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, 2004


[ ]  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)


Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes  [ ] No.

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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
or any amendment to this Form 10-KSB. [X].

State Issuer's revenues for the most recent fiscal year: $11,575,546.

The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 21, 2005 was $27,062,091.

Documents incorporated by reference:

Portions of the registrant's definitive proxy statement filed or to be filed on
or about March 23, 2005 into Part III of this Form 10-KSB.

The issuer had 1,505,022 common shares outstanding as of March 21, 2005.
<PAGE>

                           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.

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<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 securities 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.

RISK FACTORS

Bank lending is an inherently risky business. Most 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 speed 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, when viewed on a short term basis, the interest rates we pay on
deposits adjust more quickly than the interest rates we earn on loans because,
although the largest part of our loan portfolio consist of loans with interest
rates that fluctuate based upon the prime rate, those loans have minimum
interest rate floors. Due to the current low interest rate environment, the

                                       3
<PAGE>

interest rates on many of the prime-based loans are currently at their minimum
levels. As a result, if there is an increase in market interest rates, including
an increase in the prime rate, then the interest rate we earn on the loans which
are currently at their interest rate floors may not increase, while our cost of
funds would increase. This could put negative pressure on earnings. We estimate
that the interest rates on many of our prime-based loans will not begin to
increase until the prime rate increases to over 6% because the most common loans
have interest rates equal to the prime rate plus 1% per annum with a minimum
floor of 7%. We also have a substantial portfolio of investment securities with
fixed rates of interest, most of which are mortgage-backed securities with an
estimated life of not more than 4.5 years. However, an increase in interest
rates on residential mortgage loans in the future could reduce the turnover rate
of residential housing and reduce the rate of loan refinances, both of which
could, in turn, extend the estimated lives of these fixed-rate mortgage-backed
securities. That could also put negative pressure on earnings as below market
rate mortgage-backed securities could be outstanding for longer periods.

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. During a recent three month
period, trades were reported on only 14 trading days, or less than one out of
every three trading days. We had intended to apply to have our stock quoted on
the NASDAQ BBX (Bulletin Board Exchange), but that system was never implemented.
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 had experienced an economic down turn
in recent years and the economy is only now recovering. A reversal of the recent
improvement or a 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.

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. As a result, a down turn in the housing market in our
Staten Island lending area, regardless of the state of other sectors of the
economy, could have a significant negative impact on both our loan portfolio and
our level of deposits. Furthermore, there is pressure in Staten Island to slow
development and reduce residential density. This could cause a slowing of new
construction, which could adversely affect both our customers and 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.

                                       4
<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. According to FDIC
data, in the three years from June 30, 2001 to June 30, 2004, the number of bank
branches in Staten Island increased by 20%, although the number of banks with
branches in the county decreased from eleven to ten due to mergers. 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.

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 for new loans and investments are increases in deposits and principal
and interest payments on existing loans and investment securities.

Victory State Bank is a New York state-chartered commercial bank primarily
operating in Staten Island New York, which opened for business on November 13,
1997. The initial capital of $7,000,000 was raised in a public offering,
primarily to residents of and businesses in the borough of Staten Island, New
York. The Bank sold 700,000 shares of its common stock in that offering at a
price of $10.00 per share. Net organization costs of $216,000 were fully
expensed in 1997.

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. The Bank has announced
the opening of a fifth branch location in the Rosebank section of Staten Island,
subject to regulatory approval. 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.

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

                                       5
<PAGE>

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.

Summary of Significant Accounting Policies

         The following is a description of the significant accounting and
reporting policies followed in preparing and presenting financial data included
in this Report on Form 10-KSB. These policies conform with accounting principles
generally accepted in the United States of America ("GAAP").

         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. The allowance
for loan losses, prepayment estimates on the mortgage-backed securities and
collateralized mortgage obligation portfolios, and fair values of financial
instruments are particularly subject to change. Actual results can differ from
those estimates.

         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. Premiums and discounts are recognized in interest income
using a method that approximates the level yield method. 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
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
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

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<PAGE>

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.

         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. 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.

         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%. 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 for financial statement purposes.

         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.

         Recently-Issued Accounting Standards - In March 2004, the SEC issued
Staff Accounting Bulletin (SAB) No. 105 "Application of Accounting Principles to
Loan Commitments". This SAB related to Financial Accounting Standards Board
(FASB) Statement No. 133 "Accounting for Derivative Instruments and Hedging
Activities" for valuing loan commitments, considered to be derivatives, on
mortgage loans that will be sold. This SAB is effective for commitments entered
into after April 1, 2004. The adoption of SAB No. 105 did not have a material
impact on our financial position or results of operation.

         In March 2004, the FASB Emerging Issues Task Force ("EITF") reached a
consensus regarding EITF 03-1, "The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments." The consensus clarifies the meaning
of other-than-temporary impairment and its application to investments classified
as either available-for-sale or held-to-maturity under Statement of Financial
Accounting Standard No. 115, "Accounting for Certain Investments in Debt and
Equity Securities"("SFAS 115") and investments accounted for under the cost

                                       7
<PAGE>

method or the equity method. The recognition and measurement guidance for which
the consensus was reached is to be applied to other-than-temporary impairment
evaluations. In September 2004, the Financial Accounting Standards Board
("FASB") issued FASB Staff Position, FSP EITF Issue 03-01-1, which has delayed
the effective date for the measurement and recognition guidance of EITF 03-01.
The implementation date is unknown until further guidance is issued by the FASB.
We are currently evaluating the impact of adopting EITF 03-01.

         In December 2004, FASB issued Statement of Financial Accounting
Standards No 123 Revised "Share Based Payments" ("SFAS 123R") which requires all
public companies to record compensation cost for stock options provided to
employees in return for employee service. The cost is measured at the fair value
of the options when granted, and this cost is expensed over the employee service
period, which is normally the vesting period of the options. As a small business
filer, this will apply to us for awards granted or modified after the first
quarter or year beginning after December 15, 2005. Compensation cost will also
be recorded for prior option grants that vest after the date of adoption. The
effect on results of 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. There will be no significant effect on financial position as total
equity will not change. The effect of these other new standards on the Company's
financial position and results of operations is not expected to be material upon
and after adoption.

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

Lending Activities

Loan Portfolio Composition. Our loan portfolio consists primarily of commercial
mortgage loans and unsecured commercial loans. At December 31, 2004, we had
total unsecured commercial loans outstanding of $9,620,243, or 14.1% of total
loans, and commercial real estate loans of $31,741,069, or 46.5% of total loans.
We had $22,853,858 of construction loans secured by real estate, $19,893,858 of
which were construction loans to businesses for the construction of either
commercial property or residential property for sale, representing 29.1% of
total loans. Other loans in our portfolio principally included commercial loans
secured by assets other than real estate totaling $1,572,824 or 2.3% of total
loans at December 31, 2004 and consumer non-mortgage loans of $1,048,448 or 1.5%
of total loans. For the year ended December 31, 2004, approximately $58,167,819,
or 85.1%, of loans for business purposes had adjustable interest rates based on
the prime rate of interest.

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<PAGE>
<TABLE>
<CAPTION>

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

                                                                          At December 31,
                            -------------------------------------------------------------------------------------------------------
                                    2004                   2003                 2002                 2001               2000
                            -------------------   -------------------   ------------------   ------------------  ------------------
                                          % 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         $ 1,572,824     2.3%  $ 1,896,374     2.8%  $ 4,014,494    6.3%  $ 4,337,062    8.6% $ 2,564,064    5.7%
 Commercial unsecured         9,620,243    14.1     8,905,587    13.1    11,322,164   17.7    10,964,539   21.6   14,124,944   31.2
                            -----------  ------   -----------  ------   -----------  -----   ----------- ------  -----------  -----
  Total commercial loans     11,193,067    16.4    10,801,961    15.9    15,336,658   24.0    15,301,601   30.2   16,689,008   36.9
Real Estate loans:
Commercial                   31,741,069    46.5    32,416,537    47.5    31,357,950   49.1    21,553,696   42.5   17,156,979   37.8
One-to-four family            1,112,032     1.6     1,382,490     2.0       493,504    0.8       376,999    0.7      403,745    0.9
                            -----------  ------   -----------  ------   -----------  -----   ----------- ------  -----------  -----
  Total real estate loans    32,853,101    48.1    33,799,027    49.5    31,851,454   49.9    21,930,695   43.2   17,560,724   38.7
Construction loans:
Commercial                   19,893,858    29.1    20,390,849    29.8    13,562,442   21.3    10,477,294   20.7    9,029,720   20.0
Owner occupied one-to-four
 family                       2,960,000     4.3     1,870,000     2.7     1,315,000    2.1     1,803,000    3.6      733,746    1.6
                            -----------  ------   -----------  ------   -----------  -----   ----------- ------  -----------  -----
  Total construction loans   22,853,858    33.4    22,260,849    32.5    14,877,442   23.4    12,280,294   24.3    9,763,466   21.6
Other loans:
Consumer loans                1,048,448     1.5       949,899     1.4     1,179,485    1.9       796,987    1.6    1,066,746    2.4
Other loans                     435,837     0.6       510,617     0.7       509,073    0.8       331,355    0.7      177,708    0.4
                            -----------  ------   -----------  ------   -----------  -----   ----------- ------  -----------  -----
  Total other loans           1,484,285     2.1     1,460,516     2.1     1,688,558    2.7     1,128,342    2.3    1,244,454    2.8

Total loans                  68,384,311   100.0%   68,322,353   100.0%   63,754,112  100.0%   50,640,932  100.0%  45,257,652  100.0%
                            -----------  ======   -----------  ======   -----------  =====   ----------- ======  -----------  =====
Less:
 Unearned discounts, net
  and deferred loan fees,
  net                           337,426               340,892               339,601              216,139             145,311
 Allowance for loan losses    1,299,520             1,162,776             1,168,358              894,692             766,377
                            -----------           -----------           -----------          -----------         -----------
 Loans, net                 $66,747,365           $66,818,685           $62,246,153          $49,530,101         $44,345,964
                            ===========           ===========           ===========          ===========         ===========
</TABLE>

                                       9
<PAGE>

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

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

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

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

Loan Maturity. The following table shows the contractual maturity of our loans
at December 31, 2004.
<TABLE>
<CAPTION>

                                                              At December 31, 2004
                             ----------------------------------------------------------------------------------

                              Commercial     Commercial                                  Other
                              Unsecured       Secured    Construction   Real Estate     Loans (1)      Total
                             -----------    -----------   -----------   -----------   -----------   -----------
<S>                            <C>            <C>          <C>           <C>            <C>          <C>
Amounts due:
 Within one year (1)         $ 6,134,913    $   608,236   $ 7,905,609   $ 3,359,699   $   926,838   $18,935,295
 After one year:
 One to five years             3,485,330        964,588    14,948,249    26,837,321       557,447    46,792,935
Total due after five years            --             --            --     2,656,081            --     2,656,081
                             -----------    -----------   -----------   -----------   -----------   -----------
    Total amount due           9,620,243      1,572,824    22,853,858    32,853,101     1,484,285    68,384,311

Less:
 Unearned fees                      (526)         2,824       185,587       149,541            --       337,426
 Allowance for loan
  losses                         351,215         17,660       358,632       501,784        70,229     1,299,520
                             -----------    -----------   -----------   -----------   -----------   -----------
Loans, net                   $ 9,269,554    $ 1,552,340   $22,309,639   $32,201,776   $ 1,414,056   $66,747,365
                             ===========    ===========   ===========   ===========   ===========   ===========

</TABLE>

(1) Amount includes overdrawn deposit accounts of $322,141

                                       10
<PAGE>

The following table sets forth at December 31, 2004, the dollar amount of all
loans, due after December 31, 2005, and whether such loans have fixed or
variable interest rates.

                                    Due After December 31, 2005
                             -----------------------------------------
                                Fixed         Variable        Total
                             -----------    -----------    -----------

Commercial Loans:
  Unsecured                  $   327,336    $ 3,157,994    $ 3,485,330
  Secured                        387,881        576,707        964,588
Real Estate
  Commercial                     501,886     27,949,162     28,451,048
  One-to-four                  1,042,354             --      1,042,354
Construction                     360,000     14,588,249     14,948,249
Other loans                      557,447             --        557,447
                             -----------    -----------    -----------
  Total loans                $ 3,176,904    $46,272,112    $49,449,016
                             ===========    ===========    ===========

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, 2004, commercial loans totaled $11,193,067 or 16.4% 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 backed by the personal guarantee of all the 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, 2004, our commercial real estate loans totaled
$32,853,101, or 48.1% 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.

                                       11
<PAGE>

Construction Lending. Our construction loans primarily have been made 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 legal lending
limit for loans to-one borrower. 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, 2004, our construction
loans totaled $22,853,858 or 33.4% 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 $350,000, are reviewed and approved prior to
commitment by the Loan Committee, which consists of seven directors of Victory
State Bank. 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 require the approval of either the Bank's Chief Lending
Officer or Chief Executive Officer, and may require the approval of both,
depending on the amount of the loan and the loan to value ratio.

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 we 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

                                       12
<PAGE>

currently expose us to sufficient risk to warrant classification but which
possess weaknesses are designated "Special Mention" by management. We had
nineteen (19) loans, in the aggregate amount of $6,053,086, classified as
special mention, fifteen (15) loans, in the aggregate amount of $741,671,
classified as substandard, two (2) loans, in the aggregate amount of $38,135,
classified as doubtful, and no loans classified as loss as of December 31, 2004.

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 a
loss allowance that we have 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, as to Victory State
Bank, by the New York State Banking Department and the FDIC, and as to our
holding company, by the Federal Reserve, 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:

                                       13
<PAGE>
<TABLE>
<CAPTION>

                                                  At December 31, 2004
                                  ---------------------------------------------------
                                          60-89 Days               90 Days or more
                                    Number       Principal      Number      Principal
                                  ----------    ----------    ----------   ----------
<S>                                   <C>      <C>                <C>   <C>
Commercial real estate                     2    $  256,137             4   $  160,310
Commercial construction                   --            --            --           --
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%
</TABLE>
<TABLE>
<CAPTION>

                                                  At December 31, 2003
                                  ---------------------------------------------------
                                          60-89 Days               90 Days or more
                                    Number       Principal      Number      Principal
                                  ----------    ----------    ----------   ----------
<S>                                   <C>      <C>                <C>   <C>
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%
</TABLE>
<TABLE>
<CAPTION>

                                                  At December 31, 2002
                                  ---------------------------------------------------
                                          60-89 Days               90 Days or more
                                    Number       Principal      Number      Principal
                                  ----------    ----------    ----------   ----------
<S>                                   <C>      <C>                <C>   <C>
Commercial real estate                    --    $       --             7   $  925,952
Commercial construction                   --            --            --           --
Commercial unsecured                      --            --             1       14,734
Other                                     --            --            --           --
                                  ----------    ----------    ----------   ----------
Total                                     --    $       --             8   $  940,686
                                  ==========    ==========    ==========   ==========
Delinquent loans to total loans                       0.00%                      1.48%
</TABLE>
<TABLE>
<CAPTION>


                                                  At December 31, 2001
                                  ---------------------------------------------------
                                          60-89 Days               90 Days or more
                                    Number       Principal      Number      Principal
                                  ----------    ----------    ----------   ----------
<S>                                   <C>      <C>                <C>   <C>
Commercial real estate                    --    $       --            --   $       --
Commercial construction                    1         7,376            --           --
Commercial unsecured                      --            --            --           --
Other                                     --            --            --           --
                                  ----------    ----------    ----------   ----------
Total                                      1    $    7,376            --    $      --
                                  ==========    ==========    ==========   ==========
Delinquent loans to total loans                       0.01%                      0.00%
</TABLE>
<TABLE>
<CAPTION>

                                                  At December 31, 2000
                                  ---------------------------------------------------
                                          60-89 Days               90 Days or more
                                    Number       Principal      Number      Principal
                                  ----------    ----------    ----------   ----------
<S>                                   <C>      <C>                <C>   <C>
Commercial real estate                     1    $   68,995             6   $  814,210
Commercial construction                    1       110,000             2      283,458
Commercial                                 4       118,400             1      130,000
Other                                      3        15,915            --           --
                                  ----------    ----------    ----------   ----------
Total                                      9    $  313,310             9   $1,227,668
                                  ==========    ==========    ==========   ==========
Delinquent loans to total loans                       0.69%                       2.71%
</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.

                                       14
<PAGE>

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

                                      At December 31,     At December 31,
                                           2004                2003
                                       ------------        ------------

Non-performing assets:
  Commercial loans:
    Unsecured                          $     20,112        $     30,619
  Commercial real estate                    121,810             259,026
  Construction                                   --             145,000
  Consumer loan                               2,476               4,406
                                       ------------        ------------

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

Non-performing loans to total
  loans                                        0.21%               0.64%
Non-performing loans to total
  assets                                       0.06%               0.24%
Non-performing assets to total
  assets                                       0.06%               0.24%

The following table sets forth the aggregate carrying value of our assets
classified as Substandard and Doubtful according to asset type. No loans were
classified as Loss at December 31, 2004.
<TABLE>
<CAPTION>

                                     At December 31, 2004          At December 31, 2004
                                         Substandard                    Doubtful
                                  -------------------------     -------------------------
                                    Number         Amount         Number         Amount
                                  ----------     ----------     ----------     ----------
<S>                                        <C>   <C>                     <C>   <C>
Classification of assets:
Commercial Loans:
  Unsecured                                9     $  294,882              1     $   15,459
Commercial Real Estate                     5        444,313              1         22,676
Other                                      1          2,476             --             --
                                  ----------     ----------     ----------     ----------
    Total loans                           15     $  741,671              2     $   38,135
                                  ==========     ==========     ==========     ==========
</TABLE>

No assets were classified as Loss at year end 2004.

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.

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

                                       15
<PAGE>

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, 2004, our allowance for loan losses was $1,299,520 or 1.90%
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,
                                                  ---------------------------------------------------------------------------
                                                     2004            2003            2002            2001            2000
                                                  -----------     -----------     -----------     -----------     -----------
<S>                                               <C>             <C>             <C>             <C>             <C>
Allowance for Loan Losses:
 Balance at beginning of period                   $ 1,162,776     $ 1,168,358     $   894,692     $   766,377     $   263,466
 Charge-offs:
 Commercial loans:
   Unsecured                                         (180,125)       (315,490)       (130,191)       (229,337)        (95,530)
 Other loans                                           (4,940)        (17,138)        (24,421)        (15,444)        (58,666)
                                                  -----------     -----------     -----------     -----------     -----------
Total charge-offs                                    (185,065)       (332,628)       (154,612)       (244,781)       (154,196)
Recoveries                                            171,809         122,046          73,278          68,096          12,107
                                                  -----------     -----------     -----------     -----------     -----------
Net charge-offs                                       (13,256)       (210,582)        (81,334)       (176,685)       (142,089)
Provision charged to income                           150,000         205,000         355,000         305,000         645,000
                                                  -----------     -----------     -----------     -----------     -----------
Balance at end of period                          $ 1,299,520     $ 1,162,776     $ 1,168,358     $   894,692     $   766,377
                                                  ===========     ===========     ===========     ===========     ===========

Ratio of net charge-offs during the period to
 average loans outstanding during the period             0.02%           0.49%           0.27%           0.37%           0.42%
Ratio of allowance for loan losses to
 total loans at the end of period                        1.90%           1.70%           1.83%           1.77%           1.70%
Ratio of allowance for loan losses to
 non-performing loans at the end of the period         899.96%         264.84%         356.45%         137.73%          96.41%
Ratio of allowance for loan losses to
 non-performing assets at the end of the period        899.96%         264.84%         356.45%         137.73%          96.41%
</TABLE>

                                       16
<PAGE>
<TABLE>
<CAPTION>

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

                            At December 31,       At December 31,      At December 31,      At December 31,         At December 31,
                                  2004                  2003                 2002                 2001                    2000
                          ------------------    ------------------   -------------------  --------------------   ------------------
                                   % of Loans            % of Loans            % of Loans            % of Loans           % of Loans
                                        in                    in                    in                    in                    in
                                     Category              Category             Category              Category             Category
                                        to                    to                    to                    to                    to
                                      Total                 Total                 Total                 Total                 Total
                          Amount      Loans      Amount     Loans      Amount     Loans      Amount     Loans      Amount     Loans
                          ------------------    ------------------   -------------------  --------------------   ------------------
<S>                       <C>           <C>     <C>           <C>    <C>            <C>      <C>          <C>    <C>           <C>
Allowance:
 Commercial loans:
   Unsecured              $  351,215    14.1%   $  218,871    13.1%  $  290,496     17.7%    $218,772     21.6%  $  288,706    31.2%
   Secured                    17,660     2.3        22,766     2.8       55,186      6.3      290,535      8.6        7,350     5.7
 Commercial real estate      490,488    46.5       523,209    47.5      567,390     49.1      279,512     42.5      329,320    37.8
 Residential real estate      11,296     1.6        12,957     2.0        8,896      0.8        2,351      0.7        5,633     0.9
 Construction loans          358,632    33.4       354,792    32.5      206,920     23.4       79,030     24.3      112,427    21.6
 Other loans                  70,229     2.1        30,181     2.1       39,470      2.7       24,492      2.3       22,941     2.8
                          ------------------    ------------------   -------------------  --------------------   ------------------
Total allowances          $1,299,520   100.0%   $1,162,776   100.0%  $1,168,358    100.0%    $894,692    100.0%  $  766,377   100.0%
                           ==================    ==================   ===================  ====================   ==================
</TABLE>

                                       17
<PAGE>

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,
federal funds sold and corporate debt securities. 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
("CMOs") with an estimated average life of 4.5 years or less, mortgage-backed
securities ("MBSs") with maturities of seven years or less and U.S. Agency notes
with maturities of less than 15 years. These CMOs and MBSs 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, 2004, we had investment securities in the aggregate
amount of $129,403,474 with a market value of $128,532,767. Of these,
$120,903,474 were either CMO's or MBS's. The entire investment portfolio at
December 31, 2004 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:
<TABLE>
<CAPTION>

                                                                                  At December 31,
                                                      ------------------------------------------------------------------------
                                                                   2004                                    2003
                                                      --------------------------------        --------------------------------
                                                       Amortized             Fair              Amortized             Fair
                                                          Cost               Value                Cost               Value
                                                      ------------        ------------        ------------        ------------
<S>                                                   <C>                 <C>                 <C>                 <C>
Investments securities, available for sale
US Government Agency                                  $  8,500,000        $  8,481,563        $  2,000,000        $  2,000,000
FNMA 7 Year Balloon                                     11,245,666          11,118,275             698,940             743,311
FHLMC                                                      517,411             523,766           1,013,649           1,033,838
GNMA                                                     3,296,901           3,263,366           3,782,659           3,732,954
Whole Loan MBS                                           5,114,582           5,068,462           3,691,027           3,746,108
Collateralized mortgage obligations                    100,728,914         100,077,335          72,302,939          71,915,336
                                                      ------------        ------------        ------------        ------------

                                                      $129,403,474        $128,532,767        $ 83,489,214        $ 83,171,547
                                                      ============        ============        ============        ============
</TABLE>

The table below sets forth the amortized cost, weighted average yields and
stated maturities of our investment securities at December 31, 2004 and 2003,
all of which were classified as available for sale. No tax equivalent
adjustments have been made.

                                       18
<PAGE>
<TABLE>
<CAPTION>

                                                                    At December 31, 2004
                         -----------------------------------------------------------------------------------------------------------
                           Less   Weighted                 Weighted                Weighted                  Weighted
                           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
 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     3.56%  $ 11,062,800     3.92%   $114,263,136      4.40%   $129,403,474
                         =======             ============            ============             ============              ============
</TABLE>
<TABLE>
<CAPTION>

                                                                    At December 31, 2003
                         -----------------------------------------------------------------------------------------------------------
                           Less   Weighted                 Weighted                Weighted                  Weighted
                           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
 Agency                  $    --       --%   $         --       --%  $        --        --%   $  2,000,000      4.00%   $  2,000,000
FNMA 7 Year Balloon           --       --         698,940     6.82            --        --              --        --         698,940
FHLMC                         --       --         549,731     5.47        463,918     5.34              --        --       1,013,649
GNMA                          --       --              --       --             --       --       3,782,659      4.11       3,782,659
Whole Loan MBS                --       --              --       --             --       --       3,691,027      4.72       3,691,027
Collateralized Mortgage
 Obligations                  --       --          56,439     7.12        204,391     3.42      72,042,109      4.25      72,302,939
                         -------             ------------            ------------             ------------              ------------
Total                    $    --       --%   $  1,305,110     6.26%  $    668,309     4.75%   $ 81,515,795      4.26%   $ 83,489,214
                         =======             ============            ============             ============              ============
</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 funds resulting from
increases in aggregate 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.

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, except for $15,000,000 of New York City and New York State deposits
that we received in connection with the designation of the St. George area as a
banking development district, and we do not pay above-market interest rates on
jumbo deposits to attract them. We do not use brokers to obtain deposits.
Management constantly monitors our deposit accounts and, based on historical
experience, management believes we 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 that our competitors offer.

                                       19
<PAGE>

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 cost NOW and money market accounts, which
generally have interest rates substantially less than certificates of deposit.
At December 31, 2004, these types of low cost deposit accounts amounted to
$146,793,940, or 68.1% 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,
                                                2004           2003           2002
                                            ------------   ------------   ------------
<S>                                         <C>            <C>            <C>
Beginning balance                           $167,103,445   $123,702,365   $ 91,132,816
  Net increase before interest credited       47,520,990     43,211,836     31,747,263
  Interest credited on deposits                  799,038        788,600        822,286
                                            ------------   ------------   ------------

Ending balance                              $215,423,473   $167,702,801   $123,702,365
                                            ============   ============   ============
</TABLE>

The following table provides information regarding the remaining term to
maturity of our time deposits over $100,000 at December 31, 2004:


Maturity Period                                Amount
---------------                             ------------
Three months or less                        $ 39,672,289
Over three through six months                    796,913
Over six through 12 months                     3,371,919
Over 12 months                                   103,120
                                            ------------
    Total                                   $ 43,944,241
                                            ============

The following table presents by various rate categories, the amount and the
periods to maturity of the certificate accounts outstanding at December 31,
2004.
<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:
   0.00% to 0.99%            $ 10,462,436   $         --   $         --   $         --   $         --   $ 10,462,436
   1.00% to 1.99%              34,089,427        895,214             --             --             --     34,984,641
   2.00% to 2.99%               1,283,420      3,962,344        789,359        801,218             --      6,836,341
   3.00% to 3.99%                  48,996        141,490             --        446,998      1,549,605      2,187,089
                             ------------   ------------   ------------   ------------   ------------   ------------
                             $ 45,884,279   $  4,999,048   $    789,359   $  1,248,216   $  1,549,605   $ 54,470,507
                             ============   ============   ============   ============   ============   ============
</TABLE>

Borrowings

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

                                       20
<PAGE>

Personnel

As of December 31, 2004, we had 43 full-time employees and 15 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, 2004, the ratio of Tier 1 capital to total assets was 7.88%, the
ratio of Tier 1 capital to risk-weighted assets was 17.48%, and the ratio of
qualifying total capital to risk-weighted assets was 19.24%.

Our ability to pay dividends can be restricted if overall capital falls below
minimum capital levels established by the Federal Reserve for bank holding
companies.

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.

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

                                       21
<PAGE>

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,
it may elect to do so in the future.

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.

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.

                                       22
<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, 2004, the Bank met each of its capital requirements.

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

                                       23
<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, 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>

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 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. 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.

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.

                                       24
<PAGE>

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.

Federal law 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, 2004, the Company and the Bank had capital levels which
qualified them as a "well-capitalized" institution.

FDIC Insurance

The Bank is a member of the Bank Insurance Fund 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.

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

                                       25
<PAGE>

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, 2004.

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").

The CRA requires FDIC insured banks to define the assessment areas that they
serve, identify the credit needs of those assessment areas and take other
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 to 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.

                                       26
<PAGE>

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 also pays an assessment for the cost of
the FICO bond issued to fund the savings and loan bailout of 1989. The Bank paid
federal and state assessments and examination fees of $31,656 in 2004.

Transactions with Related Parties

The authority of both our Company and the Bank to engage in transactions with
related parties or "affiliates" (i.e., any entity that controls or is under
common control with an institution) 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.

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.

                                       27
<PAGE>

Federal Reserve System

Federal Reserve Board regulations require banks to maintain non-interest earning
reserves against their transaction accounts (primarily NOW and regular checking
accounts). The Federal Reserve Board regulations generally require that reserves
be maintained against aggregate transaction accounts as follows: for accounts
aggregating $40.6 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement is 3%; for accounts greater than $40.6 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 $7.0 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, and for the two week period that included December 31, 2004,
the Bank was required to maintain reserves, after deducting vault cash, of
$6,601,000. Because required reserves must be maintained in the form of either
vault cash or a direct or indirect non-interest-bearing account at a Federal
Reserve Bank, the effect of this reserve requirement is to reduce our
interest-earning assets.

                                       28
<PAGE>

                                    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.

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. The main office is also
our loan origination center. The following is information about the real
property that we own or lease.

                                       29
<PAGE>
<TABLE>
<CAPTION>

                                                                                                    Net Book Value
                                                                        Original                     of Leasehold
                                                                          Date       Date of        Improvements at
                                                         Leased or      Leased or     Lease           December 31,
Location                               Description        Owned         Acquired   Expiration(1)          2004
                                     ---------------   -------------   ---------   -------------     ------------
<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. 10301              Branch             Leased          2001       6/30/2016       $    715,559

1766 Hylan Boulevard (3)
Staten Island, N.Y. 10301              Retail Stores      Leased          2001       6/30/2016       $    205,249
                                                                                                     ------------
Total net book value                                                                                 $  1,190,429
                                                                                                     ============
</TABLE>

(1)  All lease agreements are renewable at our option. 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.

Item 3. Legal Proceedings.

VSB Bancorp, Inc., is not involved in any pending legal proceedings. The Bank is
not involved in any pending legal proceedings other than routine collection
proceedings in the ordinary course of business on loans in default. Such other
routine legal proceedings in the aggregate are believed by management to be
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>

                                                                 2004
                                                                 ----
                           First Quarter*       Second Quarter         Third Quarter       Fourth Quarter
                           --------------       --------------         -------------       --------------
<S>                            <C>                  <C>                   <C>                  <C>
High Bid..............         $24.00               $23.60                $23.60               $23.50
Low Bid...............         $17.25               $22.00                $22.30               $21.75

                                                                 2003
                                                                 ----
                           First Quarter*       Second Quarter*        Third Quarter*      Fourth Quarter*
                           --------------       --------------         -------------       --------------
High Bid..............         $14.50               $15.00                $15.75               $18.75
Low Bid...............         $12.50               $12.00                $13.13               $15.38
</TABLE>

                                       30
<PAGE>

*    All per share prices have been adjusted for the 3 for 2 stock exchange
     ratio when Victory State Bank reorganized into a subsidiary of VSB Bancorp,
     Inc. Prices have also 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 160 stockholders of record. We have not paid any cash
dividends.

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

Management's discussion and analysis of financial condition and results of
operations gives effect to the restatement of the financial statements as
described in Note 21 to the financial statements.

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, on May 30, 2003 as the result of a reorganization of
Victory State Bank into the holding company form of organization. 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, Inc. now owns 100% of the capital stock
of Victory State Bank. The transaction between these entities under common
control was accounted for at historical cost on an as if pooled basis. VSB
Bancorp, Inc. common stock is quoted on the NASDAQ Over the Counter Market under
the symbol "VSBN".

Victory State Bank is a state-chartered, stock commercial bank, which opened for
business in November 1997. Our primary market is Staten Island, New York. Since
Victory State Bank opened for business, management has worked to grow the Bank's
franchise. From one office in 1997, the Bank now has four offices. From no
deposits, no loans and less than $7.0 million of assets on the day it opened for
business in 1997, the Bank has grown to total assets of $235.7 million, total
deposits of $215.4 million and capital of $17.2 million by December 31, 2004.

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. A down turn in the local economy in recent years, which was
followed by a moderate recovery, has made it more difficult for us to originate
new loans that meet our underwriting standards. Furthermore, there is pressure
in Staten Island to reduce densities in new residential developments, which has
the potential to further limit business among builders and related industries
that form the core of our customer base. Not only does the difficulty of
originating loans cause us to invest available funds in lower-yielding
securities and deposits with other banks, but it also slows the development of
non-loan relationships which sometimes flow from cross-selling to loan
customers.

Because our activities are concentrated in Staten Island, adverse economic
conditions in the borough 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. In 2003, we contributed substantially all of the
proceeds of the trust preferred offering to Victory State Bank, thus increasing
its capital and allowing it to satisfy its regulatory capital requirements while
growth continues. However, trust preferred securities generate interest expense
at the holding company level.

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.

                                       31
<PAGE>

Asset/Liability Management

We maintain the interest rate sensitivity of our assets by investing primarily
in collateralized mortgage obligations ("CMOs") and mortgage-backed securities
("MBSs") 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, 2004, prime based loans totaled $52,489,306, or 76.8%
of total loans. Many of these prime based loans are subject to interest rate
floors of 7.00% to 8.00%. 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
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
maturing within a given time period. A gap is considered negative when the
amount of interest bearing liabilities exceeds the amount of interest earning
assets during that time period.

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.

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 cash flows
from maturity of its interest-earning assets may exceed the cash flows from the
run-off of deposits, with the excess cash reinvested at lower than current
yields. 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 the
opposite situation occurs.

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
based upon the assumptions used in the following table at December 31, 2004, we
estimate that our total interest-bearing liabilities maturing within one year
exceeded our total interest-earning assets maturing in the same period by
$7,884,687, representing a one year cumulative gap ratio of negative 3.49%.

To the extent that our core deposits are reduced at a more rapid rate than our
decay assumptions on such deposits, our need to replace maturing liabilities
could accelerate and occur faster than estimated in the table. 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. In addition, our CMOs and MBSs are subject to
extension risk, which is the risk that the loans underlying the securities will
repay or turn over more slowly than predicted when estimating the average life
of the securities. An increase in market interest rates could result in an
extension of the repayment or turnover as borrowers tend to try to hold on to
lower rate loans for longer periods. If this occurs, there could be a delay in
our ability to reinvest the funds received upon payment of the CMOs and MBSs
into higher yielding assets available as market rates rise.

Our substantial level of non-interest-bearing demand deposits complements 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.

                                       32
<PAGE>

The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2004, that 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. Loans are categorized based upon their scheduled repayment without
any assumed prepayments. Additionally, based upon peer data, we utilized deposit
decay rate assumptions of 10% for savings accounts and NOW accounts and 85% for
money market deposit accounts in the one year or less category. There can be no
assurance that deposit decay rate would not be affected by changes in the level
of interest rates.
<TABLE>
<CAPTION>

                                                                           At December 31, 2004
                                            ------------------------------------------------------------------------------------
                                               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)                       $   9,439,117     $  10,375,570     $  42,996,183    $   2,475,201     $  65,286,071
 Consumer loans (1)                             1,675,858           107,314         1,170,809               --         2,953,981
 Money market investments                         530,990                --                --               --           530,990
 Mortgage-backed securities                     7,388,260        22,164,780        91,097,016               --       120,650,056
 Other interest-earning assets                 28,007,399                --                --               --        28,007,399
 Investment securities                                 --                --         3,000,000        5,500,000         8,500,000
                                            -------------     -------------     -------------    -------------     -------------
    Total interest-earning assets              47,041,624        32,647,664       138,264,008        7,975,201       225,928,497
Less:
 Unearned (discount) and deferred fees(2)         (68,969)         (206,908)          191,344               --           (84,533)
                                            -------------     -------------     -------------    -------------     -------------
Net interest-earning assets                    46,972,655        32,440,756       138,455,352        7,975,201       225,843,964

Interest-bearing liabilities:
 Savings accounts (3)                           5,663,610           707,951         4,247,708        3,539,757        14,159,026
 NOW accounts (3)                               8,629,621         1,078,703         6,472,216        5,393,513        21,574,053
 Money market accounts (3)                     19,135,872         1,195,992         2,391,987        1,195,992        23,919,843
 Certificate accounts                          43,618,184         7,268,165         3,587,180               --        54,473,529
 Subordinated debt                                     --                --         5,155,000               --         5,155,000
                                            -------------     -------------     -------------    -------------     -------------
    Total interest-bearing liabilities         77,047,287        10,250,811        21,854,091       10,129,262       119,281,451

Interest sensitivity gap                    $ (30,074,632)    $  22,189,945     $ 116,601,261    $  (2,154,061)    $ 106,562,513
                                            =============     =============     =============    =============     =============
Cumulative gap                              $ (30,074,632)    $  (7,884,687)    $ 108,716,574    $ 106,562,513     $ 106,562,513
                                            =============     =============     =============    =============     =============
Cumulative gap as a percentage
 of total interest-earning
 assets                                            -13.31%            -3.49%            48.12%           47.17%            47.17%
Cumulative net interest-earning assets
 as a percentage of total interest-
 bearing liabilities                                60.97%            90.97%           199.60%          189.34%           189.34%
</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.
(3)  The Company, based upon peer data, utilizes deposit decay rate assumptions
     of 10% for savings accounts, NOW accounts and 85% for money market deposit
     accounts in the one year or less category.

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, many of our prime rate loans have an interest rate of prime plus 1%,
but they have minimum interest rates between 7.0% and 8%. Therefore, an increase
in the prime rate does not affect the yield on those loans until the prime rate
exceeds 6%. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels may deviate significantly from those assumed in

                                       33
<PAGE>

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.

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.

                                       34
<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, 2004, 2003 and 2002 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,
                                                       2004                                     2003
                                     -------------------------------------     -------------------------------------
                                        Average                     Yield/        Average                    Yield/
                                        Balance       Interest       Cost         Balance       Interest      Cost
                                     ------------   ------------   -------     ------------   ------------   -------
<S>                                  <C>            <C>               <C>      <C>            <C>               <C>
Assets:
Interest-earning assets:
  Loans receivable                   $ 68,513,503   $  5,340,281      7.79%    $ 68,232,867   $  5,120,215      7.50%
  Money market investments                     --             --        --          204,665          3,228      1.58
  Other interest earning assets        22,406,937        293,464      1.31       22,571,739        210,182      0.93
  Investment securities, afs           95,319,848      4,051,983      4.25       61,420,313      2,239,139      3.65
                                     ------------   ------------               ------------   ------------
  Total interest-earning assets       186,240,288      9,685,728      5.20      152,429,584      7,572,764      4.97

 Non-interest earning assets           13,260,423                                10,413,473
                                     ------------                              ------------
  Total assets                       $199,500,711                              $162,843,057
                                     ============                              ============
Liabilities and equity:
 Interest-bearing liabilities:
  Savings accounts                   $ 12,596,720         63,130      0.50     $  9,150,010         57,543      0.63
  Time accounts                        41,259,632        433,374      1.05       28,341,812        343,317      1.21
  Money market accounts                23,219,409        195,269      0.84       25,379,394        264,283      1.04
  Now accounts                         23,988,825        100,941      0.42       25,610,959        123,457      0.48
  Subordinated debt                     5,155,000        356,159      6.91        1,779,534        118,029      6.63
                                     ------------   ------------               ------------   ------------
     Total interest-bearing
      liabilities                     106,219,586      1,148,873      1.08       90,261,709        906,629      1.00
  Checking accounts                    79,654,202                                60,842,673
                                     ------------                              ------------
Total                                 185,873,788                               151,104,382
Other liabilities                       2,071,349                                 1,438,827
                                     ------------                              ------------
  Total liabilities                   187,945,137                               152,543,209
 Equity                                11,555,574                                10,299,848
                                     ------------                              ------------
  Total liabilities and equity       $199,500,711                              $162,843,057
                                     ============                              ============
Net interest income/net interest
 rate spread                                        $  8,536,855      4.12%                   $  6,666,135      3.97%
                                                    ============   =======                    ============   =======
Net interest earning assets/net
 interest margin                     $ 80,020,702                     4.58%    $ 62,167,875                     4.37%
                                     ============                  =======     ============                  =======
Ratio of interest-earning assets
 to interest-bearing liabilities             1.75x                                     1.69x
                                     ============                              ============

Return on Average Assets                     1.14%                                     0.93%
                                     ============                              ============
Return on Average Equity                    19.68%                                    14.76%
                                     ============                              ============
Tangible Equity to Total Assets              5.44%                                     5.77%
                                     ============                              ============
</TABLE>

<TABLE>
<CAPTION>

                                             Year Ended December 31,
                                                       2002
                                     -------------------------------------
                                        Average                     Yield/
                                        Balance       Interest       Cost
                                     ------------   ------------   -------
<S>                                  <C>            <C>               <C>
Assets:
Interest-earning assets:
  Loans receivable                   $ 57,353,099   $  4,411,688      7.69%
  Money market investments                 95,769          3,496      3.65
  Other interest earning assets        13,440,690        181,410      1.35
  Investment securities, afs           37,051,862      1,922,006      5.19
                                     ------------   ------------
  Total interest-earning assets       107,941,420      6,518,600      6.04

 Non-interest earning assets            6,668,093
                                     ------------
  Total assets                       $114,609,513
                                     ============
Liabilities and equity:
 Interest-bearing liabilities:
  Savings accounts                   $  8,064,155         71,779      0.89
  Time accounts                        17,186,114        387,257      2.25
  Money market accounts                17,585,434        262,750      1.49
  Now accounts                         18,351,239        100,501      0.55
  Subordinated debt                            --             --        --
                                     ------------   ------------
     Total interest-bearing
      liabilities                      61,186,942        822,287      1.34
  Checking accounts                    43,345,527
                                     ------------
Total                                 104,532,469
Other liabilities                       1,222,576
                                     ------------
  Total liabilities                   105,755,045
 Equity                                 8,854,468
                                     ------------
  Total liabilities and equity       $114,609,513
                                     ============
Net interest income/net interest
 rate spread                                        $  5,696,313      4.70%
                                                    ============   =======
Net interest earning assets/net
 interest margin                     $ 46,754,478                     5.28%
                                     ============                  =======
Ratio of interest-earning assets
 to interest-bearing liabilities             1.76x
                                     ============

Return on Average Assets                     1.03%
                                     ============
Return on Average Equity                    13.33%
                                     ============
Tangible Equity to Total Assets              7.24%
                                     ============
</TABLE>

                                       35
<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, 2004                 Year Ended December 31, 2003
                                                  Compared to                                  Compared to
                                               December 31, 2003                            December 31, 2002
                                              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                $    21,048    $   199,018    $   220,066    $   836,654   $  (128,127)   $   708,527
  Money market                         (3,234)             6         (3,228)         3,975        (4,243)          (268)
  Other interest-earning assets        (1,533)        84,815         83,282        123,269       (94,497)        28,772
  Investment securities, afs        1,237,333        575,511      1,812,844      1,264,723      (947,590)       317,133
                                  -----------    -----------    -----------    -----------   -----------    -----------
     Total                          1,253,614        859,350      2,112,964      2,228,621    (1,174,457)     1,054,164

 Interest-bearing liabilities:
  Savings accounts                     21,714        (16,127)         5,587          9,664       (23,900)       (14,236)
  Time accounts                       156,306        (66,249)        90,057        251,003      (294,943)       (43,940)
  Money market accounts               (22,464)       (46,550)       (69,014)       116,130      (114,597)         1,533
  Now accounts                         (7,786)       (14,730)       (22,516)        39,928       (16,972)        22,956
  Subordinated debt                   238,130             --        238,130        118,029            --        118,029
                                  -----------    -----------    -----------    -----------   -----------    -----------
     Total                            385,900       (143,656)       242,244        534,755      (450,413)        84,342
                                  -----------    -----------    -----------    -----------   -----------    -----------
Net change in net interest
 income                           $   867,715    $ 1,003,005    $ 1,870,720    $ 1,693,866   $  (724,044)   $   969,822
                                  ===========    ===========    ===========    ===========   ===========    ===========
</TABLE>

Comparative Results for the Years Ended December 31, 2004 and December 31, 2003

General. We had net income of $2,274,578 for the year ended December 31, 2004,
as compared to net income of $1,520,373 for the year ended December 31, 2003.
The principal categories which make up the 2004 net income are:

     o   Interest income of $9,685,728
     o   Reduced by interest expense of $1,148,873
     o   Reduced by the provision for loan losses of $150,000
     o   Increased by non-interest income of $1,889,818
     o   Reduced by non-interest expense of $6,018,691
     o   Reduced by $1,983,404 in income tax expense.

         We discuss each of these categories individually and the reasons for
the differences between the years ended December 31, 2004 and 2003 in the
following paragraphs. The over-riding factor affecting the changes in our

                                       36
<PAGE>

operating results in all these categories is our continued implementation of our
growth strategy as we discussed above. The implementation of our Employee Stock
Ownership Plan ("ESOP") in 2004 increases compensation expense as we make
contributions to the ESOP.

         Interest Income. Interest income was $9,685,728 for the year ended
December 31, 2004, compared to $7,572,764 for the year ended December 31, 2003,
an increase of $2,112,964, or 27.9%. The principal reason for the increase was a
$33,899,535 increase in the average balance of investment securities. We
invested new deposits and the proceeds of the subordinated debt in investment
securities rather than other short-term liquid assets, pending planned
redeployment in loans as, when and if appropriate opportunities are available.
The increase in the volume of investment securities, coupled with a 0.60%
increase in the average yield on those securities, generated a $1,812,844
increase in interest earned on investment securities. The reported yield for the
year ended 2003 was reduced because of accelerated amortization of premiums in
the CMO portfolio, resulting from the higher level of refinancing in the
underlying mortgages.

         We increased the average balance of our loans by 0.41% from $68,232,867
for 2003 to $68,513,503 and average yield increased by 29 basis points. The
increase in the average yield and the recovery in 2004 of interest that had not
been accrued on past due loans in 2003 were the principal reasons for a $220,066
increase in interest income from loans. Seeking to limit the adverse effects of
low market interest rates, we changed our lending strategy in 2003 to require
minimum rates on a larger portion of our prime-based loan portfolio which caused
a slight increase in loan yields. We also received $59,640 of interest during
the year on prior period loans that had been designated as non-accrual and were
paid in full in 2004. In contrast, during the year of 2003, reported interest
was reduced by $33,248 because we designated a number of loans as non-accrual
and reversed interest income that we had accrued but not received.

         Finally, we had an $83,282 increase in income from overnight funds and
other interest earning assets, as the yield increased 38 basis points due to
higher market rates on short term and overnight investments during the latter
part of 2004. We did not increase the volume of those assets despite our overall
growth because they have very low yields and, as noted above, we directed the
available funds into investment securities with higher yields.

         Interest Expense. Interest expense was $1,148,873 for the year ended
December 31, 2004, compared to $906,629 for the year ended December 31, 2003, an
increase of 26.7%. The increase was primarily the direct result of a $238,130
increase in interest on subordinated debt. The trust preferred transaction was
not completed, and the subordinated debt, created in our connection with our
issuance of trust preferred securities, was not issued until August 2003, so it
was outstanding for all of 2004 but less than half of 2003. We also experienced
an increase in interest paid on time accounts due to an increase in the volume
of those accounts as a result of our growth strategy. These increases were
partially offset by the lower average rates paid on all interest-bearing deposit
categories - savings, time deposit, money market and NOW accounts - as we
decreased rates on many deposit products in mid 2003 and had not raised those
rates by December 2004.

         Our average cost of funds increased from 1.00% to 1.08% between the
periods because of the 6.91% average cost of the subordinated debt and the
related increase in its average balance of $3,375,466 for the applicable
periods. Our average cost of interest-bearing deposits (excluding the cost of
the subordinated debt) declined from 0.89 % to 0.78%. Furthermore, we continued
to increase the volume of non-interest checking accounts, a zero cost funding
source, which represented 60% of the growth in average total deposits. This
increase was a direct result of our efforts to increase low cost funding
sources.

         Net Interest Income Before Provision for Loan Losses. Net interest
income before the provision for loan losses was $8,536,855 for the year ended
December 31, 2004, an increase of $1,870,720, or 28.1% over the $6,666,135 we
had for the year ended December 31, 2003. The increase was driven primarily by
the increase in the volume of interest-earning assets. We have continued to

                                       37
<PAGE>

implement our growth strategy which resulted in an increase of $33,810,704 in
average interest earning assets, most of which consisted of investment
securities. Our interest rate spread improved from 3.97% at December 31, 2003 to
4.12% at December 31, 2004, principally for the following reasons:

     o   low market interest rates allowed us to decrease our cost of deposits,
         which partially offset the higher expense of the subordinated debt;
     o   we were more aggressive in imposing minimum interest rate floors on our
         new loan originations to combat the effects of the low prime interest
         rate;
     o   we deployed available cash and funds from deposit growth into higher
         yielding investment securities rather than overnight investments; and
     o   as discussed above, we received interest during 2004 on non-accruing
         loans that was paid for a prior period and we had the reverse situation
         in 2003 due to designating loans as non-accrual.

         Loans are our highest yielding asset category, and due to interest rate
floors on many of our prime-based loans coupled with relatively steady market
interest rates, our average loan yields have been relatively constant for the
last three years. In contrast, the average yield on other (non-loan) interest
earning assets was approximately 3.69% during 2004, compared to approximately
2.91% during 2003. This improvement resulted from our strategy to increase the
volume of investment securities with higher yields than overnight investments
and the reduction in the amortization of premiums in the mortgage-backed
security portfolio due a slow down in prepayments as interest rates increased.
The average level of investment securities represented 81.0% of non-loan earning
assets in 2004 compared to 73.0% in 2003.

         The improvement of our interest rate spread from these factors was
partially offset by the change in our mix of assets, as loans represented a
lower percentage of average earning assets in 2004 (36.8%) than they represented
in 2003 (44.8%). This percentage decline reduced our overall average yield on
interest earning assets because instead of being able to invest available funds
in higher yielding loans, we were forced to invest them in lower yielding
investment securities. The growth in the loan portfolio was slower than the
growth in the investment securities portfolio due to competitive pressures for
loans in our marketplace.

         Most of our loans have interest rates that are based upon the
fluctuating prime rate, which was 5.25% at the end of 2004 as compared to 4.00%
at the end of 2003. Many of our prime-based loans have interest rate floors. The
loans, which are most commonly made at interest rates from 100 to 150 basis
points above the prime rate, have interest rate floors that are typically
between 7.00% and 8.00%, so the increase in the prime rate did not result in a
substantial increase in our yield on those loans. If the prime rate increases,
the rate of interest on these loans will not increase until the prime rate
reaches from 5.50% to 6.00%, while our cost of funds can be expected to increase
as market interest rates begin to rise.

         Provision for Loan Losses. The provision for loan losses was $150,000
for the year ended December 31, 2004, compared to $205,000 for the year ended
December 31, 2003. The decrease in the provision was primarily due to a moderate
decrease in the rate of delinquencies in the loan portfolio and the slowed loan
growth. 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.
Management periodically evaluates both broad categories of performing loans and
problem loans individually to assess the appropriate level of the allowance.

                                       38
<PAGE>

         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 1.90% of total loans at December 31, 2004, 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 $1,889,818 for the year
ended December 31, 2004, compared to $1,640,818 during the same period last
year. The $249,000, or 15.2% increase was caused primarily by a $282,171
increase in service charges on deposits, more specifically because of the
increase in the deposit base and a related increase in aggregate overdraft fees
charged to customers.

         Non-interest Expense. Non-interest expense was $6,018,691 for the year
ended December 31, 2004, compared to $5,255,167 for the year ended December 31,
2003. Of the $763,524 increase, the principal causes were:

     o   $629,959 in higher salary and benefits costs due to normal salary
         increases, a slight increase in staffing to support growth, $113,165 of
         compensation expense associated with the ESOP and higher benefit costs
     o   $15,119 in higher legal expenses due to being an SEC registered company
         for the entire year and lease negotiations on our pending branch.
     o   $76,886 in higher professional fees primarily due to becoming a SEC
         registered company, and increased costs due to our growth.
     o   $56,726 more of "other expenses," reflecting the effects of growth on
         other expense categories.

         Income Tax Expense. Income tax expense was $1,983,404 for the year
ended December 31, 2004, compared to income tax expense of $1,326,413 for the
year ended December 31, 2003, due to the $1,411,196 increase of income before
income taxes for the year ended December 31, 2004. Our effective tax rate
remained the same for 2004 and 2003 at 46.6%.

Comparative Results for the Years Ended December 31, 2003 and December 31, 2002.

General. We had net income of $1,520,373 for the year ended December 31, 2003,
as compared to net income of $1,180,308 for the year ended December 31, 2002.
The principal categories which make up the 2003 net income are:

     o   Interest income of $7,572,764
     o   Reduced by interest expense of $906,629
     o   Reduced by the provision for loan losses of $205,000
     o   Increased by non-interest income of $1,640,818
     o   Reduced by non-interest expense of $5,255,167
     o   Reduced by $1,326,413 in income tax expense.

We discuss each of these categories individually and the reasons for the
differences between the year ended December 31, 2003 and the year ended December
31, 2002 in the following paragraphs. The over-riding factor affecting the
changes in our operating results in all these categories is our continued
implementation of our strategy to grow our franchise through branch expansion
and growth at existing offices. Opening new branches initially has a dampening
effect on net income because we must begin incurring the staffing and occupancy
expense of a new branch before we generate funds from that branch for
investment. However, we expect that the longer term consequences of branch
expansion will be positive, as deposits and loans are gradually generated by new
branches.

                                       39
<PAGE>

         Interest Income. Interest income was $7,572,764 for the year ended
December 31, 2003, compared to $6,518,600 for the year ended December 31, 2002,
an increase of 16.2%. We increased the average balance of our loans from
$57,353,099 for 2002 to $68,232,867 for 2003, which was the fuel that drove a
$708,527 increase in interest income from loans. Although our average yield on
loans declined by 19 basis points, the effect of the increase in average volume
outweighed the effect of this decrease in yield. We also increased the average
balance of investment securities from $37,051,862 in 2002 to $61,420,313 in
2003. Although this increase in volume generated an estimated $1,264,723
increase in interest income, the increase was substantially offset by an
estimated $947,590 decline in interest earned on investment securities due to a
154 basis point decline in average yield. This decline in yield occurred because
of low market interest rates during 2003 coupled with the substantial increase
in funds available for securities investments due to growth, which funds were
invested at those low rates. Management invested most of the increase in funds
not required to fund loans in investment securities because despite the low
yield available on investment securities, they were better than the lower yields
on money market assets.

         Interest Expense. Interest expense was $906,629 for the year ended
December 31, 2003, compared to $822,287 for the year ended December 31, 2002, an
increase of 10.3%. The increase was the direct result of $118,029 of interest on
the subordinated debt and increases in the average balance of all principal
interest-bearing deposit categories - money market accounts, NOW accounts,
certificates of deposit and savings accounts - as we sought funds to grow our
asset base. However, the increase in interest expense was substantially
moderated because of declines in market interest rate conditions. Our average
cost of funds declined from 1.34% to 1.00% between the periods. Although only a
34 basis point decline, the decline represented a 25.4% decrease in our cost of
funds. Furthermore, we continued to increase the volume of non-interest checking
accounts as a zero cost funding source.

         Net Interest Income Before Provision for Loan Losses. Net interest
income before the provision for loan losses was $6,666,135 for the year ended
December 31, 2003, an increase of $969,822 over the $5,696,313 we had for the
year ended December 31, 2002. The increase was driven entirely by the increase
in the volume of interest-earning assets, but was partially offset by a 73 basis
point decline in our interest rate spread and a 91 basis point decline in our
net interest margin. The spread and margin declined principally due to the
effects of declining market interest rates coupled with a reduction in the
percentage of our average assets invested in loans between the periods.

         Loans are our highest yielding asset category, and the average rate we
earned on loans was 7.50% for the year ended December 31, 2003, or 19 basis
points lower than the yield earned for the year ended December 31, 2002. In
contrast, the average yield on other (non-loan) interest earning assets was only
approximately 2.91% for the year ended December 31, 2003, compared to
approximately 4.16% for the year ended December 31, 2002. An increase in the
percentage of assets invested in interest earning assets other than loans had
the effect of decreasing our overall average yield. The growth in the loan
portfolio has been significantly outstripped by the growth of our asset base,
due primarily to the gathering of deposits and to a lesser extent, the issuance
of $5.2 million in subordinated debt.

         The stability in the loan yield was not reflective of the approximately
130 basis point decline in the yield on other interest earning assets. Most of
our loans have interest rates that are based upon the fluctuating prime rate,
but are subject to interest rate floors of 7.0% and 7.5%. Despite the prime rate
decline during 2002 and 2003, the effect of that decline on our yields was
moderated because the interest rate floors on many of our prime-based loans have
been reached. Therefore, the decline in the prime rate in June 2003 did not
cause the rates on those loans to further decline. In contrast, the average
yield on non-loan investments continued to decline as declining market rates
drove down the yields we could earn on new securities investments.

                                       40
<PAGE>

         The average interest rate spread was 3.97% for the year ended December
31, 2003, compared to 4.70% for the same period in 2002 and the average interest
rate margin was 4.37% for the year ended December 31, 2003, compared to 5.28%
for the same period last year. The difference between the average interest rate
spread and the average interest rate margin reflects the level of capital and
non-interest-bearing checking accounts which we have to fund interest-earning
assets. However, the decline in the difference between our spread and the margin
from 58 basis points (5.28% minus 4.70%) for the year ended December 31, 2002 to
40 basis points (4.37% minus 3.97%) for the same period this year reflects that
non-interest-bearing demand deposits and capital are more valuable as funding
sources when market interest rates are higher and they can be invested in higher
yielding assets. Furthermore, as we grow and leverage our capital, non-interest
bearing capital represents a decreasing percentage of our funding sources.

         Provision for Loan Losses. The provision for loan losses was $205,000
for the year ended December 31, 2003, compared to $355,000 for the year ended
December 31, 2002. The reduction in the provision was primarily due to the
increased rate of recoveries of loans previously charged-off. The provision for
loan losses in any period depends upon the amount necessary to bring the
allowance for loan losses to the level management believes is adequate, after
taking into account charge offs and recoveries. Our allowance for loan losses is
based on management's evaluation of the risks inherent in our loan portfolio and
the general economy. Management periodically evaluates both broad categories of
performing loans and problem loans individually to assess the appropriate level
of the allowance.

         Non-interest Income. Non-interest income was $1,640,818 for the year
ended December 31, 2003, compared to $1,315,583 during the same period last
year. The $325,235 increase was caused primarily by a $143,532 increase in
service charges on deposits as a direct result of an increase in total deposit
accounts and an increase in overdraft fees charged to customers. The $37,745
increase in loan fees was due to an increase in letter of credit fees collected
in the first quarter of 2003.

         Non-interest Expense. Non-interest expense was $5,255,167 for the year
ended December 31, 2003, compared to $4,425,658 for the year ended December 31,
2002. Of the $829,509 increase, the principal causes were:

     o   $444,649 in higher salary and benefits costs primarily due to an
         increase in staffing to support growth. We had 50 full time equivalent
         employees at December 31, 2003 compared to 44 at December 31, 2002.
     o   $125,387 in higher occupancy expense, primarily due to the opening of
         our Hylan Branch in December 2002.
     o   An increase of $156,856 in "other expenses," reflecting the effects of
         growth on other expense categories.

         Income Tax Expense. Income tax expense was $1,326,413 for the year
ended December 31, 2003, compared to income tax expense of $1,050,930 for the
year ended December 31, 2002. Our effective tax rate declined from 47.1% for the
year ended December 31, 2002 to 46.6% for the year ended December 31, 2003, due
to a reduction of the corporate tax rate in New York State.

                                       41
<PAGE>

Changes in Financial Condition

         Our total assets were $235,684,467 at December 31, 2004, an increase of
$50,554,497, or 27.3%, since December 31, 2003. The increase resulted from the
investment of funds which were available to us as the result of an increase in
deposits. The deposit increase was caused generally by our efforts to grow our
franchise and specifically by the deposit increases at all our branch offices.
Our investment of these funds generated the following increase in assets.

     o   A   $ 595,326 increase in cash and due from banks
     o   A   $ 4,876,006 increase in interest bearing deposits in other
             financial institutions
     o   A   $45,361,220 increase in investment securities available for sale

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

         Our deposits (including escrow deposits) were $215,423,473 at December
31, 2004, an increase of $47,720,672, or 28.5%, from December 31, 2003, which
provided most of the funds used for the increase in assets. The increase in
deposits includes a $24,147,214 increase in non-interest demand deposits, a
$22,183,292 increase in time deposits and a $3,764,071 increase in savings
accounts, partially offset by a decrease of $2,053,600 in NOW accounts and a
$320,305 decrease in money market accounts. The time deposit increase includes a
$5 million time deposit from the City of New York, into our St. George branch,
under the City's new Bank Development District deposit program.

         Total stockholders' equity was $12,829,621 at December 31, 2004, an
increase of $2,143,009 from December 31, 2003. The increase reflected net income
of $2,274,578 for the year ended December 31, 2004, reduced by an increase of
$295,379 in other comprehensive loss due to an increase in the unrealized loss
in securities available for sale during 2004. The unrealized loss increased due
to the increase in market interest rates, principally during the second half of
2004. This unrealized loss is excluded from the calculation of regulatory
capital. Management does not anticipate selling securities in this portfolio but
changes in market interest rates or 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.

         The increase in stockholders' equity also included an increase of
$177,802 in additional paid in capital due to the exercise of options to
purchase 22,720 shares of common stock and an decrease in unearned ESOP shares
of $112,719 reflecting the effect of the gradual payment of the loan we made to
our ESOP to fund the ESOP's purchase of our stock. The ESOP purchased 74,320
shares of our common stock out of our authorized but unissued shares, which 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 $126,825 to mezzanine capital, based upon our
quoted price on December 31, 2004, but the amount still qualifies as capital for
regulatory purposes.

         VSB Bancorp, Inc. satisfied all capital ratio requirements of the
Federal Reserve at December 31, 2004, with a Tier I Leverage Capital ratio of
7.88%, a ratio of Tier I Capital to Risk-Weighted Assets ratio of 17.48%, and a
Total Capital to Risk-Weighted Assets ratio of 19.24%.

         In May of 2004, we implemented the stockholder-approved ESOP. We lent
the ESOP the money to purchase shares of our stock and the ESOP will repay the
loan principally from the cash contributions from Victory State Bank. The loan
has a ten year term, with periodic payments due annually sufficient to repay the

                                       42
<PAGE>

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.
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 will be 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 does not increase our capital by
the amount of the purchase price because the purchase price was paid by a loan
we made to the ESOP. Instead, we record an increase in capital 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 will be 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.

         On August 28, 2003, we received the net proceeds of $4.86 million from
the issuance of subordinated debt to VSB Capital Trust I and the Trust's
subsequent issuance of $5 million of trust preferred securities. We can include
the proceeds from the trust preferred securities, up to 25% of our total
capital, as Tier 1 capital, when determining compliance with Federal Reserve
regulatory capital requirements for bank holding companies.

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.

         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 contrast, for the year ended December 31, 2003, we had a net
increase in deposits of $44,000,436 and proceeds from repayment of investment
securities totaled $47,697,407. The increase in deposits was primarily
attributable to the opening of a fourth branch in December 2002 and the receipt
of a $10 million time deposit from the State of New York Comptroller's office
due to Victory State Bank's establishment of a banking development district in
St. George. In 2003, we used $4,483,177 of the available funds to fund loan
growth. We used substantially all of the remainder of the funds available for
investment to increase our interest-bearing bank balances by $1,510,226 and to
purchase investment securities.

         The principal reason that we entered into a $5 million trust preferred
securities transaction in 2003 was to increase regulatory capital to support
growth. Although the proceeds of the trust preferred securities do not
constitute capital under GAAP (and are shown as subordinated debt on our balance
sheet), the Board of Governors of the Federal Reserve System permits a bank
holding company to include net proceeds as capital when determining satisfaction
of regulatory capital ratios, up to 25% as Tier 1 capital. The Company
contributed $4.2 million of the proceeds of the trust preferred securities to
Victory State Bank as additional capital in order to increase the bank's capital
ratios and allow for future growth. At December 31, 2004, Victory State Bank
satisfied all capital ratio requirements of the Federal Deposit Insurance
Corporation, with a Tier I Leverage Capital ratio of 7.80%, a ratio of Tier I
Capital to Risk-Weighted Assets ratio of 17.28%, and a Total Capital to
Risk-Weighted Assets ratio of 18.53%.

                                       43
<PAGE>

         In both 2004 and 2003, 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 in 2004 and a $4,091,938 increase in cash and cash
equivalents in 2003. 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.
<TABLE>
<CAPTION>

Contractual Obligations and Commitments at December 31, 2004

Contractual Obligations                                            Payment Due by Period
                                            ------------------------------------------------------------------
                                                           One to        Four to                      Total
                                            Less than       three         five          After        Amounts
                                            One Year        years         years       five years    committed
                                           -----------   -----------   -----------   -----------   -----------
<S>                                        <C>           <C>           <C>           <C>           <C>
Minimum annual rental  payments under
  non-cancelable operating leases          $   333,630   $   553,526   $   445,156   $ 1,396,710   $ 2,729,022
Remaining contractual maturities of time
  deposits                                  50,883,327     2,037,575     1,549,605            --    54,470,507
                                           -----------   -----------   -----------   -----------   -----------
 Total contractual cash obligations        $51,216,957   $ 2,591,101   $ 1,994,761   $ 1,396,710   $57,199,529
                                           ===========   ===========   ===========   ===========   ===========
</TABLE>
<TABLE>
<CAPTION>

Other commitments                                        Amount of Commitment Expiration by Period
                                            ------------------------------------------------------------------
                                                           One to        Four to                      Total
                                            Less than       three         five          After        Amounts
                                            One Year        years         years       five years    committed
                                           -----------   -----------   -----------   -----------   -----------
                                           -----------   -----------   -----------   -----------   -----------
<S>                                        <C>           <C>           <C>           <C>           <C>
Loan commitments                           $14,817,207   $ 8,917,101   $        --   $        --   $23,734,308
                                           ===========   ===========   ===========   ===========   ===========
</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
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.

For reporting purposes on a historical basis, the financial statements of the
Victory State Bank prior to the reorganization will be shown as the financial
statements of VSB Bancorp, Inc.

                                       44
<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Report of Independent Registered Public Accounting Firm ....................F-1

Consolidated Statements of Financial Condition as of
 December 31, 2004 and 2003.................................................F-2

Consolidated Statements of Earnings for the Years Ended
 December 31, 2004, 2003 and 2002...........................................F-3

Consolidated Statements of Stockholders' Equity for the Years Ended
 December 31, 2004, 2003 and 2002...........................................F-4

Consolidated Statements of Cash Flows for the Years Ended
 December 31, 2004, 2003 and 2002...........................................F-5

Notes to Consolidated Financial Statements..................................F-6

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


VSB Bancorp, Inc.
Staten Island, New York

We have audited the accompanying consolidated statement of financial condition
of VSB Bancorp, Inc. as of December 31, 2004 and the related consolidated
statement of earnings, stockholders' equity and comprehensive income and cash
flows for the then year 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 audit. The financial statements of VSB
Bancorp, Inc. as of December 31, 2003 and the two years ended were audited by
other auditors whose report dated March 8, 2004 (February 22, 2005 as to the
effects of the restatement discussed in Note 21), expressed an unqualified
opinion on those statements.

We conducted our audit 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 audit provides a
reasonable basis for our opinion.

In our opinion, the 2004 consolidated financial statements referred to above
present fairly, in all material results, the financial position of VSB Bancorp,
Inc. as of December 31, 2004 and the results of its operations and its cash
flows for the year 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, 2005, except for Note 21, as to which the date is February 22,
2005.

                                      F-1
<PAGE>
<TABLE>
<CAPTION>

VSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------

ASSETS                                                             2004             2003
                                                               -------------    -------------
                                                                                 As Restated.
                                                                                 See Note 21
<S>                                                               <C>              <C>
Cash and cash equivalents                                         35,659,073       30,187,741
Money market investments, held to maturity                                --          599,356
Investment securities, available for sale                        128,532,767       83,171,547
Loans receivable (net of allowance for loan losses
 of $1,299,520 and $1,162,776, respectively)                      66,747,365       66,818,685
Accrued interest receivable                                          745,368          588,232
Premises and equipment, net                                        1,817,284        2,132,154
Prepaid and other assets                                             719,670          697,545
Deferred income taxes, net                                         1,462,940          934,710
                                                               -------------    -------------

                    Total assets                               $ 235,684,467    $ 185,129,970
                                                               =============    =============
LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Deposits
  Non-interest bearing                                         $ 101,831,037    $  77,683,823
  Interest bearing                                               113,592,436       90,018,978
Subordinated Debt                                                  5,155,000        5,155,000
Accounts payable, accrued expenses and other liabilities           2,149,548        1,585,557
                                                               -------------    -------------

                    Total liabilities                            222,728,021      174,443,358
                                                               -------------    -------------

Employee Stock Ownership Plan Repurchase Obligation                  126,825               --

STOCKHOLDERS' EQUITY
Common stock ($.0001 par value, 3,000,000 shares authorized,
 1,505,022 issued and outstanding at December 31, 2004;
 1,055,998 issued and outstanding at December 31, 2003)                  150              106
Additional paid-in capital                                         8,818,313        7,076,486
Retained earnings                                                  6,054,264        3,779,686
Unearned Employee Stock Ownership Plan shares                     (1,578,061)              --
Accumulated other comprehensive loss, net of taxes
 of $405,662 and $148,001, respectively                             (465,045)        (169,666)
                                                               -------------    -------------

                    Total stockholders' equity                    12,829,621       10,686,612
                                                               -------------    -------------

                Total liabilities and stockholders' equity     $ 235,684,467    $ 185,129,970
                                                               =============    =============
</TABLE>

See notes to consolidated financial statements.

                                      F-2
<PAGE>
<TABLE>
<CAPTION>

VSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003
AND 2002
--------------------------------------------------------------------------------
                                                   2004           2003          2002
                                               -----------    -----------    -----------
                                                              As Restated    As Restated
                                                              See Note 21    See Note 21
<S>                                            <C>            <C>            <C>
INTEREST INCOME:
  Loans receivable                             $ 5,340,281    $ 5,120,215    $ 4,411,688
  Investment securities                          4,051,983      2,239,139      1,922,006
  Other interest income                            293,464        213,410        184,906
                                               -----------    -----------    -----------
        Total interest income                    9,685,728      7,572,764      6,518,600

INTEREST EXPENSE:
  Deposits                                         792,714        788,600        822,287
  Subordinated Debt                                356,159        118,029             --
                                               -----------    -----------    -----------
        Total interest expense                   1,148,873        906,629        822,287

        Net interest income                      8,536,855      6,666,135      5,696,313

PROVISION FOR LOAN LOSSES                          150,000        205,000        355,000
                                               -----------    -----------    -----------
        Net interest income after
         provision for loan losses               8,386,855      6,461,135      5,341,313
                                               -----------    -----------    -----------
NON-INTEREST INCOME:
  Deposit service fees                           1,709,787      1,427,616      1,184,084
  Other income                                     180,031        213,202        131,499
                                               -----------    -----------    -----------
        Total non-interest income                1,889,818      1,640,818      1,315,583
                                               -----------    -----------    -----------
NON-INTEREST EXPENSES:
  Salaries and employee benefits                 3,418,905      2,788,946      2,344,297
  Occupancy and equipment                          947,954        940,930        815,543
  Data processing service fees                     255,350        277,540        236,563
  Legal fees                                       134,371        119,252         76,037
  Professional fees                                235,041        158,155        139,730
  Other                                          1,027,070        970,344        813,488
                                               -----------    -----------    -----------
        Total non-interest expenses              6,018,691      5,255,167      4,425,658
                                               -----------    -----------    -----------

INCOME BEFORE INCOME TAXES                       4,257,982      2,846,786      2,231,238
                                               -----------    -----------    -----------
PROVISION/(BENEFIT) FROM INCOME TAXES:
  Current                                        2,253,973      1,468,861      1,232,511
  Deferred                                        (270,569)      (142,448)      (181,581)
                                               -----------    -----------    -----------

        Total income taxes                       1,983,404      1,326,413      1,050,930
                                               -----------    -----------    -----------

NET INCOME                                     $ 2,274,578    $ 1,520,373    $ 1,180,308
                                               ===========    ===========    ===========

Basic net income per share of common stock     $      1.60    $      1.08    $      0.84
                                               ===========    ===========    ===========
Diluted net income per share of common stock   $      1.54    $      1.04    $      0.81
                                               ===========    ===========    ===========
Comprehensive income                           $ 1,979,199    $   923,495    $ 1,465,499
                                               ===========    ===========    ===========
</TABLE>

See notes to consolidated financial statements.

                                      F-3
<PAGE>
<TABLE>
<CAPTION>

VSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR
THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
--------------------------------------------------------------------------------

                                                                                                        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, 2001       1,050,000   $        105  $  6,999,895   $ 1,079,005  $         --    $  142,021    $  8,221,026

Exercise stock option                  6,000              1        76,591                                                    76,592
Comprehensive income:
Net income                                                                    1,180,308                                   1,180,308
Other comprehensive income:
Unrealized holding gains, net
  of taxes                                --             --            --            --            --       285,191         285,191
                                ------------   ------------  ------------   -----------  ------------    ----------    ------------
Total comprehensive income                                                                                                1,465,499

Balance at December 31, 2002       1,056,000            106     7,076,486     2,259,313            --       427,212       9,763,117

Holding company
 reorganization                           (2)
Comprehensive income:
Net income                                                                    1,520,373                                   1,520,373
Other comprehensive income:
Unrealized holding loss, net
   of taxes                               --             --            --            --            --      (596,878)       (596,878)
                                ------------   ------------  ------------   -----------  ------------    ----------    ------------
Total comprehensive income                                                                                                  923,495

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
                                ============   ============  ============   ===========  ============    ==========    ============
</TABLE>

See notes to consolidated financial statements.

                                      F-4
<PAGE>
<TABLE>
<CAPTION>

VSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2004,
2003 and 2002
--------------------------------------------------------------------------------
                                                                    2004            2003            2002
                                                                ------------    ------------    ------------
<S>                                                             <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income                                                     $  2,274,578    $  1,520,373    $  1,180,308
 Adjustments to reconcile net income to net cash
  provided by operating activities:
   Depreciation and amortization                                     496,132         508,195         379,245
   Accretion of discount, net amortization of premium               (141,627)        207,201        (113,849)
   ESOP compensation expense                                         113,164              --              --
   Provision for loan losses                                         150,000         205,000         355,000
   Loss/(gain) on the sale of other assets                             3,188          (5,464)             --
   Other                                                                  --              --              --
 Changes in operating assets and liabilities:
   (Increase)/decrease in prepaid and other assets                   (22,125)       (282,223)        488,294
   Increase in accrued interest receivable                          (157,136)       (163,596)        (58,523)
   Increase in deferred income taxes                                (270,569)       (142,448)       (112,345)
   Increase in accrued expenses, income tax payable
    and other liabilities                                            563,991         206,413         307,337
                                                                ------------    ------------    ------------
       Net cash provided by operating activities                   3,009,596       2,053,451       2,425,467
                                                                ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Net decrease/( increase) in loans receivable                        231,930      (4,483,177)    (12,833,809)
 Proceeds from maturities of money market investments                599,356          12,895         550,187
 Proceeds from repayments and calls of investment securities,
  available for sale                                              31,356,409      47,697,407      24,856,565
 Purchases of money market investments                                    --        (612,251)       (500,000)
 Purchase of investment securities, available for sale           (77,439,652)    (89,496,101)    (28,153,508)
 Purchases of premises and equipment, net                           (184,450)       (235,722)     (1,436,755)
 Proceeds from the sale of other assets                                   --              --          30,000
                                                                ------------    ------------    ------------
       Net cash used in investing activities                     (45,436,407)    (47,116,949)    (17,487,320)
                                                                ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Net increase in deposits                                         47,720,672      44,000,436      32,569,549
 Exercise of stock options                                           177,804              --          76,592
 Proceeds from ESOP loan                                           1,690,780              --              --
 Purchase of ESOP shares                                          (1,690,780)             --              --
 Issuance of subordinated debt                                            --       5,155,000              --
 Purchase of fractional shares, 4 for 3 split                           (333)             --              --
                                                                ------------    ------------    ------------
       Net cash provided by financing activities                  47,898,143      49,155,436      32,646,141
                                                                ------------    ------------    ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                          5,471,332       4,091,938      17,584,288

CASH AND CASH EQUIVALENTS,
 BEGINNING OF YEAR                                                30,187,741      26,095,803       8,511,515
                                                                ------------    ------------    ------------
CASH AND CASH EQUIVALENTS,
 END OF YEAR                                                    $ 35,659,073    $ 30,187,741    $ 26,095,803
                                                                ============    ============    ============
SUPPLEMENTAL DISCLOSURE OF CASH
 FLOW INFORMATION:
 Cash paid during the period for:
  Interest                                                      $  1,220,386    $    784,751    $    830,829
                                                                ============    ============    ============
  Income taxes                                                  $  2,185,655    $  1,509,869    $  1,181,607
                                                                ============    ============    ============
</TABLE>

See notes to consolidated financial statements.

                                      F-5
<PAGE>

VSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
2004, 2003 AND 2002
--------------------------------------------------------------------------------

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. All
adjustments consisting of normal recurring accruals, which in the opinion of
management are necessary for fair presentation of the consolidated financial
statements, have been included.

     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,
and fair values of financial instruments are particularly subject to change.

     Reclassifications - Some items in the prior year financial statements, as
restated, 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. 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

                                      F-6
<PAGE>

maintain depends upon its level of transaction accounts. During the fourteen day
period from December 23, 2004 through January 5, 2005, Victory State Bank was
required to maintain reserves, after deducting vault cash, of $6,601,000.
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.
Due to increases in the volume of transaction accounts, Victory State Bank is
now required to report transaction account levels to the Federal Reserve on a
weekly basis.

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

     Money Market Investments, Held to Maturity - Money market investments
represent short-term investments (with original maturities of one year or less)
which are held to maturity. These investments are carried at cost, adjusted for
the accretion of discount or the amortization of premium using a method which
approximates the level yield method over the period to maturity. Carrying values
of these investments approximate current market values.

     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. Premiums and discounts are recognized in interest income
using a method that approximates the level yield method. 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 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
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

                                      F-7
<PAGE>

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.

     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. 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.

     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 and its eventual disposition. 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,
less the cost to sell.

     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

                                      F-8
<PAGE>

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.

     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.

     Basic and Diluted Net Income Per Common Share - Basic net income per share
of common stock is based on 1,425,909, 1,407,999 and 1,400,592, the weighted
average number of common shares outstanding for the years ended December 31,
2004, 2003 and 2002, respectively. Diluted net income per share of common stock
is based on 1,481,258, 1,467,616 and 1,455,423, the weighted average number of
common shares and potentially dilutive common shares outstanding for the years
ended December 31, 2004, 2003 and 2002, 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 34,623, 52,183 and
64,969 shares for the years ended December 31, 2004, 2003, and 2002,
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>

                                         2004                                2003                                2002
                          ---------------------------------   ---------------------------------  ---------------------------------
                                       Weighted                             Weighted                            Weighted
                             Net       Average     Per Share      Net       Average    Per Share    Net         Average   Per Share
                            Income     Shares       Amount       Income     Shares      Amount     Income       Shares      Amount
                          ----------  ----------   --------   ----------  ----------   --------  ----------   ----------   --------
<S>                       <C>          <C>         <C>        <C>          <C>         <C>       <C>           <C>         <C>
Basic earnings per
  common share
------------------------
Net income available to
 common stockholders      $2,274,578   1,425,909   $   1.60   $1,520,373   1,407,999   $   1.08  $1,180,308    1,400,592   $   0.84
                                                   ========                            ========                            ========

Effect of dilutive shares
-------------------------
  Weighted average
    shares, if converted                  55,349                              59,617                              54,831
                                      ----------                          ----------                          ----------

Diluted earnings per
  common share
------------------------
Net income available to
 common stockholders      $2,274,578   1,481,258   $   1.54   $1,520,373   1,467,616   $   1.04  $1,180,308    1,455,423   $   0.81
                          ==========  ==========   ========   ==========  ==========   ========  ==========   ==========   ========
</TABLE>

     Stock Based Compensation - At December 31, 2004, 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.

                                      F-9
<PAGE>

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, 2004, 2003 and 2002.
<TABLE>
<CAPTION>

                                                       2004            2003            2002
                                                  -------------   -------------   -------------
<S>                                               <C>             <C>             <C>
Net Income
   As reported                                    $   2,274,578   $   1,520,373   $   1,180,308
   Less: Total stock-based compensation expense
   determined under the fair value method for
   all rewards, net of related tax effects               53,897          20,666          22,942
                                                  -------------   -------------   -------------
Pro-forma                                         $   2,220,681   $   1,499,707   $   1,157,366
                                                  =============   =============   =============


                                                       2004            2003            2002
                                                  -------------   -------------   -------------
Basic earnings per common share
   As reported                                    $        1.60   $        1.08   $        0.84
   Less: Total stock-based compensation expense
   determined under the fair value method for
   all rewards, net of related tax effects                 0.04            0.01            0.01
                                                  -------------   -------------   -------------

Pro-forma                                         $        1.56   $        1.07   $        0.83
                                                  =============   =============   =============


                                                       2004            2003            2002
                                                  -------------   -------------   -------------
Diluted earnings per common share
   As reported                                    $        1.54   $        1.04   $        0.81
   Less: Total stock-based compensation expense
   determined under the fair value method for
   all rewards, net of related tax effects                 0.04            0.02            0.01
                                                  -------------   -------------   -------------

Pro-forma                                         $        1.50   $        1.02   $        0.80
                                                  =============   =============   =============
</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 - In March 2004, the SEC issued Staff
Accounting Bulletin (SAB) No. 105 "Application of Accounting Principles to Loan
Commitments". This SAB related to Financial Accounting Standards Board (FASB)
Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities"
for valuing loan commitments, considered to be derivatives, on mortgage loans
that will be sold. This SAB is effective for commitments entered into after
April 1, 2004. The adoption of SAB No. 105 did not have a material impact on our
financial position or results of operation.


                                      F-10
<PAGE>

     In March 2004, the FASB Emerging Issues Task Force ("EITF") reached a
consensus regarding EITF 03-1, "The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments." The consensus clarifies the meaning
of other-than-temporary impairment and its application to investments classified
as either available-for-sale or held-to-maturity under Statement of Financial
Accounting Standard No. 115, "Accounting for Certain Investments in Debt and
Equity Securities"("SFAS 115") and investments accounted for under the cost
method or the equity method. The recognition and measurement guidance for which
the consensus was reached is to be applied to other-than-temporary impairment
evaluations. In September 2004, the Financial Accounting Standards Board
("FASB") issued FASB Staff Position, FSP EITF Issue 03-01-1, which has delayed
the effective date for the measurement and recognition guidance of EITF 03-01.
The implementation date is unknown until further guidance is issued by the FASB.
We are currently evaluating the impact of adopting EITF 03-01.

     In December 2004, FASB issued Statement of Financial Accounting Standards
No 123 Revised "Share Based Payments" ("SFAS 123R") which requires all public
companies to record compensation cost for stock options provided to employees in
return for employee service. The cost is measured at the fair value of the
options when granted, and this cost is expensed over the employee service
period, which is normally the vesting period of the options. As a small business
filer, this will apply to awards granted or modified after the first quarter or
year beginning after December 15, 2005. Compensation cost will also be recorded
for prior option grants that vest after the date of adoption. The effect on
results of 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.
There will be no significant effect on financial position as total equity will
not change. The effect of these other new standards on the Company's financial
position and results of operations is not expected to be material upon and after
adoption.

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

3.   MONEY MARKET INVESTMENTS, HELD TO MATURITY

     The components of money market investments at December 31, 2003 are as
follows:

                                                         2003
                                                      ----------

Money Market Deposits                                 $  599,356
                                                      ----------
                                                      $  599,356
                                                      ==========

4.   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, 2004 and 2003:

                                      F-11
<PAGE>
<TABLE>
<CAPTION>

                                                              December 31, 2004
                                      ---------------------------------------------------------------
                                                          Gross            Gross          Estimated
                                        Amortized      Unrealized        Unrealized         Market
                                          Cost            Gains            Losses           Value
                                      -------------   -------------    -------------    -------------
<S>                                   <C>             <C>              <C>              <C>
US Government Agency                  $   8,500,000   $          --    $     (18,437)   $   8,481,563
FNMA MBS                                 11,245,666          11,831         (139,222)      11,118,275
FHLMC MBS                                   517,411           6,355               --          523,766
GNMA MBS                                  3,296,901              --          (33,535)       3,263,366
Whole Loan MBS                            5,114,582          22,372          (68,492)       5,068,462
Collateralized mortgage obligations     100,728,914         340,531         (992,110)     100,077,335
                                      -------------   -------------    -------------    -------------
                                      $ 129,403,474   $     381,089    $  (1,251,796)   $ 128,532,767
                                      =============   =============    =============    =============
</TABLE>
<TABLE>
<CAPTION>

                                                              December 31, 2003
                                      ---------------------------------------------------------------
                                                          Gross            Gross          Estimated
                                        Amortized      Unrealized        Unrealized         Market
                                          Cost            Gains            Losses           Value
                                      -------------   -------------    -------------    -------------
<S>                                   <C>             <C>              <C>              <C>
US Government Agency                  $   2,000,000   $          --    $          --    $   2,000,000
FNMA 7 Year Balloon MBS                     698,940          44,371               --          743,311
FHLMC MBS                                 1,013,649          20,189               --        1,033,838
GNMA MBS                                  3,782,659              --          (49,705)       3,732,954
Whole Loan MBS                            3,691,027          55,081               --        3,746,108
Collateralized mortgage obligations      72,302,939         302,904         (690,507)      71,915,336
                                      -------------   -------------    -------------    -------------
                                      $  83,489,214   $     422,545    $    (740,212)   $  83,171,547
                                      =============   =============    =============    =============
</TABLE>

The tax benefit related to these net unrealized gains and losses were $405,662
and $148,001 at December 31, 2004 and 2003, 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, 2004 and 2003:

                                      F-12
<PAGE>
<TABLE>
<CAPTION>

December 31, 2004                          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                  $  8,481,563    $    (18,437)   $         --    $         --    $  8,481,563    $    (18,437)
FNMA                                    10,546,317        (139,222)             --              --      10,546,317        (139,222)
GNMA                                            --              --       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>
<TABLE>
<CAPTION>

December 31, 2003                          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>
GNMA                                  $  3,732,954    $    (49,705)   $         --    $         --    $  3,732,954    $    (49,705)
Collateralized mortgage obligations     33,083,936        (690,507)             --              --      33,083,936        (690,507)
                                      ------------    ------------    ------------    ------------    ------------    ------------
                                      $ 36,816,890    $   (740,212)   $         --    $         --    $ 36,816,890    $   (740,212)
                                      ============    ============    ============    ============    ============    ============
</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, 2004, three debt securities have unrealized losses with
aggregate depreciation of 5% from the Company's amortized cost basis. These
unrealized losses relate principally to interest rate fluctuations from the date
of purchase. 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. As management has the ability to hold debt securities until maturity,
or for the foreseeable future if classified as available for sale, no declines
are deemed to be other than temporary.

The maturity schedule of all investment securities available for sale at
amortized cost and estimated fair values for December 31, 2004 was as follows:

                                      F-13
<PAGE>

                                                  Available for Sale Securities

                                                                 Estimated
                                                   Amortized       Fair
Expected Maturity                                    Cost          Value
                                                 ------------   ------------

Less than one year                               $         --   $         --
Due after one year through                          4,077,538      4,093,850
  five years
Due after five years through                       11,062,800     11,049,331
  ten years
Due after ten years                               114,263,136    113,389,586
                                                 ------------   ------------
                                                 $129,403,474   $128,532,767
                                                 ============   ============

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 2004 and 2003 had a carrying amount of
$23,739,000 and $13,420,000, respectively and were pledged to secure public
deposits.

5.   LOANS RECEIVABLE, NET

     Loans receivable, net at December 31, 2004 and 2003 are summarized as
follows:


                                                     2004           2003
                                                 ------------   ------------

Commercial loans (principally variable rate):
  Secured                                        $  1,572,824   $  1,896,374
  Unsecured                                         9,620,243      8,905,587
                                                 ------------   ------------
    Total commercial loans                         11,193,067     10,801,961

Real estate loans:
  Commercial                                       31,741,069     32,416,537
  One-to-four family                                1,112,032      1,382,490
                                                 ------------   ------------
    Total real estate loans                        32,853,101     33,799,027

Construction loans (net of undisbursed funds of
$9,774,166 and $10,944,166, respectively)          22,853,858     22,260,849

Consumer loans                                      1,048,448        949,899
Other loans                                           435,837        510,617
                                                 ------------   ------------
                                                    1,484,285      1,460,516
                                                 ------------   ------------

Total loans receivable                             68,384,311     68,322,353

Less:
Unearned loans fees, net                             (337,426)      (340,892)
Allowance for loan losses                          (1,299,520)    (1,162,776)
                                                 ------------   ------------

Total                                            $ 66,747,365   $ 66,818,685
                                                 ============   ============

      The activity in the allowance for loan losses, for the years ended
December 31, 2004, 2003 and 2002, are summarized as follows:

                                      F-14
<PAGE>
<TABLE>
<CAPTION>

                                                                    2004           2003           2002
                                                                ------------   ------------   ------------
<S>                                                             <C>            <C>            <C>
Beginning balance                                               $  1,162,776   $  1,168,358   $    894,692
Charge-offs                                                         (185,065)      (332,627)      (154,612)
Recoveries                                                           171,809        122,045         73,278
Provision                                                            150,000        205,000        355,000
                                                                ------------   ------------   ------------

Ending balance                                                  $  1,299,520   $  1,162,776   $  1,168,358
                                                                ============   ============   ============
</TABLE>

     Nonaccrual loans outstanding at December 31, 2004 and 2003 are summarized
as follows:
<TABLE>
<CAPTION>

                                                                                   2004           2003
                                                                               ------------   ------------
<S>                                                                            <C>            <C>
                  Nonaccrual loans:
                    Unsecured commercial loans                                 $     20,112   $     30,619
                    Commercial real estate                                          121,810        259,026
                    Construction                                                         --        145,000
                    Consumer loans                                                    2,476          4,406
                                                                               ------------   ------------

                   Total nonaccrual loans                                      $    144,398   $    439,051
                                                                               ============   ============
</TABLE>
<TABLE>
<CAPTION>

                                                                   2002            2002           2000
                                                                ------------   ------------   ------------
<S>                                                             <C>            <C>            <C>
Interest income that would have been recorded during
 the year on nonaccrual loans outstanding at year-end
 in accordance with original terms                              $      7,149   $     19,959   $      7,560
                                                                ============   ============   ============

Interest income included in net income during the
 year on nonaccrual loans outstanding at year-end               $      5,211   $     15,781   $         --
                                                                ============   ============   ============
</TABLE>

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

<TABLE>
<CAPTION>

                                                            2004                           2003
                                                 ---------------------------   ----------------------------
                                                                   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   $     30,619   $      6,124
   Commercial real estate                             121,810         31,165        259,026         61,643
   Construction                                            --             --        145,000         29,000
   Consumer loans                                       2,476            495          4,406            881
 Without a related allowance for loan losses
   Commercial and financial                                --             --             --             --
                                                 ------------   ------------   ------------   ------------
                                                 $    144,398   $     35,682   $    439,051   $     97,648
                                                 ============   ============   ============   ============
</TABLE>

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

                                      F-15
<PAGE>

                                                        Investment in
                                                        Impaired Loans
                                                 ---------------------------
                                                     2004           2003
                                                 ------------   ------------
Average recorded investment                      $    151,009   $    455,173
                                                 ============   ============

Interest income recognized during time period
 that loans were impaired, using cash-basis
 method of accounting                            $      1,602   $      3,729
                                                 ============   ============

     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, 2004 and 2003, the Company had no restructured loans.

6.   ACCRUED INTEREST RECEIVABLE

     Accrued interest receivable at December 31, 2004 and 2003 are summarized as
follows:

                                                     2004           2003
                                                 ------------   ------------

Loans receivable                                 $    246,796   $    262,892
Investment securities, available for sale             498,572        325,340
                                                 ------------   ------------

                      Total                      $    745,368   $    588,232
                                                 ============   ============

7.   PREMISES AND EQUIPMENT

     Premises and equipment at December 31, 2004 and 2003 are summarized as
follows:

                                                     2004           2003
                                                 ------------   ------------

Leasehold improvements                           $  1,818,910   $  1,808,238
Computer equipment and software                       468,981        646,041
Furniture, fixtures and equipment                     807,050        940,584
Other                                                  25,987         23,131
                                                 ------------   ------------
                                                    3,120,928      3,417,994

Less accumulated depreciation and amortization     (1,303,644)    (1,285,840)
                                                 ------------   ------------

Total                                            $  1,817,284   $  2,132,154
                                                 ============   ============

    Depreciation and amortization expense amounted to $496,132, $508,195 and
$379,245 for the years ended December 31, 2004, 2003 and 2002, respectively.

                                      F-16
<PAGE>

     At December 31, 2004, the Company was obligated under four non-cancelable
operating leases on property used for banking purposes. Rental expense, under
these leases was $343,161 for each of the three years ended December 31, 2004,
2003 and 2002, respectively.

     The projected minimum rental payments under the terms of the leases at
December 31, 2004 are summarized as follows:

                                                  Year Ending
                 December 31,                        Amount
                 ------------                    ------------
                     2005                        $    333,630
                     2006                             336,670
                     2007                             216,856
                     2008                             220,093
                     2009                             225,063
                  Thereafter                        1,396,710
                                                 ------------

                    Total                        $  2,729,022
                                                 ============

8.   PREPAID AND OTHER ASSETS

     Prepaid and other assets at December 31, 2004 and 2003 are summarized as
follows:

                                                     2004           2003
                                                 ------------   ------------

Accounts receivable and other assets             $      4,954   $      6,191
Security deposit receivable                            57,360         64,715
Deferred initial direct lease costs                    22,460         37,514
Prepaid assets                                        187,178        157,227
Equity securities, primarily FHLB stock               135,700         74,900
Investment in unconsolidated subsidiary               155,000        155,000
Subordinated debt related placement cost              104,263        132,763
Late charges receivable                                52,755         69,235
                                                 ------------   ------------

                                                 $    719,670   $    697,545
                                                 ============   ============

9.   DEPOSITS

     Deposits are summarized, according to their original terms, at December 31,
2004 and 2003 as follows:

                                      F-17
<PAGE>
<TABLE>

                                                2004                                         2003
                             ------------------------------------------   ------------------------------------------
                                                             Weighted                                      Weighted
                                                              Average                                      Average
                                Amount         Percent      Stated Rate      Amount         Percent      Stated Rate
                             ------------   ------------   ------------   ------------   ------------   ------------
<S>                           <C>                  <C>             <C>     <C>                  <C>             <C>
Demand accounts:
Checking                     $101,560,932          47.14%            --%  $ 77,416,339          46.15%            --%
Variable-rate money market     23,388,850          10.86           0.65     23,709,155          14.14           0.69
Statement savings              14,159,026           6.57           0.50     10,394,955           6.20           0.50
Interest-bearing checking      21,574,053          10.01           0.32     23,627,653          14.09           0.55
                             ------------   ------------   ------------   ------------   ------------   ------------

                              160,682,861          74.58           0.18    135,148,102          80.58           0.26

Time deposits:
Less than six months           31,400,968          14.58           1.12     11,823,870           7.05           0.83
Six months to one year         18,369,058           8.53           2.06     16,680,670           9.95           1.60
More than one year              4,700,481           2.18           2.89      3,782,675           2.26           2.71
                             ------------   ------------   ------------   ------------   ------------   ------------

                               54,470,507          25.29           1.59     32,287,215          19.26           1.45

Other deposits                    270,105           0.13             --        267,484           0.16             --
                             ------------   ------------   ------------   ------------   ------------   ------------

Total                        $215,423,473         100.00%          0.49%  $167,702,801         100.00%          0.60%
                             ============   ============   ============   ============   ============   ============
</TABLE>

     The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $43,944,241 and $21,607,961 at
December 31, 2004 and 2003 respectively.

Scheduled maturities of time deposits at December 31, 2004 are as follows

                                Amount         Percent
                             ------------   ------------
Within six months            $ 45,884,279          84.23%
Six months to one year          4,999,048           9.18
One to five years               3,587,180           6.59
                             ------------   ------------

               Total         $ 54,470,507         100.00%
                             ============   ============

10.   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.

                                      F-18
<PAGE>

     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, 2004, 2003 and 2002.

     The components of the income tax expense/(benefit) for the years ended
December 31, 2004, 2003 and 2002 are summarized as follows:
<TABLE>
<CAPTION>

                                                2004           2003           2002
                                            ------------   ------------   ------------
<S>                                         <C>            <C>            <C>
Current:
  Federal                                   $  1,392,322   $    925,793   $    734,919
  State and local                                861,651        543,068        497,592
                                            ------------   ------------   ------------
                                               2,253,973      1,468,861      1,232,511

Deferred:
  Federal                                       (168,489)      (104,405)       (98,651)
  State and local                               (102,080)       (38,043)       (82,930)
                                            ------------   ------------   ------------
                                                (270,569)      (142,448)      (181,581)
                                            ------------   ------------   ------------
                                            $  1,983,404   $  1,326,413   $  1,050,930
                                            ============   ============   ============
</TABLE>

     The components of the deferred income tax asset, net as of December 31,
2004 and 2003 are summarized as follows:
<TABLE>
<CAPTION>

                                                               2004           2003
                                                           ------------   ------------
<S>                                                        <C>            <C>
Deferred loan fees                                         $     84,063   $    161,009
Excess book allowance for loan losses                           519,086        444,415
Unrealized loss/(gain) on investment securities                 405,662        148,001
Other compensation expense                                      167,850        106,457
Other                                                           286,279         74,828
                                                           ------------   ------------

            Deferred tax asset, net                        $  1,462,940   $    934,710
                                                           ============   ============
</TABLE>

     The tax effect of SFAS 115 was recorded directly to equity and to the
deferred tax asset.

     The Company's effective tax rate differs from the statutory Federal tax
rate for the years ended December 31, 2004, 2003 and 2002 are as follows:

                                      F-19
<PAGE>
<TABLE>
<CAPTION>

                                          2004                        2003                         2002
                                ------------------------    ------------------------    ------------------------
<S>                             <C>                 <C>     <C>                 <C>     <C>                 <C>
Federal income tax provision
  at statutory rates            $1,447,714          34.0%   $  967,907          34.0%   $  758,621          34.0%
State and local taxes, net of
  Federal income tax benefit       523,732          12.3       350,155          12.3       274,442          12.3
Other                               11,958           0.3         8,351           0.3        17,867           0.8
                                ----------    ----------    ----------    ----------    ----------    ----------

                                $1,983,404          46.6%   $1,326,413          46.6%   $1,050,930          47.1%
                                ==========    ==========    ==========    ==========    ==========    ==========
</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.

11.  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, 2004, that the Bank meets all capital adequacy requirements to which it is
subject.

     The Bank was required to maintain a reserve balance with the Federal
Reserve Bank of New York of $6,601,000 as of December 31, 2004. The Bank is
subject to certain restrictions on the availability of its undistributed
earnings for payment of dividends to stockholders, including prior regulatory
approval.

     In accordance with the New York State Banking Law and the New York State
Banking Board Regulations, the Bank credits 10% of quarterly net income to
regulatory surplus and is required to do so until such time as shareholders'
equity is equal to 10% of amounts due to depositors. As of December 31, 2004,
regulatory surplus equals 10% of deposits.

     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-20
<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, 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

As of December 31, 2003:
  Tier 1 Capital
   (to Average Assets)         $15,131,000         8.40%   $ 7,203,000         4.00%    $ 9,003,750         5.00%
  Tier 1 Capital
   (to Risk Weighted Assets)    15,131,000        16.48      3,672,320         4.00       5,508,480         6.00
  Total Capital
   (to Risk Weighted Assets)    16,279,000        17.73      7,344,640         8.00       9,180,800        10.00
</TABLE>

The Company's consolidated capital ratios as of December 31, 2004 were as
follows: Tier 1 Capital to Average Assets of 7.88%; Tier 1 Capital to Risk
Weighted Assets of 17.48%; and Total Capital to Risk Weighted Assets of 19.24%,
which are not substantially different than the Bank's capital ratios at December
31, 2004 and therefore are not presented separately.

12.  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 $110,204 to the 401(k) plan
in 2004, $123,108 in 2003 and $108,323 in 2002.

Stock Option Plans

     The purpose of the VSB Bancorp, Inc. 2000 Incentive Stock Option Plan (the
"2000 Incentive Plan") and the VSB Bancorp, Inc. 1998 Incentive Stock Option
Plan (the "1998 Incentive Plan") is to advance the interests of the Company and
its shareholders by providing those key employees of the Company and its
affiliates, upon whose judgment, initiative and efforts the successful conduct
of the business of the Bank and its affiliates largely depends, with additional
incentive to perform in a superior manner. A purpose of the 2000 Incentive Plan

                                      F-21
<PAGE>

and the 1998 Incentive Plan is also to attract people of experience and ability
to the service of the Company and its affiliates. Pursuant to the terms of the
2000 Incentive Plan, 42,000 shares of VSB Bancorp, Inc. common stock have been
reserved for issuance under the terms of the Plan. Pursuant to the terms of the
1998 Incentive Plan, 42,000 shares of VSB Bancorp, Inc. common stock have been
reserved for issuance under the terms of the Plan. To the extent that options
are granted under the 2000 Incentive Plan and the 1998 Incentive Plan, the
shares underlying such options are unavailable for any other use including
future grants under the 2000 Incentive Plan and the 1998 Incentive Plan, except
those options which terminate, or are forfeited without being exercised, may be
recycled into new grants. The exercise price is determined by the Committee of
the Board of Directors and may not be less than the fair market value of VSB
Bancorp, Inc. common stock on the date of the grant. The term of each option is
determined by the Committee of the Board of Directors and may not exceed ten
years after the date of the grant. Options vest and are exercisable as
determined by the Board of Directors but currently vest 20% per year after the
date of the grant. In 2004, 5,920 options from the 2000 Incentive Plan were
exercised and 12,800 options from the 1998 Incentive Plan were exercised. As of
December 31, 2004, 33,732 options of the remaining 36,080 options under the 2000
Incentive Plan were granted and 12,080 were vested or exercisable and the
remaining 29,200 options under the 1998 Incentive Plan were granted and 29,200
were vested or exercisable.

     The purpose of the VSB Bancorp, Inc. 2004 Directors Stock Option Plan (the
"2004 Directors' Plan") is to promote the growth and profitability of the
Company by providing all directors of the Company with an incentive to achieve
long-term objectives of the Company and to attract and retain both employee and
non-employee directors of outstanding competence by providing such Directors
with an opportunity to acquire an equity interest in the Company. The purpose of
the VSB Bancorp, Inc. 2000 Directors Stock Option Plan (the "2000 Directors'
Plan") and the 1998 Directors Stock Option Plan (the "1998 Directors' Plan") is
to promote the growth and profitability of the Company by providing outside
directors of the Company with an incentive to achieve long-term objectives of
the Company and to attract and retain non-employee directors of outstanding
competence by providing such outside Directors with an opportunity to acquire an
equity interest in the Company. Pursuant to the terms of the 2004 Directors'
Plan, 55,000 shares of VSB Bancorp, Inc. common stock have been reserved for
issuance under the terms of the 2004 Directors' Plan. Pursuant to the terms of
the 2000 Directors' Plan, 28,000 shares of VSB Bancorp, Inc. common stock have
been reserved for issuance under the terms of the 2000 Directors' Plan. Pursuant
to the terms of the 1998 Directors' Plan, 28,000 shares of VSB Bancorp, Inc.
common stock have been reserved for issuance under the terms of the 1998
Directors' Plan. To the extent that options are granted under the 2004
Directors' Plan, the 2000 Directors' Plan and the 1998 Directors' Plan, the
shares underlying such options are unavailable for any other use including
future grants under the 2004 Directors' Plan, the 2000 Directors' Plan and the
1998 Directors' Plan, except those options which terminate, or are forfeited
without being exercised, may be recycled into new grants. The exercise price is
determined by the Board of Directors and may not be less than the fair market
value of VSB Bancorp, Inc. common stock on the date of the grant. The term of
each option is determined by the Board of Directors and may not exceed ten years
after the date of the grant. Options vest and are exercisable as determined by
the Board of Directors. Of the 55,000 options available under the 2004
Directors' Plan, 45,000 options were granted in April 2004 and those options
vest over a five year period at an annual rate of 20%. All 28,000 options under
the 2000 Directors' Plan were granted and all 28,000 options from the 1998
Directors' Plan were granted. In January 2004, 4,000 options from the 2000
Directors' Plan were exercised. In December 2002, 4,000 options from the 2000
Directors' Plan were exercised and 4,000 options from the 1998 Directors' Plan
were exercised. As of December 31, 2004, no options from the 2004 Directors'

                                      F-22
<PAGE>

Plan were vested or exercisable; the remaining 20,000 options under the 2000
Directors' Plan were vested and were exercisable; and the remaining 24,000
options under the 1998 Directors' Plan were vested and were exercisable.
<TABLE>
<CAPTION>


Stock Option Grants in 2004
---------------------------------------------------------------------------------------------------
                                          Percent
                                          of Total
                                       Options Granted  Exercise
                           Number of     to employees    or Base
                            Options       in Fiscal       Price        Expiration      Grant Date
                            Granted        Year(1)      ($/share)         Date       Present Value
---------------------------------------------------------------------------------------------------
<C>                            <C>          <C>        <C>               <C>  <C>    <C>
2000 Incentive Plan            19,965(1)    100.00%    $      19.50      1/19/2014   $    129,373(2)
2004 Directors' Plan           45,000(1)     22.22%    $      22.00     04/27/2014   $    351,450(2)
</TABLE>

(1)  Options granted will become exercisable at a rate of 20% per annum after
     the grant date.

(2)  Present value of the options was calculated using the illiquid trading
     market value of the VSB Bancorp, Inc. Common Stock.

     The weighted average fair value of options granted during 2004 was $7.40.
There were no option grants in 2003 and 2002. For purposes of the pro forma
calculation under SFAS No. 123, the fair value of the options granted is
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions used for the 2004:

                                                       Exercise
                                          2004           Rate
                                       ----------     ----------
Dividend yield                                 --%
Expected volatility                         27.13
Risk-free interest rate                      4.32
Expected life                            10 Years            100%

     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, 2004, 2003 and 2002, and changes during the
years ended, consist of the following:

                                      F-23
<PAGE>
<TABLE>
<CAPTION>

                                                       2004                          2003                         2002
                                             -------------------------     -------------------------     -------------------------
                                                              Weighted                      Weighted                     Weighted
                                                              Average                       Average                      Average
                                                              Exercise                      Exercise                     Exercise
                                               Shares         Price          Shares         Price          Shares        Price
                                             ----------     ----------     ----------     ----------     ----------     ----------
<S>                                             <C>         <C>               <C>         <C>               <C>         <C>
Options outstanding
 at the beginning of the year                   111,300     $     6.78        111,800     $     6.77        120,400     $     6.79

     Granted                                     64,965          21.23             --             --             --             --
     Canceled                                     1,613          17.15            500           5.94            600           6.77
     Exercised                                   22,720           6.71             --             --          8,000           6.97
                                             ----------     ----------     ----------     ----------     ----------     ----------

Options outstanding at the end of the year      151,932     $    12.85        111,300     $     6.78        111,800     $     6.77
                                             ===========     ==========     ==========     ==========     ==========     ==========
Options exercisable at the end of the year       85,280     $     6.84         98,060     $     6.87         85,600     $     6.89
                                             ===========     ==========     ==========     ==========     ==========     ==========

Weighted average remaining contractual life of
options outstanding at the end of the year             6.5 Years                    5.6 Years                     6.6 Years
</TABLE>


     Described below is the range of exercise prices for options granted under
the following option plans
<TABLE>
<CAPTION>

                                                                            Weighted        Weighted
                                                             Number of      Average         Average
                                        Range of            Exercisable     Exercise      Contractual
Plan Description                     Exercise Prices          Shares         Price           Life
--------------------------------   -------------------     ------------   ------------   ------------
<S>                              <C>                    <C>              <C>            <C>
1998 Director Stock Option Plan    From $6.13 to $8.00           24,000   $       7.69           4.04

1998 Incentive Stock Option Plan   From $5.94 to $8.00           29,200           7.10           4.10

2000 Director Stock Option Plan           $5.94                  20,000           5.94           5.33

2000 Incentive Stock Option Plan     $5.94 and $19.50            12,080          13.43           7.40

2004 Director Stock Option Plan           $22.00                     --          22.00           9.33
</TABLE>

All per share data has been adjusted for the 3 for 2 stock split and the 4 for 3
stock dividend.


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

                                      F-24
<PAGE>

     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 2004, 2,000 SARs were exercised. As of December 31, 2004, of the
     remaining 23,000 SARs, all 23,000 were granted and all 23,000 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 $190,000,
     $157,000 and $85,500 for the years ended December 31, 2004, 2003 and 2002,
     respectively

     SAR Grants in 2004

     The Company did not issue any SAR grants in 2004.

13.  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:

                                                          2004          2003
                                                         Amount        Amount
                                                       -----------   -----------

Commitments to fund secured construction loans         $ 9,774,166   $10,944,166
Commitments to fund all other commercial loans          13,960,142    18,071,715
                                                       -----------   -----------
                                                       $23,734,308   $29,015,881
                                                       ===========   ===========

     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.

     VSB Bancorp, Inc. is not involved in any pending legal proceedings. The
Bank is not involved in any pending legal proceedings other than routine
collection proceedings in the ordinary course of business on loans in default.
Such other routine legal proceedings in the aggregate are believed by management
to be immaterial to our financial condition or results of operations.

14.  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

                                      F-25
<PAGE>

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.

     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.

     Off-Balance Sheet Instruments - The fair value of lending commitments is
     estimated using the fees currently charged to enter into similar
     agreements, taking into account the remaining terms of the agreements and
     the present creditworthiness of the counterparties. For fixed-rate loan
     commitments, fair value also considers the difference between current
     levels of interest rates and the committed rates.

     The estimated fair values of the Company's financial instruments at
December 31, 2004 and 2003 were as follows:

                                      F-26
<PAGE>
<TABLE>
<CAPTION>

                                                       2004                         2003
                                           ---------------------------   ---------------------------
                                             Carrying        Fair          Carrying        Fair
                                              Amount         Value          Amount         Value
                                           ------------   ------------   ------------   ------------
<S>                                        <C>            <C>            <C>            <C>
Financial Assets:
    Cash and cash equivalents              $  7,651,674   $  7,651,674   $  7,056,348   $  7,056,348
    Interest-bearing balances                28,007,399     28,007,399     23,131,393     23,131,393
    Money market securities                          --             --        599,356        599,356
    Investment securities                   128,532,767    128,532,767     83,171,547     83,171,547
    Loans receivable                         66,747,365     83,109,864     66,818,685     77,900,730
    Other financial assets                      745,368        745,368        588,232        588,232
                                           ------------   ------------   ------------   ------------

    Total Financial Assets                 $231,684,573   $248,047,072   $181,365,561   $192,447,606
                                           ============   ============   ============   ============

Financial Liabilities:
    Non-interest bearing deposits          $161,485,913   $161,485,913   $135,415,586   $135,415,586
    Interest bearing deposits                54,470,507     66,010,396     32,287,215     40,388,264
    Trust preferred securities                5,155,000      5,268,819      5,155,000      5,210,739
    Other liabilities                            22,628         22,628         20,646         20,646
                                           ------------   ------------   ------------   ------------

    Total Financial Liabilities            $221,134,048   $232,787,756   $172,878,447   $181,035,235
                                           ============   ============   ============   ============

Off Balance Sheets Investments:
                                             Notional        Fair          Notional        Fair
                                              Amount         Value          Amount         Value
                                           ------------   ------------   ------------   ------------

Commitments to extend credit               $ 23,734,308   $    133,248   $ 29,015,881   $    173,380
</TABLE>

15.  INTEREST RATE RISK

     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.

                                      F-27
<PAGE>

16.     RELATED PARTIES

     In the ordinary course of business, the Company at times has had loans, and
other financial transactions, with its executive officers and directors. At
December 31, 2004, the aggregate amount of loans outstanding to directors was
$1,468,153. There were no loans granted to executive officers.

     The change in aggregate amount of loans outstanding to directors as of
December 31, 2004 and 2003 are as follows:

                                                2004           2003
                                            ------------   ------------

         Beginning balance                  $    281,187   $     42,209
         Originations                          2,630,409      1,393,683
         Payments                             (1,443,443)    (1,154,705)
                                            ------------   ------------

         Ending balance                     $  1,468,153   $    281,187
                                            ============   ============

     The interest income that was paid on these loans was $60,919 and $17,933
for 2004 and 2003, respectively. Certain officers and directors own, in the
aggregate, 40.7% and 32.2% of the common shares outstanding at December 31, 2004
and 2003, respectively.

17.  QUARTERLY FINANCIAL DATA (UNAUDITED)

     The following represents summarized unaudited quarterly financial data of
the Company (in dollars, except per share amounts):
<TABLE>
<CAPTION>

                                            ---------------------------------------------------------
                                                                 Three Months Ended
                                            ---------------------------------------------------------
                                            December 31    September 30     June 30        March 31
                                            ------------   ------------   ------------   ------------
<S>                                         <C>            <C>            <C>            <C>
2004
Interest income                             $  2,756,998   $  2,497,607   $  2,246,976   $  2,184,147
Interest expense                                 350,032        287,316        262,020        249,505
Net interest income                            2,406,966      2,210,291      1,984,956      1,934,642
Provision for loan loss                           20,000         30,000         50,000         50,000
Provision for income taxes                       581,542        539,459        426,965        435,438
Net income                                       667,259        618,841        489,308        499,170

Net income per common share:
Basic                                       $       0.47   $       0.43   $       0.34   $       0.35
Diluted                                     $       0.45   $       0.42   $       0.33   $       0.34

2003
Interest income                             $  2,163,572   $  1,899,732   $  1,821,465   $  1,687,995
Interest expense                                 260,921        216,771        210,607        218,330
Net interest income                            1,902,651      1,682,961      1,610,858      1,469,665
Provision for loan loss                           85,000         50,000         30,000         40,000
Provision for income taxes                       448,364        338,418        305,290        234,341
Net income                                       513,517        388,320        352,450        266,086

Net income per common share:
Basic                                       $       0.36   $       0.28   $       0.25   $       0.19
Diluted                                     $       0.35   $       0.26   $       0.24   $       0.18
</TABLE>

                                      F-28
<PAGE>
<TABLE>
<CAPTION>

18.  CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY ONLY

VSB BANCORP, INC.

STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 2004 and 2003                                           2004            2003
                                                                 ------------    ------------
<S>                                                              <C>             <C>
ASSETS

Cash and cash equivalents                                        $      1,957    $         --
Money markets                                                         530,990         599,356
Investment in subsidiaries                                         17,291,629      15,116,079
Deferred taxes                                                            203              --
Other assets                                                          350,979         244,634
                                                                 ------------    ------------

                  Total assets                                   $ 18,175,758    $ 15,960,069
                                                                 ============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Subordinated debt                                                $  5,155,000    $  5,155,000
Accounts payable, accrued expenses and other liabilities               64,312         118,457
                                                                 ------------    ------------

                  Total liabilities                                 5,219,312       5,273,457
                                                                 ------------    ------------
COMMITMENTS AND CONTINGENT LIABILITIES

STOCKHOLDERS' EQUITY
Common stock ($.0001 par value, 3,000,000 shares authorized,
 1,505,022 issued and outstanding at December 31, 2004;
 1,055,998 issued and outstanding at December 31, 2003)                   150             106
Additional paid-in capital                                          8,945,138       7,076,486
Retained earnings                                                   6,054,264       3,779,686
Unearned Employee Stock Ownership Plan shares                      (1,578,061)
Accumulated other comprehensive loss, net of taxes of
 $405,662 and $148,001, respectively                                 (465,045)       (169,666)
                                                                 ------------    ------------

                  Total stockholders' equity                       12,956,446      10,686,612
                                                                 ------------    ------------

            Total liabilities and stockholders' equity           $ 18,175,758    $ 15,960,069
                                                                 ============    ============
</TABLE>

                                      F-29
<PAGE>

VSB BANCORP, INC.

STATEMENT OF OPERATIONS
FOR THE PERIODS ENDED DECEMBER 31, 2004 AND 2003

                                                     2004           2003
                                                 ------------   ------------
INTEREST INCOME:
  Other interest income                          $     17,033   $      2,251
                                                 ------------   ------------
        Total interest income                          17,033          2,251

INTEREST EXPENSE:
  Subordinated debt                                   356,159        118,029
                                                 ------------   ------------
        Total interest expense                        356,159        118,029

                                                 ------------   ------------
        Net interest loss                            (339,126)      (115,778)
                                                 ------------   ------------
NON-INTEREST EXPENSES:
  Legal fees                                           52,664          7,079
  Professional fees                                        --            405
  Other                                                61,219         16,007
                                                 ------------   ------------
        Total non-interest expenses                   113,883         23,491
                                                 ------------   ------------

LOSS BEFORE INCOME TAXES                             (453,009)      (139,269)
                                                 ------------   ------------
PROVISION/(BENEFIT) FROM INCOME TAXES:
  Current                                            (211,072)       (64,801)
  Deferred                                               (203)            --
                                                 ------------   ------------

        Total income taxes                           (211,275)       (64,801)
                                                 ------------   ------------

EQUITY IN UNDISTRIBUTED EARNINGS, NET OF TAXES      2,516,312      1,594,841
                                                 ------------   ------------

NET INCOME                                       $  2,274,578   $  1,520,373
                                                 ============   ============

VSB Bancorp, Inc. was formed on May 30, 2003.

                                      F-30
<PAGE>
<TABLE>
<CAPTION>

VSB BANCORP, INC.

STATEMENT OF CASH FLOWS FOR THE PERIODS ENDED DECEMBER 31, 2004 AND 2003
------------------------------------------------------------------------

                                                                       2004            2003
                                                                   ------------    ------------
<S>                                                                <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income                                                        $  2,274,578    $  1,520,373
 Adjustments to reconcile net income to net cash
   used in operating activities:
 Changes in operating assets and liabilities:
   ESOP compensation expense                                                445              --
   Undistributed income of subsidiaries                              (2,470,928)     (1,594,841)
   Increase in other assets                                            (106,346)       (244,634)
   Increase in deferred income taxes                                       (203)             --
   (Decrease)/increase in accrued expenses, income taxes payable
    and other liabilities                                               (54,145)        118,457
                                                                   ------------    ------------
        Net cash used by operating activities                          (356,599)       (200,645)
                                                                   ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Investments in subsidiaries                                                 --     (11,431,591)
 Net increase in loan receivable                                     (1,578,061)             --
 Net decrease/(increase) in money market deposit                         68,366        (599,356)
                                                                   ------------    ------------
        Net cash used in investing activities                        (1,509,695)    (12,030,947)
                                                                   ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from issuance of common stock                                      --       7,076,592
 Exercise stock option                                                  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                             --       5,155,000
                                                                   ------------    ------------
        Net cash provided by financing activities                     1,868,251      12,231,592
                                                                   ------------    ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                 1,957              --

CASH AND CASH EQUIVALENTS,
 BEGINNING OF YEAR                                                           --              --
                                                                   ------------    ------------
CASH AND CASH EQUIVALENTS,
 END OF YEAR                                                       $      1,957    $         --
                                                                   ============    ============
SUPPLEMENTAL DISCLOSURE OF CASH
 FLOW INFORMATION:
 Cash paid during the period for:
   Interest                                                        $    412,621    $         --
                                                                   ============    ============
   Income taxes                                                    $         --    $         --
                                                                   ============    ============
</TABLE>

VSB Bancorp, Inc. was formed on May 30, 2003.

19.     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.

        Vested participants receive the shares at the end of employment. A
participant may require stock receive to be repurchased unless the stock is
traded on an established market.

                                      F-31
<PAGE>

     The contribution to the ESOP during 2004 was $112,719. Expense was
$113,164.

Shares held by the ESOP were as follows

                                                     2004
                                                 ------------

Allocated to particpants                                5,700
Unearned                                               68,620
                                                 ------------

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

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

20.  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.

     Required interest payments on subordinated debentures over the next four
years are:


                          2005                   $    356,159
                          2006                        356,159
                          2007                        356,159
                          2008                        234,471

                                                 ------------
                      Total                      $  1,302,948
                                                 ============

                                      F-32
<PAGE>

21.  RESTATEMENT OF BASIC AND DILUTED EARNINGS PER SHARE AND DECONSOLIDATION OF
     VSB CAPITAL TRUST I

     The following table sets forth the data as previously reported in the
Company's original report on 2003 Form 10-KSB and the data as adjusted for the
four for three stock dividend paid during the first quarter of 2004 and the
deconsolidation of VSB Capital Trust I:
<TABLE>
<CAPTION>

                                        2003                          2002                          2001
                             -------------------------     -------------------------     -------------------------
                                 As                            As                            As
                             Previously         As         Previously         As         Previously         As
                              Reported       Restated       Reported       Restated       Reported       Restated
                             ----------     ----------     ----------     ----------     ----------     ----------
<S>                          <C>            <C>            <C>            <C>            <C>            <C>
For the year ended
 December 31:

Basic earnings
  per share                  $     1.44     $     1.08     $     1.12     $     0.84     $     0.88     $     0.66
                             ==========     ==========     ==========     ==========     ==========     ==========

Diluted earnings
  per share                  $     1.37     $     1.04     $     1.08     $     0.81     $     0.87     $     0.65
                             ==========     ==========     ==========     ==========     ==========     ==========
</TABLE>

     The data reported in the original 2003 Form 10-KSB was based upon the
actual average shares outstanding of 1,055,999 shares (basic) and 1,107,778
shares (diluted), 1,050,444 shares (basic) and 1,091,567 shares (diluted) shares
and 1,050,000 shares (basic) and 1,060,356 shares (diluted) for 2003, 2002 and
2001 respectively. After retroactively adjusting for the stock dividend
announced and paid during the first quarter of 2004, the number of shares
outstanding was 1,407,999 shares (basic) and 1,467,616 shares (diluted),
1,400,592 shares (basic) and 1,455,423 shares (diluted) and 1,400,000 shares
(basic) and 1,413,808 shares (diluted) for 2003, 2002 and 2001 respectively.

     In addition the following table sets forth the data as previously reported
in the Company's original report on 2003 Form 10-KSB and the data as adjusted
for deconsolidation of VSB I Capital Trust, which was originally consolidated by
the Company. No changes have been made to the income statement arising from this
adjustment because the amounts are immaterial:

                                         2003
                             ---------------------------
                                  As
                              Previously         As
                               Reported       Restated
                             ------------   ------------
As of
 December 31, 2003:

Prepaid and other assets     $    542,545   $    697,545
                             ============   ============

Trust preferred securities   $  5,000,000
                             ============
Subordinated Debt                           $  5,155,000
                                            ============

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

                                      F-33
<PAGE>

Item 8. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure.

(a)(1)

i.   Our Board of Directors, on March 9, 2004, unanimously decided not to retain
     the firm of Deloitte & Touche LLP as our independent accountant for 2004.

ii.  Deloitte & Touche LLP's report on our financial statements for the past two
     years does not contain an adverse opinion or disclaimer of opinion, and was
     not modified as to uncertainty, audit scope, or accounting principles.

iii. The decision to change accountants was approved by the Board of Directors
     upon the unanimous recommendation of the Audit Committee of the Board of
     Directors.

iv.

     A.  There were no disagreements with Deloitte & Touche LLP, whether or not
         resolved, on any matter of accounting principles or practices,
         financial statement disclosure, or auditing scope or procedure, which,
         if not resolved to Deloitte & Touche LLP's satisfaction, would have
         caused Deloitte & Touche LLP to make reference to the subject matter of
         the disagreement in connection with its report.

     B.  Deloitte & Touche LLP did not advise us that:

         1.       internal controls necessary to develop reliable financial
                  statements did not exist; or

         2.       information has come to the attention of Deloitte & Touche LLP
                  which made Deloitte & Touche LLP unwilling to rely on
                  management's representations, or unwilling to be associated
                  with the financial statements prepared by management; or

         3.       the scope of the audit should be expanded significantly, or
                  information has come to Deloitte & Touche LLP's attention that
                  Deloitte & Touche LLP has concluded will, or if further
                  investigated might, materially impact the fairness or
                  reliability of a previously issued audit report or the
                  underlying financial statements, or the financial statements
                  issued or to be issued covering the fiscal periods subsequent
                  to the date of the most recent audited financial statements
                  (including information that might preclude the issuance of an
                  unqualified audit report), and the issue was not resolved to
                  Deloitte & Touche LLP satisfaction prior to its resignation or
                  dismissal.

(b) New Independent Public Accountants

On March 9, 2004, our Board of Directors, upon the unanimous recommendation of
the Audit Committee of the Board of Directors, unanimously approved the
retention of the firm of Crowe Chizek and Company LLC as our independent public
accountants for 2004, subject to ratification by our stockholders at the 2004
annual meeting of stockholders.

During our two most recent fiscal years, or thereafter until March 9, 2004, we
did not consult with Crowe Chizek and Company LLC regarding the application of
accounting principles to a specific completed or contemplated transaction, or
the type of audit opinion that might be rendered on our financial statements and
no written or oral advice was provided that was an important factor considered
<PAGE>

by the Audit Committee or the Board of Directors in reaching a decision as to
the accounting, auditing or financial reporting issue.

                                    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
4 through 8 of the Company's Definitive Proxy Statement for its 2005 Annual
Meeting of Stockholders dated March 25, 2005, as filed with the Commission on
March 23, 2005 (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.

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**
6.11       VSB Bancorp, Inc. Employee Stock Ownership Plan***
11.1       Statement re: computation of per share earnings.
<PAGE>

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
23.1       Consent of Independent Registered Public Accounting Firm
23.2       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.
99.1       Opinion of Former Independent Registered Public Accounting Firm

*   - previously filed as an 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 to the Issuer's definitive proxy statement
      for its 2004 Annual Meeting of Stockholders on Form 14A as filed with the
      Securities and Exchange Commission on March 24, 2004.
*** - previously filed as an appendix accompanying the Issuer's definitive proxy
      statement for its 2004 Annual Meeting of Stockholders on Form 14A as filed
      with the Securities and Exchange Commission on March 24, 2004.

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.
<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 23, 2005                   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 23, 2005
---------------------------------------------------              --------------
Merton Corn, President, Chief Executive Officer                  Date
and Director

/s/ RAFFAELE M. BRANCA                                           March 23, 2005
---------------------------------------------------              --------------
Raffaele M. Branca, Executive Vice President,                    Date
Chief Financial and Accounting Officer and Director

/s/ JOSEPH J. LIBASSI                                            March 23, 2005
---------------------------------------------------              --------------
Joseph J, LiBassi, Chairman of the Board                         Date

/s/ JOAN NERLINO CADDELL                                         March 23, 2005
---------------------------------------------------              --------------
Joan Nerlino Caddell, Director                                   Date

/s/ ROBERT S. CUTRONA, SR.                                       March 23, 2005
---------------------------------------------------              --------------
Robert S. Cutrona, Sr., Director                                 Date

/s/ CHAIM FARKAS                                                 March 23, 2005
---------------------------------------------------              --------------
Chaim Farkas, Director                                           Date

/s/ ALFRED C. JOHNSEN                                            March 23, 2005
---------------------------------------------------              --------------
Alfred C. Johnsen, Director                                      Date

/s/ CARLOS PEREZ                                                 March 23, 2005
---------------------------------------------------              --------------
Carlos Perez, Director                                           Date

/s/ BRUNO SAVO                                                   March 23, 2005
---------------------------------------------------              --------------
Bruno Savo, Director                                             Date