VSB Bancorp, Inc. Fourth Quarter 2008 and Full Year 2008 Results of Operations

Market Wire, January, 2009

VSB Bancorp, Inc. (NASDAQ: VSBN), the holding company for Victory State Bank, reported net income of $600,820 for the fourth quarter of 2008, a 17.1% increase from the fourth quarter of 2007. Net income for all of 2008 was $1,931,744 as compared to net income of $2,047,226 for 2007, a decline of 5.6%. The following unaudited figures were released today. Pre-tax income was $972,481 in the fourth quarter of 2008, as compared to $848,669 for the fourth quarter of 2007, an increase of $123,812, or 14.6%. Net income for the quarter was $600,820, or basic income of $0.32 per common share, as compared to a net income of $513,155, or $0.27 basic income per common share, for the quarter ended December 31, 2007.

The $87,665 increase in net income for the fourth quarter of 2008 was attributable primarily to a more rapid decline in our cost of funds than the decline in our asset yields as market interest rates declined. We experienced a decrease in interest expense on time deposits of $223,850, a $40,067 decrease in interest expense on money market deposits, and an $89,040 decrease in interest on subordinated debt due to repayment of the subordinated debt on August 8, 2008, for a total $361,883 decline in interest expense. This compares to a decrease in interest income on loans of $21,433 and a decrease in interest income from other interest earning assets of $172,909, which were the principal causes of the $174,072 decline in interest income. We also had a $49,615 increase in non-interest income, an increase in income tax expense of $36,147 and an increase in the provision for loan losses of $120,000. The increase in the provision for loan loss was due to the higher level of charge-offs and the further deterioration of the real estate market and local economy.

The reduction in interest income on loans is attributable to a rapid decline of the prime rate, which negatively affected the yield on our loans, partially offset by the increase in average loan balance of $6,029,760, for the fourth quarter of 2008. After remaining steady for approximately 15 months, the prime rate declined 3.25% from 8.25% at September 1, 2007 to 5.00% at September 1, 2008 and continued to decline during the fourth quarter of 2008 to reach 3.25% at December 16, 2008. The reductions in the prime rate have caused our prime based loans to reach their interest rate floors. These floors have helped to stabilize the interest income from the loan portfolio and were a significant contributor to moderating the decline in interest income. Non-interest expense was stable but the components had some volatility. Salary and benefits expense declined $39,150 due, in part, to the retirement of the former president and reduced incentive and ESOP compensation expense. This reduction was offset by a $55,395 increase in occupancy expense, mostly due to utility increases, a $15,900 increase in professional fees, and a $12,032 increase in computer expenses. Positively affecting non-interest expense was a $50,177 decrease in legal fees due to the recovery of legal fees on non-accrual loans that were paid in full, and a $7,400 reduction in director fees.

Total assets increased to $212.7 million at December 31, 2008, an increase of $8.9 million, or 4.3%, from December 31, 2007. This increase occurred despite our repayment of $5.2 million in subordinated debt during 2008. Total deposits, including escrow deposits, increased to $188.1 million, an increase of $11.8 million, or 6.7%. The Bancorp's Tier 1 capital ratio was 10.70% at December 31, 2008. We redeemed our trust preferred securities and repaid the subordinate debt on August 8, 2008, the first available redemption date.

Average interest-earning assets and average loans increased by $11.7 million and $6.0 million, respectively, from the fourth quarter of 2007 to the fourth quarter of 2008. Average demand deposits, an interest free source of funds for the Bancorp to invest, decreased by $515,559 from the fourth quarter of 2007 to approximately 34% of average total deposits for the fourth quarter of 2008. Average interest-bearing deposits increased by $7.3 million, resulting in an overall $6.8 million increase in total deposits from the fourth quarter of 2007 to the fourth quarter of 2008. The Company's interest rate spread and interest rate margin were 3.73% and 4.34%, respectively, for the quarter ended December 31, 2008 as compared to 3.36% and 4.36%, respectively, for the quarter ended December 31, 2007. Non-interest income increased $49,615 to $606,814 in the fourth quarter of 2008 due in part to the increase in the per item charge for insufficient fund transactions that went into effect in March 2008. Non-interest expense totaled $1.8 million in the fourth quarter of 2008.

Pre-tax income decreased to $3,447,997 for the year ended December 31, 2008, as compared to $3,720,737 for 2007, a decrease of $272,740, or 7.3%. Net income for the year ended December 31, 2008 was $1,931,744, or basic net income of $1.04 per common share, as compared to a net income of $2,047,226, or basic net income of $1.12 per common share, for the year ended December 31, 2007. The $115,482 reduction in net income for the year ended December 31, 2008 was attributable to an increase in the provision for loan loss of $290,000, and a decrease in interest income of $1,263,059. The yield on average loans dropped 188 basis points, which caused an 80 basis point drop in our overall average yield on interest-earning assets. The drop in loan yield was due to the 5.00% reduction in the prime rate from September 2007 to December 2008.