from those institutions by providing personalized service
and providing the same level of care to small community based businesses that
only Fortune 500 companies can obtain from the largest banks.

The Loss of Key Personnel Could Impair our Future Success. Our future success
depends in part on the continued service of our executive officers, other key
management, as well as our staff, and our ability to continue to attract,
motivate, and retain additional highly qualified employees. The loss of one or
more of our key personnel or our inability to timely recruit replacements of
such personnel, or otherwise attract, motivate, or retain qualified personnel
could have an adverse effect on our business, operating results and financial
condition.

Lending Activities

Loan Portfolio Composition. Our loan portfolio consists primarily of commercial
mortgage loans and unsecured commercial loans. At December 31, 2005, we had
total unsecured commercial loans outstanding of $11,078,101, or 14.9% of total
loans, and commercial real estate loans of $29,794,108, or 40.1% of total loans.
There was $29,611,346 of construction loans secured by real estate, $26,623,846
of which were construction loans to businesses for the construction of either
commercial property or residential property for sale, representing 35.8% of
total loans. Other loans in our portfolio principally included commercial loans
secured by assets other than real estate totaling $1,584,484 or 2.1% of total
loans at December 31, 2005 and consumer non-mortgage loans of $1,477,366 or 2.0%
of total loans. For the year ended December 31, 2005, approximately $62,840,808,
or 84.5%, of loans for business purposes had adjustable interest rates based on
the prime rate of interest.

The following table sets forth the composition of our loan portfolio in dollar
amounts and in percentages at the dates indicated

<TABLE>
<CAPTION>
                                                                      At December 31,
                        -----------------------------------------------------------------------------------------------------------
                                2005                  2004                  2003                 2002                  2001
                        -------------------   -------------------   -------------------   -------------------   -------------------
                                      % of                  % of                  % of                  % of                  % of
                           Amount     Total      Amount     Total      Amount     Total     Amount      Total     Amount      Total
                        -----------   -----   -----------   -----   -----------   -----   -----------   -----   -----------   -----
<S>                     <C>            <C>    <C>            <C>    <C>            <C>    <C>            <C>    <C>            <C>
Commercial loans:
 Commercial secured     $ 1,584,484     2.1%  $ 1,572,824     2.3%  $ 1,896,374     2.8%  $ 4,014,494     6.3%  $ 4,337,062     8.6%
 Commercial unsecured    11,078,101    14.9     9,620,243    14.1     8,905,587    13.1    11,322,164    17.7    10,964,539    21.6
                        -----------   -----   -----------   -----   -----------   -----   -----------   -----   -----------   -----
    Total commercial
      loans              12,662,585    17.0    11,193,067    16.4    10,801,961    15.9    15,336,658    24.0    15,301,601    30.2
Real Estate loans:
Commercial               29,794,108    40.1    31,741,069    46.5    32,416,537    47.5    31,357,950    49.1    21,553,696    42.5
One-to-four family          298,779     0.4     1,112,032     1.6     1,382,490     2.0       493,504     0.8       376,999     0.7
                        -----------   -----   -----------   -----   -----------   -----   -----------   -----   -----------   -----
    Total real estate
      loans              30,092,887    40.5    32,853,101    48.1    33,799,027    49.5    31,851,454    49.9    21,930,695    43.2
Construction loans:
Commercial               26,623,846    35.8    19,893,858    29.1    20,390,849    29.8    13,562,442    21.3    10,477,294    20.7
Owner occupied
  one-to-four family      2,987,500     4.0     2,960,000     4.3     1,870,000     2.7     1,315,000     2.1     1,803,000     3.6
                        -----------   -----   -----------   -----   -----------   -----   -----------   -----   -----------   -----
    Total construction
      loans              29,611,346    39.8    22,853,858    33.4    22,260,849    32.5    14,877,442    23.4    12,280,294    24.3
Other loans:
Consumer loans            1,477,366     2.0     1,048,448     1.5       949,899     1.4     1,179,485     1.9       796,987     1.6
Other loans                 486,009     0.7       435,837     0.6       510,617     0.7       509,073     0.8       331,355     0.7
                        -----------   -----   -----------   -----   -----------   -----   -----------   -----   -----------   -----
    Total other loans     1,963,375     2.7     1,484,285     2.1     1,460,516     2.1     1,688,558     2.7     1,128,342     2.3

Total loans              74,330,193   100.0%   68,384,311   100.0%   68,322,353   100.0%   63,754,112   100.0%   50,640,932   100.0%
                        -----------   =====   -----------   =====   -----------   =====   -----------   =====   -----------   =====

Less:
 Unearned discounts,
   net and deferred
   loan fees, net           386,088               337,426               340,892               339,601               216,139
 Allowance for loan
   losses                 1,153,298             1,299,520             1,162,776             1,168,358               894,692
                        -----------           -----------           -----------           -----------           -----------
 Loans, net             $72,790,807           $66,747,365           $66,818,685           $62,246,153           $49,530,101
                        ===========           ===========           ===========           ===========           ===========
</TABLE>

The following table sets forth our loan originations and principal repayments
for the periods indicated. We did not purchase or sell any loans in 2005, 2004
or 2003.

                                       4
<PAGE>

                                    Year Ended      Year Ended      Year Ended
                                   December 31,    December 31,    December 31,
                                       2005            2004            2003
                                   ------------    ------------    ------------

Commercial Loans (gross):
 At beginning of period            $ 11,193,067    $ 10,801,961    $ 15,336,658
  Commercial loans originated:
   Secured                            1,318,810         537,400       1,109,942
   Unsecured                         39,289,021      23,088,067      24,918,508
                                   ------------    ------------    ------------
  Total commercial loans             40,607,831      23,625,467      26,028,450
 Principal repayments               (39,138,313)    (23,234,361)    (30,563,147)
                                   ------------    ------------    ------------
 At end of period                  $ 12,662,585    $ 11,193,067    $ 10,801,961
                                   ============    ============    ============

Real Estate loans:
At beginning of period             $ 32,853,101    $ 33,799,027    $ 31,851,454
Real estate loans originated:
    Commercial                       11,228,592      10,373,324      12,104,500
    One-to-four family                  370,000         325,000       5,862,639
                                   ------------    ------------    ------------
   Total real estate loans           11,598,592      10,698,324      17,967,139
Principal repayments                (14,358,806)    (11,644,250)    (16,019,566)
                                   ------------    ------------    ------------
 At end of period                  $ 30,092,887    $ 32,853,101    $ 33,799,027
                                   ============    ============    ============
Construction loans
At beginning of period             $ 22,853,858    $ 22,260,849    $ 14,877,442
   Construction loans originated     33,364,808      26,851,000      25,867,500
  Principal repayments              (26,607,320)    (26,257,991)    (18,484,093)
                                   ------------    ------------    ------------
 At end of period                  $ 29,611,346    $ 22,853,858    $ 22,260,849
                                   ============    ============    ============
Other loans (gross):
 At beginning of period            $  1,484,285    $  1,460,516    $  1,688,558
   Other loans originated             1,801,270       1,242,684         771,063
  Principal repayments               (1,322,180)     (1,218,915)       (999,105)
                                   ------------    ------------    ------------
At end of period                   $  1,963,375    $  1,484,285    $  1,460,516
                                   ============    ============    ============

Loan Maturity. The following table shows the contractual maturity of our loans
at December 31, 2005.

<TABLE>
<CAPTION>
                                                             At December 31, 2005
                             ---------------------------------------------------------------------------------------

                              Commercial     Commercial                                     Other
                              Unsecured       Secured      Construction   Real Estate      Loans (1)        Total
                             ------------   ------------   ------------   ------------   ------------   ------------
<S>                          <C>            <C>            <C>            <C>            <C>            <C>
Amounts due:
 Within one year (1)         $  6,730,354   $    441,169   $  9,205,215   $  5,365,451   $  1,337,646   $ 23,079,835
  After one year:
  One to five years             4,347,747      1,143,315     20,406,131     19,627,748        625,729     46,150,670
Total due after five years             --             --             --      5,099,688             --      5,099,688
                             ------------   ------------   ------------   ------------   ------------   ------------
    Total amount due           11,078,101      1,584,484     29,611,346     30,092,887      1,963,375     74,330,193

Less:
   Unearned fees                       --            925        238,651        146,512             --        386,088
  Allowance for loan
      losses                      360,532          2,349        362,590        370,907         56,920      1,153,298
                             ------------   ------------   ------------   ------------   ------------   ------------
Loans, net                   $ 10,717,569   $  1,581,210   $ 29,010,105   $ 29,575,468   $  1,906,455   $ 72,790,807
                             ============   ============   ============   ============   ============   ============
</TABLE>
(1) Amount includes overdrawn deposit accounts of $365,275

The following table sets forth at December 31, 2005, the dollar amount of all
loans, due after December 31, 2006, and whether such loans have fixed or
variable interest rates.

                                       5
<PAGE>

                                   Due After December 31, 2006
                           ------------------------------------------
                              Fixed         Variable        Total
                           ------------   ------------   ------------

Commercial Loans:
    Unsecured              $    260,112   $  4,087,635   $  4,347,747
    Secured                     315,344        827,971      1,143,315
Real Estate
    Commercial                  663,120     23,917,436     24,580,556
    One-to-four                 146,880             --        146,880
Construction                         --     20,406,131     20,406,131
Other loans                     625,729             --        625,729
                           ------------   ------------   ------------
    Total loans            $  2,011,185   $ 49,239,173   $ 51,250,358
                           ============   ============   ============

Commercial Business Lending. We originate commercial business loans directly to
the professional and business community in our market area. We target small to
medium sized business, and professionals such as lawyers, doctors and
accountants. Applications for commercial business loans are obtained primarily
from the efforts of our directors and senior management, who have extensive
contacts in the local business community, or from branch referrals. As of
December 31, 2005, commercial loans totaled $12,662,585 or 17.0% of total loans.

Commercial business loans we originate generally have terms of five years or
less and have adjustable interest rates tied to the Wall Street Journal Prime
Rate plus a margin. Such loans may be secured or unsecured. Secured commercial
business loans can be collateralized by receivables, inventory and other assets.
All these loans are either loans to individuals for which they have personal
liability or loans to entities backed by the personal guarantee of principals of
the borrower. The loans generally have shorter maturities and higher yields than
residential lending. Management has extensive experience in originating
commercial business loans within our marketplace.

Commercial business loans generally carry the greatest credit risks of the loans
in our portfolio because repayment is more dependent on the success of the
business operations of the borrower. Some of these loans are unsecured and those
that are secured frequently have collateral that rapidly depreciates or is
difficult to control in the event of a default.

Commercial Real Estate Lending. We originate commercial real estate loans that
are generally secured by properties used for business purposes such as retail
stores, other mixed-use (business and residential) properties, restaurants,
light industrial and small office buildings located in our primary market area.
Our commercial real estate loans are generally made in amounts up to 70% of the
appraised value of the property. These loans are most commonly made with terms
up to five years with interest rates that adjust to 100 or 150 basis points
above the floating prime rate. A significant portion of these loans are subject
to an interest rate floor ranging between 7.00% to 7.50%. Our underwriting
standards consider the collateral of the borrower, the net operating income of
the property and the borrower's expertise, credit history and profitability. We
require personal guarantees from the borrower or the principals of the borrowing
entity. At December 31, 2005, our commercial real estate loans totaled
$30,092,887, or 40.5% of total loans.

Loans secured by commercial real estate are generally larger and involve greater
risks than one-to-four family residential mortgage loans, but generally lesser
risks than commercial loans. Because payments on loans secured by commercial
real estate properties are often dependent on the successful operation and
management of the properties, repayment of such loans may be subject to adverse
conditions in the real estate market or the economy, to a greater extent than
other types of loans. We seek to minimize these risks through our lending
policies and underwriting standards, which restrict new originations of such
loans to our primary lending area and qualify such loans on the basis of the
property's income stream, collateral value and debt service ratio.

                                       6
<PAGE>

Construction Lending. Our construction loans primarily have been made to
builders and developers to finance the construction of one- to four-family
residential properties and, to a lesser extent, multi-family residential real
estate properties. Our policies provide that construction loans may be made in
amounts up to the lesser of 80% of the total hard and soft costs of the project
or Victory State bank's loans to-one borrower limitation. We generally require
personal guarantees. Construction loans generally are made with prime-based
interest rates with terms up to 18 months. Loan proceeds are disbursed in
increments as construction progresses and as inspections warrant. At December
31, 2005, our construction loans totaled $29,611,346 or 39.8% of total loans.

Construction loans generally carry greater credit risks than residential
mortgage loans on completed properties because their repayment is more dependent
on the borrower's ability to sell or rent units under construction and the
general as well as local economic conditions. Because payments on construction
loans are often dependent on the successful completion of construction project
and the management of the project, repayment of such loans may be subject to
adverse conditions in the real estate market or the economy, to a greater extent
than other types of loans.

Loan Approval Procedures and Authority. All unsecured loans in excess of
$200,000 and all secured loans over $400,000, are reviewed and approved by the
Loan Committee, which consists of seven directors of Victory State Bank, prior
to commitment. Smaller loans may be approved by underwriters designated by the
Bank's Chief Executive Officer. Consumer loans not secured by real estate and
unsecured consumer loans, depending on the amount of the loan and the loan to
value ratio, where applicable, require the approval of the Bank's Chief Lending
Officer and/or Chief Executive Officer.

Upon receipt of a completed loan application from a prospective borrower, we
order a credit report and we verify other information. If necessary, we request
additional financial information. An independent appraiser we designate performs
an appraisal of the real estate intended to secure the proposed loan. The Board
of Victory State Bank annually approves the independent appraisers and approves
the Bank's appraisal policy. It is our policy to obtain title insurance on all
real estate first mortgage loans. Borrowers must also obtain hazard insurance
prior to closing. Some borrowers are required to make monthly escrow deposits
which we then use to pay items such as real estate taxes.

Delinquencies and Classified Assets

Delinquent Loans. Our collection procedures for mortgage loans include sending a
past due notice at 15 days and a late notice after payment is 30 days past due.
In the event that payment is not received after the late notice, letters are
sent or phone calls are made to the borrower. We attempt to obtain full payment
or work out a repayment schedule with the borrower to avoid foreclosure.
Generally, we authorize foreclosure proceedings when a loan is over 90 days
delinquent. We record property acquired in foreclosure as real estate owned at
the lower of its appraised value less costs to dispose, or cost. We cease to
accrue interest on all loans 90 days past due and reverse all accrued but unpaid
interest when the loan becomes non-accrual. We continue to accrue interest on
construction loans that are 90 days past contractual maturity date if we expect
the loan to be paid in full in the next 60 days and all interest is paid up to
date.

The collection procedures for other loans generally include telephone calls to
the borrower after ten days of the delinquency and late notices at 15 and 25
days past due. Letters and telephone calls generally continue until the matter
is referred to a collection attorney or resolved. After the loan is 90 days past
due, the loan is referred to counsel and is written-off.

Classified Assets. Federal regulations and our Loan Review and Risk Rating
Policy provide for the classification of loans and other assets we consider to
be of lesser quality as "Substandard", "Doubtful" or "Loss" assets. An asset is
considered "Substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "Doubtful" have all of the weaknesses
inherent in those classified "Substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not

                                       7
<PAGE>

currently expose us to sufficient risk to warrant classification but which
possess weaknesses are designated "Special Mention" by management. We had twenty
(20) loans, in the aggregate amount of $2,390,871, classified as special
mention, ten (10) loans, in the aggregate amount of $1,775,228, classified as
substandard, one (1) loan, in the aggregate amount of $19,587, classified as
doubtful, and no loans classified as loss as of December 31, 2005.

When we classify an asset as Substandard or Doubtful, we provide, as part of our
general allowance for loan losses, an amount management deems prudent to
recognize the risks pertaining to the loans. A general allowance represents loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike a specific allowance, has not been
allocated to particular problem assets. When we classify an asset as "Loss," we
either establish a specific allowance for losses equal to 100% of the amount of
the asset or charge off that amount.

Victory State Bank's Loan Review Officer and Board of Directors regularly review
problem loans and review all classified assets on a quarterly basis. We believe
our policies are consistent with the regulatory requirements regarding
classified assets. Our determination as to the classification of our assets and
the amount of our valuation allowances is subject to review by the New York
State Banking Department and the FDIC, which can order the establishment of
additional general or specific loss allowances.

The following table sets forth delinquencies in our loan portfolio as of the
dates indicated:

                                       8
<PAGE>

<TABLE>
<CAPTION>
                                                 At December 31, 2005
                                  --------------------------------------------------
                                         60-89 Days              90 Days or more
                                    Number     Principal       Number     Principal
                                  ----------   ----------    ----------   ----------
<S>                                       <C>  <C>                    <C> <C>
Commercial real estate                    --   $       --             6   $1,123,081
Commercial construction                   --           --             2      579,000
Commercial unsecured                       1        8,420            --           --
                                  ----------   ----------    ----------   ----------
Total                                      1   $    8,420             8   $1,702,081
                                  ==========   ==========    ==========   ==========

Delinquent loans to total loans                      0.01%                      2.29%


                                                 At December 31, 2004
                                  --------------------------------------------------
                                         60-89 Days              90 Days or more
                                    Number     Principal       Number     Principal
                                  ----------   ----------    ----------   ----------
Commercial real estate                     2   $  256,137             4   $  160,310
Commercial unsecured                      --           --             1       20,112
Other                                     --           --             1        2,476
                                  ----------   ----------    ----------   ----------
Total                                      2   $  256,137             6   $  182,898
                                  ==========   ==========    ==========   ==========

Delinquent loans to total loans                      0.37%                      0.27%


                                                 At December 31, 2003
                                  --------------------------------------------------
                                         60-89 Days              90 Days or more
                                    Number     Principal       Number     Principal
                                  ----------   ----------    ----------   ----------
Commercial real estate                     2   $  503,694             4   $  259,026
Commercial construction                   --           --             1      145,000
Commercial unsecured                      --           --             1       30,619
Other                                     --           --             1        4,406
                                  ----------   ----------    ----------   ----------
Total                                      2   $  503,694             7   $  439,051
                                  ==========   ==========    ==========   ==========

Delinquent loans to total loans                      0.74%                      0.64%


                                                 At December 31, 2002
                                  --------------------------------------------------
                                         60-89 Days              90 Days or more
                                    Number     Principal       Number     Principal
                                  ----------   ----------    ----------   ----------
Commercial real estate                    --   $       --             7   $  925,952
Commercial unsecured                      --           --             1       14,734
                                  ----------   ----------    ----------   ----------
Total                                     --   $       --             8   $  940,686
                                  ==========   ==========    ==========   ==========

Delinquent loans to total loans                      0.00%                      1.48%


                                                 At December 31, 2001
                                  --------------------------------------------------
                                         60-89 Days              90 Days or more
                                    Number     Principal       Number     Principal
                                  ----------   ----------    ----------   ----------
Commercial construction                    1   $    7,376            --   $       --
Other                                     --           --            --           --
                                  ----------   ----------    ----------   ----------
Total                                      1   $    7,376            --   $       --
                                  ==========   ==========    ==========   ==========

Delinquent loans to total loans                      0.01%                      0.00%
</TABLE>

Loans 90 days or more past due represent non-accrual loans and loans that are
contractually past due maturity but are still accruing interest.

                                       9
<PAGE>

Non-performing Assets. The following table sets forth information about our
non-performing assets at December 31, 2005, 2004 and 2003.

<TABLE>
<CAPTION>
                                 At December 31,   At December 31,   At December 31,
                                      2005              2004              2003
                                 --------------    --------------    --------------
<S>                              <C>               <C>               <C>
Non-performing assets:
  Commercial loans:
    Unsecured                    $           --    $       20,112    $       30,619
  Commercial real estate              1,022,097           121,810           259,026
  Construction                          579,000                --           145,000
  Consumer loan                              --             2,476             4,406
                                 --------------    --------------    --------------

       Total non-performing
          assets                 $    1,601,097    $      144,398    $      439,051
                                 ==============    ==============    ==============

Non-performing loans to total
  loans                                    2.15%             0.21%             0.64%
Non-performing loans to total
  assets                                   0.74%             0.06%             0.24%
Non-performing assets to total
  assets                                   0.74%             0.06%             0.24%
</TABLE>

The gross interest income that would have been recorded in 2005 if the
non-accrual loans had been current in accordance with their original terms was
$64,880. The amount of interest income on those loans that was included in net
income for 2005 was $18,667.

The following table sets forth the aggregate carrying value of our assets
classified as Substandard, Doubtful and Loss according to asset type:

                             At December 31, 2005      At December 31, 2005
                                  Substandard                Doubtful
                            -----------------------   -----------------------
                              Number       Amount       Number       Amount
                            ----------   ----------   ----------   ----------
Classification of assets:
Commercial Loans:
    Unsecured                        4   $  150,153           --   $       --
Commercial Real Estate               3      904,217            1       19,587
Construction                         3      677,293           --           --
Other                                1       43,565           --           --
                            ----------   ----------   ----------   ----------
    Total loans                     11   $1,775,228            1   $   19,587
                            ==========   ==========   ==========   ==========

No assets were classified as Loss at year end 2005.

Allowance for Loan Losses

Our allowance for loan losses is established through a provision for loan losses
based on management's evaluation of the risks inherent in its loan portfolio and
the general economy. When analyzing the adequacy of the allowance for loan
losses, management first considers performing loans in our loan portfolio that
have no material identified weaknesses. Management considers historical
experience, the state of the economy, our credit process, the nature of
collateral, industry trends, geographic considerations and other factors, when
assessing these loans. Management then establishes an amount equal to a fixed
percentage of the performing loans in each of our five principal loan categories
as appropriate to be included in the allowance to cover inherent weaknesses in
the broad category of loans.

                                       10
<PAGE>

In addition, management analyzes each loan that has been identified as having
specific weaknesses to determine the appropriate level of the allowance for that
loan. This analysis considers both the general factors which are considered in
assessing performing loans as well as specific facts pertinent to each loan,
such as collateral value, borrower's income and ability to repay, payment
history, the reasons for and length of the delinquency, and the value of any
credit support. Although loans may be analyzed individually or in groups to
determine the allowance, the entire allowance is available for any losses that
occur.

In order to assist in determining the allowance, an independent loan review
firm, senior management and the Bank's Board of Directors review the allowance
for loan losses quarterly. If they determine that the allowance is inadequate,
then management increases the provision for loan losses to bring the allowance
up to the level required.

As of December 31, 2005, our allowance for loan losses was $1,153,298 or 1.55%
of total loans. Based upon all relevant and presently available information,
management believes that the allowance for loan losses is appropriate. We
continue to monitor and modify the level of the allowance for loan losses in
order to maintain the allowance at a level which management considers
appropriate. While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary, based on changes in
economic and local market conditions beyond management's control. In addition,
federal and state bank regulatory agencies periodically review Victory State
Bank's loan loss allowance as part of their periodic safety and soundness
examinations of the Bank. They may recommend or seek to compel increases in the
allowance if they believe that weaknesses in the loan portfolio are more
significant than management's assessment.

The following table sets forth the activity in our allowance for loan losses:

<TABLE>
<CAPTION>
                                                                                    For the Year
                                                                                       Ended
                                                                                    December 31,
                                                  --------------------------------------------------------------------------------
                                                      2005             2004             2003             2002             2001
                                                  ------------     ------------     ------------     ------------     ------------
<S>                                               <C>              <C>              <C>              <C>              <C>
Allowance for Loan Losses:
   Balance at beginning of period                 $  1,299,520     $  1,162,776     $  1,168,358     $    894,692     $    766,377
   Charge-offs:
   Commercial loans:
     Unsecured                                        (318,399)        (180,125)        (315,490)        (130,191)        (229,337)
   Other loans                                         (25,302)          (4,940)         (17,138)         (24,421)         (15,444)
                                                  ------------     ------------     ------------     ------------     ------------
Total charge-offs                                     (343,701)        (185,065)        (332,628)        (154,612)        (244,781)
Recoveries                                             257,479          171,809          122,046           73,278           68,096
                                                  ------------     ------------     ------------     ------------     ------------
Net charge-offs                                        (86,222)         (13,256)        (210,582)         (81,334)        (176,685)
Provision charged to income                            (60,000)         150,000          205,000          355,000          305,000
                                                  ------------     ------------     ------------     ------------     ------------
Balance at end of period                          $  1,153,298     $  1,299,520     $  1,162,776     $  1,168,358     $    894,692
                                                  ============     ============     ============     ============     ============

Ratio of net charge-offs during the period to
 average loans outstanding during the period              0.12%            0.02%            0.49%            0.27%            0.37%
Ratio of allowance for loan losses to
 total loans at the end of period                         1.55%            1.90%            1.70%            1.83%            1.77%
Ratio of allowance for loan losses to
 non-performing loans at the end of the period           72.03%          899.96%          264.84%          356.45%          137.73%
Ratio of allowance for loan losses to
 non-performing assets at the end of the period          72.03%          899.96%          264.84%          356.45%          137.73%
</TABLE>

The following table sets forth the allocation of our allowance for loan losses
among each of the categories listed.

                                       11
<PAGE>

<TABLE>
<CAPTION>
                                 At December 31,              At December 31,              At December 31,
                                       2005                         2004                         2003
                            --------------------------   -------------------------    -------------------------
                                           % of Loans                   % of Loans                   % of Loans
                                          in Category                  in Category                  in Category
                                              to                           to                           to
                              Amount      Total Loans      Amount      Total Loans      Amount      Total Loans
                            -----------   -----------    -----------   -----------    -----------   -----------
<S>                         <C>                 <C>      <C>                 <C>      <C>                 <C>
Allowance:
  Commercial loans:
    Unsecured               $   360,532          14.9%   $   351,215          14.1%   $   218,871          13.1%
    Secured                       2,349           2.1         17,660           2.3         22,766           2.8
  Commercial real estate        363,072          40.1        490,488          46.5        523,209          47.5
  Residential real estate         7,835           0.4         11,296           1.6         12,957           2.0
  Construction loans            362,590          39.8        358,632          33.4        354,792          32.5
  Other loans                    56,920           2.7         70,229           2.1         30,181           2.1
                            -----------   -----------    -----------   -----------    -----------   -----------
Total allowances            $ 1,153,298         100.0%   $ 1,299,520         100.0%   $ 1,162,776         100.0%
                            ===========   ===========    ===========   ===========    ===========   ===========

<CAPTION>

                                 At December 31,              At December 31,
                                       2002                         2001
                            -------------------------    -------------------------
                                           % of Loans                   % of Loans
                                          in Category                  in Category
                                              to                           to
                              Amount      Total Loans      Amount      Total Loans
                            -----------   -----------    -----------   -----------
<S>                         <C>                 <C>      <C>                 <C>
Allowance:
  Commercial loans:
    Unsecured               $   290,496          17.7%   $   218,772          21.6%
    Secured                      55,186           6.3        290,535           8.6
  Commercial real estate        567,390          49.1        279,512          42.5
  Residential real estate         8,896           0.8          2,351           0.7
  Construction loans            206,920          23.4         79,030          24.3
  Other loans                    39,470           2.7         24,492           2.3
                            -----------   -----------    -----------   -----------
Total allowances            $ 1,168,358         100.0%   $   894,692         100.0%
                            ===========   ===========    ===========   ===========
</TABLE>

Investment Activities

State-chartered banking institutions have the authority to invest in various
types of liquid assets, including United States Treasury Obligations, securities
of various federal agencies, certain certificates of deposits of insured banks
and savings institutions, certain bankers' acceptances, repurchase agreements
and federal funds. Additionally, it is appropriate for us to maintain
investments for ongoing liquidity needs and we have maintained liquid assets at
a level believed to be adequate to meet our normal daily activities.

Our investment policy, established by the Board of Directors of Victory State
Bank and implemented by its Asset/Liability Committee, attempts to provide and
maintain liquidity, generate a favorable return on investments without incurring
undue interest rate and credit risk, and complement our lending activities.
Although we classify most of our securities portfolio as available for sale, it
is our practice to retain most of our securities until they mature.

Our policies generally limit investments to government and federal agency
securities or AAA rated securities, including corporate debt obligations, that
are investment grade with weighted average lives of seven years or less. Our
policies provide that all investment purchases be ratified by the Bank's Board
and may only be initiated by the President or Chief Financial Officer of the
Bank. Investment securities consist of collateralized mortgage obligations
("CMO") with an estimated average lives of 4.5 years or less, mortgage-backed
securities ("MBS") with maturities of seven years or less and U.S. Agency notes
with a maturity of less than 15 years. These CMOs and MBS are backed by federal
agencies such as Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC") or are "AAA" rated whole loan
securities. At December 31, 2005, we had investment securities with a cost basis
of $108,689,698 and a fair value of $106,023,293. Of these, $97,633,137 were
either CMO's or MBS's. The entire investment portfolio at December 31, 2005 was
classified as available for sale and is accounted on a fair market value basis.

The following table sets forth certain information regarding the amortized cost
and fair values of the investment securities, available for sale portfolio at
the dates indicated:

                                       12
<PAGE>

<TABLE>
<CAPTION>
                                                              At December 31,
                          ---------------------------------------------------------------------------------------
                                     2005                          2004                          2003
                          ---------------------------   ---------------------------   ---------------------------
                           Amortized        Fair         Amortized        Fair         Amortized        Fair
                              Cost          Value           Cost          Value           Cost          Value
                          ------------   ------------   ------------   ------------   ------------   ------------
<S>                       <C>            <C>            <C>            <C>            <C>            <C>
Investments securities,
   available for sale
US Government Agency      $  8,500,000   $  8,390,156   $  8,500,000   $  8,481,563   $  2,000,000   $  2,000,000
FNMA                         9,348,861      9,067,796     11,245,666     11,118,275        698,940        743,311
FHLMC                          321,113        320,258        517,411        523,766      1,013,649      1,033,838
GNMA                         2,718,832      2,627,459      3,296,901      3,263,366      3,782,659      3,732,954
Whole Loan MBS               4,135,883      4,051,823      5,114,582      5,068,462      3,691,027      3,746,108
Collateralized mortgage
   obligations              83,665,009     81,565,801    100,728,914    100,077,335     72,302,939     71,915,336
                          ------------   ------------   ------------   ------------   ------------   ------------

                          $108,689,698   $106,023,293   $129,403,474   $128,532,767   $ 83,489,214   $ 83,171,547
                          ============   ============   ============   ============   ============   ============

The table below sets forth certain information regarding the amortized cost
value, weighted average yields and stated maturities of our investment
securities at December 31, 2005 and 2004.
<CAPTION>

                                                             At December 31, 2005
                 -------------------------------------------------------------------------------------------------------------------
                              Weighted                 Weighted                  Weighted                   Weighted
                 Less Than    Average       1 To 5     Average       5 To 10     Average       Over 10      Average
                   1 Year      Yield        Years       Yield         Years       Yield         Years        Yield          Total
                 ----------  ----------   ----------  ----------   -----------  ----------   ------------  ----------   ------------
<S>              <C>               <C>    <C>               <C>    <C>                <C>    <C>                 <C>    <C>
Investment
  Securities:
US Government
  Agency         $       --          --%  $5,500,000        3.00%  $ 3,000,000        3.89%  $         --          --%  $  8,500,000
FNMA 7 Year
  Balloon            29,328        5.56           --          --     2,889,149        4.15      6,430,384        3.90      9,348,861
FHLMC                    --          --      321,113        4.95            --          --             --          --        321,113
GNMA                     --          --           --          --            --          --      2,718,832        4.40      2,718,832
Whole Loan MBS           --          --           --          --            --          --      4,135,883        4.74      4,135,883
Collateralized
   Mortgage
   Obligations           --          --           --          --     1,935,895        4.57     81,729,114        4.45     83,665,009
                 ----------               ----------               -----------               ------------               ------------

Total            $   29,328        5.56%  $5,821,113        3.11%  $ 7,825,044        4.15%  $ 95,014,213        4.42%  $108,689,698
                 ==========               ==========               ===========               ============               ============


                                                             At December 31, 2004
                 -------------------------------------------------------------------------------------------------------------------
                              Weighted                 Weighted                  Weighted                   Weighted
                 Less Than    Average       1 To 5     Average       5 To 10     Average       Over 10      Average
                   1 Year      Yield        Years       Yield         Years       Yield         Years        Yield          Total
                 ----------  ----------   ----------  ----------   -----------  ----------   ------------  ----------   ------------

Investment
  Securities:
US Government
   Agency        $       --          --%  $3,000,000        2.98%  $ 5,500,000        3.54%  $         --          --%  $  8,500,000
FNMA 7 Year
   Balloon               --          --      560,127        5.33     2,976,988        4.36      7,708,551        3.92     11,245,666
FHLMC                    --          --      517,411        5.02            --          --             --          --        517,411
GNMA                     --          --           --          --            --          --      3,296,901        4.39      3,296,901
Whole Loan MBS           --          --           --          --            --          --      5,114,582        4.66      5,114,582
Collateralized
   Mortgage
   Obligations           --          --           --          --     2,585,812        4.24     98,143,102        4.43    100,728,914
                 ----------               ----------               -----------               ------------               ------------

Total            $       --          --%  $4,077,538        3.60%  $11,062,800        4.07%  $114,263,136        4.40%  $129,403,474
                 ==========               ==========               ===========               ============               ============
</TABLE>

Source of Funds

General. Deposits are the primary source of our funds for use in lending,
investing and for other general purposes. In addition to deposits, we obtain
funds from principal repayments and prepayments on loans and securities. Loan
and securities repayments are a relatively stable source of funds, while deposit
inflows and outflows as well as unscheduled prepayments are influenced by
general interest rates and money market conditions.

                                       13
<PAGE>

Deposits. We offer a variety of deposit accounts having a range of interest
rates and terms. Our deposits consist of non-interest bearing checking accounts,
money market accounts, time deposit ("certificate") accounts, statement savings
and NOW accounts. The flow of deposits is influenced significantly by general
economic conditions, changes in money market rates, prevailing interest rates
and competition. Our deposits are obtained primarily from the areas in which our
offices are located. We do not actively solicit certificate accounts in excess
of $100,000, nor do we use brokers to obtain deposits. Management constantly
monitors our deposit accounts and, based on historical experience, management
believes it will retain a large portion of such accounts upon maturity. Deposit
account terms we offer vary according to the minimum balance required, the time
periods that the funds must remain on deposit and the interest rates, among
other factors. In determining the characteristics of the deposit account
programs we offer, we consider potential profitability, matching terms of the
deposits with loan products, the attractiveness to the customers and the rates
offered by our competitors.

Our focus on customer service, primarily for the business and professional
community in our marketplace, has facilitated our retention of non-interest
bearing checking accounts and low costing NOW and money market accounts, which
generally have interest rates substantially less than certificate of deposits.
At December 31, 2005, these types of low cost deposit accounts amounted to
$110,710,876, or 57.3% of total deposits.

The following table presents deposit activity for the periods indicated.

<TABLE>
<CAPTION>
                                                            Year Ended        Year Ended       Year Ended
                                                            December 31,      December 31,     December 31,
                                                               2005              2004             2003
                                                          --------------    --------------   --------------
<S>                                                       <C>               <C>              <C>
Beginning balance                                         $  215,423,473    $  167,103,445   $  123,702,365
      Net (decrease)/ increase before interest credited      (23,793,756)       47,520,990       43,211,836
      Interest credited on deposits                            1,621,442           799,038          788,600
                                                          --------------    --------------   --------------

Ending balance                                            $  193,251,159    $  215,423,473   $  167,702,801
                                                          ==============    ==============   ==============
</TABLE>

The following table provides information regarding the remaining term to
maturity of our time deposits over $100,000 at December 31, 2005:

     Maturity Period                                              Amount
   -------------------                                        -------------

   Three months or less                                       $  49,298,102
   Over three through six months                                  6,103,486
   Over six through 12 months                                     1,575,750
   Over 12 months                                                        --
                                                              -------------
       Total                                                  $  56,977,338
                                                              =============

The following table presents by various rate categories, the amount and the
periods to maturity of the certificate accounts outstanding at December 31,
2005.

                                       14
<PAGE>

<TABLE>
<CAPTION>
                                       Over Six Mos.  Over One Year  Over Two Years
                         Six Months    Through One    Through Two    Through Three   Over Three
                          And Less         Year          Years           Years         Years           Total
                        ------------   ------------   ------------   ------------   ------------   ------------
<S>                     <C>            <C>            <C>            <C>            <C>            <C>
Certificate accounts:
   1.00% to 1.99%       $ 12,934,695   $  1,265,963   $         --   $         --   $         --   $ 14,200,658
   2.00% to 2.99%         37,907,884        601,759        959,829        164,000             --     39,633,472
   3.00% to 3.99%         10,886,812      1,095,135        443,196        327,000      1,145,000     13,897,143

                        ------------   ------------   ------------   ------------   ------------   ------------
                        $ 61,729,391   $  2,962,857   $  1,403,025   $    491,000   $  1,145,000   $ 67,731,273
                        ============   ============   ============   ============   ============   ============
</TABLE>

Borrowings

We do not routinely utilize borrowings, but in connection with the issuance of
$5 million in trust preferred securities in August 2003, we issued a $5.2
million subordinated note to VSB Capital Trust I. Therefore, at December 31,
2004 and 2005, we had $5.2 million in subordinated debt.

Personnel

As of December 31, 2005, we had 51 full-time employees and 20 part-time
employees. These employees are not represented by a collective bargaining unit
and we consider our relationship with our employees to be good.

                           REGULATION AND SUPERVISION

Regulation of VSB Bancorp, Inc.

VSB Bancorp, Inc., is a New York corporation and is subject to and governed by
the New York Business Corporation Law. It is a bank holding company and thus is
subject to regulation, supervision, and examination by the Federal Reserve.

Bank Holding Company Regulation. As a bank holding company, we are required to
file periodic reports and other information with the Federal Reserve and the
Federal Reserve may conduct examinations of us.

We are subject to capital adequacy guidelines of the Federal Reserve. The
guidelines apply on a consolidated basis and require bank holding companies to
maintain a minimum ratio of Tier1 capital to total assets of 4.0%. The minimum
ratio is 3.0% for the most highly rated bank holding companies. The Federal
Reserve's capital adequacy guidelines also require bank holding companies to
maintain a minimum ratio of qualifying total capital to risk-weighted assets of
8.0%, and a minimum ratio of Tier1 capital to risk-weighted assets of 4.0%. As
of December 31, 2005, the ratio of Tier 1 capital to total assets was 9.54%, the
ratio of Tier 1 capital to risk-weighted assets was 20.37%, and the ratio of
qualifying total capital to risk-weighted assets was 21.47%.

Our ability to pay dividends can be restricted if overall capital falls below
levels established by the Federal Reserve's guidelines.

Federal Reserve approval is required if we seek to acquire direct or indirect
ownership or control of 5% or more of the voting shares of a bank or bank
holding company. We must obtain Federal Reserve approval before we acquire all
or substantially all the assets of a bank or merge or consolidate with another
bank holding company. These provisions also would apply to a bank holding
company that sought to acquire 5% or more of the common stock of or to merge or
consolidate with us.

                                       15
<PAGE>

Bank holding companies like us may not engage in activities other than banking
and activities so closely related to banking or managing or controlling banks as
to be a proper incident thereto. Federal Reserve regulations contain a list of
permissible non-banking activities that are closely related to banking or
managing or controlling banks and the Federal Reserve has identified a limited
number of additional activities by order. These activities include lending
activities, certain data processing activities, and securities brokerage and
investment advisory services, trust activities and leasing activities. A bank
holding company must file an application or a notice with the Federal Reserve
prior to acquiring more than 5% of the voting shares of a company engaged in
such activities. A bank holding company that is well capitalized and well
managed and meets other conditions may provide notice after making the
acquisition.

We have the right to elect to be treated as a financial holding company if the
Bank is well capitalized and well managed and has at least a satisfactory record
of performance under the Community Reinvestment Act. Financial holding companies
that meet certain conditions may engage in activities that are financial in
nature or incidental to financial activities, or activities that are
complementary to a financial activity and do not pose a substantial risk to the
safety and soundness of depository institutions or the financial system
generally. Federal law identifies certain activities that are deemed to be
financial in nature, including non-banking activities currently permissible for
bank holding companies to engage in both within and outside the United States,
as well as insurance and securities underwriting and merchant banking
activities. The Federal Reserve may identify additional activities that are
permissible financial activities. No prior notice to the Federal Reserve is
required for a financial holding company to acquire a company engaged in these
activities or to commence these activities directly or indirectly through a
subsidiary.

We have not elected to be treated as a financial holding company since we have
no current plans to use the authority to engage in expanded activities. However,
we may elect to do so in the future.

Section 404 of the Sarbanes-Oxley Act. The Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley") implements a broad range of corporate governance and
accounting measures for public companies (including VSB Bancorp, Inc.) designed
to promote honesty and transparency in corporate America. Among many other
requirements, Sarbanes-Oxley includes a requirement, in Section 404, that annual
reports include Section 404 of the Act requires each annual report of a public
company to include a report by management on the company's internal control over
financial reporting. The Securities and Exchange Commission has extended the
deadline for non-accelerated filers (such as VSB Bancorp, Inc.) to comply with
the filing requirements under Section 404. Under the extension, we are not
required to comply with Section 404 until the fiscal year ending December 31,
2007. There have been proposals to amend, repeal or further delay the
implementation Section 404 requirements and we cannot determine the ultimate
outcome of those proposals. If we are required to implement Section 404 in its
current form, we would be required to allocate significant amounts of management
and other employee time to compliance and incur significant expense in fees to
our independent registered public accountants.

Statutory Restrictions on Acquisition of VSB Bancorp, Inc., and Victory State
Bank

Applicable provisions of the New York Banking Law, the federal Bank Holding
Company Act, and other federal statutes, restrict the ability of persons or
entities to acquire control of a bank holding company. Under the Change in Bank
Control Act, persons who intend to acquire control of a bank holding company,
either directly or indirectly or through or in concert with one or more persons
must give 60 days' prior written notice to the Federal Reserve. "Control" would
exist when an acquiring party directly or indirectly has voting control of at
least 25% of our voting securities or the power to direct our management or
policies. Under Federal Reserve regulations, a rebuttable presumption of control
would arise with respect to an acquisition where, after the transaction, the
acquiring party has ownership control, or the power to vote at least 10% (but
less than 25%) of our common stock.

The New York Banking Law requires prior approval of the New York Banking Board
before any action is taken that causes any company to acquire direct or indirect
control of a banking institution that is organized in the State of New York. The
term "control" is defined generally to mean the power to direct or cause the
direction of the management and policies of the banking institution and is
presumed to exist if the company owns, controls or holds with power to vote 10%
or more of the voting stock of the banking institution.

                                       16
<PAGE>

Section 912 of the New York Business Corporation Law, known as the New York
Anti-Takeover Law, restricts the ability of interested stockholders to engage in
business combinations with a New York corporation. In general terms, Section 912
prohibits any New York corporation covered by the statute from merging with an
interested shareholder (i.e., one who owns 20% or more of the outstanding voting
stock) for five years following the date on which the interested shareholder
first acquired 20% of the stock, unless before that date the Board of Directors
of the corporation had approved either the merger or the interested
shareholder's stock purchase.

Section 912 defines an interested stockholder as the beneficial owner, directly
or indirectly, of 20% or more of the outstanding voting stock of a corporation;
and certain other entities that have owned 20% or more of a corporation's stock
during the past five years. A business combination is defined as a merger,
consolidation, sale of 10% or more of the assets, or similar transaction.

Unless an interested stockholder waits five years after becoming an interested
stockholder to engage in a business combination, the business combination is
prohibited unless our Board of Directors has approved either (a) the business
combination or (b) the acquisition of stock by the interested stockholder,
before the interested stockholder acquired its 20% interest. Even though the
interested stockholder waits five years, the business combination is prohibited
unless either:

         (i)    the business combination or the acquisition of stock by the
interested stockholder was approved by the Board of Directors before the
interested stockholder acquired its 20% interest;

         (ii)   the business combination is approved by a majority vote of all
outstanding shares of stock not beneficially owned by the interested stockholder
or its affiliates or associates at a meeting held at least five years after the
interested stockholder becomes an interested stockholder; or

         (iii)  the price paid for common stock acquired in the business
combination is, in general terms, at least as much as the greater of (a) highest
price paid by the interested stockholder for any stock since the interested
stockholder first owned 5% of the stock of the corporation, or (b) the market
value of the stock as of the date of announcement of the business combination;
and the price paid for stock other than common stock is subject to comparable
minimum standards.

                                       17
<PAGE>

Regulation of Victory State Bank

The Bank is subject to extensive regulation and examination by the New York
State Banking Department ("Department"), as its chartering authority, and by the
FDIC, as the insurer of its deposits. The federal and state laws and regulations
which are applicable to banks regulate, among other things, the scope of their
business, their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
certain loans. The Bank must file reports with the Department and the FDIC
concerning its activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions such as
establishing branches and mergers with, or acquisitions of, other depository
institutions. There are periodic examinations by the Department and the FDIC to
test the Bank's compliance with various regulatory requirements. This regulation
and supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulation, whether by
the Department, the FDIC or as a result of the enactment of legislation, could
have a material adverse impact on the Bank and its operations.

Capital Requirements

The FDIC imposes capital adequacy standards on state-chartered banks, which,
like the Bank, are not members of the Federal Reserve System.

The FDIC's capital regulations establish a minimum 3.0% Tier I leverage capital
requirement for the most highly-rated state-chartered, non-member banks, with an
additional cushion of at least 100 basis points for all other state-chartered,
non-member banks, which effectively will increase the minimum Tier I leverage
ratio for such other banks to 4.0%. Under the FDIC's regulation, the
highest-rated banks are those that the FDIC determines are not anticipating or
experiencing significant growth and have well diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and, in general, which are considered a strong banking organization and
are rated composite 1 under the Uniform Financial Institutions Rating System.
Tier I or core capital is defined as the sum of common stockholders' equity
(including retained earnings), non-cumulative perpetual preferred stock and
related surplus, and minority interests in consolidated subsidiaries, minus all
intangible assets other than certain qualifying supervisory goodwill and certain
mortgage servicing rights.

The FDIC also requires that banks meet a risk-based capital standard. The
risk-based capital standard for banks requires the maintenance of a ratio of
total capital (which is defined as Tier I capital and supplementary capital) to
risk-weighted assets of 8.0% and Tier I capital to risk-weighted assets of 4%.
In determining the amount of risk-weighted assets, all assets, plus certain
off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based
on the risks the FDIC believes are inherent in the type of asset or item. The
components of Tier I capital are the same as for the leverage capital standard.
The components of supplementary capital include certain perpetual preferred
stock, certain mandatory convertible securities, certain subordinated debt and
intermediate preferred stock and general allowances for loan and lease losses.
Allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
capital counted toward supplementary capital cannot exceed 100% of core capital.

The FDIC has an additional, higher capital level, known as well-capitalized. In
order to be classified as well-capitalized, a bank must have a Tier1 leverage
ratio of at least 5%, a Tier1 risk-based capital ratio of at least 6% and a
total risk-based capital ratio of at least 10%.

At December 31, 2005, the Bank met each of its capital requirements.

The following table shows the Bank's actual capital amounts and ratios.

                                       18
<PAGE>

<TABLE>
<CAPTION>
                                                                                           To be well-capitalized
                                                                       For capital         under prompt corrective
                                               Actual               adequacy purposes         action provisions
                                       ----------------------    ----------------------    ----------------------
                                         Amount        Ratio        Amount       Ratio        Amount       Ratio
                                       ------------   -------    ------------   -------    ------------   -------
<S>                                    <C>              <C>      <C>               <C>     <C>              <C>
As of December 31, 2005
       Tier 1 Capital
           (to Average Assets)         $ 20,453,000      9.19%   $  8,897,920      4.00%   $ 11,122,400      5.00%
       Tier 1 Capital
           (to Risk Weighted Assets)     20,453,000     19.66%      4,162,120      4.00%      6,243,180      6.00%
       Total Capital
           (to Risk Weighted Assets)     21,606,000     20.76%      8,324,240      8.00%     10,405,300     10.00%
</TABLE>

Activities and Investments of New York-Chartered Banks.

The Bank derives its lending, investment and other authority primarily from the
applicable provisions of New York State Banking Law and the regulations of the
Department, as limited by FDIC regulations and other federal laws and
regulations. See "Activities and Investments of FDIC Insured State-Chartered
Banks" below. These New York laws and regulations authorize the Bank to invest
in real estate mortgages, consumer and commercial loans, certain types of debt
securities, including certain corporate debt securities and obligations of
federal, State and local governments and agencies, and certain other assets. A
bank's aggregate lending powers are not subject to percentage of asset
limitations, although there are limits applicable to single borrowers. A New
York-chartered bank may also exercise trust powers upon approval of the
Department. The Bank does not have trust powers.

The New York Banking Board has the power to adopt regulations that enable state
chartered banks to exercise the rights, powers and privileges permitted for a
national bank. The Bank has not engaged in material activities authorized by
such regulations.

With certain limited exceptions, the Bank may not make loans or extend credit
for commercial, corporate or business purposes (including lease financing) to a
single borrower, the aggregate amount of which would be in excess of 15% of the
Bank's net worth, on an unsecured basis, and 25% of the net worth if the loan is
collateralized by readily marketable collateral or collateral otherwise having a
value equal to the amount by which the loan exceeds 15% of the Bank's net worth.
Theses limits do not apply to loans made by VSB Bancorp, Inc. directly at the
holding company level. The Bank currently complies with all applicable
loans-to-one-borrower limitations and VSB Bancorp, Inc. has not made any loans
in its own name.

Activities and Investments of FDIC-Insured State-Chartered Banks.

The activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. In addition, an
FDIC-insured state-chartered bank may not directly, or indirectly through a
subsidiary, engage as "principal" in any activity that is not permissible for a
national bank unless the FDIC has determined that such activities would pose no
risk to the insurance fund of which it is a member and the bank is in compliance
with applicable regulatory capital requirements.

                                       19
<PAGE>

Regulatory Enforcement Authority

Applicable banking laws include substantial enforcement powers available to
federal banking regulators. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease-and-desist
or removal orders and to initiate injunctive actions against banking
organizations and institution-affiliated parties, as defined. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports filed with
regulatory authorities.

Under the New York State Banking Law, the Department may issue an order to a New
York-chartered banking institution to appear and explain an apparent violation
of law, to discontinue unauthorized or unsafe practices and to keep prescribed
books and accounts. Upon a finding by the Department that any director, trustee
or officer of any banking organization has violated any law, or has continued
unauthorized or unsafe practices in conducting the business of the banking
organization after having been notified by the Department to discontinue such
practices, such director, trustee or officer may be removed from office by the
Department after notice and an opportunity to be heard. The Bank does not know
of any past or current practice, condition or violation that might lead to any
proceeding by the Department against the Bank or any of its directors or
officers. The Department also may take possession of a banking organization
under specified statutory criteria.

Prompt Corrective Action.

Section 38 of the Federal Deposit Insurance Act ("FDIA") provides the federal
banking regulators with broad power to take "prompt corrective action" to
resolve the problems of undercapitalized institutions. The extent of the
regulators' powers depends on whether the institution in question is "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." A bank is deemed to be (i)
"well capitalized" if it has total risk-based capital ratio of 10.0% or more,
has a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage
capital ratio of 5.0% or more and is not subject to specified requirements to
meet and maintain a specific capital level for any capital measure, (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized," (iii) "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is
less than 4.0% (3.0% under certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%, and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. The regulations also provide that a federal banking
regulator may, after notice and an opportunity for a hearing, reclassify a "well
capitalized" institution as "adequately capitalized" and may require an
"adequately capitalized" institution or an "undercapitalized" institution to
comply with supervisory actions as if it were in the next lower category if the
institution is in an unsafe or unsound condition or engaging in an unsafe or
unsound practice. The federal banking regulator may not, however, reclassify a
"significantly undercapitalized" institution as "critically undercapitalized."

An institution generally must file a written capital restoration plan which
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with an appropriate federal banking regulator
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." Immediately upon becoming undercapitalized, an
institution becomes subject to statutory provisions, which, among other things,
set forth various mandatory and discretionary restrictions on the operations of
such an institution.

At December 31, 2005, the Company and the Bank had capital levels which
qualified it as a "well-capitalized" institution.

                                       20
<PAGE>

FDIC Insurance

The Bank is a member of the Bank Insurance Fund ("BIF") administered by the
FDIC. As insurer, the FDIC is authorized to conduct examinations of, and to
require reporting by, FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious threat to the FDIC.

On February 8, 2006, President Bush signed into law the Federal Deposit
Insurance Reform Act of 2005. The law increases the amount of deposit insurance
available for retirement accounts, indexes the amount of deposit insurance to
inflation, merges the two existing deposit insurance funds (one historically for
banks and one historically for savings and loan associations) into a single fund
and gives the FDIC greater flexibility in determining the amount of future
deposit insurance premiums that banks may be required to pay. The law also
grants banks that were in existence prior to December 31, 1996 and paid deposit
insurance premium prior to that date a credit against future deposit insurance
assessments that the FDIC may make. The amount of the credit for each bank is
based upon the amount of deposits they had on December 31, 1996. Since the Bank
did not open for business until 1997, it is not entitled to any credit.
Therefore, if the FDIC decides to reimpose deposit insurance premiums in the
future, the Bank may be at a competitive disadvantage when compared to
institutions with longer operating histories because those institutions might
have lower expenses for deposit insurance premiums. The effect of the credit
cannot be determined at this time because that effect would depend upon whether,
when and upon what basis the FDIC imposes deposit insurance premiums in the
future.

The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines, after a hearing, that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances that would result in
termination of the Bank's deposit insurance.

Brokered Deposits

Under federal law and applicable regulations, (i) a well capitalized bank may
solicit and accept, renew or roll over any brokered deposit without restriction,
(ii) an adequately capitalized bank may not accept, renew or roll over any
brokered deposit unless it has applied for and been granted a waiver of this
prohibition by the FDIC and (iii) an undercapitalized bank may not (x) accept,
renew or roll over any brokered deposit or (y) solicit deposits by offering an
effective yield that exceeds by more than 75 basis points the prevailing
effective yields on insured deposits of comparable maturity in such
institution's normal market area or in the market area in which such deposits
are being solicited. The term "undercapitalized insured depository institution"
is defined to mean any insured depository institution that fails to meet the
minimum regulatory capital requirement prescribed by its appropriate federal
banking agency. The FDIC may, on a case-by-case basis and upon application by an
adequately capitalized insured depository institution, waive the restriction on
brokered deposits upon a finding that the acceptance of brokered deposits does
not constitute an unsafe or unsound practice with respect to such institution.
The Bank had no brokered deposits outstanding at December 31, 2005.

Community Reinvestment and Consumer Protection Laws

In connection with its lending activities, the Bank is subject to a variety of
federal laws designed to protect borrowers and promote lending to various
sectors of the economy and population. Included among these are the Home
Mortgage Disclosure Act, Real Estate Settlement Procedures Act, Truth-in-Lending
Act, Equal Credit Opportunity Act, Fair Credit Reporting Act and Community
Reinvestment Act ("CRA").

                                       21
<PAGE>

The CRA requires FDIC insured banks to define the assessment areas that they
serve, identify the credit needs of those assessment areas and take actions that
respond to the credit needs of the community. The FDIC must conduct regular CRA
examinations of the Bank and assign it a CRA rating of "outstanding,"
"satisfactory," "needs improvement" or "unsatisfactory." The Bank is also
subject to provisions of the New York State Banking Law which impose similar
obligations to serve the credit needs of its assessment areas. The New York
Banking Department makes a biennial written assessment of a bank's compliance,
and makes the assessment available to the public. Federal and New York State
laws both require consideration of these ratings when reviewing a bank's
application to engage in certain transactions, including mergers, asset
purchases and the establishment of branch offices. A negative assessment may
serve as a basis for the denial of any such application. The Bank has received
"Satisfactory" ratings from both the New York Banking Department and the FDIC.

Limitations on Dividends

The payment of dividends by the Bank is subject to various regulatory
requirements. Under New York State Banking Law, a New York-chartered stock bank
may declare and pay dividends out of its net profits, unless there is an
impairment of capital, but approval of the Superintendent of Banks is required
if the total of all dividends declared in a calendar year would exceed the total
of its net profits for that year combined with its retained net profits of the
preceding two years, subject to certain adjustments.

Miscellaneous

The Bank is subject to restrictions on loans to its non-bank subsidiaries, on
investments in the stock or securities thereof, on the taking of such stock or
securities as collateral for loans to any borrower, and on the issuance of a
guarantee or letter of credit on behalf of the Bank or its non-bank
subsidiaries. The Bank also is subject to restrictions on most types of
transactions with the Bank or its non-bank subsidiaries, requiring that the
terms of such transactions be substantially equivalent to terms of similar
transactions with non-affiliated firms.

Assessments

Banking institutions are required to pay assessments to both the FDIC and the
NYSBD to fund their operations. The assessments are based upon the amount of the
Bank's total assets. The Bank must also pay an examination fee to the NYSBD when
they conduct an examination. The Bank paid federal and state assessments and
examination fees of $48,705 in 2005.

Transactions with Related Parties

The Bank's authority to engage in transactions with related parties or
"affiliates" (i.e., any entity that controls or is under common control with an
institution, including the Bank) or to make loans to certain insiders, is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
limits the aggregate amount of transactions with any individual affiliate to 10%
of the capital and surplus of the institution and also limits the aggregate
amount of transactions with all affiliates to 20% of the institution's capital
and surplus.

Loans to affiliates must be secured by collateral with a value that depends on
the nature of the collateral. The purchase of low quality assets from affiliates
is generally prohibited. Loans and asset purchases with affiliates, must be on
terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with nonaffiliated companies.
In the absence of comparable transactions, such transactions may only occur
under terms and circumstances, including credit standards that in good faith
would be offered to or would apply to nonaffiliated companies.

                                       22
<PAGE>

The Bank's authority to extend credit to executive officers, directors and 10%
shareholders, as well as entities controlled by such persons, is currently
governed by Regulation O of the Federal Reserve Board. Regulation O generally
requires such loans to be made on terms substantially similar to those offered
to unaffiliated individuals (except for preferential loans made in accordance
with broad based employee benefit plans), places limits on the amount of loans
the Bank may make to such persons based, in part, on the Bank's capital
position, and requires certain approval procedures to be followed.

Standards for Safety and Soundness

FDIC regulations require that Victory State Bank adopt procedures and systems
designed to foster safe and sound operations in the areas of internal controls,
information systems, internal and audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth, asset quality, earnings
and compensation, fees and benefits. Among other things, theses regulations
prohibit compensation and benefits and arrangements that are excessive or that
could lead to a material financial loss. If Victory State Bank fails to meet any
of these standards, it will be required to submit to the FDIC a plan specifying
the steps that will be taken to cure the deficiency. If it fails to submit an
acceptable plan or fails to implement the plan, FDIC the will require it or VSB
Bancorp, Inc. to correct the deficiency and until corrected, may impose
restrictions on them.

The FDIC has also adopted regulations that require Victory State Bank to adopt
written loan policies and procedures that are consistent with safe and sound
operation, are appropriate for the size of the Bank, and must be reviewed by the
Bank's Board of Directors annually. Victory State Bank has adopted such policies
and procedures, the material provisions of which are discussed above as part of
the discussion of our lending operations.

Federal Reserve System

The Federal Reserve Board regulations require banks to maintain non-interest
earning reserves against their transaction accounts (primarily regular checking
accounts and interest-bearing checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $48.3 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; for accounts greater than $48.3 million, the reserve requirement is $1.2
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $40.6
million. The first $7.8 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Bank is in compliance these requirements. Because required
reserves must be maintained in the form of either vault cash or a
non-interest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the Federal Reserve Board, the effect of this reserve requirement
is to reduce our interest-earning assets.

                                    TAXATION

                                Federal Taxation

General

We are subject to federal income taxation in the same general manner as other
corporations with some exceptions discussed below. The following discussion of
federal taxation is intended only to summarize certain pertinent federal income
tax matters and is not a comprehensive description of the tax rules applicable
to us. Our federal income tax returns have not been audited or closed without
audit by the Internal Revenue Service.

Method of Accounting

We report our income and expenses on the accrual method of accounting and use a
tax year ending December 31 for filing our consolidated federal income tax
returns. The Company files consolidated tax returns with the Bank and VSB
Capital Trust I.

                                       23
<PAGE>

Bad Debt Reserves

We use the experience method in computing bad debt deductions for federal tax
purposes.

Minimum Tax

The Internal Revenue Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMT is in excess of the Company's regular tax liability. Net
operating losses can offset no more than 90% of AMT. Certain payments of
alternative minimum tax may be used as credits against regular tax liabilities
in future years. We have not been subject to the alternative minimum tax and
have no such amounts available as credits.

                            State and Local Taxation

New York State and New York City Taxation.

New York State Franchise Tax on corporations is imposed in an amount equal to
the greater of (a) 7.5% of "entire net income" allocable to New York State (b)
3% of "alternative entire net income" allocable to New York State (c) 0.01% of
the average value of assets allocable to New York State or (d) a nominal minimum
tax. Entire net income is based on federal taxable income, subject to certain
modifications. Alternative entire net income is equal to entire net income
without certain modifications. The New York City Corporation Tax is imposed
using similar alternative taxable income methods and rates.

A temporary Metropolitan Transportation Business Tax Surcharge on banking
corporations doing business in the Metropolitan District has been applied since
1982. We transact a significant portion of our business within this District and
thus we are subject to this surcharge. The current surcharge rate is 17% of the
State franchise tax liability. New York City does not impose comparable
surcharges.

For New York State and City tax purposes, the bad debt deduction may be computed
using a specific formula based on our actual loss history ("Experience Method").

Item 2. Description of Property.

We conduct our business through four banking offices, with our fifth and sixth
offices currently under construction. The main office is also our loan
origination center.

                                       24
<PAGE>

<TABLE>
<CAPTION>
                                                                         Original                         Net Book Value
                                                                           Date           Date of          of Leasehold
                                                        Leased or       Leased or          Lease         Improvements at
Location                              Description         Owned          Acquired      Expiration (1)   December 31, 2005
                                     --------------   --------------  ---------------  ---------------  -----------------
<S>                                  <C>                 <C>               <C>           <C>                <C>
3155 Amboy Road
Staten Island, N.Y. 10306             Main Office        Leased            1997          12/31/2006         $   29,591

755 Forest Avenue
Staten Island, N.Y. 10310               Branch           Leased            1999          11/30/2013         $  164,416

One Hyatt Street
Staten Island, N.Y. 10301               Branch           Leased            1999          10/30/2014         $   75,614

1762 Hylan Boulevard (2)
Staten Island, N.Y. 10305               Branch           Leased            2001           6/30/2016         $  715,559

1766 Hylan Boulevard (3)
Staten Island, N.Y. 10305            Retail Stores       Leased            2001           6/30/2016         $  205,249

4142 Hylan Boulevard
Staten Island, N.Y. 10308               Branch           Leased            2005           3/25/2020              (4)

1065 Bay Street
Staten Island, N.Y. 10305               Branch           Leased            2006              (5)                 (4)

                                                                                                        -----------------
Total net book value                                                                                        $1,190,429
                                                                                                        =================
</TABLE>

(1)  All lease agreements with the exception of 3155 Amboy Road are renewable at
     our option.
(2)  Hylan Boulevard Branch commenced operations on December 4, 2002.
(3)  We leased the retail stores at 1766 Hylan Boulevard as a component of the
     lease for the Hylan branch and we sublease the property to retail tenants.
(4)  Construction in progress. No recorded book value.
(5)  This branch is under construction and the lease term will expire 15 years
     after the date of delivery of the space to the Bank by the landlord after
     certain construction is complete.

Item 3. Legal Proceedings.

The Bank is a defendant in an action pending in Supreme Court, Richmond County,
commenced by IndyMac Bank, F.S.B. against the Bank, LaMattina & Associates, Inc.
("LAI") and various individuals and entities alleged to be officers, directors
or otherwise to have relationships with LAI. LAI was a deposit customer of the
Bank engaged in the business of providing real estate settlement services to
lenders making residential mortgage loans. The plaintiff alleges that it was
such a lender and that it had provided funds to LAI by wiring those funds to an
account of LAI at the Bank to use to fund mortgage loans to be made by the
plaintiff, only to have LAI not use those funds for their intended purpose. The
action was commenced in August 2005. In November 2005, the plaintiff amended its
complaint to add the Bank as a defendant and asserted a claim against the Bank
for aiding and abetting a breach of a fiduciary duty.

After the Bank made a motion to dismiss the claims against it, the plaintiff
requested court permission to drop the aiding and abetting a breach of fiduciary
duty claim, and to instead assert different claims based upon alleged
negligence, misappropriation and deceptive business practices under the New York
General Business Law. The proposed amended complaint requests monetary damages
against the Bank of $1,817,041 plus recovery of attorneys fees. The Bank
anticipates that the court will permit the plaintiff to amend its complaint. The
Bank intends to defend aggressively the amended claims and has referred the
litigation to its insurance carrier, which has indicated that at least some of
the claims in the proposed second amended complaint asserted against the Bank
are covered by insurance.

                                       25
<PAGE>

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.

Item 4, Submission of Matters to a Vote of Security Holders.

None

                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

Our common stock is quoted on the NASDAQ Over the Counter Market ("OTC") under
the symbol "VSBN".

The following table reflects the high and low bid price for our common stock
during each calendar quarter of the last two fiscal years. Such information is
derived from quotations published by Bloomberg LP. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.

<TABLE>
<CAPTION>
                                                             2005
                                                             ----
                         First Quarter       Second Quarter        Third Quarter        Fourth Quarter
                         -------------       --------------        -------------        --------------
<S>                          <C>                  <C>                  <C>                   <C>
High Bid..............       $25.50               $27.00               $23.00                $21.60
Low Bid...............       $21.55               $21.50               $21.00                $19.40
                                                             2004
                                                             ----
                         First Quarter*      Second Quarter        Third Quarter        Fourth Quarter
                         -------------       --------------        -------------        --------------
High Bid..............       $24.00               $23.60               $23.60                $23.50
Low Bid...............       $17.25               $22.00               $22.30                $21.75
</TABLE>

* All per share prices have been adjusted for the one share for every three
shares stock split effected as a stock dividend paid on March 8, 2004.

We have approximately 273 stockholders of record. We have not paid any cash
dividends.

In a transaction consummated on May 30, 2003, we became the holding company for
Victory State Bank as the result of what is commonly known as a reverse
triangular merger. We issued our common stock to the then existing common
stockholders of Victory State Bank in exchange for the outstanding common stock
of Victory State Bank in the holding company reorganization. All shares issued
were common stock. There was no underwriter in connection with the transaction.
The shares issued on a three for two exchange basis. We issued 1,055,998 shares
of our common stock upon consummation of the transaction and settled for
fractional shares, aggregating two whole shares, in cash.

The transaction was exempt from registration under the Securities Act of 1933
pursuant to Section 3(a)(12) as a bank holding company reorganization. VSB
Bancorp, Inc. and Victory State Bank filed applications or notices with the New
York State Superintendent of Banks, the Federal Deposit Insurance Corporation
and the Board of Governors of the Federal Reserve System and received all
required approvals to complete the holding company reorganization from those
regulators.

                                       26
<PAGE>

Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations

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 State
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. Our primary business is owning all of the issued and outstanding
stock of the Bank. Victory State Bank is a New York State chartered commercial
bank, founded in November 1997. The Bank is supervised by the New York State
Banking Department and the Federal Deposit Insurance Corporation ("FDIC"). The
Bank gathers deposits from individuals and businesses primarily in Staten Island
and makes loans throughout that community. The Bank invests funds that are not
used for lending primarily in government securities, mortgage backed securities
and collateralized mortgage obligations. Customer deposits are insured, up to
the applicable limit, by the FDIC. VSB Bancorp, Inc. common stock is quoted on
the NASDAQ Over the Counter Market ("OTC") under the symbol "VSBN".

Since the Bank opened for business in 1997, the Board of Directors and
management have pursued a strategy of growth and expansion in order to enhance
the long term value of our banking franchise. The Board of Directors and
management anticipate that an increase in customer deposits, and the resulting
increase in funds we would have available to fund asset growth, will generate an
increase in net interest income.

We experienced an overall decline in deposits in 2005 due to factors we discuss
below. We expect to open two new branches in 2006 and we anticipate that those
new branches, as well as our existing branch network, will generate an increase
in funds for investment in the future.

In order to support branch expansion and asset growth, we have not paid cash
dividends since we opened for business. Instead, our Board of Directors has
elected to retain earnings to increase our capital base so that we can continue
to be classified as well-capitalized for regulatory capital purposes while we
grow.

We also recognize that, on a short term basis, the development of a branch
network generates significant expenses before it generates income from increased
business. Our Board of Directors views the adverse effect on net income which
occurs immediately after a branch opening as an investment in our future. As we
have seen with our existing banking offices, as they mature and their deposits
increase, we have increasing funds available for investment.

During 2005, we faced a number of challenges, including increases in market
interest rates that pushed up our cost of funds, both due to the upward pressure
of deposit rates. Furthermore, our customers appear to have elected to move
funds into higher rate deposit types such as certificate accounts as our rates
on those products were high enough to outweigh the decreased convenience
associated with them. However, the increase in the prime rate also allowed us to
increase the yields on our existing prime based loans and originate new loans at
higher initial interest rates.

Also important in 2005 was a shift in our deposit mix as we experienced a
decline in non-interest bearing demand deposits. This decline resulted from a
number of factors including a reduction in real estate activity, which reduced
demand deposits held in connection with pending real estate transactions; our
termination of a relationship with a company providing services to residential
mortgage lenders that eliminated demand deposit balances held by that company on
pending and closed loans; and a shift in customer preferences towards interest
bearing accounts as the yields on those accounts increased to the point where
they became desirable alternatives.

Management intends to exert efforts to continue growing our company in the
future. However, both internal and external factors could adversely affect our
future growth. The recent down turn in the economy has made it more difficult
for us to originate new loans that meet our underwriting standards. Not only
does that cause us to invest available funds in lower-yielding securities and

                                       27
<PAGE>

deposits with other banks, but it also slows the development of non-loan
relationships which sometimes flow from cross-selling to loan customers.

A continuation of adverse general economic conditions could make it difficult
for us to execute our growth plans. Furthermore, regulatory capital requirements
could have a negative effect on our ability to grow if growth outpaces our
ability to support that growth with increased capital.

Our results of operations are dependent primarily on net interest income, which
is the difference between the income earned on our loan and investment
portfolios and our costs of funds, consisting primarily of interest paid on our
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.

Critical Accounting Policies

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.

Asset/Liability Management

We maintain the interest rate sensitivity of our assets by investing primarily
in CMO's and MBS's with short and intermediate average lives to generate cash
flows and by originating and retaining primarily loans with interest rates based
on the prime rate. As of December 31, 2005, prime based loans totaled
$62,840,808, or 84.5% of total loans. Many of these prime based loans are
subject to interest rate floors of 7.00% to 8.50%. We anticipate that we will
continue to concentrate on originating prime based loans in our principal market
areas. We also expect to continue to invest other available funds that we cannot
invest in loans in short-term investment grade securities.

Cash Flow Sensitivity Analysis. The matching of assets and liabilities may be
analyzed by examining our cash flow sensitivity "gap." An asset or liability is
said to be cash flow sensitive within a specific time period if it will mature
or reprice within that time period. The cash flow sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing within a
specific time period and the amount of interest-bearing liabilities maturing
within that time period. A gap is considered positive when the amount of
interest earning assets exceeds the amount of interest bearing liabilities. A
gap is considered negative when the amount of interest bearing liabilities
exceeds the amount of interest earning assets.

During a period of falling interest rates, the net income of an institution with
a positive gap can be expected to be adversely affected because the yield on its
interest-earning assets should reprice downward faster than the decline in its
cost of funds. Conversely, during a period of rising interest rates, the net
income of an institution with a positive gap position can be expected to
increase as it is able to invest in higher yielding interest-earning assets at a
more rapid rate than its interest-earning liabilities reprice. A positive gap
may not protect an institution with a large portfolio of adjustable rate based
loans or mortgage-backed securities from increases in interest rates for
extended time periods if such loans or securities have annual and lifetime
interest rate caps. The increase in the cost of funds in a rapidly increasing
rate environment could exceed the cap on assets yields, negatively impacting net
interest income. However, our prime rate based loans and our securities
investments generally do not have any annual or lifetime caps.

In the current interest rate environment, we generally have been investing
available funds not needed for lending in CMOs and MBSs with estimated average
lives of four and one-half years or less. As a result of this strategy, and

                                       28
<PAGE>

based upon the assumptions used in the following table at December 31, 2005, our
total interest-bearing liabilities maturing within one year exceeded our total
interest-earning assets maturing in the same period by $16,989,547, representing
a one year cumulative gap ratio of negative 3.57%. We closely monitor our
interest rate risk as such risk relates to our operational strategies. The
Victory State Bank Board of Directors has established an Asset/Liability
Committee, responsible for reviewing our asset/liability policies and interest
rate risk position, which generally meets quarterly and reports back to the
Board on interest rate risk and trends on a quarterly basis. We are currently
attempting to achieve a positive gap position in light of the current interest
rate environment. There can be no assurance, however, that we will be able to
achieve a positive gap position or that our strategies will not result in
maintaining a negative gap position in the future. Although we have not
experienced a material runoff in our core deposits, there can be no assurances
that such a runoff will not occur in the future if depositors seek higher
yielding investments.

Our substantial level of non-interest-bearing demand deposits also furthers our
goal of maintaining a positive gap because the interest cost of those deposits
will not increase as market rates increase. However an increase in market
interest rates could cause our customers to shift funds from demand deposits
into interest earning deposits if interest rates are high enough to justify
maintaining multiple accounts. Furthermore, there have been frequent proposals
in Congress to permit the payment of interest on commercial demand deposits. The
adoption of such legislation could have a significant effect on our net income
by forcing us to pay interest on business demand deposits to maintain parity
with our competitors.

The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2005 which we estimate,
based upon certain assumptions, will mature in each of the future time periods
shown. Except as stated below, the amount of assets and liabilities shown which
mature during a particular period were determined in accordance with the earlier
of estimated repayment or runoff or the contractual terms of the asset or
liability. Our loan prepayment assumptions are based on peer banks' historical
performance and statistics, including a 26.7% prepayment assumption on other
loans and a 38.0% prepayment assumption on fixed-rate loans. There can be no
assurance that deposits would reprice to peer bank's historical levels if
interest rates were to increase. Certain shortcomings are inherent in the method
of analysis presented in the foregoing table. For example, although certain
assets and liabilities may have similar maturities, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets may have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
For example, if a prime rate loan has a minimum interest rate of 7.5%, an
increase in a very low prime rate might not be sufficient to increase the
interest rate on the loan to more than the minimum. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table. Finally, the
ability of many borrowers to service their prime rate loans may decrease in the
event of an interest rate increase.

                                       29
<PAGE>

<TABLE>
<CAPTION>
                                                                            At December 31, 2005
                                            -----------------------------------------------------------------------------------
                                                Three             Four            More than
                                               months           to twelve        One year to       More than
                                               or less           months          five years        five years         Total
                                            -------------     -------------     -------------    -------------    -------------
<S>                                         <C>               <C>               <C>              <C>              <C>
Interest-earning assets:
 Commercial loans (1)                       $  68,679,297     $      36,987     $     340,707    $     200,078    $  69,257,069
 Consumer loans (1)                             3,335,691            28,352            47,019           66,092        3,477,154
 Money market investments                         730,758                --                --               --          730,758
 Mortgage-backed securities                     5,722,472        17,167,416        77,225,387               --      100,115,275
 Other interest-earning assets                 21,394,072                --                --               --       21,394,072
 Investment securities                                 --                --         5,500,000        3,000,000        8,500,000
                                            -------------     -------------     -------------    -------------    -------------
    Total interest-earning assets              99,862,290        17,232,755        83,113,113        3,266,170      203,474,328
Less:
 Unearned (discount) and deferred fees(2)         (92,268)         (276,804)           57,408               --         (311,664)
                                            -------------     -------------     -------------    -------------    -------------
Net interest-earning assets                    99,770,022        16,955,951        83,170,521        3,266,170      203,162,664

Interest-bearing liabilities:
 Savings accounts                              14,809,010                --                --               --       14,809,010
 NOW accounts                                  23,574,056                --                --               --       23,574,056
 Money market accounts                         20,907,998                --                --               --       20,907,998
 Certificate accounts                          53,220,153        11,472,095         3,039,025               --       67,731,273
 Subordinated debt                                     --                --         5,155,000               --        5,155,000
                                            -------------     -------------     -------------    -------------    -------------
    Total interest-bearing liabilities        112,511,217        11,472,095         8,194,025               --      132,177,337

Interest sensitivity gap                    $ (12,741,195)    $   5,483,856     $  74,976,496    $   3,266,170    $  70,985,327
                                            =============     =============     =============    =============    =============
Cumulative gap                              $ (12,741,195)    $  (7,257,339)    $  67,719,157    $  70,985,327    $  70,985,327
                                            =============     =============     =============    =============    =============
Cumulative gap as a percentage
  of total interest-earning
  assets                                            -6.26%            -3.57%            33.28%           34.89%           34.89%
Cumulative net interest-earning assets
  as a percentage of total interest-
  bearing liabilities                               88.68%            94.15%           151.23%          153.70%          153.70%
</TABLE>

(1)   For purposes of the gap analysis, mortgage and other loans are reduced for
      non-performing loans but are not reduced for the allowance for possible
      loan losses.
(2)   For purposes of the gap analysis, unearned discount and deferred fees are
      pro-rated.



Analysis of Net Interest Income

Our profitability is primarily dependent upon net interest income. Net interest
income represents the difference between interest income on interest-earning
assets and the interest expense on interest-bearing liabilities. Net interest
income depends primarily upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.

                                       30
<PAGE>

Average Balance Sheet

The following table sets forth certain information relating to our consolidated
statements of financial condition and the consolidated statements of earnings
for the fiscal years ended December 31, 2005, 2004 and 2003 and reflects the
average yield on assets and average cost of liabilities for the period
indicated. Such yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the periods
shown. Average balances are derived from average daily balances. The average
balance of loans receivable does not include loans on which we have discontinued
accruing interest. The yields and costs include net fees, which are considered
adjustments to yields. No tax equivalent adjustments have been made.

<TABLE>
<CAPTION>
                            Year Ended December 31,               Year Ended December 31,               Year Ended December 31,
                                     2005                                  2004                                  2003
                      ----------------------------------   ----------------------------------   -----------------------------------
                         Average                  Yield/     Average                   Yield/     Average                    Yield/
                         Balance     Interest      Cost      Balance       Interest     Cost      Balance        Interest     Cost
                      ------------ ------------   ------   ------------  ------------  ------   ------------   ------------  ------
<S>                   <C>          <C>              <C>   <C>           <C>              <C>   <C>            <C>              <C>
Assets:
Interest-earning
 assets:
  Loans receivable    $ 71,521,353 $  5,828,338     8.15% $ 68,513,503  $  5,340,281     7.79% $ 68,232,867   $  5,120,215     7.50%
  Other interest
    earning assets      18,196,007      585,512     3.22    22,406,937       293,464     1.31    22,571,739        210,182     0.93
  Investment
    securities         114,817,580    4,870,635     4.24    95,319,848     4,051,983     4.25    61,624,978      2,242,367     3.64
                      ------------ ------------           ------------  ------------           ------------   ------------
  Total interest-
    earning assets     204,534,940   11,284,485     5.52   186,240,288     9,685,728     5.20   152,429,584      7,572,764     4.97

 Non-interest
    earning assets      13,044,634                          13,260,423                           10,413,473
                      ------------                        ------------                         ------------
  Total assets        $217,579,574                        $199,500,711                         $162,843,057
                      ============                        ============                         ============

Liabilities and
 equity:
 Interest-bearing
 liabilities:
  Savings accounts    $ 15,745,514       79,073     0.50  $ 12,596,720        63,130     0.50  $  9,150,010         57,543     0.63
  Time accounts         60,071,303    1,200,566     2.00    41,259,632       433,374     1.05    28,341,812        343,317     1.21
  Money market
   accounts             20,835,285      229,906     1.10    23,219,409       195,269     0.84    25,379,394        264,283     1.04
  Now accounts          24,524,078      104,620     0.43    23,988,825       100,941     0.42    25,610,959        123,457     0.48
  Subordinated debt      5,155,000      356,159     6.91     5,155,000       356,159     6.91     1,779,534        118,029     6.63
                      ------------ ------------           ------------  ------------           ------------   ------------
     Total interest-
      bearing
      liabilities      126,331,180    1,970,324     1.56   106,219,586     1,148,873     1.08    90,261,709        906,629     1.00
  Checking accounts     74,654,567                          79,654,202                           60,842,673
                      ------------                        ------------                         ------------
Total                  200,985,747                         185,873,788                          151,104,382
Other liabilities        2,631,982                           2,071,349                            1,438,827
                      ------------                        ------------                         ------------
  Total liabilities    203,617,729                         187,945,137                          152,543,209
 Equity                 13,961,845                          11,555,574                           10,299,848
                      ------------                        ------------                         ------------
  Total liabilities
    and equity        $217,579,574                        $199,500,711                         $162,843,057
                      ============                        ============                         ============
Net interest
 income/net
 interest
 rate spread                       $  9,314,161     3.96%               $  8,536,855     4.12%                $  6,666,135     3.97%
                                   ============   ======                ============   ======                 ============  =======
Net interest
 earning
 assets/net
 interest margin      $ 78,203,760                  4.55% $ 80,020,702                   4.58% $ 62,167,875                    4.37%
                      ============                ======  ============                 ======  ============                  ======
Ratio of
 interest-earning
 assets to interest-
 bearing liabilities          1.62 x                              1.75 x                               1.69 x
                      ============                        ============                         ============

Return On
  Average Assets:                                   1.18%                                1.14%                                 0.93%
                                                  ======                               ======                                ======
Return On
  Average Equity:                                  18.39%                               19.68%                                14.76%
                                                  ======                               ======                                ======
Equity To Assets:                                   6.73%                                5.44%                                 5.77%
                                                  ======                               ======                                ======
</TABLE>

                                       31
<PAGE>

Rate/Volume Analysis

The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our interest income and interest expense during the
periods indicated. Information is provided in each category with respect to (i)
changes attributable to changes in volume (changes in volume multiplied by prior
rate), (ii) changes attributable to changes in rate (changes in rate multiplied
by prior volume), and (iii) the net change. The changes attributable to the
combined impact of volume and rate have been allocated proportionately to the
changes due to volume and the changes due to rate.

<TABLE>
<CAPTION>
                                         Year Ended December 31, 2005                 Year Ended December 31, 2004
                                                 Compared to                                  Compared to
                                               December 31, 2004                            December 31, 2003
                                              Increase/(Decrease)                          Increase/(Decrease)
                                            In Net Interest Income                       In Net Interest Income
                                  -----------------------------------------   -----------------------------------------
                                           Due to                                       Due to
                                  --------------------------                  --------------------------
                                    Volume          Rate            Net         Volume          Rate           Net
                                  -----------    -----------    -----------   -----------    -----------    -----------
<S>                               <C>            <C>            <C>           <C>            <C>            <C>
Interest-earning assets:
  Loans receivable                $   234,312    $   253,745    $   488,057   $    21,048    $   199,018    $   220,066
  Money market                             --             --             --        (3,234)             6         (3,228)
  Other interest-earning assets       (55,163)       347,211        292,048        (1,533)        84,815         83,282
  Investment securities, afs          828,654        (10,002)       818,652     1,237,333        575,511      1,812,844
                                  -----------    -----------    -----------   -----------    -----------    -----------
     Total                          1,007,802        590,955      1,598,757     1,253,614        859,350      2,112,964

 Interest-bearing liabilities:
  Savings accounts                     15,744            199         15,943        21,714        (16,127)         5,587
  Time accounts                       197,523        569,669        767,192       156,306        (66,249)        90,057
  Money market accounts               (20,027)        54,664         34,637       (22,464)       (46,550)       (69,014)
  Now accounts                          2,248          1,431          3,679        (7,786)       (14,730)       (22,516)
  Subordinated debt                        --             --             --       238,130             --        238,130
                                  -----------    -----------    -----------   -----------    -----------    -----------
     Total                            195,488        625,963        821,451       385,900       (143,656)       242,244
                                  -----------    -----------    -----------   -----------    -----------    -----------
Net change in net interest
 income                           $   812,314    ($   35,008)   $   777,306   $   867,715    $ 1,003,005    $ 1,870,720
                                  ===========    ===========    ===========   ===========    ===========    ===========
</TABLE>

                                          Year Ended December 31, 2003
                                                  Compared to
                                                December 31, 2002
                                               Increase/(Decrease)
                                             In Net Interest Income
                                  ----------------------------------------
                                            Due to
                                  -------------------------
                                    Volume         Rate            Net
                                  -----------   -----------    -----------

Interest-earning assets:
  Loans receivable                $   836,654   ($  128,127)   $   708,527
  Money market                          3,975        (4,243)          (268)
  Other interest-earning assets       123,269       (94,497)        28,772
  Investment securities, afs        1,264,723      (947,590)       317,133
                                  -----------   -----------    -----------
     Total                          2,228,621    (1,174,457)     1,054,164

 Interest-bearing liabilities:
  Savings accounts                      9,664       (23,900)       (14,236)
  Time accounts                       251,003      (294,943)       (43,940)
  Money market accounts               116,130      (114,597)         1,533
  Now accounts                         39,928       (16,972)        22,956
  Subordinated debt                   118,029            --        118,029
                                  -----------   -----------    -----------
     Total                            534,755      (450,413)        84,342
                                  -----------   -----------    -----------
Net change in net interest
 income                           $ 1,693,866   ($  724,044)   $   969,822
                                  ===========   ===========    ===========


Comparative Results for the Years Ended December 31, 2005 and December 31, 2004

General. We had net income of $2,567,429 for the year ended December 31, 2005,
as compared to net income of $2,274,578 for the year ended December 31, 2004.
The principal categories which make up the 2005 net income are:

     o   Interest income of $11,284,485
     o   Reduced by interest expense of $1,970,324
     o   Increased by a credit provision for loan losses of $60,000
     o   Increased by non-interest income of $2,117,640
     o   Reduced by non-interest expense of $6,684,898
     o   Reduced by $2,239,474 in income tax expense.

         We discuss each of these categories individually and the reasons for
the differences between the years ended December 31, 2005 and 2004 in the
following paragraphs. The most significant factors that caused changes in net
income from 2004 to 2005 were the increase in short-term interest rates and an
increase in the average volume of interest-earning assets and liabilities. The
interest rate increase affected both our yields on investments and our cost of
funds, while the increase in average volume had a more significant effect on
yields earned than on rates paid. Our average yields earned are higher than our
cost of funds, and thus an increase in interest-earning assets provides more
interest income than the cost of the increase in interest bearing liabilities to
fund those assets. Therefore, our proposed new branches in 2006 and other
marketing efforts are designed to seek to reverse the decline in assets we
experienced during 2005. The implementation of our Employee Stock Ownership Plan
("ESOP") also increases compensation expense as we make contributions to the
ESOP.

                                       32
<PAGE>

         Interest Income. Interest income was $11,284,485 for the year ended
December 31, 2005, compared to $9,685,728 for the year ended December 31, 2004,
an increase of $1,598,757, or 16.5%. The reasons for this increase include a
$19,497,732 increase in the average balance of investment securities, which
generated an additional $818,652 of interest income. Toward the end of 2004, we
were able to increase the average volume of investment securities by focusing
funds we could not deploy in loans into higher-yielding investment securities
instead of lower-yielding short term investments such as overnight federal funds
sold. Our volume of investment securities was highest at the beginning of 2005
and gradually declined during the year as principal was repaid on those
securities, The reported yield on investment securities for the year ended 2005
was flat from the prior year because the purchases made in the portfolio in 2005
were made during the fourth quarter and they did not create a material change in
the average yield

         Also contributing to the increase in interest income was a $3,007,850
or 4.4% increase in the average balance of loans receivable, coupled with a 36
basis point increase in the yield on loans. These increases generated a $488,057
increase in interest earned on loans. The increase in the volume of loans was a
result of our efforts to increase our loan portfolio because loans are our
highest earning asset category. The average yield on our loans increased because
during 2005 the prime rate increased to the point where our prime based loans
began to reprice upward from their interest rate floors that had been effective
in 2004.

         Finally, we had a $292,048 increase in income from overnight funds and
other interest earning assets, as the yield increased 191 basis points during
2005 due to higher market rates on short term and overnight investments. The
volume of these assets declined by $4,210,930 from 2004 as we directed our
available funds into investment securities which gain higher yields than
overnight investments.

         Interest Expense. Interest expense was $1,970,324 for the year ended
December 31, 2005, compared to $1,148,873 for the year ended December 31, 2004,
an increase of 71.5%. More than 90% of the $821,451 increase in interest expense
was represented by an increase in the cost of our time deposits. The average
balance of time accounts increased by $18,811,671 (or 45.6%) and the average
rate on those accounts increased by 95 basis points, which resulted in an
increase of $767,192 in interest expense. The increase in rate was due to the
increase in market rates, while the volume increase, which represented
substantially all of our increase in average deposit balances between the two
years, was apparently the result of a shift in customer preferences in favor of
time deposit accounts. The rates we paid on those accounts increased to the
point where we believe customers perceived a sufficient economic benefit for
agreeing to lock up the deposited funds for the term to maturity of the time
deposit.

         Our average cost of funds increased from 1.08% to 1.56% between the
periods because of the increase in the cost of time and money market deposits
and the shift in favor of time deposits, which are our highest cost deposit
category. In addition, average non-interest bearing checking accounts decreased
as a percentage of total deposits from 42.9% in 2004 to 37.1% in 2005. This
decrease is due to the migration of deposits from non-interest bearing to
interest-bearing products as rates increased throughout the year and the
decrease in mortgage related checking account balances as the mortgage market
cooled in 2005 and the Bank terminated its relationship with a customer that had
maintained large balances.

         Net Interest Income Before Provision for Loan Losses. Net interest
income before the provision for loan losses was $9,314,161 for the year ended
December 31, 2005, an increase of $777,306, or 9.1% over the $8,536,855 we had
for the year ended December 31, 2004. The increase was driven primarily by the
increase in the volume of average interest-earning assets, partially offset by
the increase in the cost of funds due to the higher market rates and the related
customer reallocation of deposits into higher cost products. We benefited from
having higher interest earning assets toward the beginning of the year, which
resulted in an increase of $19,497,732 in average investment securities. Our
interest rate spread declined by 16 basis points from 4.12% at December 31, 2004
to 3.96% at December 31, 2005, principally for the following reasons:

                                       33
<PAGE>

     o    An increase in prevailing interest rates caused a substantial increase
          in the cost of our money market and time deposits;
     o    Customers appear to have shifted their deposit preferences towards
          higher cost time deposits as the increase in interest rates made those
          deposits more attractive; but
     o    These negative effects were partially offset by the increase in the
          yield and average volume of interest earning assets.

Our net interest margin, which takes into account the effect of non-interest
bearing funding sources such as checking accounts and capital, declined by only
3 basis points from 2004 to 2005. This decline was less than the decline in
spread because, as interest rates rise, zero cost funding sources become more
and more valuable. The increase in yields on assets funded by non-interest
bearing deposits and capital outweighed the negative effects of a $4,999,655 (or
6.3%) decline in the average balance of checking accounts from $79,654,202 in
2004 to $74,654,567 in 2005.

         The prime rate, which is the index used to adjust interest rates on
many of our loans, was 7.25% at the end of 2005, as compared to 5.25% at the end
of 2004. Although these loans primarily have interest rates with a margin of 100
to 150 basis points above the prime rate, many have interest rate floors so that
the rates on the loans cannot decline below 7.00% to 7.50%. As a result of the
prime rate increase, the index plus the margin exceeded the floors on many of
these loans in 2005, so our yields on these loans now adjust with increases in
the prime rate. Therefore, we had higher loan yields in 2005 than we had in 2004
when many of the loans had interests rates equal to their floor rates. If the
prime rate continues to rise, these loans will continue to re-price upwards
along with prime. Conversely, if the prime rate falls, these loans will re-price
downward with prime until rates reach the interest rate floors.

         Provision for Loan Losses. In 2005, we recorded a $60,000 credit to the
provision for loan losses, compared to a provision for loan losses of $150,000
for the year ended December 31, 2004. The $210,000 net decrease in the provision
was primarily due to a moderate decrease in the rate of unsecured loan
delinquencies in the loan portfolio. If we are able to effectuate a material
increase in our loan portfolio to increase average asset yields, that would
probably also generate an increase in the provision for loan losses.

         The provision for loan losses in any period depends upon the amount
necessary to bring the allowance for loan losses to the level management
believes is appropriate, after taking into account charge offs and recoveries.
Our allowance for loan losses reflects probable incurred losses based on
management's evaluation of the loan portfolio, and the general economy, local
economic conditions and other factors affecting loan repayments. 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 1.55% of total loans at December 31, 2005, but there can be no
assurance that a higher level, or a higher provision for loan losses, will not
be necessary in the future.

         Non-interest Income. Non-interest income was $2,117,640 for the year
ended December 31, 2005, compared to $1,889,818 during the same period last
year. The $227,822, or 12.1% increase was caused primarily by a $150,151
increase in net rental income, which resulted from a one-time payment of
$119,000 from a tenant of the Bank who opted to terminate the sub-lease
agreement in which the Bank is lessor. This payment satisfied all conditions of
the sub-lease agreement.

                                       34
<PAGE>

         Service fees on deposit accounts declined from 2004 to 2005 as the
volume of deposit account transactions generating fee income declined. Although
average deposits increased from year to year, much of this increase was in time
deposit accounts that tend not to generate fee income, and by the end of 2005,
total deposits were lower than they had been at the beginning of 2005. Most of
the decline during 2005 was in the non-interest bearing checking account
category, which is the account type that tends to generate the highest level of
service fees.

         Non-interest Expense. Non-interest expense was $6,684,898 for the year
ended December 31, 2005, compared to $6,018,691 for the year ended December 31,
2004. an increase of $666,207, or 11.1%. The principal causes of the increase
were:

     o   $361,580 in higher salary and benefits costs due to normal salary
         increases, a slight increase in staffing to support growth, and higher
         benefit costs.
     o   $38,807 in higher legal expenses incurred in connection with a number
         of pending lawsuits involving a former customer of the Bank.
     o   $263,820 more of "other expenses," reflecting the effects of branch
         expansion on other expense categories, increased costs of service
         providers and a $100,000 expense associated with the establishment of a
         reserve for an unasserted claim. The reserve involves a transaction
         between other parties that was processed by the Company.

         Income Tax Expense. Income tax expense was $2,239,474 for the year
ended December 31, 2005, compared to income tax expense of $1,983,404 for the
year ended December 31, 2004, due to the $548,921 increase of income before
income taxes for the year ended December 31, 2005. Our effective tax rate
remained the same for 2005 and 2004 at 46.6%.

Changes in Financial Condition

         Our total assets were $215,775,712 at December 31, 2005, a decrease of
$19,908,755, or 8.4%, since December 31, 2004. The decline resulted from a need
to fund a decline in deposits, principally demand accounts. We funded the
decline in deposits primarily with cash flows from principal paydowns on
investment securities. The total decrease in assets can be categorized as
follows.

     o   A $4,334,926 decrease in cash and equivalents
     o   A $22,509,474 decrease in investment securities available for sale
     o   Partially offset by a $6,043,442 increase in net loans receivable, as
         management continued its efforts to increase our loan portfolio in
         order to increase interest income.

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

         Our deposits (including escrow deposits) were $193,251,159 at December
31, 2005, a decrease of $22,172,314, or 10.3%, from December 31, 2004. The
decrease in total deposits includes a $34,868,496 decrease in non-interest
demand deposits and a $3,211,610 decrease in money market accounts, partially
offset by a $2,000,003 increase in NOW accounts, a $649,984 increase in savings
and a $13,260,766 increase in time deposits.

         Total stockholders' equity was $14,531,407 at December 31, 2005, an
increase of $1,701,786 from December 31, 2004. The increase reflected net income
of $2,567,429 for the year ended December 31, 2005, reduced by an increase of
$959,082 in other comprehensive loss due to an increase in the unrealized loss
in securities available for sale during 2005. The unrealized loss increased due
to the increase in market interest rates, which drove down the market value of
the fixed rate bond portfolio. This unrealized loss is excluded from the

                                       35
<PAGE>

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

         The change in stockholders' equity also included a decrease of $75,640
in additional paid in capital due to reclassification of $158,113 representing
the Employee Stock Ownership Plan Repurchase Obligation, partially offset by the
increase due to the exercise of options to purchase 4,800 shares of common stock
and a decrease in unearned ESOP shares of $169,078 reflecting the effect of the
gradual payment of the loan we made to fund the ESOP's purchase of our stock.

         VSB Bancorp, Inc. satisfied all capital ratio requirements of the
Federal Reserve at December 31, 2005, with a Tier I Leverage Capital ratio of
9.54%, a ratio of Tier I Capital to Risk-Weighted Assets ratio of 20.37%, and a
Total Capital to Risk-Weighted Assets ratio of 21.47%.

         In May of 2004, we implemented the stockholder-approved ESOP. We lent
the ESOP the money to purchase shares of our stock with the expectation that the
ESOP will repay the loan principally from contributions from Victory State Bank
as part of its employee compensation program. The loan has a ten year term, with
periodic payments due annually sufficient to repay the loan, including interest,
in monthly installments over the term of the loan. The interest rate is fixed at
4.00%, the prime rate on the date of the loan.

         Upon implementation, the ESOP purchased 74,320 shares of our common
stock out of our authorized but unissued shares, which initially had no net
effect on capital on the purchase date. The purchase price was $22.75 per share,
the fair market value at that time, for a total purchase price of $1.7 million.
As payments are made to reduce the ESOP loan, stock is released from the
security interest for the loan, resulting in an increase in capital equal to the
market value of the ESOP stock as it is released. However, under federal law
regarding employee stock ownership plans, since our stock is not considered to
be "readily tradable on an established market," employees who receive a
distribution of stock from the ESOP upon termination of employment have the
right to require that we repurchase the stock at fair value. We reflect this
contingent repurchase obligation on our balance sheet as a reclassification of
additional paid in capital of $284,938 to mezzanine capital, based upon our
quoted price on December 31, 2005, but the amount still qualifies as capital for
regulatory purposes. Employees are not permitted to make contributions to the
ESOP.

         For financial statement reporting purposes, we record the compensation
expense related to the ESOP when shares are 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.

Liquidity and Capital Resources

         Our primary sources of funds are increases in deposits and proceeds
from the repayment of investment securities. We use these funds principally to
purchase new investment securities and to fund increases in our loan portfolio.

                                       36
<PAGE>

         For the year ended December 31, 2005, we had a net decrease in total
deposits of $22,172,314 as a result of a $35,430,119 decline in demand deposit
accounts, partially offset by a $13,260,766 increase in time deposits. We
received proceeds from repayment of investment securities of $28,371,189, which
we used to fund the deposit outflow, net loan growth of $6,043,442 and the
purchase of $7,776,706 of investment securities. The decrease in deposits is
primarily attributable to a decline in real estate activity in our community,
which resulted in a reduction in demand deposits created in connection with
pending real estate and mortgage loan transactions, as well as our termination
of our relationship with a customer in the real estate settlement business.
Demand deposits also tend to decline in a rising rate environment, as customers
have a greater incentive to place their funds in interest-bearing accounts.

         In contrast, for the year ended December 31, 2004, we had a net
increase in deposits of $47,720,672 as a result of the continued implementation
of our strategy to seek to grow our bank. We also received proceeds from
repayment of investment securities of $31,356,409. We used those funds to
increase our interest-bearing bank balances by $4,876,006 and to purchase
$77,439,652 of investment securities and money market investments. The increase
in deposits is primarily attributable to deposit increases at all our branches
and a $5 million time deposit from the City of New York, into our St. George
branch, under New York City's new Bank Development District deposit program.

         In 2005, we experienced a net decline of $4,334,926 in cash and
equivalents because of our strategy to invest available cash in investments and
loans as opposed to lower yielding overnight deposits. Total cash and
equivalents at December 31, 2005 were $31,324,147.

         In contrast, during 2004 funds available to us exceeded the amount of
investments we chose to make, so we experienced a $5,471,332 increase in cash
and cash equivalents. Total cash and cash equivalents at December 31, 2004 were
$35,659,073.

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 December 31, 2005

<TABLE>
<CAPTION>
Contractual Obligations                                              Payment due by Period
                                           ------------------------------------------------------------------------

                                            Less than     One to three   Four to five       After      Total Amounts
                                             One Year         years          years       five years      committed
                                           ------------   ------------   ------------   ------------   ------------
<S>                                        <C>            <C>            <C>            <C>            <C>
Minimum annual rental  payments under
      non-cancelable operating leases      $    511,869   $  1,219,592   $    415,101   $  2,950,638   $  5,097,200
Remaining contractual maturities of time
      deposits                               64,692,248      1,894,025      1,145,000             --     67,731,273
                                           ------------   ------------   ------------   ------------   ------------
 Total contractual cash obligations        $ 65,204,117   $  3,113,617   $  1,560,101   $  2,950,638   $ 72,828,473
                                           ============   ============   ============   ============   ============


Other commitments                                           Amount of commitment Expiration by Period
                                           ------------------------------------------------------------------------

                                            Less than     One to three   Four to five       After      Total Amounts
                                             One Year         years          years       five years      committed
                                           ------------   ------------   ------------   ------------   ------------

                                           ------------   ------------   ------------   ------------   ------------
Loan commitments                           $ 17,093,709   $  9,326,424   $     15,000   $         --   $ 26,435,133
                                           ============   ============   ============   ============   ============
</TABLE>

Impact of Inflation and Changing Prices

The consolidated financial statements and related notes presented herein have
been prepared in accordance with accounting principles generally accepted in the
United States, which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time and due to inflation. Unlike
industrial companies, nearly all of our assets and liabilities are monetary. As

                                       37
<PAGE>

a result, interest rates have a greater impact on our performance than do the
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.

                                     PART II

Item 7.

The company's financial statements appear on the following pages:

                                       38
<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>

<S>                                                                                                     <C>
Report of Independent Registered Public Accounting Firm ................................................F-1

Consolidated Statements of Financial Condition as of December 31, 2005 and 2004.........................F-2

Consolidated Statements of Earnings for the Years Ended December 31, 2005 and 2004......................F-3

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2005 and 2004..........F-4

Consolidated Statements of Cash Flows for the Years Ended December 31, 2005 and 2004....................F-5

Notes to Consolidated Financial Statements..............................................................F-6
</TABLE>

<PAGE>



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and Stockholders
VSB Bancorp, Inc.
Staten Island, New York


We have audited the accompanying consolidated statements of financial condition
of VSB Bancorp, Inc. as of December 31, 2005 and 2004 and the related
consolidated statement of earnings, stockholders' equity and comprehensive
income and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based upon our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material results, the financial position of VSB Bancorp, Inc. as
of December 31, 2005 and 2004 and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.




                                            /s/ Crowe Chizek and Company LLC
                                            Livingston, New Jersey
                                            February 16, 2006

                                      F-1
<PAGE>

VSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ASSETS                                                             2005             2004
                                                               -------------    -------------

<S>                                                            <C>              <C>
Cash and cash equivalents                                      $  31,324,147    $  35,659,073
Investment securities, available for sale                        106,023,293      128,532,767
Loans receivable (net of allowance for loan losses
    of $1,153,298 and $1,299,520, respectively)                   72,790,807       66,747,365
Accrued interest receivable                                          728,627          745,368
Premises and equipment, net                                        1,441,087        1,817,284
Prepaid and other assets                                           1,169,556          719,670
Deferred income taxes, net                                         2,298,195        1,462,940
                                                               -------------    -------------

                          Total assets                         $ 215,775,712    $ 235,684,467
                                                               =============    =============

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Deposits
    Non-interest bearing                                       $  66,959,580    $ 101,831,037
    Interest bearing                                             126,291,579      113,592,436
Subordinated Debt                                                  5,155,000        5,155,000
Accounts payable, accrued expenses and other liabilities           2,553,208        2,149,548
                                                               -------------    -------------

                        Total liabilities                        200,959,367      222,728,021
                                                               -------------    -------------

Employee Stock Ownership Plan Repurchase Obligation                  284,938          126,825

STOCKHOLDERS' EQUITY
Common stock ($.0001 par value, 3,000,000 shares authorized,
 1,509,822 issued and outstanding at December 31, 2005;
 1,505,022 issued and outstanding at December 31, 2004)                  151              150
Additional paid-in capital                                         8,742,673        8,818,313
Retained earnings                                                  8,621,693        6,054,264
Unearned Employee Stock Ownership Plan shares                     (1,408,983)      (1,578,061)
Accumulated other comprehensive loss, net of taxes
  of $1,242,278 and $405,662, respectively                        (1,424,127)        (465,045)
                                                               -------------    -------------

                   Total stockholders' equity                     14,531,407       12,829,621
                                                               -------------    -------------

           Total liabilities and stockholders' equity          $ 215,775,712    $ 235,684,467
                                                               =============    =============
</TABLE>

See notes to consolidated financial statements.

                                      F-2
<PAGE>

VSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED DECEMBER 31,
2005 AND 2004
--------------------------------------------------------------------------------

                                                       2005            2004
                                                   ------------    ------------

INTEREST INCOME:
     Loans receivable                              $  5,828,338    $  5,340,281
     Investment securities                            4,870,635       4,051,983
     Other interest income                              585,512         293,464
                                                   ------------    ------------
             Total interest income                   11,284,485       9,685,728

INTEREST EXPENSE:
     Deposits                                         1,614,165         792,714
     Subordinated Debt                                  356,159         356,159
                                                   ------------    ------------
             Total interest expense                   1,970,324       1,148,873

             Net interest income                      9,314,161       8,536,855

PROVISION (CREDIT) FOR LOAN LOSSES                      (60,000)        150,000
                                                   ------------    ------------

             Net interest income after
               provision (credit) for loan losses     9,374,161       8,386,855
                                                   ------------    ------------

NON-INTEREST INCOME:
     Deposit service fees                             1,685,198       1,709,787
     Other income                                       432,442         180,031
                                                   ------------    ------------
             Total non-interest income                2,117,640       1,889,818
                                                   ------------    ------------

NON-INTEREST EXPENSES:
     Salaries and employee benefits                   3,780,485       3,418,905
     Occupancy and equipment                            976,949         947,954
     Data processing service fees                       241,396         255,350
     Legal fees                                         173,178         134,371
     Professional fees                                  222,000         235,041
     Director fees                                      167,050         123,500
     Supplies and service                               287,652         201,886
     Checkbook charges                                  156,115         165,267
     Other                                              680,073         536,417
                                                   ------------    ------------
             Total non-interest expenses              6,684,898       6,018,691
                                                   ------------    ------------

INCOME BEFORE INCOME TAXES                            4,806,903       4,257,982
                                                   ------------    ------------

PROVISION/(BENEFIT) FROM INCOME TAXES:
     Current                                          2,238,114       2,253,973
     Deferred                                             1,360        (270,569)
                                                   ------------    ------------

             Total income taxes                       2,239,474       1,983,404
                                                   ------------    ------------

NET INCOME                                         $  2,567,429    $  2,274,578
                                                   ============    ============

Basic net income per share of common stock         $       1.78    $       1.60
                                                   ============    ============
Diluted net income per share of common stock       $       1.73    $       1.54
                                                   ============    ============
Comprehensive income                               $  1,608,347    $  1,979,199
                                                   ============    ============

See notes to consolidated financial statements.

                                       F-3
<PAGE>

VSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                        Accumulated
                               Number of                     Additional                    Unearned         Other         Total
                                 Common         Common        Paid-in        Retained        ESOP       Comprehensive  Stockholders'
                                 Shares         Stock         Capital        Earnings       Shares     Earnings/(Loss)    Equity
                              ------------   ------------   ------------   ------------  ------------   ------------   ------------
<S>                              <C>         <C>            <C>            <C>           <C>            <C>            <C>
Balance at December 31, 2003     1,055,998   $        106   $  7,076,486   $  3,779,686  $         --   $   (169,666)  $ 10,686,612

Exercise of stock option            22,720              2        177,802                                                    177,804
4 for 3 stock split and the
   purchase of fractional
   shares                          351,984             35           (368)                                                      (333)
Purchase of newly issued
   common stock by ESOP             74,320              7      1,690,773                                                  1,690,780
Issuance of ESOP shares                                                                    (1,690,780)                   (1,690,780)
Amortization of earned
    portion of ESOP
    common stock                                                                              112,719                       112,719
Amortization of excess fair
    value of cost - ESOP                                             445                                                        445
Transfer to ESOP repuchase
   obligation                                                   (126,825)                                                  (126,825)
Comprehensive income:
  Net income                                                                  2,274,578                                   2,274,578
  Other comprehensive
    income, net:
    Unrealized holding
    loss arising during
    the year                            --             --             --             --            --       (295,379)      (295,379)
                              ------------   ------------   ------------   ------------  ------------   ------------   ------------
Total comprehensive income                                                                                                1,979,199

Balance at December 31, 2004     1,505,022            150      8,818,313      6,054,264    (1,578,061)      (465,045)    12,829,621
                              ------------   ------------   ------------   ------------  ------------   ------------   ------------

Exercise of stock option             4,800              1         63,731                                                     63,732
Amortization of earned
    portion of ESOP
    common stock                                                                              169,078                       169,078
Amortization of excess fair
    value of cost - ESOP                                          18,742                                                     18,742
Transfer to ESOP repuchase
   obligation                                                   (158,113)                                                  (158,113)
Comprehensive income:
  Net income                                                                  2,567,429                                   2,567,429
  Other comprehensive
    income, net:
    Unrealized holding
    loss arising during
    the year                            --             --             --             --            --       (959,082)      (959,082)
                              ------------   ------------   ------------   ------------  ------------   ------------   ------------
Total comprehensive income                                                                                                1,608,347

Balance at December 31, 2005     1,509,822   $        151      8,742,673   $  8,621,693  $ (1,408,983)  $ (1,424,127)  $ 14,531,407
                              ============   ============   ============   ============  ============   ============   ============
</TABLE>

See notes to consolidated financial statements.

                                       F-4
<PAGE>

VSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
2005 and 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                      2005            2004
                                                                  ------------    ------------
<S>                                                               <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                     $  2,567,429    $  2,274,578
   Adjustments to reconcile net income to net cash
      provided by operating activities:
       Depreciation and amortization                                   449,777         496,132
       Accretion of discount, net amortization of premium             (177,651)       (141,627)
       ESOP compensation expense                                       187,820         113,164
       (Credit) provision for loan losses                              (60,000)        150,000
      (Gain) / loss on the sale of other assets                         (4,500)          3,188
       Other                                                                --              --
   Changes in operating assets and liabilities:
     Increase in prepaid and other assets                             (449,886)        (22,125)
      Decrease / (increase) in accrued interest receivable              16,741        (157,136)
      Decrease / (increase) in deferred income taxes                     1,360        (270,569)
      Increase in accrued expenses, income tax payable
        and other liabilities                                          403,660         563,991
                                                                  ------------    ------------
          Net cash provided by operating activities                  2,934,750       3,009,596
                                                                  ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net ( increase) / decrease in loans receivable                   (5,686,497)        231,930
   Proceeds from maturities of money market investments                     --         599,356
   Proceeds from repayments and calls of investment securities,
     available for sale                                             28,371,189      31,356,409
   Purchase of investment securities, available for sale            (7,776,706)    (77,439,652)
   Purchases of premises and equipment, net                            (69,080)       (184,450)
                                                                  ------------    ------------
          Net cash provided by (used in) investing activities       14,838,906     (45,436,407)
                                                                  ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net (decrease) / increase in deposits                           (22,172,314)     47,720,672
   Exercise of stock options                                            63,732         177,804
   Proceeds from ESOP loan                                                  --       1,690,780
   Purchase of ESOP shares                                                  --      (1,690,780)
  Purchase of fractional shares, 4 for 3 split                              --            (333)
                                                                  ------------    ------------
          Net cash (used in) provided by financing activities      (22,108,582)     47,898,143
                                                                  ------------    ------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                (4,334,926)      5,471,332

CASH AND CASH EQUIVALENTS,
   BEGINNING OF YEAR                                                35,659,073      30,187,741
                                                                  ------------    ------------

CASH AND CASH EQUIVALENTS,
   END OF YEAR                                                    $ 31,324,147    $ 35,659,073
                                                                  ============    ============

SUPPLEMENTAL DISCLOSURE OF CASH
   FLOW INFORMATION:
   Cash paid during the period for:
     Interest                                                     $  2,176,292    $  1,220,386
                                                                  ============    ============
     Income taxes                                                 $  2,500,378    $  2,185,655
                                                                  ============    ============
</TABLE>

See notes to consolidated financial statements.

                                       F-5
<PAGE>

VSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005
and 2004
--------------------------------------------------------------------------------

1.   GENERAL

     VSB Bancorp, Inc. ("Bancorp" or "Company") became the holding company for
Victory State Bank ("Bank"), a New York State chartered commercial bank on May
30, 2003 as the result of a reorganization of Victory State Bank into the
holding company form of organization. Through the Bank, the Company is primarily
engaged in the business of commercial banking, and to a lesser extent retail
banking, in Staten Island New York. The stockholders of Victory State Bank
became the stockholders of VSB Bancorp, Inc. as a result of the reorganization,
receiving three shares of VSB Bancorp, Inc. stock for each two shares of Victory
State Bank stock. Each stockholder owned the same percentage interest in VSB
Bancorp immediately after the reorganization that the stockholder owned in
Victory State Bank immediately before the reorganization, subject to immaterial
differences due to adjustments for cash in lieu of fractional shares. VSB
Bancorp now owns 100% of the capital stock of Victory State Bank. No
stockholders of Victory State Bank exercised dissenter's rights to receive cash
instead of shares of VSB Bancorp. The transaction between these entities under
common control was accounted for at historical cost on an "as if pooled basis".


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 (the "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.

     Cash and Cash Equivalents - Cash and cash equivalents consists of cash on
hand, due from banks and interest-bearing deposits. Net cash flows are reported
for customer loan and deposit transactions and interest-bearing deposits.
Regulation D of the Board of Governors of the Federal Reserve system requires
that Victory State Bank maintain non-interest-bearing deposits or cash on hand
as reserves against its demand deposits. The amount of reserves which Victory
State Bank is required to maintain depends upon its level of transaction
accounts. During the fourteen day period from December 22, 2005 through January
4, 2006, Victory State Bank was required to maintain reserves, after deducting
vault cash, of $5,960,000. 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.

                                      F-6
<PAGE>

     Interest-bearing bank balances - Interest-bearing bank balances mature
overnight and are carried at cost.

     Investment Securities, Available for Sale - Investment securities,
available for sale, are to be held for an unspecified period of time and include
securities that management intends to use as part of its asset/liability
strategy. These securities may be sold in response to changes in interest rates,
prepayments or other factors and are carried at estimated fair value. Gains or
losses on the sale of such securities are determined by the specific
identification method. Interest income includes amortization of purchase premium
and accretion of purchase discount. Premiums and discounts are recognized in
interest income using a method that approximates the level yield method without
anticipating prepayments, except for mortgage-backed securities where
prepayments are estimated. Unrealized holding gains or losses, net of deferred
income taxes, are excluded from earnings and reported as other comprehensive
income in a separate component of stockholders' equity until realized. Declines
in the fair value of securities below their cost that are other than temporary
are reflected as realized losses. In estimating other-than-temporary losses,
management considers: (1) the length of time and extent that fair value has been
less than cost, (2) the financial condition and near term prospects of the
issuer, and (3) the Company's ability and intent to hold the security for a
period sufficient to allow for any anticipated recovery in fair value.

     The Company invests primarily in agency Collateralized Mortgage-Backed
Obligations ("CMOs") with estimated average lives primarily under 4.5 years and
Mortgage-Backed Securities. These securities are primarily issued by the Federal
National Mortgage Association ("FNMA"), the Government National Mortgage
Association ("GNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") and
are primarily comprised of mortgage pools guaranteed by FNMA, GNMA or FHLMC. The
Company also invests in whole loan CMOs, all of which are AAA rated. These
securities expose the Company to risks such as interest rate, prepayment and
credit risk and thus pay a higher rate of return than comparable treasury
issues.

     Loans Receivable - Loans receivable, that management has the intent and
ability to hold for the foreseeable future or until maturity or payoff, are
stated at unpaid principal balances, adjusted for deferred net origination and
commitment fees and the allowance for loan losses. Interest income on loans is
credited as earned.

     It is the policy of the Company to provide a valuation allowance for
probable incurred losses on loans based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations which
may affect the borrower's ability to repay, estimated value of underlying
collateral and current economic conditions in the Company's lending area. The
allowance is increased by provisions for loan losses charged to earnings and is
reduced by charge-offs, net of recoveries. While management uses available
information to estimate losses on loans, future additions to the allowance may
be necessary based upon the expected growth of the loan portfolio and any
changes in economic conditions beyond management's control. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on judgments
different from those of management. Management believes, based upon all relevant
and available information, that the allowance for loan losses is adequate.

     The Company has a policy that all loans 90 days past due are placed on
non-accrual status. It is the Company's policy to cease the accrual of interest
on loans to borrowers past due less than 90 days where a probable loss is
estimated and to reverse out of income all interest that is due. The Company
applies payments received on non-accrual loans to the outstanding principal
balance due. On a limited basis, the Company may apply a payment to interest on
a non-accrual loan if there is no impairment or no estimatible loss on this
asset. The Company continues to accrue interest on construction loans that are
90 days past contractual maturity date if the loan is expected to be paid in
full in the next 60 days and all interest is paid up to date.

                                      F-7
<PAGE>

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

     The Company considers a loan to be impaired when, based on current
information, it is probable that the Company will be unable to collect all
principal and interest payments due according to the contractual terms of the
loan agreement. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Impairment is measured on a
loan by loan basis for commercial and construction loans. Impaired loans are
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral. The fair value of
the collateral, as reduced by costs to sell, is utilized if a loan is collateral
dependent. Large groups of smaller balance homogeneous loans, such as consumer
loans and residential loans, are collectively evaluated for impairment.

Long-Lived Assets - The Company periodically evaluates the recoverability of
long-lived assets, such as premises and equipment, to ensure the carrying value
has not been impaired. In performing the review for recoverability, the Company
would estimate the future cash flows expected to result from the use of the
asset. If the sum of the expected future cash flows is less than the carrying
amount, an impairment will be recognized. The Company reports these assets at
the lower of the carrying value or fair value.

     Subordinated Debt - In August of 2003, the Company formed VSB Capital Trust
I (the "Trust"). The Trust is a statutory business trust organized under
Delaware law and the Company owns all of its common securities. The Trust issued
$5.0 million of Trust Preferred Capital Securities to an independent investor
and $155,000 of common securities to the Company. The Company issued a $5.16
million subordinated debenture to the Trust. The subordinated debenture is the
sole asset of the Trust. The subordinated debenture and the Trust Preferred
Capital Securities pay interest and dividends, respectively, on a quarterly
basis, at a rate of 6.909%, for the first five years. They mature thirty years
after the issuance of the securities and are non-callable for five years. After
the first five years, the Trust Preferred Securities may be called by the
Company at any quarterly interest payment date at par and the rate of interest
that fluctuates quarterly based upon 300 basis points over the 90 day LIBOR
rate. The Trust is not consolidated with the Company.

     Premises and Equipment - Premises, leasehold improvements, and furniture
and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization are accumulated by the straight-line method over
the estimated useful lives of the respective assets, which range from three to
ten years. Leasehold improvements are amortized at the lesser of their useful
life or the term of the lease.

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

     Income Taxes - The Company utilizes the liability method to account for
income taxes. Under this method, deferred tax assets and liabilities are
determined on differences between financial reporting and the tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
expected to be in effect when the differences are expected to reverse. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.

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

                                      F-8
<PAGE>

     Basic and Diluted Net Income Per Common Share - Basic net income per share
of common stock is based on 1,441,989 and 1,425,909, the weighted average number
of common shares outstanding for the years ended December 31, 2005 and 2004,
respectively. Diluted net income per share of common stock is based on 1,488,104
and 1,481,258, the weighted average number of common shares and potentially
dilutive common shares outstanding for the years ended December 31, 2005 and
2004, 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 46,115 and 55,349 shares for the years ended December
31, 2005 and 2004, 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 years ended December 31, are as follows:

<TABLE>
<CAPTION>
                                            2005                                   2004
                            ------------------------------------   ------------------------------------
                                          Weighted                               Weighted
                               Net        Average     Per Share       Net        Average     Per Share
                              Income       Shares       Amount       Income       Shares       Amount
                            ----------   ----------   ----------   ----------   ----------   ----------
<S>                         <C>           <C>         <C>          <C>           <C>         <C>
Basic earnings per
  common share
--------------------------
Net income available to
 common stockholders        $2,567,429    1,441,989   $     1.78   $2,274,578    1,425,909   $     1.60
                                                      ==========                             ==========

Effect of dilutive shares
--------------------------
  Weighted average
    shares, if converted                     46,115                                 55,349
                                         ----------                             ----------

Diluted earnings per
  common share
--------------------------
Net income available to
 common stockholders        $2,567,429    1,488,104   $     1.73   $2,274,578    1,481,258   $     1.54
                            ==========   ==========   ==========   ==========   ==========   ==========
</TABLE>

     Stock Based Compensation - At December 31, 2005, the Company had
stock-based employee compensation plans. The Company accounts for these plans
under Accounting Principles Board Opinion, ("APB Opinion") No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. No stock-based
employee compensation expense has been reflected in net income for stock options
as all rights and options to purchase the Company's stock granted under these
plans have an exercise price equal to the market value of the underlying stock
on the date of grant. In December 2005, the Board authorized the acceleration of
the vesting of all outstanding stock options issued to both employees and
directors. The decision to accelerate the vesting of these options, which the
Company believes is in the best interest of its stockholders, was made primarily
to reduce non-cash compensation expense, approximately $169,000 of future
compensation expense, net of taxes, that would have been recorded in its income
statement in future periods upon the adoption of Financial Accounting Standards
Board Statement No. 123R (Share-Based Payment) in January 2006

If compensation cost for the Stock Plan and Director's Stock Plan awards had
been measured based on the fair value of the stock options awarded at the grant
dates, net income and basic and diluted earnings per common share would have
been reduced to the pro-forma amounts on the table below for the years ended
December 31, 2005 and 2004, including the effect of accelerating all the
outstanding stock options in December 2005.

                                      F-9
<PAGE>

<TABLE>
<CAPTION>
                                                         2005             2004
                                                    --------------   --------------
<S>                                                 <C>              <C>
Net Income
     As reported                                    $    2,567,429   $    2,274,578
     Less: Total stock-based compensation expense
     determined under the fair value method for
     all rewards, net of related tax effects               218,887           53,897
                                                    --------------   --------------

Pro-forma                                           $    2,348,542   $    2,220,681
                                                    ==============   ==============

                                                         2005             2004
                                                    --------------   --------------

Basic earnings per common share
     As reported                                    $         1.78   $         1.60
     Less: Total stock-based compensation expense
     determined under the fair value method for
     all rewards, net of related tax effects                  0.15             0.04
                                                    --------------   --------------

Pro-forma                                           $         1.63   $         1.56
                                                    ==============   ==============

                                                         2005             2004
                                                    --------------   --------------

Diluted earnings per common share
     As reported                                    $         1.73   $         1.54
     Less: Total stock-based compensation expense
     determined under the fair value method for
     all rewards, net of related tax effects                  0.15             0.04
                                                    --------------   --------------

Pro-forma                                           $         1.58   $         1.50
                                                    ==============   ==============
</TABLE>

     Employee Stock Ownership Plan - 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. Dividends on allocated ESOP
shares reduce retained earnings; dividends on unearned ESOP shares reduce debt
and accrued interest. As participants may put their ESOP shares back to the
Company upon termination, an amount of equity equal to these shares times the
current market price is reclassified out of stockholders' equity.

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

     Recently-Issued Accounting Standards - FAS 123, Revised, required companies
to record compensation expense for stock options provided to employees in return
for employment service. The cost is measured at the fair value of the options
when granted, and this cost is expensed over the employment service period,
which is normally the vesting period of the options. This will apply to awards
granted or modified in fiscal years beginning in 2006. Compensation cost will
also be recorded for prior option grants that vest after the date of adoption.
The effect of result on operations will depend on the level of future option
grants and the calculation of the fair value of the options granted at such
future date, as well as the vesting periods provided, and so cannot currently be
predicted. As of December 31, 2005 vesting on all outstanding option grants were
accelerated so that they are immediately exercisable. By accelerating the
vesting of these options, we estimate that approximately $169,000 of future
compensation expense, net of taxes, will be eliminated.

     Management continuously monitors emerging issues and accounting bulletins,
some of which could potentially impact the Company's financial statements

                                      F-10
<PAGE>

3.   INVESTMENT SECURITIES, AVAILABLE FOR SALE

     The fair value of available for sale securities and the related gross
unrealized gains and losses recognized in accumulated other comprehensive
income/(loss) were as follows at December 31, 2005 and 2004:

                                                December 31, 2005
                                   -------------------------------------------
                                    Estimated        Gross            Gross
                                      Fair         Unrealized       Unrealized
                                      Value          Gains            Losses
                                   ------------   ------------    ------------

US Government Agency               $  8,390,156   $         --    $   (109,844)
FNMA MBS                              9,067,796            169        (281,234)
FHLMC MBS                               320,258            325          (1,180)
GNMA MBS                              2,627,459             --         (91,373)
Whole Loan MBS                        4,051,823             --         (84,060)
Collateralized mortgage
   obligations                       81,565,801         29,588      (2,128,796)
                                   ------------   ------------    ------------
                                   $106,023,293   $     30,082    $ (2,696,487)
                                   ============   ============    ============


                                                December 31, 2004
                                   -------------------------------------------
                                    Estimated        Gross            Gross
                                      Fair         Unrealized       Unrealized
                                      Value          Gains            Losses
                                   ------------   ------------    ------------

US Government Agency               $  8,481,563   $         --    $    (18,437)
FNMA MBS                             11,118,275         11,831        (139,222)
FHLMC MBS                               523,766          6,355              --
GNMA MBS                              3,263,366             --         (33,535)
Whole Loan MBS                        5,068,462         22,372         (68,492)
Collateralized mortgage
   obligations                      100,077,335        340,531        (992,110)
                                   ------------   ------------    ------------
                                   $128,532,767   $    381,089    $ (1,251,796)
                                   ============   ============    ============

     The tax benefits related to these net unrealized gains and losses were
$1,242,278 and $405,662 at December 31, 2005 and 2004, respectively.

     The following table shows the banks investments' gross unrealized losses
and estimated fair value aggregated by investment category and length of time
that an individual security has been in the continuous unrealized loss position
at December 31, 2005 and 2004:

                                      F-11
<PAGE>

<TABLE>
<CAPTION>
December 31, 2005                  Less than 12 months               More than 12 months                      Total
                             -------------------------------   -------------------------------   -------------------------------

                                  Fair          Unrealized          Fair          Unrealized          Fair          Unrealized
                                  Value            Loss             Value            Loss             Value            Loss
                             --------------   --------------   --------------   --------------   --------------   --------------
<S>                          <C>              <C>              <C>              <C>              <C>              <C>
US Government Agency         $           --   $           --   $    8,390,156   $     (109,844)  $    8,390,156   $     (109,844)
FHLMC MBS                           258,602           (1,180)              --               --          258,602           (1,180)
FNMA MBS                            501,974           (8,126)       8,536,325         (273,108)       9,038,299         (281,234)
GNMA MBS                                 --               --        2,627,459          (91,373)       2,627,459          (91,373)
Whole Loan MBS                    3,093,344          (58,415)         958,479          (25,645)       4,051,823          (84,060)
Collateralized mortgage
   obligations                   37,031,800         (575,439)      40,740,451       (1,553,357)      77,772,251       (2,128,796)
                             --------------   --------------   --------------   --------------   --------------   --------------
                             $   40,885,720   $     (643,160)  $   61,252,870   $   (2,053,327)  $  102,138,590   $   (2,696,487)
                             ==============   ==============   ==============   ==============   ==============   ==============


December 31, 2004                  Less than 12 months               More than 12 months                      Total
                             -------------------------------   -------------------------------   -------------------------------

                                  Fair          Unrealized          Fair          Unrealized          Fair          Unrealized
                                  Value            Loss             Value            Loss             Value            Loss
                             --------------   --------------   --------------   --------------   --------------   --------------

US Government Agency         $    8,481,563   $      (18,437)  $           --   $           --   $    8,481,563   $      (18,437)
FNMA MBS                         10,546,317         (139,222)              --               --       10,546,317         (139,222)
GNMA MBS                                 --               --        3,263,366          (33,535)       3,263,366          (33,535)
Whole Loan MBS                    3,119,780          (68,492)              --               --        3,119,780          (68,492)
Collateralized mortgage
   obligations                   51,235,171         (632,465)      11,309,155         (359,645)      62,544,326         (992,110)
                             --------------   --------------   --------------   --------------   --------------   --------------
                             $   73,382,831   $     (858,616)  $   14,572,521   $     (393,180)  $   87,955,352   $   (1,251,796)
                             ==============   ==============   ==============   ==============   ==============   ==============
</TABLE>

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

     At December 31, 2005, 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. In
analyzing an issuer's financial condition, management considers whether the
securities are issued by the federal government or its agencies, whether
downgrades by bond rating agencies have occurred, and industry analysts'
reports. Because the decline in fair value is attributable to changes in
interest rates and not credit quality, and because the Company has the ability
and intent to hold these securities until a market price recovery or maturity,
these investments are not considered other-than-temporarily impaired. At
December 31, 2005 there were seven 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.

     The maturity schedule of all investment securities available for sale at
amortized cost and estimated fair values for December 31, 2005 was as follows:

                                      F-12
<PAGE>


                                                                 Estimated
     Securities, Available for Sale            Amortized           Fair
     Expected Maturity                            Cost             Value
                                              ------------     ------------

     Less than one year                       $     29,328     $     29,496
     Due after one year through                  5,821,113        5,764,790
       five years
     Due after five years through                7,825,044        7,654,801
       ten years
     Due after ten years                        95,014,213       92,574,206
                                              ------------     ------------
                                              $108,689,698     $106,023,293
                                              ============     ============


     Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
penalties.

     Securities pledged at year end 2005 and 2004 had a carrying amount of
$27,725,000 and $23,739,000, respectively and were pledged to secure public
deposits and balances in excess of the deposit insurance limit on certain
customer accounts.

4.   LOANS RECEIVABLE, NET

     Loans receivable, net at December 31, 2005 and 2004 are summarized as
follows:

<TABLE>
<CAPTION>
                                                           2005            2004
                                                       ------------    ------------
<S>                                                    <C>             <C>
     Commercial loans (principally variable rate):
       Secured                                         $  1,584,484    $  1,572,824
       Unsecured                                         11,078,101       9,620,243
                                                       ------------    ------------
         Total commercial loans                          12,662,585      11,193,067

     Real estate loans:
       Commercial                                        29,794,108      31,741,069
       One-to-four family                                   298,779       1,112,032
                                                       ------------    ------------
         Total real estate loans                         30,092,887      32,853,101

     Construction loans (net of undisbursed funds of
     $10,160,576 and $9,774,166, respectively)           29,611,346      22,853,858

     Consumer loans                                       1,477,366       1,048,448
     Other loans                                            486,009         435,837
                                                       ------------    ------------
                                                          1,963,375       1,484,285
                                                       ------------    ------------

     Total loans receivable                              74,330,193      68,384,311

     Less:
     Unearned loans fees, net                              (386,088)       (337,426)
     Allowance for loan losses                           (1,153,298)     (1,299,520)
                                                       ------------    ------------

     Total                                             $ 72,790,807    $ 66,747,365
                                                       ============    ============
</TABLE>

    The activity in the allowance for loan losses, for the years ended December
31, 2005 and 2004 are summarized as follows:

                                      F-13
<PAGE>

                                        2005            2004
                                    ------------    ------------

               Beginning balance    $  1,299,520    $  1,162,776
               Charge-offs              (343,701)       (185,065)
               Recoveries                257,479         171,809
               (Credit) Provision        (60,000)        150,000
                                    ------------    ------------

               Ending balance       $  1,153,298    $  1,299,520
                                    ============    ============

     Nonaccrual loans outstanding at December 31, 2005 and 2004 are summarized
as follows:

                                              2005           2004
                                          ------------   ------------
           Nonaccrual loans:
             Unsecured commercial loans   $         --   $     20,112
             Commercial real estate          1,022,097        121,810
             Construction                      579,000             --
             Consumer loans                         --          2,476
                                          ------------   ------------

            Total nonaccrual loans        $  1,601,097   $    144,398
                                          ============   ============

                                                        2005           2004
                                                    ------------   ------------
Interest income that would have been recorded
  during the year on nonaccrual
  loans outstanding at year-end
  in accordance with original terms                 $     64,880   $      7,149
                                                    ============   ============

     The Company's recorded investment in impaired loans at December 31 is as
follows:

<TABLE>
<CAPTION>
                                                         2005                           2004
                                              ---------------------------   ---------------------------
                                                               Related                        Related
                                               Investment     Allowance      Investment      Allowance
                                              in Impaired     for loan      in Impaired      for loan
                                                 Loans         losses          Loans          losses
                                              ------------   ------------   ------------   ------------
<S>                                           <C>            <C>            <C>            <C>
Impaired loans
   With a related allowance for loan losses
      Commercial and financial                $         --   $         --   $     20,112   $      4,022
      Commercial real estate                     1,022,097        160,171        121,810         31,165
      Construction                                 579,000         86,850             --             --
      Consumer loans                                    --             --          2,476            495
                                              ------------   ------------   ------------   ------------


                                              $  1,601,097   $    247,021   $    144,398   $     35,682
                                              ============   ============   ============   ============
</TABLE>

     The following table sets forth certain information about impaired loans at
December 31:

                                      F-14
<PAGE>

<TABLE>
<CAPTION>
                                                                               Investment in
                                                                               Impaired Loans
                                                                          -----------------------
                                                                             2005         2004
                                                                          ----------   ----------
<S>                                                                       <C>          <C>
Average recorded investment                                               $  803,971   $  151,009
                                                                          ==========   ==========

Interest income recognized during time period that loans were impaired,
     using cash-basis method of accounting                                $   18,667   $    1,602
                                                                          ==========   ==========
</TABLE>

     The Company's loan portfolios are primarily comprised of commercial loans
made to small businesses and individuals located in the Borough of Staten
Island. As of December 31, 2005 and 2004, the Company had no restructured loans.

5.   ACCRUED INTEREST RECEIVABLE

     Accrued interest receivable at December 31, 2005 and 2004 are summarized as
follows:

                                                            2005         2004
                                                         ----------   ----------

Loans receivable                                         $  300,178   $  246,796
Investment securities, available for sale                   428,449      498,572
                                                         ----------   ----------

                   Total                                 $  728,627   $  745,368
                                                         ==========   ==========

6.   PREMISES AND EQUIPMENT

     Premises and equipment at December 31, 2005 and 2004 are summarized as
follows:

                                                     2005            2004
                                                 ------------    ------------

Leasehold improvements                           $  1,822,390    $  1,818,910
Computer equipment and software                       383,156         468,981
Furniture, fixtures and equipment                     787,949         807,050
Other                                                  26,323          25,987
                                                 ------------    ------------
                                                    3,019,818       3,120,928

Less accumulated depreciation and amortization     (1,578,731)     (1,303,644)
                                                 ------------    ------------

Total                                            $  1,441,087    $  1,817,284
                                                 ============    ============

    Depreciation and amortization expense amounted to $449,777 and $496,132 for
the years ended December 31, 2005 and 2004, respectively.

    At December 31, 2005, the Company was obligated under six non-cancelable
operating leases on property used for banking purposes. Rental expense under
these leases was $363,477 and $343,161 for the years ended December 31, 2005 and
2004, respectively.

    The projected minimum rental payments under the terms of the leases at
December 31, 2005 are summarized as follows:

                                      F-15
<PAGE>

                         Year Ending
                         December 31,                          Amount
                        ----------------                   -------------

                             2006                          $     485,669
                             2007                                390,856
                             2008                                394,092
                             2009                                399,062
                             2010                                404,949
                          Thereafter                           3,046,371
                                                           -------------

                             Total                         $   5,120,999
                                                           =============

7.   PREPAID AND OTHER ASSETS

     Prepaid and other assets at December 31, 2005 and 2004 are summarized as
follows:


                                                    2005           2004
                                                ------------   ------------

     Accounts receivable and other assets       $    267,158   $     27,414
     Security deposit receivable                      57,360         57,360
     Prepaid assets                                  218,706        187,178
     Equity securities, primarily FHLB stock         337,600        135,700
     Investment in unconsolidated subsidiary         155,000        155,000
     Subordinated debt related placement cost         75,763        104,263
     Late charges receivable                          57,969         52,755
                                                ------------   ------------

                                                $  1,169,556   $    719,670
                                                ============   ============

8.   DEPOSITS

     Deposits are summarized, according to their original terms, at December 31,
2005 and 2004 as follows:

                                      F-16
<PAGE>

<TABLE>
<CAPTION>
                                                 2005                                           2004
                             -------------------------------------------    -------------------------------------------
                                                              Weighted                                       Weighted
                                                              Average                                        Average
                                Amount        Percent       Stated Rate        Amount        Percent       Stated Rate
                             ------------   ------------    ------------    ------------   ------------    ------------
<S>                          <C>                  <C>               <C>     <C>                  <C>               <C>
Demand accounts:
Checking                     $ 66,692,436          34.52%             --%   $101,560,932          47.14%             --%
Variable-rate money market     20,177,240          10.44            0.81      23,388,850          10.86            0.65
Statement savings              14,809,010           7.66            0.50      14,159,026           6.57            0.50
Interest-bearing checking      23,574,056          12.20            0.33      21,574,053          10.01            0.32
                             ------------   ------------    ------------    ------------   ------------    ------------

                              125,252,742          64.82            0.25     160,682,861          74.58            0.18

Time deposits:
Less than six months           39,444,207          20.41            2.51      31,400,968          14.58            1.12
Six months to one year         23,583,453          12.20            3.28      18,369,058           8.53            2.06
More than one year              4,703,613           2.43            3.56       4,700,481           2.18            2.89
                             ------------   ------------    ------------    ------------   ------------    ------------

                               67,731,273          35.04            2.85      54,470,507          25.29            1.59

Other deposits                    267,144           0.14              --         270,105           0.13              --
                             ------------   ------------    ------------    ------------   ------------    ------------

Total                        $193,251,159         100.00%           0.54%   $215,423,473         100.00%           0.49%
                             ============   ============    ============    ============   ============    ============
</TABLE>

     The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $56,977,338 and $43,944,241 at
December 31, 2005 and 2004 respectively.

     Scheduled maturities of time deposits at December 31, 2005 are as follows:

                                             Amount         Percent
                                          ------------   ------------

       Within six months                  $ 61,729,391          91.14%
       Six months to one year                2,962,857           4.37
       One to five years                     3,039,025           4.49
                                          ------------   ------------

                   Total                  $ 67,731,273         100.00%
                                          ============   ============

9.   INCOME TAXES

     The Company files consolidated federal, state and local income tax returns
on a calendar-year basis. For federal, state and local income tax purposes, the
Company uses the specific charge-off method in computing its federal, state and
local tax bad debt deduction.

      The basis for the determination of state and local tax is the greater of a
tax on entire net income or a tax computed on taxable assets. Federal, state and
city income tax provisions were determined based on the tax computed on net
income for the years ended December 31, 2005 and 2004.

                                      F-17
<PAGE>

     The components of the income tax expense/(benefit) for the years ended
December 31, 2005 and 2004 are summarized as follows:

                                      2005            2004
                                  ------------    ------------

       Current:
        Federal                   $  1,380,322    $  1,392,322
        State and local                857,792         861,651
                                  ------------    ------------
                                     2,238,114       2,253,973

       Deferred:
        Federal                            847        (168,489)
        State and local                    513        (102,080)
                                  ------------    ------------
                                         1,360        (270,569)
                                  ------------    ------------
                                  $  2,239,474    $  1,983,404
                                  ============    ============

     The components of the deferred income tax asset, net as of December 31,
2005 and 2004 are summarized as follows:

<TABLE>
<CAPTION>
                                                             2005           2004
                                                         ------------   ------------
<S>                                                      <C>            <C>
       Deferred loan fees                                $    215,337   $     84,063
       Excess book allowance for loan losses                  482,898        519,086
       Unrealized loss/(gain) on investment securities      1,242,278        405,662
       Other compensation expense                             145,009        167,850
       Other                                                  212,673        286,279
                                                         ------------   ------------

               Deferred tax asset, net                   $  2,298,195   $  1,462,940
                                                         ============   ============
</TABLE>

     Management evaluated the weight of available evidence and concluded that it
is more likely than not that the Company will realize the net deferred tax asset
in future years. Factors influencing management's judgment include, among other
things, changes in the levels of actual and expected future taxable income and
anticipated reversals of net deductible temporary differences.

     The Company's effective tax rate differs from the statutory Federal tax
rate for the years ended December 31, 2005 and 2004 and are as follows:

                                            2005                  2004
                                     ------------------    ------------------

     Federal income tax provision
       at statutory rates            $1,634,347    34.0%   $1,447,714    34.0%
     State and local taxes, net of
       Federal income tax benefit       591,249    12.3       523,732    12.3
     Other                               13,878     0.3        11,958     0.3
                                     ----------    ----    ----------    ----

                                     $2,239,474    46.6%   $1,983,404    46.6%
                                     ==========    ====    ==========    ====

                                      F-18
<PAGE>

10.  REGULATORY MATTERS

     The Bank is a New York State chartered stock form commercial bank. The
Bank's deposits are insured by the Federal Deposit Insurance Corporation
("FDIC"). The Bank is subject to certain FDIC capital requirements. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
discretionary actions by the regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet certain specific capital guidelines that involve quantitative measures
of the Bank's assets, liabilities and certain off-balance sheet items calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.

     As of the latest notification from the FDIC, the Bank was classified as
"well capitalized" under the regulatory framework for prompt corrective action.
To be categorized as "well capitalized," the Bank must maintain Tier 1 Leverage,
Tier 1 Risk-Based and minimum Total risk-based ratios as set forth in the table
below. There are no conditions or events since that notification that management
believes have changed the Bank's category. Management believes, as of December
31, 2005, that the Bank meets all capital adequacy requirements to which it is
subject.

     The Bank is subject to certain restrictions on the availability of its
undistributed earnings for payment of dividends to stockholders, including prior
regulatory approval.

     The following table is the Bank's actual capital amounts and ratios, as
well as the minimum required levels for both "capital adequacy purposes" and to
be considered "well capitalized". No deductions were made for qualitative
judgments by regulators:

                                      F-19
<PAGE>

<TABLE>
<CAPTION>
                                                                                       To be well-capitalized
                                                                   For capital         under prompt corrective
                                          Actual                adequacy purposes         action provisions
                                   ---------------------      ---------------------     ---------------------
As of December 31, 2005               Amount      Ratio          Amount      Ratio         Amount      Ratio
-----------------------            ---------------------      ---------------------     ---------------------
<S>                                <C>             <C>        <C>              <C>      <C>             <C>
Tier 1 Capital
 (to Average Assets)               $ 20,453,000     9.19%     $  8,897,920     4.00%    $ 11,122,400     5.00%
Tier 1 Capital
 (to Risk Weighted Assets)           20,453,000    19.66         4,162,120     4.00        6,243,180     6.00
Total Capital
 (to Risk Weighted Assets)           21,606,000    20.76         8,324,240     8.00       10,405,300    10.00


As of December 31, 2004
-----------------------

Tier 1 Capital
 (to Average Assets)               $ 17,647,000     7.80%     $  9,045,280     4.00%    $ 11,306,600     5.00%
Tier 1 Capital
 (to Risk Weighted Assets)           17,647,000    17.28         4,085,000     4.00        6,127,500     6.00
Total Capital
 (to Risk Weighted Assets)           18,924,000    18.53         8,170,000     8.00       10,212,500    10.00
</TABLE>

The Company's consolidated capital ratios as of December 31, 2005 were as
follows: Tier 1 Capital to Average Assets of 9.54%; Tier 1 Capital to Risk
Weighted Assets of 20.37%; and Total Capital to Risk Weighted Assets of 21.47%,
which are not substantially different than the Bank's capital ratios at December
31, 2005 and therefore are not presented separately.

11.  EMPLOYEE BENEFITS

     The Bank does not currently maintain a defined contribution benefit plan
but sponsors an incentive savings plan (401(k) plan) which started March 1,
1999. All eligible employees, who have reached the age of 21, have at least one
year of service and work a minimum of 1,000 hours per year will be permitted to
make tax deferred contributions up to certain limits. The Bank may reduce or
cease matching contributions if it is determined that the current or accumulated
net earnings or undivided profits of the Bank are insufficient to pay the full
contributions in a plan year. The Bank contributed $120,530 to the 401(k) plan
in 2005 and $110,204 in 2004.

Stock Options

     Options to buy stock are granted to directors, officers and employees under
the VSB Bancorp, Inc. 2000 Incentive Plan, the 1998 Incentive Plan, the 2004
Directors' Plan, the 2000 Directors' Plan and the 1998 Directors' Plan which, in
the aggregate, provide for issue up to 195,000 options. Exercise price is the
market price at the date of grant, so there is no compensation expense
recognized in the income statement. The maximum option term is ten years, and
the options vesting period is up to five years.

     As of December 31, 2005 the Board accelerated the vesting on all
outstanding options so that they became immediately exercisable. By accelerating
the vesting of these options, we estimate that approximately $169,000 of future
compensation expense, net of taxes, will be eliminated.

                                      F-20
<PAGE>

There were no stock option grants in 2005.

<TABLE>
<CAPTION>
     Stock Option Grants in 2004

     --------------------------------------------------------------------------------------------------

                                                      Percent of Total      Exercise or
                                     Number of       Options Granted to      Base Price
                                      Options        employees in Fiscal      ($/share)      Expiration
                                      Granted             Year(1)                               Date
     --------------------------------------------------------------------------------------------------
<S>                                   <C>                    <C>               <C>           <C>   <C>
     2000 Incentive Plan              19,965(1)              100.00%           $19.50        01/19/2014
     2004 Directors' Plan             45,000(1)               22.22%           $22.00        04/27/2014
</TABLE>

     (1) Options granted will become exercisable at a rate of 20% per annum
     after the grant date. As of 12/31/05, all options have been accelerated so
     that all outstanding options became immediately exercisable.

     The weighted average fair value of options granted during 2004 was $7.40.
There were no option grants in 2005. For purposes of the pro forma calculation
under SFAS No. 123, the fair value of the options granted in 2004 is estimated
using the Black-Scholes option pricing model with the following weighted average
assumptions used for the 2004 options:


                                      2004
                                   ----------

     Dividend yield                       --%
     Expected volatility               27.13
     Risk-free interest rate            4.32
     Expected life                  10 Years

     The stock option components of the 2000 Incentive Plan, the 1998 Incentive
Plan and the 2004 Directors' Plan, the 2000 Directors' Plan and the 1998
Directors' Plan, as of December 31, 2005 and 2004, and changes during the years
ended, consist of the following:

<TABLE>
<CAPTION>
                                                                2005                       2004
                                                      ------------------------   ------------------------
                                                                     Weighted                   Weighted
                                                                     Average                    Average
                                                                     Exercise                   Exercise
                                                        Shares        Price        Shares        Price
                                                      ----------    ----------   ----------    ----------
<S>                                                      <C>        <C>             <C>        <C>
     Options outstanding                                 151,932    $    12.85      111,300    $     6.78
      at the beginning of the year

          Granted                                             --            --       64,965         21.23
          Canceled                                        (1,133)        19.50       (1,613)        17.15
          Exercised                                       (4,800)        10.18      (22,720)         6.71
                                                      ----------                 ----------

     Options outstanding at the end of the year          145,999    $    12.89      151,932    $    12.85
                                                      ==========    ==========   ==========    ==========
     Options exercisable at the end of the year          145,999    $    12.89       85,280    $     6.84
                                                      ==========    ==========   ==========    ==========

     Weighted average remaining contractual life of
     options outstanding at the end of the year              5.6 Years                  6.5 Years
</TABLE>

     Described below is the range of exercise prices for options granted under
     the following option plans as of December 31, 2005:

                                      F-21
<PAGE>

<TABLE>
<CAPTION>
                                            Range of                Number of         Weighted Average    Weighted Average
Plan Description                            Exercise Prices     Exercisable Shares    Exercise Price      Contractual Life
--------------------------------------    -------------------   ------------------    ----------------    ----------------
<S>                                       <C>                         <C>                  <C>                 <C>
1998 Director Stock Option Plan           From $6.13 to $8.00         22,000               $ 7.66              3.11

1998 Incentive Stock Option Plan          From $5.94 to $8.00         26,400                 7.20              3.04

2000 Director Stock Option Plan                $5.94                  20,000                 5.49              4.40

2000 Incentive Stock Option Plan           $5.94 and $19.50           33,599                13.00              6.33

2004 Director Stock Option Plan                $22.00                 44,000                22.00              8.50
                                                                ------------------    ----------------    ----------------

All Plans                                                            145,999               $12.89              5.60
                                                                ==================    ================    ================
</TABLE>

Stock Appreciation Rights

     The Company issued stock appreciation rights ("SARs") to an officer of the
Company to advance the interests of the Company and its shareholders by
providing this key officer of the Company and its affiliates, upon whose
judgment, initiative and efforts were instrumental upon the formation and
development of the Company and its affiliates, with an additional incentive to
perform in a superior manner. Pursuant to the terms, 25,000 SARs with an
exercise price of $5.00 per SAR, as determined by the Board of Directors, have
been issued. There are no SARs available to be granted and those SARs which
terminate, or are forfeited without being exercised, can not be recycled into
new grants. The term of each SAR is determined by the Committee of the Board of
Directors and may not exceed ten years after the date of the grant. The SARs
vest and are exercisable for the cash value between the Company's stock price
less the exercise price. The SARs vest over five years, 40% two years after the
grant date and 20% per year after. In 2005, 6,000 SARs were exercised. As of
December 31, 2005, of the remaining 17,000 SARs, all 17,000 were granted and all
17,000 were vested or exercisable. The accounting for these instruments is
according to FIN 28: "Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans," for which compensation expense was
$31,000 and $190,000 for the years ended December 31, 2005 and 2004,
respectively.

     The Company did not issue any SAR grants in 2005 and 2004.

12.  COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET
     RISK

     The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business in order to meet the financing needs of its
customers. Such financial instruments primarily include commitments to extend
credit.

     A summary of these commitments and contingent liabilities, all of which are
variable rate commitments, at December 31:

                                                         2005           2004
                                                     ------------   ------------
                                                        Amount         Amount
                                                     ------------   ------------

     Commitments to fund secured construction loans  $ 10,160,576   $  9,774,166
     Commitments to fund all other commercial loans    18,638,006     13,960,142
                                                     ------------   ------------
                                                     $ 28,798,582   $ 23,734,308
                                                     ============   ============

                                      F-22
<PAGE>

     Commitments to extend credit are legally binding agreements to lend to a
customer. Commitments are issued following the Company's evaluation of each
applicant's creditworthiness on a case-by-case basis. The Company's exposure to
credit loss in the event of nonperformance by the other party to the financial
instrument is represented by the contractual notional amount of those
instruments.

     The Bank is a defendant in a lawsuit against a former customer brought by a
third party. The Bank intends to defend aggressively the claims made against it.

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.

13.  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.

        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 and
        prepayment assumptions.

        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.

                                      F-23
<PAGE>

        Subordinated Debt- The fair value of subordinated debt is based upon the
        current rates for such instruments of the same remaining maturity.

        Other Liabilities - The estimated fair value of other liabilities, which
        primarily include accrued interest payable, approximates their carrying
        amount.

     The estimated fair values of the Company's financial instruments at
December 31, 2005 and 2004 were as follows:

<TABLE>
<CAPTION>
                                                 2005                           2004
                                      ---------------------------   ---------------------------
                                        Carrying        Fair          Carrying         Fair
                                         Amount         Value          Amount          Value
                                      ------------   ------------   ------------   ------------
<S>                                   <C>            <C>            <C>            <C>
Financial Assets:
      Cash and cash equivalents       $ 31,324,147   $ 31,324,147   $ 35,659,073   $ 35,659,073
      Investment securities            106,023,293    106,023,293    128,532,767    128,532,767
      Loans receivable                  72,790,807     72,739,105     66,747,365     83,109,864
      Other financial assets               728,627        728,627        745,368        745,368
                                      ------------   ------------   ------------   ------------

      Total Financial Assets          $210,866,874   $210,815,172   $231,684,573   $248,047,072
                                      ============   ============   ============   ============

Financial Liabilities:
      Non-interest bearing deposits   $ 66,959,580   $ 66,959,580   $101,831,037   $101,831,037
      Interest bearing deposits        126,291,579    126,313,306    113,592,436    125,132,325
      Trust preferred securities         5,155,000      5,107,565      5,155,000      5,268,819
      Other liabilities                    176,063        176,063         22,628         22,628
                                      ------------   ------------   ------------   ------------

      Total Financial Liabilities     $198,582,222   $198,556,514   $220,601,101   $232,254,809
                                      ============   ============   ============   ============
</TABLE>

14.  INTEREST RATE RISK (UNAUDITED)

     The Company's principal business of originating loans, issuing term
certificates of deposit and other interest-bearing deposit accounts and
investing in short-term investment securities inherently includes elements of
interest rate risk and requires careful application of interest rate management
techniques to manage such risks.

     Because the Company has a varied array of investment, loan and deposit
products, which differ as to maturity, repricing terms and interest rate spreads
relative to various rate indices, different interest rate risk management
strategies are utilized.

     The Company funds its assets primarily with deposits. A substantial portion
of these, mature or reprice within one year of their origination or last
repricing date.

     In view of the short maturity profile of the Company's funding sources, the
Company invests in loans and investments which have a maturity or repricing date
designed to match the Company's funding maturities and serve as a natural hedge
of the related interest rate risk.

     Net interest income will fluctuate based on changes in the general level of
interest rates, changes in the levels of interest sensitive assets and
liabilities, and changes in the relationships between different interest rate
indices. In addition, net interest income can also be affected by timing of
repricing dates and repayments and changes in estimated prepayments.

15.  RELATED PARTIES

     In the ordinary course of business, the Bank at times has had loans, and
other financial transactions, with its executive officers and directors. At
December 31, 2005, the aggregate amount of loans outstanding to directors was

                                      F-24
<PAGE>

$239,838. These loans were all granted upon the same terms and conditions,
including interest rates and collateral, as were applicable to loans to
unaffiliated persons. There were no loans granted to executive officers.

     The change in aggregate amount of loans outstanding to directors as of
December 31, 2005 and 2004 are as follows:

                                           2005            2004
                                       ------------    ------------

            Beginning balance          $  1,468,153    $    281,187
            Originations                    314,377       2,630,409
            Payments                     (1,542,692)     (1,443,443)
                                       ------------    ------------

            Ending balance             $    239,838    $  1,468,153
                                       ============    ============

     The interest income that was paid on these loans was $75,530 and $60,919
for 2005 and 2004, respectively. Certain officers and directors own, in the
aggregate, 33.2% and 40.7% of the common shares outstanding at December 31, 2005
and 2004, respectively.

16.  CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY ONLY

<TABLE>
<CAPTION>
     VSB BANCORP, INC.

     STATEMENTS OF FINANCIAL CONDITION
     DECEMBER 31, 2005 and 2004                                             2005            2004
     ---------------------------------------------------------------    ------------    ------------
<S>                                                                     <C>             <C>
     ASSETS

     Cash and cash equivalents                                          $        321    $      1,957
     Money markets                                                           730,758         530,990
     Investment in subsidiaries                                           19,075,629      17,291,629
     Deferred taxes                                                               --             203
     Other assets                                                            242,942         350,979
                                                                        ------------    ------------

                              Total assets                              $ 20,049,650    $ 18,175,758
                                                                        ============    ============

     LIABILITIES AND STOCKHOLDERS' EQUITY

     LIABILITIES:
     Subordinated debt                                                  $  5,155,000    $  5,155,000
     Accounts payable, accrued expenses and other liabilities                 78,305          64,312
                                                                        ------------    ------------

                           Total liabilities                               5,233,305       5,219,312
                                                                        ------------    ------------

     COMMITMENTS AND CONTINGENT LIABILITIES

     STOCKHOLDERS' EQUITY
     Common stock ($.0001 par value, 3,000,000 shares authorized,
      1,509,822 issued and outstanding at December 31, 2005;
      1,505,022 issued and outstanding at December 31, 2004)                     151             150
     Additional paid-in capital                                            9,027,611       8,945,138
     Retained earnings                                                     8,621,693       6,054,264
     Unearned Employee Stock Ownership Plan shares                        (1,408,983)     (1,578,061)
     Accumulated other comprehensive loss, net of taxes of $1,242,278
      and $405,662, respectively                                          (1,424,127)       (465,045)
                                                                        ------------    ------------

                       Total stockholders' equity                         14,816,345      12,956,446
                                                                        ------------    ------------

               Total liabilities and stockholders' equity               $ 20,049,650    $ 18,175,758
                                                                        ============    ============
</TABLE>

                                      F-25
<PAGE>

VSB BANCORP, INC.

STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------

                                                     2005            2004
                                                 ------------    ------------
INTEREST INCOME:
     Loans recievable                            $     63,104    $         --
     Other interest income                              7,277          17,033
                                                 ------------    ------------
             Total interest income                     70,381          17,033

INTEREST EXPENSE:
     Subordinated debt                                356,159         356,159
                                                 ------------    ------------
             Total interest expense                   356,159         356,159

                                                 ------------    ------------
             Net interest loss                       (285,778)       (339,126)
                                                 ------------    ------------

NON-INTEREST INCOME:
     Other                                             10,709              --
                                                 ------------    ------------
                                                       10,709              --

NON-INTEREST EXPENSES:
     Legal fees                                        48,000          52,664
     Other                                             61,067          61,219
                                                 ------------    ------------
             Total non-interest expenses              109,067         113,883
                                                 ------------    ------------

LOSS BEFORE INCOME TAXES                             (384,136)       (453,009)
                                                 ------------    ------------

PROVISION/(BENEFIT) FROM INCOME TAXES:
     Current                                         (209,669)       (211,072)
     Deferred                                           1,187            (203)
                                                 ------------    ------------

             Total income taxes                      (208,482)       (211,275)
                                                 ------------    ------------

EQUITY IN UNDISTRIBUTED EARNINGS, NET OF TAXES      2,743,083       2,516,312
                                                 ------------    ------------

NET INCOME                                       $  2,567,429    $  2,274,578
                                                 ============    ============

                                      F-26
<PAGE>

VSB BANCORP, INC.

STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                         2005            2004
                                                                     ------------    ------------
<S>                                                                  <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                        $  2,567,429    $  2,274,578
   Adjustments to reconcile net income to net cash
       used in operating activities:
   Changes in operating assets and liabilities:
      ESOP compensation expense                                            18,742             445
      Undistributed income of subsidiaries                             (2,743,083)     (2,470,928)
      Increase in other assets                                            108,038        (106,346)
      Increase in deferred income taxes                                       203            (203)
     (Decrease)/increase in accrued expenses, income taxes payable
        and other liabilities                                              13,993         (54,145)
                                                                     ------------    ------------
          Net cash used in operating activities                           (34,678)       (356,599)
                                                                     ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Investments in subsidiaries                                                 --              --
   Net increase in loan receivable                                        169,078      (1,578,061)
   Net decrease/(increase) in money market deposit                       (199,768)         68,366
                                                                     ------------    ------------
          Net cash used in investing activities                           (30,690)     (1,509,695)
                                                                     ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of common stock                                      --              --
   Exercise stock option                                                   63,732         177,804
   4 for 3 stock split and the purchase of fractional shares                   --            (333)
   Proceeds from ESOP loan                                                     --       1,690,780
   Proceeds from the issuance of subordinated debt                             --              --
                                                                     ------------    ------------
          Net cash provided by financing activities                        63,732       1,868,251
                                                                     ------------    ------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                       (1,636)          1,957

CASH AND CASH EQUIVALENTS,
   BEGINNING OF YEAR                                                        1,957              --
                                                                     ------------    ------------

CASH AND CASH EQUIVALENTS,
   END OF YEAR                                                       $        321    $      1,957
                                                                     ============    ============

SUPPLEMENTAL DISCLOSURE OF CASH
   FLOW INFORMATION:
   Cash paid during the period for:
     Interest                                                        $    345,450    $    412,621
                                                                     ============    ============
     Income taxes                                                    $         --    $         --
                                                                     ============    ============
</TABLE>

17.  EMPLOYEE STOCK OWNERSHIP PLAN

     Employees participate in an Employee Stock Ownership Plan ("ESOP"). VSB
Bancorp, Inc. ESOP Trust was formed on May 1, 2004. The ESOP borrowed from the
Company to purchase 74,320 shares of stock at $22.75 per share. The Company
makes discretionary contributions to the ESOP, as well as paying dividends on
unallocated shares to the ESOP, and the ESOP uses funds it receives to repay the
loan. When loan payments are made, ESOP shares are allocated to participants
based on relative compensation and expense is recorded. Dividends on allocated
shares increase participant accounts.

     Shares allocated to each participant, to the extent vested, are distributed
to the participant upon termination of employment. As required by federal law, a
participant may require the Company to repurchase shares so distributed unless
the stock is traded on an established market.

                                      F-27
<PAGE>

     The contribution to the ESOP was $169,078 and $112,719 for the years ended
December 31, 2005 and 2004, respectively. ESOP expense was $187,820 and
$113,165, for the years ended December 31, 2005 and 2004, respectively.

     Shares held by the ESOP at December 31, 2005 and 2004 were as follows:


                                                         2005           2004
                                                     ------------   ------------

Shares allocated to particpants                            14,071          5,700
Unearned shares                                            60,249         68,620
                                                     ------------   ------------

     Total ESOP Shares                                     74,320         74,320
                                                     ============   ============
     Fair value of unearned shares                   $  1,340,540   $  1,526,795
                                                     ============   ============

     Fair value of allocated shares subject
      to repurchase obligation                       $    284,938   $    126,825
                                                     ============   ============

18.  SUBORDINATED DEBENTURES

     In August of 2003, the Company formed VSB Capital Trust I (the "Trust").
The Trust is a statutory business trust organized under Delaware law and the
Company owns all of its common securities. The Trust issued $5.0 million of
Trust Preferred Capital Securities to an independent investor and $155,000 of
common securities to the Company. The Company issued a $5.16 million
subordinated debenture to the Trust. The subordinated debenture is the sole
asset of the Trust. The subordinated debenture and the Trust Preferred Capital
Securities pay interest and dividends, respectively, on a quarterly basis, at a
rate of 6.909%, for the first five years. They mature thirty years after the
issuance of the securities and are non-callable for five years. After the first
five years, the Trust Preferred Securities may be called by the Company at any
quarterly interest payment date at par and the rate of interest that fluctuates
quarterly based upon 300 basis points over the 90 day LIBOR rate.

     The Company reports as liabilities the subordinated debentures issued by
the Company and held by the Trust.





                                *****************

                                      F-28
<PAGE>

Item 8.   Changes In and Disagreements With Accountants on Accounting and
          Financial Disclosure

     The information required by this Item is incorporated by reference to page
14 of the Company's Definitive Proxy Statement for its 2006 Annual Meeting of
Stockholders dated March 24, 2006, as filed with the Commission on March 27,
2006 (the "Proxy Statement").

Item 8-A. Disclosure

     As of the end of the period covered by this report, we carried out an
evaluation, under the supervision of, and with the participation of, our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as contemplated by Rule 13a-15 under the Securities Exchange Act of
1934 (the "Exchange Act"). Based upon, and as of the date of, that evaluation,
our Chief Executive Officer and our Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective, in all material
respects, in timely alerting them to material information relating to the
Company (and its consolidated subsidiaries) required to be included in the
periodic reports the Company is required to file and submit to the Securities
and Exchange Commission under the Exchange Act.

                                    PART III


Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act

     The information required by this Item is incorporated by reference to pages
7 through 13 of the Proxy Statement.

Item 10. Executive Compensation

     The information required by this Item is incorporated by reference to pages
8 through 9 of the Proxy Statement.

Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

     The information required by this Item is incorporated by reference to pages
11 through 12 of the Proxy Statement.

Item 12. Certain Relationships and Related Transactions

     The information required by this Item is incorporated by reference to pages
12 through 13 of the Proxy Statement.

                                       39
<PAGE>

Item 13. Exhibits and Reports on Form 8-K.

Exhibit No.         Title of Exhibit
-----------         ----------------

2.1                 Restated Certificate of Incorporation of VSB Bancorp, Inc.*
2.2                 Bylaws of VSB Bancorp, Inc.*
6.1                 Employment Agreement between Merton Corn and Victory State
                    Bank*
6.2                 Victory State Bank 2000 Incentive Stock Option Plan*
6.3                 Victory State Bank 2000 Directors Stock Option Plan*
6.4                 Victory State Bank 1998 Incentive Stock Option Plan*
6.5                 Victory State Bank 1998 Directors Stock Option Plan*
6.6                 VSB Bancorp, Inc. Restated 2000 Incentive Stock Option Plan*
6.7                 VSB Bancorp, Inc. Restated 2000 Directors Stock Option Plan*
6.8                 VSB Bancorp, Inc. Restated 1998 Incentive Stock Option Plan*
6.9                 VSB Bancorp, Inc. Restated 1998 Directors Stock Option Plan*
6.10                VSB Bancorp, Inc. 2004 Directors Stock Option Plan**
12.1                Agreement, Plan of Reorganization and Plan of Acquisition
                    among Victory State Bank, VSB Bancorp, Inc. and Victory
                    Interim Bank (in formation)*
21.                 Subsidiaries of the Registrant
23.                 Consent of Independent Registered Public Accounting Firm
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.

* - previously filed as exhibit to the Issuer's Registration Statement on Form
10-SB (File No. 0-50237) as filed with the Securities and Exchange Commission on
April 4, 2003.
** - previously filed as an exhibit included in the Issuer's proxy statement for
its 2004 Annual Meeting of Stockholders on Form 14A.


Item 14. Principal Accountant Fees and Services.

The information required by this Item is incorporated by reference to pages 13
through 14 of the Proxy Statement.

                                       40
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                                VSB Bancorp, Inc.
                                                (Registrant)
Date: March 27, 2006
                                                By: /s/ MERTON CORN
                                                    ----------------------------
                                                    Merton Corn, President and
                                                    Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated below.


/s/ MERTON CORN                                               March 27, 2006
---------------------------------------------------           --------------
Merton Corn, President, Chief Executive Officer               Date
and Director

/s/ RAFFAELE M. BRANCA                                        March 27, 2006
---------------------------------------------------           --------------
Raffaele M. Branca, Executive Vice President,                 Date
Chief Financial and Accounting Officer and Director

/s/ JOSEPH J. LIBASSI                                         March 27, 2006
---------------------------------------------------           --------------
Joseph J, LiBassi, Chairman of the Board                      Date

/s/ JOAN NERLINO CADDELL                                      March 27, 2006
---------------------------------------------------           --------------
Joan Nerlino Caddell, Director                                Date

/s/ ROBERT S. CUTRONA, SR.                                    March 27, 2006
---------------------------------------------------           --------------
Robert S. Cutrona, Sr., Director                              Date

/s/ CHAIM FARKAS                                              March 27, 2006
---------------------------------------------------           --------------
Chaim Farkas, Director                                        Date

/s/ ALFRED C. JOHNSEN                                         March 27, 2006
---------------------------------------------------           --------------
Alfred C. Johnsen, Director                                   Date

/s/ CARLOS PEREZ                                              March 27, 2006
---------------------------------------------------           --------------
Carlos Perez, Director                                        Date

/s/ BRUNO SAVO                                                March 27, 2006
---------------------------------------------------           --------------
Bruno Savo, Director                                          Date

                                       41