EXHIBIT
      13 ANNUAL
      REPORT TO STOCKHOLDERS






**SFSB,
      INC.**





**2005
      ANNUAL REPORT**





**Page
                #****Letter
                to Stockholders****Selected
                Consolidated Financial and Other Data****Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations****Consolidated
                Financial Statements****Directors
                and Officers****Investor
                and Corporate Information**





1


SFSB,
        INC.
 1614
        Churchville Road
 Bel
        Air,
        Maryland 21015
 (443)
        265-5570
 
 
 Dear
        Fellow Stockholder,
 
 Our
        company’s financial results for the year ending December 31, 2005 are detailed
        on the pages that follow.  The closing of our Edgewood branch and the
        decision to place a non-performing commercial land acquisition and development
        participation loan on non-accrual status had a major impact on the
        results.
 
 In
        November 2005, we received regulatory approval to close the Edgewood location
        and had to accelerate a portion of expenses related to the depreciation on
        the
        leasehold improvements on the Edgewood branch.  Even though this decision
        will have a negative short term impact, we believe that, long term, the branch
        closing will have a positive effect on earnings as we will cease to incur
        some
        of the costs associated with branch operations, yet retain in our portfolio
        the
        loans that were originated from the branch. The Edgewood branch personnel
        have
        remained with us and were reassigned to positions at the Bel Air branch and
        corporate headquarters.
 
 In
        the
        third quarter of 2005, we placed a commercial land acquisition and development
        participation loan on non-accrual status.  As a result, we discontinued the
        accrual of interest and we reversed previously accrued interest.  We
        continue to believe the project is viable and that our collateral position
        is
        adequate.
 
 We
        believe we will see a positive effect on net interest income for 2006 as
        a
        result of the 22.65% increase in net loans outstanding as of December 31,
        2005
        compared to December 31, 2004.  We are excited about our online bill pay,
        which we introduced in the third quarter of 2005, to complement our internet
        banking product.
 
 In
        September 2005, the bank was awarded the 2005 Harford Award for the best
        retail
        service operation in Harford County.  We are proud to receive this
        prestigious award and will continue to give service first.  Our pledge is
        that no bank will ever treat you better as we strengthen communities and
        serve
        neighbors.
 
 Our
        focus
        for 2006 will be profitability.  The board, executive management and
        management will be holding a strategic planning meeting during the second
        quarter of 2006. A majority of our time will be spent discussing and reviewing
        ways to increase profitability.  The board and executive management will
        continue to focus on improving profitability and our efforts to control costs
        will be on-going.
 
 In
        closing, our directors, management and staff thank you for your support and
        confidence in our first year operating as a public company.  Both are
        greatly appreciated.
  Sincerely,/s/Philip E. LoganPhilip E. LoganPresident,
                  Chief Executive Officerand
                  Chairman of the Board




2


**SELECTED
      CONSOLIDATED FINANCIAL AND OTHER DATA**





The
      summary information presented below at or for each of the periods presented
      is
      derived in part from our consolidated financial statements. The information
      at
      and for the year ended December 31, 2005 and 2004 is derived from the audited
      consolidated financial statements of SFSB, Inc. The information at December
      31,
      2003 is derived from the audited consolidated financial statements of Slavie
      Federal Savings Bank. The following information is only a summary, and should
      be
      read together with “Management’s Discussion and Analysis of Financial Condition
      and Results of Operations” and our financial statements and the related notes
      included elsewhere in this annual report. Results for past periods are not
      necessarily indicative of results that may be expected for any future period.








**At
                December 31,****2005**
            
            **2004**
            
            **2003**(In
                Thousands)**Selected
                Financial Condition Data:**Total
                assets
            
            $
            171,067
            
            $
            160,433
            
            $
            126,436Cash
                and cash equivalents
            
            
            1,342
            
            
            15,597
            
            
            3,497Loans
                receivable(1)
            
            
            144,609
            
            
            117,900
            
            
            93,210Investment
                securities
            
            
            16,676
            
            
            18,958
            
            
            22,108Deposits
            
            
            109,623
            
            
            109,711
            
            
            97,824Borrowings
            
            
            36,000
            
            
            26,500
            
            
            16,500Equity
            
            
            22,805
            
            
            22,620
            
            
            10,941





__________


(1)  Net
      of
      loans in process, allowance for loan losses and deferred loan fees.








**Years
                Ended December 31,****2005**
            
            **2004**
            
            **2003**(In
                Thousands, except for per share data)**Selected
                Operating Data:**Total
                interest income
            
            $
            7,720
            
            $
            6,517
            
            $
            5,852Total
                interest expense
            
            
            3,795
            
            
            3,075
            
            
            3,229Net
                interest income
            
            
            3,925
            
            
            3,442
            
            
            2,623Provision
                for loan losses
            
            
            58
            
            
            50
            
            
            39Net
                interest income after provision for loan losses
            
            
            3,867
            
            
            3,392
            
            
            2,584Other
                income
            
            
            234
            
            
            78
            
            
            101Non-interest
                expense
            
            
            3,700
            
            
            3,008
            
            
            2,615Income
                taxes
            
            
            162
            
            
            192
            
            
            8Net
                income
            
            $
            239
            
            $
            270
            
            $
            62Basic
                Earnings per Share
            
            $
            0.08
            
            
            N/A
            
            
            N/ADiluted
                Earnings per Share
            
            $
            0.08
            
            
            N/A
            
            
            N/A






3


**At
                or for the Years Ended December 31,****2005**
            
            
            
            **2004**
            
            **2003****Selected
                Financial Ratios and Other Data:**Performance
                Ratios:Return
                on average assets(1)
            
            
            0.15
            %
            
            
            
            0.20
            %
            
            
            0.05
            %Return
                on average equity
            
            
            1.05
            
            
            
            
            2.25
            
            
            
            0.57Net
                loans to total assets
            
            
            84.53
            
            
            
            
            73.49
            
            
            
            73.72Net
                yield on average interest-earning assets
            
            
            5.05
            
            
            
            
            4.89
            
            
            
            5.33Net
                cost of interest bearing liabilities
            
            
            2.83
            
            
            
            
            2.43
            
            
            
            3.10Net
                interest rate spread(2)
            
            
            2.22
            
            
            
            
            2.46
            
            
            
            2.23Net
                interest margin(3)
            
            
            2.57
            
            
            
            
            2.58
            
            
            
            2.39Average
                interest-earning assets to average interest bearing
                liabilities
            
            
            1.14
            x
            
            
            
            1.06
            x
            
            
            1.06
            xNon-interest
                expense to average assets
            
            
            2.31
            %
            
            
            
            2.14
            %
            
            
            2.23
            %Average
                equity to average assets
            
            
            14.22
            
            
            
            
            8.53
            
            
            
            9.30Efficiency
                ratio(4)
            
            
            88.96
            
            
            
            
            85.46
            
            
            
            96.00Capital
                Ratios:Tangible
                ratio
            
            
            9.70
            %
            
            
            
            9.72
            %
            
            
            8.66
            %Tier
                1 core ratio
            
            
            9.70
            
            
            
            
            9.72
            
            
            
            8.66Total
                risk-based capital ratio
            
            
            18.26
            
            
            
            
            19.45
            
            
            
            16.31Asset
                Quality Ratios:Net
                charge-offs (recoveries) to average non-performing assets
            
            
            -
            %
            
            
            
            -
            %
            
            
            -
            %Net
                charge-offs (recoveries) to average loans outstanding
            
            
            -
            
            
            
            
            -
            
            
            
            -Allowance
                for loan losses to gross loans outstanding
            
            
            0.32
            
            
            
            
            0.35
            
            
            
            0.39Non-performing
                loans to total assets
            
            
            0.73
            
            
            
            
            0.23
            
            
            
            0.13Non-performing
                assets to total assets
            
            
            0.73
            
            
            
            
            0.23
            
            
            
            0.13Non-performing
                loans to total loans
            
            
            0.86
            
            
            
            
            0.31
            
            
            
            0.18Other
                Data:Number
                of full-service offices(5)
            
            
            3
            
            
            
            
            3
            
            
            
            3





(1)
            Ratio
                of net income to average total
                assets.


(2)
            The
                difference between the yield on average interest-earning assets and
                the
                cost of average interest-bearing
                liabilities.


(3)
            Net
                interest income divided by average interest-earning
                assets.


(4)
            The
                efficiency ratio represents the ratio of non-interest expenses divided
                by
                the sum of net interest income and non-interest
                income.


(5)
            We
                closed our Edgewood branch on February 24, 2006. We currently have
                two
                full-service offices.








4


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL**


**CONDITION
      AND RESULTS OF OPERATIONS**





SFSB,
      Inc. is a federal corporation, which was organized in 2004 as part of the mutual
      holding company reorganization of Slave Federal Savings Bank. Our principal
      asset is our investment in Slavie Federal Savings Bank. We are a majority owned
      subsidiary of Slavie Bancorp, MHC, a federally chartered mutual holding company.
      In connection with the reorganization, we sold 1,339,031 shares of our common
      stock and issued 1,636,594 shares to our mutual holding company parent. The
      net
      proceeds from our stock offering totaled $12,710,000. At December 31, 2005,
      we
      had consolidated assets of $171,067,000, deposits of $109,623,000 and
      shareholders' equity of $22,805,000.





The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with our consolidated financial
      statements, including the related footnotes to the consolidated financial
      statements, included elsewhere in this annual report.





**Overview**





Earnings
      declined to $239,000 in 2005 as compared to $270,000 in 2004 primarily due
      to
      the addition of security guards at our Bel Air location, the acceleration of
      depreciation on the leasehold improvements of the Edgewood branch in connection
      with closing the branch, and the costs associated with becoming a public company
      at the end of 2004. The decline was also the result of the impact of a decision
      to place a non-performing commercial land acquisition and development
      participation loan on non-accrual status and, therefore, not accruing interest
      on that loan. Net interest income increased $483,000, or 14.03% , and
      non-interest income increased $156,000, or 200.00%. These improvements were
      offset by a $692,000, or 23.01%, increase in non-interest expenses. Total
      non-interest income improved because we recognized a loss of $102,166 on the
      sale of our ground rent portfolio during the second quarter of
      2004.





We
      hold a
      19% participation (approximately $1,080,000 in unpaid principal balance) in
      an
      acquisition and development loan. Although this loan became delinquent in the
      fourth quarter of 2004, we had continued to accrue interest on the loan because
      we believed that collection of all principal and interest on the loan was
      probable. In the third quarter of 2005, we placed the loan on non-accrual
      status. As a result, we discontinued the accrual of interest and we reversed
      previously accrued interest. Previously, we reported that we expected a national
      homebuilder would purchase the property to build residential units as soon
      as
      the borrower developed the property to the “record plat” stage, at which time
      the loan would be paid in full, and that we expected that to occur prior to
      the
      end of 2005. In early November 2005, the national homebuilder agreed to release
      the borrower from its purchase agreement with the national homebuilder. On
      November 18, 2005, the participating banks successfully negotiated a 90-day
      Forbearance Agreement with the borrower for the purpose of allowing the borrower
      to negotiate the sale of the property. On February 7, 2006, the borrower
      executed a Letter Agreement with the national homebuilder to purchase the
      property in “as is” condition. The Letter Agreement was contingent upon
      completion of a feasibility study within 45 days of its execution. The national
      homebuilder has completed its feasibility study and, on March 27, 2006, approved
      the purchase of the property, subject to the municipality’s approval of road
      access plans. Subject to the municipality’s approval of road access plans,
      closing is anticipated to occur by the end of April 2006. The above referenced
      Forbearance Agreement was extended and runs coterminous with the Letter
      Agreement. The Letter Agreement references payment in full of principal, accrued
      interest and all costs of collection for this participation loan. As of the
      date
      of this filing, this participation loan continues to be on non-accrual status.
      We continue to believe the project is viable and that our collateral position
      is
      adequate. Ultimately, we believe we will receive all interest and principal
      on
      this loan, although there can be no assurance that this will be the
      case.





Opened
      in
      November 2001, our Edgewood branch has been an active part of the community
      it
      serves, but it has been unable to generate the business necessary to keep it
      a
      viable part of our strategic plan. In November 2005, we received regulatory
      approval to close our Edgewood location and we closed the branch on February
      24,
      2006. In December 2005, we incurred $49,000 in expenses related to the
      acceleration of depreciation on the leasehold improvements of the Edgewood
      branch. We will incur approximately $98,000 of additional expenses in the first
      quarter of 2006 in connection with closing the branch, primarily related to
      the
      acceleration of depreciation on the leasehold improvements. Long term, we
      believe the branch closing will have a positive effect on earnings as we will
      cease to incur some of the costs associated with branch operations, yet retain
      in our portfolio the loans that were originated from the branch. The Edgewood
      branch personnel have remained with us and were reassigned to positions at
      the
      Bel Air branch and corporate headquarters.




5


Key
      measurements and events for year ended December 31, 2005 include the
      following:





·
            Total
                assets at December 31, 2005 increased by 6.63% to $171,067,000 as
                compared
                to $160,433,000 as of December 31, 2004.





·
            Net
                loans outstanding increased by 22.65% from $117,900,000 as of December
                31,
                2004 to $144,609,000 as of December 31,
                2005.





·
            Nonperforming
                loans at December 31, 2005 totaled $1,245,000. We believe an appropriate
                allowance for loan losses continues to be
                maintained.





·
            Deposits
                at December 31, 2005 were $109,623,000, a decrease of $88,000 or
                0.08%
                from December 31, 2004.





·
            We
                realized net income of $239,000 for the year ended December 31, 2005,
                compared to net income of $270,000 for the year ended December 31,
                2004.





·
            Net
                interest income, our main source of income, was $3,925,000 during
                the year
                ended December 31, 2005 compared to $3,442,000 for the year ended
                December
                31, 2004. This represents an increase of 14.03%.





·
            Non-interest
                income increased by $156,000 or 200.00% for the year ended December
                31,
                2005 as compared to the year ended December 31, 2004, from $78,000
                to
                $234,000.





·
            Non-interest
                expense increased by $692,000 or 23.01% for the year ended December
                31,
                2005 as compared to the year ended December 31, 2004, from $3,008,000
                to
                $3,700,000.





·
            In
                June 2005, we introduced a new 48 month certificate of deposit account
                known as the Bump Up Plus CD Account which allows the account holder
                to
                raise the interest rate to a higher level once during the term of
                the CD,
                as well as allowing a one time ability to withdrawal up to half of
                the
                original principal invested without penalty. As of December 31, 2005,
                we
                had $1,295,000 of deposits in this type of account and we anticipate
                additional growth during 2006.





·
            In
                the third quarter 2005, we began offering Simplicity Bill Pay to
                compliment our online ServiceFirst Internet banking.








A
      detailed discussion of the factors leading to these changes can be found in
      the
      discussion below.





**General**





Our
      profitability depends primarily on our net interest income, which is the
      difference between interest and dividend income on interest-earning assets,
      primarily loans, investment securities, mortgage-backed securities and other
      interest-earning assets (primarily federal funds sold), and interest expense
      on
      interest-bearing liabilities, consisting primarily of deposit accounts and
      borrowings. Net interest income is dependent upon the level of interest rates
      and the extent and degree of changes to such rates. Our profitability also
      depends on our non-interest expenses and, to a lesser extent, on our provision
      for loan losses, non-interest income and income taxes. Our profitability also
      may be affected significantly by changes in market interest rates, applicable
      statutes and regulations, general and local economic and competitive conditions,
      as well as other factors beyond our control.




Our
        non-interest income, which currently consists primarily of rental income
        and
        other miscellaneous income, historically has been nominal. One of our continued
        strategies going forward is to build our sources of non-interest income.
        See
“Business Strategy.” Non-interest expense currently consists primarily of
        compensation and related expenses; occupancy expense; deposit insurance
        premiums; advertising expense; data processing expense; furniture, fixture
        and
        equipment expenses; telephone, postage and delivery expenses and other general
        and administrative expenses. ****
 
 We
        expect
        non-interest expense to increase as a result of the increased costs associated
        with operating as a public company and the increased compensation expense
        associated with our employee stock ownership plan and our stock based
        compensation plans.





6


**Critical
      Accounting Policies**





Slavie
      Federal Savings Bank’s financial statements are prepared in accordance with
      accounting principles generally accepted in the United States of America or
      GAAP, and follow general practices within the industry in which we operate.
      Application of these principles requires management to make estimates,
      assumptions, and judgments that affect the amounts reported in the financial
      statements and accompanying notes. These estimates, assumptions, and judgments
      are based on information available as of the date of the financial statements;
      accordingly, as this information changes, the financial statements could reflect
      different estimates, assumptions, and judgments. Certain policies inherently
      have a greater reliance on the use of estimates, assumptions, and judgments
      and
      as such have a greater possibility of producing results that could be materially
      different than originally reported. Estimates, assumptions, and judgments are
      necessary when assets and liabilities are required to be recorded at fair value,
      when a decline in the value of an asset not carried on the financial statements
      at fair value warrants an impairment write-down or valuation allowance to be
      established, or when an asset or liability needs to be recorded contingent
      upon
      a future event. Carrying assets and liabilities at fair value inherently results
      in more financial statement volatility. The fair values and the information
      used
      to record valuation adjustments for certain assets and liabilities are based
      either on quoted market prices or are provided by other third-party sources,
      when available.





The
      most
      significant accounting policies followed by Slavie Federal Savings Bank are
      presented in Note 1 to the financial statements. These policies, along with
      the
      disclosures presented in the other financial statement notes and in this
      financial review, provide information on how significant assets and liabilities
      are valued in the financial statements and how those values are determined.
      Based on the valuation techniques used and the sensitivity of financial
      statement amounts to the methods, assumptions, and estimates underlying those
      amounts, management has identified the determination of the allowance for loan
      losses as the accounting area that requires the most subjective or complex
      judgments, and as such could be most subject to revision as new information
      becomes available.





The
      allowance for loan losses represents management’s best estimate of losses known
      and inherent in the loan portfolio that are both probable and reasonable to
      estimate, based on, among other factors, historical loss experience, the types
      of loans and the amount of loans in the loan portfolio, adverse situations
      that
      may affect the borrower’s ability to repay, estimated value of any underlying
      collateral, and prevailing economic conditions (particularly as such conditions
      relate to our market area). Determining the amount of the allowance for loan
      losses is considered a critical accounting estimate because it requires
      significant estimates, assumptions and judgment. The loan portfolio also
      represents the largest asset type on our balance sheet.





We
      have
      developed a methodology for evaluating the adequacy of the allowance for loan
      losses that distinguishes between **** specific
      allowances for identified problem loans (“watch list” loans), a general
      valuation allowance on certain identified problem loans and a general valuation
      allowance for the remainder of the loan portfolio. Two of our officers review
      the watch list loans and establish an individual allowance allocation on certain
      loans based on such factors as: (1) the strength of the customer’s personal or
      business cash flow; (2) the availability of other sources of repayment; (3)
      the
      amount due or past due; (4) the type and value of collateral; (5) the strength
      of our collateral position; (6) the estimated cost to sell the collateral;
      and
      (7) the borrower’s effort to cure the delinquency. We also establish a general
      allowance for watch list loans that do not have an individual allowance. We
      segregate these loans by loan category and assign allowance percentages to
      each
      category based on inherent losses associated with each type of lending and
      consideration that these loans, in the aggregate, represent an above-average
      credit risk and that more of these loans will prove to be uncollectible compared
      to loans in the general portfolio. Finally, we establish another general
      allowance for loans that are not on the watch list to recognize the inherent
      losses associated with lending activities, but which, unlike specific
      allowances, has not been allocated to particular problem assets. This general
      valuation allowance is determined by segregating the loans by loan category
      and
      assigning allowance percentages based on our historical loss experience and
      delinquency trends. The allowance may be adjusted for significant factors that,
      in management’s judgment, affect the collectibility of the portfolio as of the
      evaluation date. The applied loss factors are reevaluated annually to ensure
      their relevance in the current environment.





7


Management
      has significant discretion in making the judgments inherent in the determination
      of the provision and allowance for loan losses, including in connection with
      the
      valuation of collateral and the financial condition of the borrower. The
      establishment of allowance factors is a continuing exercise and allowance
      factors may change over time, resulting in an increase or decrease in the amount
      of the provision or allowance based upon the same volume and classification
      of
      loans. **** Changes
      in allowance factors or in management’s interpretation of those factors will
      have a direct impact on the amount of the provision, and a corresponding effect
      on income and assets. Also, errors in management’s perception and assessment of
      the allowance factors could result in the allowance not being adequate to cover
      losses in the portfolio, and may result in additional provisions or charge-offs,
      which would adversely affect income and capital. For additional information
      regarding the allowance for loan losses, see “Results of Operations for the
      Years Ended December 31, 2005 and 2004 - Provision for Loan Losses and Analysis
      of Allowance for Loan Losses.”





In
      December, 2004, the Financial Accounting Standards Board (FASB) issued Statement
      No. 123(R), “Share-Based Payment” (“SFAS 123R”). We adopted this standard in the
      third quarter of 2005 in connection with our initial granting of stock based
      compensation awards. This revised standard addresses the accounting for
      share-based payment transactions in which a company receives employee services
      in exchange for either equity instruments of the company or that are based
      on a
      fair value of the company’s equity instruments or that may be settled by the
      issuance of such equity instruments. Under the new standard, the company is
      required to account for such transactions using a fair-value method and to
      recognize the expense in the consolidated statement of income. We selected
      the
      Black-Scholes Option-Pricing model for calculating the fair value of option
      grants. The impact on operations in future periods is determined by amortizing
      the remaining value of our currently outstanding options, plus the value imputed
      to future option grants using the above described methods. There is no impact
      on
      cash flow.





**Business
      Strategy**





Our
      business strategy is to operate and grow a profitable community-oriented
      financial institution serving primarily retail customers in our market area.
      The
      following strategic initiatives form the foundation of our
      strategy:





Our
      business strategy is to grow and improve our profitability by:





·
            Leveraging
                excess equity to improve earnings;





·
            Increasing
                loan diversification;





·
            Increasing
                residential loan originations;





·
            Increasing
                customer access through enhanced electronic delivery systems;





·
            Building
                sources of fee income; and





·
            Maintaining
                a high quality loan portfolio through prudent underwriting practices.





*Leveraging
      excess equity to improve earnings* .
      Leveraging excess equity means that we have sufficient regulatory capital to
      increase our deposits and other borrowings to finance a greater amount of
      interest earning assets. The capital offering provided us with approximately
      $12,710,000 of additional capital, which we have used for this purpose. Our
      borrowings increased $9,500,000 during 2005 and $10,000,000 during
      2004.





8


*Increasing
      loan diversification, particularly with respect to commercial business and
      commercial real estate loans* .
      We
      believe that increasing loan diversification has increased our competitive
      profile and improved earnings through higher yields. We hired an experienced
      commercial lender in April 2004 and a commercial business development officer
      in
      October 2005, and we have focused our commercial lending activities on small
      to
      mid-size businesses in our market area. We seek to distinguish ourselves by
      providing responsive personal service and local decision making. Our goal is
      to
      grow the commercial business and commercial real estate loan portfolio to 10%
      of
      total loans over the next four years. During 2005, our commercial mortgage
      loans
      increased from $2,990,000 to $5,402,000, or 3.70% of our loan portfolio and
      our
      commercial business loans increased from $516,000 to $1,481,000, or 1.01% of
      our
      loan portfolio. We have also expanded our consumer lending activities by
      cross-selling to a larger base of transaction accounts (through additional
      marketing efforts in this area).





*Increasing
      residential loan originations* .
      During
      2005, we continued to grow our residential mortgage lending within our market
      area, and, to facilitate further the loan growth, we hired an additional
      residential loan officer in October 2005. As of December 31, 2005 and December
      31, 2004, $122,262,000 and $104,854,000, respectively, or 83.74% and 88.37%,
      respectively, of our total loan portfolio consisted of one- to four-family
      residential loans. During the years ended December 31, 2005 and December 31,
      2004, we originated $27,444,000 and $30,228,000, respectively, of one- to
      four-family residential mortgage loans.





Our
      growth strategy contemplates that we will retain for our portfolio those loans
      meeting our interest rate risk and balance sheet composition targets and will
      sell the remaining loans in the secondary market on a servicing released basis
      and without recourse. Our goal is to, gradually, increase to 20% of the amount
      of fixed rate loans that we sell in the secondary market. Over time, we may
      evaluate selling loans on a servicing retained basis. To date, our secondary
      market activities remain limited. During 2005, we sold one residential mortgage
      loan with a principal balance of $155,000. We expect that decisions to sell
      loans will be based on prevailing market interest rate conditions and interest
      rate risk management and not on the anticipated collectibility of the loan
      sold.





We
      believe enhanced residential mortgage loan origination volume should (1)
      increase opportunities for non-interest income and (2) enhance the customer
      base
      for cross-selling purposes.





*Increasing
      customer access through enhanced electronic delivery systems* . **** We
      believe that our electronic delivery systems will increase transaction accounts,
      emphasize cross-selling, increase non-interest income and raise our profile.
      We
      have affiliated with an ATM network, allowing our customers to use the ATM
      machines of another larger financial institution without charge. Also, we have
      introduced ServiceFirst Internet Banking and Simplicity Bill Pay to our
      customers which allows them to view their account information online, transfer
      balances among Slavie accounts and pay their bills electronically.





*Building
      sources of fee income* .
      We hope
      to increase our fee income by, among other things, intensifying the marketing
      of
      transaction accounts and business checking accounts and broadening the financial
      products and services we offer. In the second half of 2004, we began to offer
      overdraft protection for transaction accounts. We currently have a contractual
      arrangement with a broker-dealer to provide financial planning related services
      to our customers and potential customers and we are in the process of hiring
      one
      or two individuals to provide financial planning services. We anticipate the
      hiring of these individuals to take place before the end of 2006. Our activities
      to date in this area have achieved only limited success. Fee income, other
      than
      a non-recurring item, increased by $4,000 during 2005 compared to 2004.





*Maintaining
      a high quality loan portfolio through prudent underwriting
      practices* .
      We
      believe that high asset quality is a key to long-term success. We have sought
      to
      maintain a high level of asset quality and moderate credit risk by focusing
      on
      residential mortgage lending and by using conservative underwriting standards.
      At December 31, 2005, our nonperforming loans (loans that were 90 days or more
      past due) were 0.86% of our


total
      loan portfolio and 0.73% of total assets. Although we intend to continue to
      increase our commercial mortgage and commercial business lending, which have
      greater credit risk than residential mortgage loans, we will continue to utilize
      conservative underwriting standards.




9




**Comparison
      of Financial Condition at December 31, 2005 and 2004**





*Assets* .
      Our
      total assets increased by $10,634,000, or 6.63%, to $171,067,000 at December
      31,
      2005, from $160,433,000 at December 31, 2004. The increase in total assets
      resulted primarily from a $26,709,000, or 22.65% increase in net loans
      receivable, from $117,900,000 at December 31, 2004 to $144,609,000 at December
      31, 2005. This increase was partially offset by a $14,255,000, or 91.40%
      decrease in cash and cash equivalents from $15,597,000 at December 31, 2004
      to
      $1,342,000 at December 31, 2005 and a $2,456,000, or 35.18% decrease in
      mortgage-backed securities, from $6,981,000 at December 31, 2004 to $4,525,000
      at December 31, 2005.





Approximately
      69.92% of the $26,709,000 increase in net loans receivable was the result of
      additional one-to-four family residential loan originations, consistent with
      our
      intended growth strategy in this area. In general, the decrease in
      mortgage-backed securities resulted from scheduled repayments and payoffs and
      our use of the received funds to originate loans. Cash and cash equivalents
      declined primarily because we invested the cash into new loans, and returned
      $1,453,000 of funds deposited with us by potential purchasers in our stock
      offering whose subscription funds were returned in January 2005.





*Liabilities* .
      Total
      liabilities increased by $10,449,000, or 7.58%, to $148,262,000 at December
      31,
      2005, from $137,813,000 at December 31, 2004. The increase in total liabilities
      resulted from an $1,291,000, or 205.57% increase in checks outstanding in excess
      of bank balance, from $628,000 at December 31, 2004 to $1,919,000 at December
      31, 2005 and a $9,500,000, or 35.85% increase in borrowings, from $26,500,000
      at
      December 31, 2004 to $36,000,000 at December 31, 2005. These increases were
      modestly offset by a $297,000, or 46.05% decrease in other liabilities, from
      $645,000 at December 31, 2004 to $348,000 at December 31, 2005, and a decrease
      of $88,000, or 0.08%, in deposits, from $109,711,000 at December 31, 2004 to
      $109,623,000 at December 31, 2005. The increase in borrowings was consistent
      with our strategy of leveraging excess equity and utilizing the borrowings
      for
      loan originations. The other liabilities consist primarily of accrued federal
      and state income taxes and accrued interest on Federal Loan Home Bank
      borrowings.





*Equity* .
      Total
      equity increased by $185,000, or 0.82% to $22,805,000 at December 31, 2005,
      compared to $22,620,000 at December 31, 2004. The increase in equity reflects
      net income of $239,000 and stock based compensation of $108,000, partially
      offset by $96,000 of stock repurchases and a $66,000 increase in accumulated
      other comprehensive loss (resulting from unrealized losses on investments
      available for sale, net of tax).





10


**Average
      Balances, Net Interest Income, Yields Earned and Rates
      Paid**





The
      following table presents for the periods indicated the total dollar amount
      of
      interest income from average interest earning assets and the resultant yields,
      as well as the interest expense on average interest bearing liabilities,
      expressed both in dollars and rates. No tax equivalent adjustments were made
      and
      no income was exempt from federal income taxes. All average balances are monthly
      average balances. We do not believe that the monthly averages differ materially
      from what the daily averages would have been. Non-accruing loans have been
      included in the table as loans carrying a zero yield. The amortization of loan
      fees is included in computing interest income, however, such fees are not
      material.





**At
                December 31,**
            
            **Years
                Ended December 30,****2005**
            
            **2005**
            
            **2004**
            
            **2003****Outstanding
                Balance**
            
            **Yield/Rate**
            
            **Average
                Outstanding Balance**
            
            **Interest
                Earned/**
              **Paid**
            
            **Yield/**
              **Rate**
            
            **Average
                Outstanding Balance**
            
            **Interest
                Earned/**
              **Paid**
            
            **Yield/**
              **Rate**
            
            **Average
                Outstanding Balance**
            
            **Interest
                Earned/ Paid**
            
            **Yield/**
              **Rate**(Dollars
                in Thousands)Interest-earning
                assets:Loans
                receivable(1)
            
            $
            144,609
            
            
            5.47
            %
            $
            129,169
            
            $
            6,875
            
            
            5.32
            %
            $
            107,580
            
            $
            5,785
            
            
            5.38
            %
            $
            79,769
            
            $
            4,960
            
            
            6.22
            %Mortgage-backed
                securities
            
            
            4,525
            
            
            4.54
            
            
            5,662
            
            
            204
            
            
            3.60
            
            
            8,438
            
            
            288
            
            
            3.41
            
            
            11,076
            
            
            410
            
            
            3.70Investment
                securities (available for sale)
            
            
            8,153
            
            
            4.22
            
            
            8,059
            
            
            279
            
            
            3.46
            
            
            7,912
            
            
            188
            
            
            2.38
            
            
            7,297
            
            
            159
            
            
            2.18Investment
                securities (held to maturity)
            
            
            3,998
            
            
            3.74
            
            
            3,997
            
            
            153
            
            
            3.83
            
            
            3,994
            
            
            152
            
            
            3.81
            
            
            4,829
            
            
            222
            
            
            4.60Other
                interest-earning assets
            
            
            2,674
            
            
            4.47
            
            
            6,062
            
            
            209
            
            
            3.45
            
            
            5,412
            
            
            104
            
            
            1.92
            
            
            6,922
            
            
            101
            
            
            1.46Total
                interest-earning assets
            
            
            163,959
            
            
            5.32
            %
            
            152,949
            
            
            7,720
            
            
            5.05
            %
            
            133,336
            
            
            6,517
            
            
            4.89
            %
            
            109,893
            
            
            5,852
            
            
            5.33
            %Non-interest
                earning assets
            
            
            7,108
            
            
            
            
            
            7,232
            
            
            
            
            
            
            
            
            7,413
            
            
            
            
            
            
            
            
            7,520Total
                assets
            
            $
            171,067
            
            
            
            
            $
            160,181
            
            
            
            
            
            
            
            $
            140,749
            
            
            
            
            
            
            
            $
            117,413Interest-bearing
                liabilities:Savings
                deposits
            
            $
            29,356
            
            
            1.27
            %
            $
            33,595
            
            
            436
            
            
            1.30
            %
            $
            32,562
            
            
            324
            
            
            1.00
            %
            $
            28,235
            
            
            345
            
            
            1.22
            %Demand
                and NOW accounts
            
            
            2,548
            
            
            0.58
            
            
            2,339
            
            
            13
            
            
            0.56
            
            
            2,176
            
            
            13
            
            
            0.60
            
            
            1,951
            
            
            14
            
            
            0.72Certificates
                of deposit
            
            
            76,900
            
            
            3.80
            
            
            72,124
            
            
            2,539
            
            
            3.52
            
            
            67,647
            
            
            2,190
            
            
            3.24
            
            
            68,443
            
            
            2,715
            
            
            3.97Escrows
              Borrowings
            
            
            2
              36,000
            
            
            -
              3.68
            
            
            15
              26,250
            
            
            -
              807
            
            
            -
              3.07
            
            
            16
              23,917
            
            
            -
              548
            
            
            -
              2.29
            
            
            23
              5,507
            
            
            -
              155
            
            
            -
              2.81Total
                interest-bearing liabilities
            
            
            144,806
            
            
            3.20
            %
            
            134,323
            
            
            3,795
            
            
            2.83
            %
            
            126,318
            
            
            3,075
            
            
            2.43
            %
            
            104,159
            
            
            3,229
            
            
            3.10
            %Non-interest-bearing
                liabilities
            
            
            3,456
            
            
            
            
            
            3,077
            
            
            
            
            
            
            
            
            2,429
            
            
            
            
            
            
            
            
            2,339Total
                liabilities
            
            
            148,262
            
            
            
            
            
            137,400
            
            
            
            
            
            
            
            
            128,747
            
            
            
            
            
            
            
            
            106,498Total
                equity(2)
            
            
            22,805
            
            
            
            
            
            22,781
            
            
            
            
            
            
            
            
            12,002
            
            
            
            
            
            
            
            
            10,915Total
                liabilities and equity
            
            $
            171,067
            
            
            
            
            $
            160,181
            
            
            
            
            
            
            
            $
            140,749
            
            
            
            
            
            
            
            $
            117,413Net
                interest income
            
            
            
            
            
            
            
            
            
            
            $
            3,925
            
            
            
            
            
            
            
            $
            3,442
            
            
            
            
            
            
            
            $
            2,623Interest
                rate spread(3)
            
            
            
            
            
            2.12
            %
            
            
            
            
            
            
            
            2.22
            %
            
            
            
            
            
            
            
            2.46
            %
            
            
            
            
            
            
            
            2.23
            %Net
                interest-earning assets
            
            $
            19,153
            
            
            
            
            $
            18,626
            
            
            
            
            
            
            
            $
            7,018
            
            
            
            
            
            
            
            $
            5,734Net
                interest margin(4)
            
            
            
            
            
            2.39
            %
            
            
            
            
            
            
            
            2.57
            %
            
            
            
            
            
            
            
            2.58
            %
            
            
            
            
            
            
            
            2.39
            %Ratio
                of interest earning assets to interest bearing liabilities
            
            
            
            
            
            
            
            
            
            
            
            1.14x
            
            
            
            
            
            
            
            
            1.06x
            
            
            
            
            
            
            
            
            1.06x







(1)
            Loans
                receivable are net of the allowance for loan
                losses.


(2)
            Net
                interest rate spread represents the difference between the average
                yield
                on interest earning assets and the average cost of interest bearing
                liabilities.


(3)
            Net
                interest margin represents net interest income as a percentage of
                average
                interest earning assets.





11


**Rate/Volume
      Analysis**





The
      following table presents the dollar amount of changes in interest income and
      interest expense for major components of interest-earning assets and
      interest-bearing liabilities. It distinguishes between the changes related
      to
      changes in outstanding balances and those due to the changes in interest rates.
      For each category of interest-earning assets and interest-bearing liabilities,
      information is provided on changes attributable to (1) changes in volume (i.e.,
      changes in volume multiplied by old rate), (2) changes in rate (i.e., changes
      in
      rate multiplied by old volume), and (3) total changes in rate and volume. For
      purposes of this table, changes attributable to both rate and volume, which
      cannot be segregated, have been allocated proportionately to the change due
      to
      volume and the change due to rate.





**Years
                Ended December 31,**
            
            **Years
                Ended December 31,****2005
                vs. 2004**
            
            **2004
                vs. 2003****Increase/(Decrease)**
              **Due
                to**
            
            
            
            **Increase/(Decrease)**
              **Due
                to****Volume**
            
            **Rate**
            
            **Total**
              **Increase**
              **(Decrease)**
            
            **Volume**
            
            **Rate**
            
            **Total**
              **Increase**
              **(Decrease)**(In
                Thousands)Interest
                income:Loans
                receivable
            
            $
            1,154
            
            $
            (64
            )
            $
            1,090
            
            $
            1,561
            
            $
            (736
            )
            $
            825Mortgage-backed
                securities
            
            
            (99
            )
            
            15
            
            
            (84
            )
            
            (92
            )
            
            (30
            )
            
            (122
            )Investment
                securities (available for sale)
            
            
            4
            
            
            87
            
            
            91
            
            
            13
            
            
            16
            
            
            29Investment
                securities (held to maturity)
            
            
            0
            
            
            1
            
            
            1
            
            
            (35
            )
            
            (35
            )
            
            (70
            )Other
                interest-earnings assets
            
            
            14
            
            
            91
            
            
            105
            
            
            (25
            )
            
            28
            
            
            3Total
                interest income
            
            
            1,073
            
            
            130
            
            
            1,203
            
            
            1,422
            
            
            (757
            )
            
            665Interest
                expense:Savings
                deposits
            
            
            11
            
            
            101
            
            
            112
            
            
            48
            
            
            (69
            )
            
            (21
            )Demand
                and NOW deposits
            
            
            0
            
            
            0
            
            
            0
            
            
            1
            
            
            (2
            )
            
            (1
            )Certificates
                of deposits
            
            
            151
            
            
            197
            
            
            348
            
            
            (21
            )
            
            (504
            )
            
            (525
            )Escrow.
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0Borrowings
            
            
            58
            
            
            202
            
            
            260
            
            
            427
            
            
            (34
            )
            
            393Total
                interest expense
            
            
            220
            
            
            500
            
            
            720
            
            
            455
            
            
            (609
            )
            
            (154
            )Net
                interest income
            
            $
            853
            
            
            ($370
            )
            $
            483
            
            $
            967
            
            $
            (148
            )
            $
            819





**Comparison
      of Operating Results for the Years Ended December 31, 2005 and
      2004**





*Net
      Income* .
      Net
      income decreased by $31,000, or 11.48%, to $239,000 for the year ended December
      31, 2005, from $270,000 for the year ended December 31, 2004. The decrease
      was
      due primarily to a $692,000 increase in non-interest expenses, offset by a
      $483,000 increase in net interest income and a $156,000 increase in non-interest
      income.





*Net
      Interest Income* .
      Net
      interest income increased $483,000, or 14.03%, to $3,925,000 for the year ended
      December 31, 2005, from $3,442,000 for the year ended December 31, 2004. The
      increase was due primarily to an increase of $19,613,000, or 14.71%, in average
      interest earning assets to $152,949,000 from $133,336,000 and a 16 basis point
      increase in the yield on average interest earnings assets. These increases
      were
      partially offset by an increase of $8,005,000, or 6.34%, in average interest
      bearing liabilities to $134,323,000 from $126,318,000 and a 40 basis point
      increase in the cost of average interest bearing liabilities.





Our
      interest rate spread decreased to 2.22% from 2.46%, reflecting the more rapid
      increase in the cost of our average interest bearing liabilities as compared
      to
      the increase in the yield of our interest earning assets. Our net interest
      margin decreased to 2.57% from 2.58% because the growth in average interest
      earning assets was not enough to offset the increase in the cost of interest
      bearing liabilities.





12


The
      ratio
      of interest earning assets to interest bearing liabilities improved to 1.14
      times for the year ended December 31, 2005 from 1.06 times for the year ended
      December 31, 2004.





*Interest
      Income* .
      Interest income increased by $1,203,000, or 18.46%, to $7,720,000 for the year
      ended December 31, 2005, from $6,517,000 for the year ended December 31, 2004.
      The increase in interest income resulted primarily from an increase of
      $1,090,000, or 18.84%, in interest and fee income from loans, $92,000, or
      27.06%, in interest income from investment securities and $105,000, or 100.96%,
      in interest income from other interest earning assets (primarily consisting
      of
      interest earned on federal funds sold and Federal Home Loan Bank stock),
      partially offset by a decrease of $84,000, or 29.17% in interest income from
      mortgage-backed securities.





The
      increase in interest income reflected a $19,613,000, or 14.71% increase in
      the
      average balance of interest earning assets to $152,949,000 from $133,336,000,
      and a 16 basis point increase in the yield on average interest earning assets
      to
      5.05% for the year ended December 31, 2005 from 4.89% for the year ended
      December 31, 2004, reflecting an increase in market interest rates.





The
      increase in interest income and fees on loans was due to a $21,589,000, or
      20.07% increase in average net loans receivable, from $107,580,000 to
      $129,169,000, offset by a 6 basis point decrease in the average yield on net
      loans receivable. The yield declined because long term interest rates generally
      declined throughout the second part of 2004, and we made a large number of
      long-term fixed rate mortgage loans during this period. The interest income
      and
      fees on loans for the year ended December 31, 2005 was also adversely affected
      by the placement of an acquisition and development loan on non-accrual status.





The
      decrease in interest income from mortgage-backed securities was primarily the
      result of a $2,776,000, or 32.90% decline in average mortgage-backed securities.
      The increase in interest income from investment securities was primarily
      reflective of a 108 basis point increase in the average yield and a $147,000
      or
      1.86% increase in the average balance of available for sale investment
      securities. The decrease in interest income from mortgage-backed securities
      was
      primarily the result of a $2,776,000, or 32.90%, decline in average
      mortgage-backed securities, which was modestly offset by a 19 basis point
      increase in the yield on these securities.





The
      increase in interest income from other interest earning assets (primarily
      federal funds sold) was due to a $650,000, or 12.01%, increase in average other
      interest earning assets, from $5,412,000 to $6,062,000, and a 153 basis point
      increase in the average yield on these assets (as a result of increases in
      short
      term market interest rates). Other interest earning assets increased primarily
      as a result of the additional capital received from the stock
      offering.





*Interest
      Expense* .
      Interest expense, which consists of interest paid on deposits and borrowings,
      increased by $720,000, or 23.41% to $3,795,000 for the year ended December
      31,
      2005, from $3,075,000 for the year ended December 31, 2004. The increase in
      interest expense resulted from an increase in the average balance and average
      cost of interest bearing liabilities. The average balance of interest bearing
      deposits increased to $108,058,000 from $102,385,000 and the average cost of
      deposits increased by 29 basis points as a result of increased market interest
      rates. The average balance of borrowings increased to $26,250,000 from
      $23,917,000 and the average cost of borrowings increased by 78 basis points
      as a
      result of longer term borrowings at higher interest rates.





*Provision
      for Loan Losses* .
      We
      establish provisions for loan losses, which are charged to operations, at a
      level estimated as necessary to absorb known and inherent losses that are both
      probable and reasonably estimable at the date of the financial statements.
      In
      evaluating the level of the allowance for loan losses, management considers,
      among other things, historical loss experience, the types of loans and the
      amount of loans in the loan portfolio, adverse situations that may affect the
      borrower’s ability to repay, estimated value of any underlying collateral, and
      prevailing economic conditions (particularly as such conditions relate to our
      market area). We charge losses on loans against the allowance when we believe
      that collection of loan principal is unlikely. Recoveries on loans previously
      charged off are added back to the allowance.





Based
      on
      our evaluation of these factors, management made a provision of $58,000 and
      $50,000 for the years ended December 31, 2005 and December 31, 2004,
      respectively. We had an automobile loan charge-off of $2,000 during the year
      ended December 31, 2005. There were no loan charge-offs during the year ended
      December 31, 2004. We used the same methodology and generally similar
      assumptions in assessing the allowance for both periods.





13


The
      provision for 2005 reflects part of the $108,000 allowance that we have
      allocated to the non-performing acquisition and development loan described
      above
      and the increase of $2,412,000 in commercial mortgage loans and $965,000 in
      commercial non-mortgage loans during the year ended December 31, 2005. Non-performing
      loans increased to $1,245,000 from $365,000, or 241.10% for the period.
      Non-performing loans were 0.86% and 0.31% of total loans at December 31, 2005
      and 2004.





This
      evaluation is inherently subjective, as it requires estimates that are
      susceptible to significant revisions as more information becomes available
      or as
      future events change. The level of the allowance is based on estimates, and
      the
      ultimate losses may vary from these estimates.





The
      allowance for loan losses totaled $474,000, or 0.32%, of total loans outstanding
      of $146,008,000 at December 31, 2005, compared to an allowance for loan losses
      of $413,000, or 0.35% of loans outstanding of $118,650,000 at December 31,
      2004.





Although
      we believe that we use the best information available to establish the allowance
      for loan losses, future additions to the allowance may be necessary based on
      estimates that are susceptible to change as a result of changes in economic
      conditions and other factors. In addition, the Office of Thrift Supervision,
      as
      an integral part of its examination process, periodically reviews our allowance
      for loan losses. The Office of Thrift Supervision may require us to recognize
      adjustments to the allowance based on its judgments about information available
      to it at the time of its examination.





*Other
      Income* .
      Historically, our non-interest income has been relatively modest and one of
      our
      strategic initiatives is to increase our non-interest income. Non-interest
      income increased $156,000 or 200.00%, to $234,000 for the year ended December
      31, 2005, as compared to $78,000 for the year ended December 31, 2004. The
      primary reason for the increase is because of a $102,000 loss during the second
      quarter of 2004 on the sale of our ground rent portfolio. Rental income from
      our
      headquarters building increased $32,000, or 29.91%, to $139,000 for the year
      ended December 31, 2005 as compared to $107,000 for the year ended December
      31,
      2004. The increase in rental income is a result of our headquarters building
      being 81% leased at the end of 2005 as compared to 69% at the end of 2004.
      Currently, we intend to utilize the remaining 19% of available space for future
      expansion and have ceased actively attempting to lease this space.




Our
      other
      income (generally, fees from deposit accounts, late charges from delinquent
      loan
      products and ATM fees) increased by $22,000, or 30.56%, to $94,000 for the
      year
      ended December 31, 2005, as compared to $72,000 for the year ended December
      31,
      2004. The increase is primarily the result of receiving an additional $18,000
      in
      connection with the 2004 sale of our ground rents due to a purchase price
      adjustment . The
      ground rent portfolio was sold to a company controlled by director J. Benson
      Brown.





Ground
      rents are relatively unique to the Baltimore area. They represent obligations
      on
      the part of a homeowner to pay semi-annual rents to the holder of their ground
      lease. The ground lease typically is for a term of 99 years, automatically
      renewable forever and is freely transferable. The only obligation of the
      homeowner is to pay the ground rent to the holder of the ground lease for as
      long as the homeowner owns the real property. The holder of the ground lease
      has
      no right to take possession of the real property as long as the ground rent
      is
      paid. Under Maryland law, the owner of the real property has a right to redeem
      the ground lease based upon a statutory formula. The resale price of a ground
      lease is typically substantially less than the redemption price. During the
      first part of 2004, we made a strategic decision to sell our ground rent
      portfolio because this type of investment was not consistent with our long
      range
      plans in light of the servicing and collection burden associated with a large
      group of small balances.




14




*Non-interest
      Expense* .
      Non-interest expense was $3,700,000 for the year ended December 31, 2005 as
      compared to $3,008,000 for the year ended December 31, 2004, an increase of
      $692,000, or 23.01%. The increase was due primarily to a $312,000 increase
      in
      compensation and related expenses, a $73,000 increase in occupancy expenses
      and
      a $289,000 increase in other expenses (consisting primarily of office supplies
      and printing expenses, network support expenses, professional services expenses,
      dues and subscriptions expenses, a robbery loss and professional fees associated
      with being a public company).





The
      increase in compensation and related expenses reflects, among other items,
      the
      hiring of temporary security personnel at our Bel Air location in March 2005.and
      the hiring of a residential loan officer and a commercial business development
      officer in October 2005. The increase in compensation and related expenses
      also
      includes $108,000 of non-cash stock based expenses, including the Employee
      Stock
      Ownership Plan and our stock based compensation plans (no costs in 2004). After
      determining that the security at the Bel Air location was adequate, we ceased
      incurring the security related costs after November 2005.





The
      increase in occupancy expenses reflected costs incurred in building out tenant
      space at our headquarters building and $49,000 in expenses related to the
      acceleration of depreciation on the leasehold improvements of our Edgewood
      branch, which we closed on February 24, 2006.





The
      increase in other non-interest expenses resulted primarily from a $176,000
      increase in professional fees due to the cost associated with being a public
      company, a $37,000 increase in printing expenses, a $15,000 increase in network
      support expenses, an $11,000 increase in office supplies, a $10,000 increase
      in
      dues and subscriptions and a $23,000 increase in professional services
      expenses.





*Income
      Tax Expense* .
      The
      provision for income taxes decreased to $162,000 for the year ended December
      31,
      2005 from $192,000 for the year ended December 31, 2004, representing a decrease
      of $30,000. The decrease in the provision for income taxes was primarily due
      to
      a lower level of income before taxes. The effective tax rate was 40.48% and
      41.63% for 2005 and 2004, respectively.





**Management
      of Market Risk**





*General* .
      The
      majority of our assets and liabilities are monetary in nature. Consequently,
      our
      most significant form of market risk is interest rate risk. Our assets,
      consisting primarily of mortgage loans, have longer maturities than our
      liabilities, consisting of deposits and borrowings. As a result, a principal
      part of our business strategy is to manage interest rate risk and reduce the
      exposure of our net interest income to changes in market interest rates.
      Accordingly, we have an asset/liability management committee, which consists
      of
      senior management and one outside director operating under a policy adopted
      by
      the board of directors. The committee is responsible for evaluating the interest
      rate risk inherent in our assets and liabilities, for determining the level
      of
      risk that is appropriate given our business strategy, operating environment,
      capital, liquidity and performance objectives, and for managing this risk
      consistent with the guidelines approved by the board of directors. Senior
      management monitors the level of interest rate risk on a regular basis and
      the
      asset/liability management committee meets at least quarterly to review our
      asset/liability policies and interest rate risk position.





*Net
      Portfolio Value and Interest Rate Risk* .
      In past
      years, many savings institutions have measured interest rate sensitivity by
      computing the “gap” between the assets and liabilities which are expected to
      mature or reprice within certain time periods, based on assumptions regarding
      loan prepayment and deposit decay rates formerly provided by the Office of
      Thrift Supervision. However, the Office of Thrift Supervision now requires
      the
      computation of amounts by which the net present value of an institution’s cash
      flow from assets, liabilities and off balance sheet items (the institution’s net
      portfolio value or “NPV”) would change in the event of a range of assumed
      changes in market interest rates. The Office of Thrift Supervision provides
      all
      institutions that file a Consolidated Maturity/Rate Schedule as a part of their
      quarterly Thrift Financial Report with an interest rate sensitivity report
      of
      net portfolio value. The Office of Thrift Supervision simulation model uses
      a
      discounted cash flow analysis and an option-based pricing approach to measuring
      the interest rate sensitivity of net portfolio value. Historically, the Office
      of Thrift Supervision model estimated the economic value of each type of asset,
      liability and off-balance sheet contract under the assumption that the United
      States Treasury yield curve increases or decreases instantaneously on any given
      day by 100 to 300 basis points in 100 basis point increments. However, given
      the
      current low level of market interest rates, we did not receive a NPV calculation
      for an interest rate decrease of greater than 200 basis points. A basis point
      equals one-hundredth of one percent, and 100 basis points equals one percent.
      An
      increase in interest rates from 3% to 4% would mean, for example, a 100 basis
      point increase in the “Change in Interest Rates” column below. The Office of
      Thrift Supervision provides us the results of the interest rate sensitivity
      model, which is based on information we provide to the Office of Thrift
      Supervision to estimate the sensitivity of our net portfolio value.





15


The
      table
      below sets forth, as of December 31, 2005, the latest date for which the Office
      of Thrift Supervision has provided us with an interest rate sensitivity report
      of net portfolio value, the estimated changes in our net portfolio value that
      would result from the designated instantaneous changes in the United States
      Treasury yield curve.





**Net
                Portfolio Value**
            
            **Net
                Portfolio Value as a % of Present Value of Assets****Change
                in Interest Rates**
              **(basis
                points)**
            
            **Estimated**
              **NPV**
            
            **Amount
                of Change**
            
            **Percent**
              **Of**
              **Change**
            
            **NPV**
              **Ratio**
            
            **Change
                in Basis**
              **Points**(Dollars
                in Thousands)+300
            
            $
            7,853
            
            $
            (10,898
            )
            
            (58
            )%
            
            5.01
            %
            
            (583)
                basis points+200
            
            
            11,765
            
            
            (6,986
            )
            
            (37
            )
            
            7.24
            
            
            (360)
                basis points+100
            
            
            15,483
            
            
            (3,268
            )
            
            (17
            )
            
            9.22
            
            
            (162)
                basis points0
            
            
            18,752
            
            
            -
            
            
            -
            
            
            10.84
            
            
            -
                basis points-100
            
            
            21,040
            
            
            2,289
            
            
            12
            
            
            11.86
            
            
            102
                basis points-200
            
            
            21,122
            
            
            2,370
            
            
            13
            
            
            11.74
            
            
            90
                basis points





The
      table
      above indicates that at December 31, 2005, in the event of a 100 basis point
      increase in interest rates, we would experience a 17% decrease in net portfolio
      value. In the event of a 200 basis point increase in interest rates, we would
      experience a 37% decrease in net portfolio value.





Certain
      shortcomings are inherent in the methodology used in the above interest rate
      risk measurement. Modeling changes in net portfolio value require making certain
      assumptions that may or may not reflect the manner in which actual yields and
      costs respond to changes in market interest rates. In this regard, the net
      portfolio value table presented assumes that the composition of our
      interest-sensitive assets and liabilities existing at the beginning of a period
      remains constant over the period being measured and assumes that a particular
      change in interest rates is reflected uniformly across the yield curve
      regardless of the duration or repricing of specific assets and liabilities.
      Accordingly, although the net portfolio value table provides an indication
      of
      our interest rate risk exposure at a particular point in time, such measurements
      are not intended to and do not provide a precise forecast of the effect of
      changes in market interest rates on our net interest income and will differ
      from
      actual results.




As
      indicated above, our ability to maintain a positive “spread” between the
      interest earned on assets and the interest paid on deposits and borrowings
      is
      affected by changes in interest rates. Our fixed-rate loans generally are
      profitable if interest rates are stable or declining since these loans have
      yields that exceed our cost of funds. If interest rates increase, however,
      we
      would have to pay more on our deposits and new borrowings, which would adversely
      affect the interest rate spread. In order to offset the potential effects of
      dramatic increases in market rates of interest, we have, among other things,
      implemented or will implement a number of strategies designed to assist in
      managing interest rate risk, including the following:




·
              Pursuing
                  greater diversification into other types of lending, particularly
                  commercial real estate and commercial business loans, which typically
                  have
                  shorter terms and higher interest rates than single family residential
                  mortgage loans.


·
              Maintaining
                  a portion of the investment portfolio in short-term
                  liquidity;


·
            Offering
                a variety of adjustable rate loan products, including one-year adjustable
                rate mortgage loans, construction loans and home equity lines of
                credit;




16




·
              Reducing
                  the interest rate sensitivity of interest-bearing liabilities through
                  utilizing fixed rate FHLB advances with terms of more than one
                  year;


·
            Placing
                a greater emphasis on building sources of non-interest income through
                expanded offerings of products and services;
                and





·
            Emphasizing
                growth of less interest rate sensitive and lower cost “core deposits” in
                the form of transaction accounts, including commercial deposit
                accounts.





**Liquidity
      Management**





Liquidity
      is the ability to meet current and future financial obligations of a short-term
      nature. Our primary sources of funds consist of deposit inflows, borrowings
      from
      the Federal Home Loan Bank of Atlanta, scheduled amortization and prepayment
      of
      loans and mortgage-backed securities, maturities and calls of held to maturity
      investment securities and earnings and funds provided from operations. While
      scheduled principal repayments on loans and mortgage-backed securities are
      a
      relatively predictable source of funds, deposit flows, calls of securities
      and
      loan prepayments are greatly influenced by market interest rates, economic
      conditions, and rates offered by our competition.





We
      regularly adjust our investments in liquid assets based upon our assessment
      of
      (1) expected loan demand, (2) expected deposit flows, (3) yields available
      on
      interest-earning deposits and securities and (4) the objectives of our
      asset/liability management policy.





Our
      most
      liquid assets are cash and cash equivalents. The levels of these assets depend
      on our operating, financing, lending and investing activities during any given
      period. At December 31, 2005, cash and cash equivalents totaled $1,342,000.
      Securities classified as available-for-sale, which can provide additional
      sources of liquidity, totaled $8,153,000 at December 31, 2005. However, because
      all of these securities were in an unrealized loss position at December 31,
      2005, and because management has the intent and ability to hold these securities
      until recovery or maturity, management does not consider these securities as
      a
      source of liquidity at December 31, 2005. Also, at December 31, 2005, we had
      advances outstanding of $36,000,000 from the Federal Home Loan Bank of Atlanta.
      On that date, we had the ability to borrow an additional $15,329,000.





At
      December 31, 2005, we had outstanding commitments to originate loans of
      $2,425,000 (excluding the undisbursed portions of loans). These commitments
      do
      not necessarily represent future cash requirements since certain of these
      instruments may expire without being funded. We also extend lines of credit
      to
      customers, primarily home equity lines of credit. The borrower is able to draw
      on these lines as needed, thus the funding is generally unpredictable. Unused
      home equity lines of credit amounted to $5,073,000 at December 31, 2005 and
      unused commercial lines of credit amounted to $1,018,000 at December 31, 2005.
      Since the majority of unused lines of credit expire without being funded, it
      is
      anticipated that our obligation to fund the above commitment amount will be
      substantially less than the amounts reported.





Certificates
      of deposit accounts scheduled to mature within one year totaled $41,073,000,
      or
      37.47%, of total deposits at December 31, 2005. Management believes that
      the large percentage of deposits in shorter-term certificates of deposit
      reflects customers’ hesitancy to invest their funds in long-term certificates of
      deposit in the current low interest rate environment. If these deposits do
      not
      remain with us, we will be required to seek other sources of funds, including
      other certificates of deposit and/or additional borrowings. Depending on market
      conditions, we may be required to pay higher rates on such deposits or other
      borrowings than we currently pay on the certificates of deposit due on or before
      December 31, 2006. We believe, however, that, based on past experience, a
      significant portion of our certificates of deposit will remain with us. We
      believe we have the ability to attract and retain deposits by adjusting the
      interest rates offered.





17


The
      following table presents certain of our contractual obligations as of December
      31, 2005.





**Total**
            
            **Less
                than One Year**
            
            **One
                to Three Years**
            
            **Three
                to Five Years**
            
            **More
                than Five Years****Contractual
                Obligations**
            
            (In
                thousands)Long
                and short-term debtobligations
            
            $
            36,000
            
            $
            9,500
            
            $
            1,500
            
            $
            -
            
            $
            25,000Certificate
                of deposit maturities
            
            
            76,900
            
            
            41,073
            
            
            20,124
            
            
            15,703
            
            
            -Leases
            
            
            9
            
            
            9
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            112,909
            
            $
            50,582
            
            $
            21,624
            
            $
            15,703
            
            $
            25,000







Our
      borrowings are with the Federal Home Loan Bank of Atlanta and are secured by
      Federal Home Loan Bank of Atlanta stock that we own and a blanket lien on
      mortgages. Borrowings at December 31, 2005 consisted of $5,000,000 short term
      fixed rate FHLB advances bearing interest at 2.83%, and $26,500,000 long term
      fixed rate FHLB advances with interest rates ranging from 3.08% to 4.90%. There
      is also a $4,500,000 short term daily rate FHLB advance bearing an interest
      rate
      of 4.44% as of December 31, 2005. Borrowings at December 31, 2004 consisted
      of
      $20,000,000 short term fixed rate FHLB advances bearing interest at rates
      ranging from 1.57% to 2.44% and $6,500,000 long term fixed rate FHLB advances
      with interest rates ranging from 2.83% to 4.90%.





Our
      primary investing activity is the origination of loans, primarily one- to
      four-family residential mortgage loans, commercial loans, and the purchase
      of
      securities. Our primary financing activity consists of activity in deposit
      accounts and Federal Home Loan Bank of Atlanta advances. Asset growth has
      outpaced deposit growth over the past 18-21 months and the increased liquidity
      needed to fund the asset growth has been provided through increased Federal
      Home
      Loan Bank borrowings. Deposit flows are affected by the overall level of
      interest rates, the interest rates and products offered by us and our local
      competitors and other factors. We generally manage the pricing of our deposits
      to be competitive. Occasionally, we offer promotional rates on certain deposit
      products to attract deposits.





The
      following table presents our primary investing and financing activities during
      the periods indicated.







**Year
                Ended December 31,****2005**
            
            
            **2004**(In
                Thousands)Investing
              Activities:One-
                to four-family loan originations
            
            $
            27,444
            
            $
            30,228Other
                loan originations
            
            
            11,806
            
            
            5,780Financing
                Activities:(Decrease)
                Increase in deposits
            
            
            (88
            )
            
            11,884Increase
                in FHLB advances
            
            
            9,500
            
            
            10,000Proceeds
                from stock offering
            
            
            -
            
            
            11,544





The
      foregoing was consistent with our expectations and the pricing policies we
      implemented. All of our deposit products other than certificates of deposit
      decreased during 2005. Specifically, non-interest bearing deposits decreased
      by
      $878,000, NOW and money market demand deposits decreased by $2,695,000 and
      savings deposits decreased by $5,924,000, while certificates of deposit
      increased by $9,413,000. Deposits increased in 2004 as a result of approximately
      $2,535,000 of interest that we paid on existing accounts, from new funds of
      $11,816,000 deposited into a higher yielding statement savings account that
      we
      began to offer in July 2004 and $11,544,000 in net proceeds from our stock
      offering. The balance in the higher yielding statement savings account at
      December 31, 2005 was $7,400,000.





We
      are
      not aware of any known trends, events or uncertainties that will have or are
      reasonably likely to have a material effect on our liquidity, capital or
      operations, nor are we aware of any current recommendation by regulatory
      authorities, which if implemented, would have a material effect on liquidity,
      capital or operations.





18





**Capital
      Management** ******





We
      are
      subject to various regulatory capital requirements administered by the Office
      of
      Thrift Supervision, including a risk-based capital measure. The risk-based
      capital guidelines include both a definition of capital and a framework for
      calculating risk-weighted assets by assigning balance sheet assets and
      off-balance sheet items to broad risk categories. At December 31, 2005, we
      exceeded all of our regulatory capital requirements. We are considered “well
      capitalized” under regulatory guidelines. See note 14 of the notes to the
      consolidated financial statements.




**Off-Balance
      Sheet Arrangements**




In
      the
      normal course of operations, we engage in a variety of financial transactions
      that, in accordance with generally accepted accounting principles, are not
      recorded in our financial statements. These transactions involve, to varying
      degrees, elements of credit, interest rate, and liquidity risk. Such
      transactions are used primarily to manage customers’ requests for funding and
      take the form of loan commitments and lines of credit. Our exposure to credit
      loss from non-performance by the other party to the above-mentioned financial
      instruments is represented by the contractual amount of those instruments.
      We
      use the same credit policies in making commitments and conditional obligations
      as we do for on-balance-sheet instruments. In general, we do not require
      collateral or other security to support financial instruments with
      off-balance-sheet credit risk.




**Financial
                  Instruments Whose****Contract
                  Amount Represents**
              
              **Contract
                  Amount At****Credit
                  Risk**
              
              **December
                  31, 2005**
              
              **December
                  31, 2004**Lines
                  of credit - commercial
              
              $
              1,018
              
              $
              442Lines
                  of credit - home equity
              
              
              5,073
              
              
              3,603Lines
                  of credit - overdraft checking
              
              
              95
              
              
              14Mortgage
                  loan commitments
              
              
              2,425
              
              
              2,429


Commercial
      lines of credit are generally secured by a blanket lien on assets of the
      borrower. Revolving Lines of Credit (RLOC) are typically used for short term
      working capital needs and are based most heavily on the accounts receivable
      and
      inventory components of the borrower’s balance sheet. RLOC have terms of one
      year, are subject to annual reaffirmation and carry variable rates of interest.
      We generally receive a one percent fee, based on the commitment
      amount.





Equipment
      lines of credit are secured by equipment being purchased and sometimes by a
      blanket lien on assets of the borrower as well. Each advance is repaid over
      a
      three to five years and carries a variable or prevailing fixed rate of interest.
      We will generally advance up to 80% of the cost of the new or used equipment.
      These credit facilities are revolving in nature and the commitment is subject
      to
      annual reaffirmation.





For
      both
      types of credit facilities listed above, we evaluate each customer’s credit
      worthiness on a case-by-case basis.





Home
      equity lines of credit are secured by second deeds of trust on residential
      real
      estate. They have fixed expiration dates as long as there is no violation of
      any
      condition established in the contract. We evaluate each customer’s credit
      worthiness on a case-by-case basis.





Overdraft
      lines of credit on checking accounts are unsecured. Linked to any Slavie Federal
      personal checking account, the line will automatically make a deposit to the
      customer’s checking account if the balance falls below the amount needed to pay
      an item presented for payment.





Our
      outstanding commitments to make mortgages are at fixed rates ranging from 5.00%
      to 6.00% and 4.875% to 5.75% at December 31, 2005 and December 31, 2004,
      respectively. Loan commitments expire 60 days from the date of the
      commitment.




For
        the
        years ended December 31, 2005 and December 31, 2004, we engaged in no
        off-balance-sheet transactions reasonably likely to have a material effect
        on
        our financial condition, results of operations or cash flows.





19


**Recent
      Accounting Pronouncements**





In
      March
      2004, the EITF reached a consensus on Issue No. 03-1, “The Meaning of
      Other-Than-Temporary Impairment and Its Application to Certain Investments.”
EITF 03-1 provides guidance on other-than-temporary impairment models for
      marketable debt and equity securities accounted for under SFAS 115 and
      non-marketable equity securities accounted for under the cost method. The EITF
      developed a basic three-step model to evaluate whether an investment is
      other-than-temporarily impaired. In November 2005, the FASB approved the
      issuance of FASB Staff Position FAS No. 115-1 and FAS 124-1, “The Meaning
      of Other-Than-Temporary Impairment and Its Application to Certain Investments.”
The FSP addresses when an investment is considered impaired, whether the
      impairment is other-than-temporary and the measurement of an impairment loss.
      The FSP also includes accounting considerations subsequent to the recognition
      of
      an other-than-temporary impairment and requires certain disclosures about
      unrealized losses that have not been recognized as other-than-temporary. The
      FSP
      is effective for reporting periods beginning after December 15, 2005 with
      earlier application permitted. The effective date for SFSB, Inc. will be the
      first quarter of 2006. The adoption of this accounting principle is not expected
      to have a significant impact on our financial position or results of operations.




**Impact
      of Inflation and Changing Prices**





The
      financial statements and related notes of Slavie Federal Savings Bank have
      been
      prepared in accordance with GAAP. GAAP generally requires the measurement of
      financial position and operating results in terms of historical dollars, without
      consideration for changes in the relative purchasing power of money over time
      due to inflation. The impact of inflation on our operations is reflected in
      increased operating costs. Unlike most industrial companies, virtually all
      of
      our assets and liabilities are primarily monetary in nature. As a result,
      interest rates generally have a more significant impact on our performance
      than
      does the effect of inflation. Interest rates do not necessarily move in the
      same
      direction or in the same magnitude as the prices of goods and services, since
      such prices are affected by inflation to a larger extent than interest rates.
      For a discussion of the possible effect of changes in interest rates on our
      operations, see “- Management of Market Risk.”





**Forward
      Looking Statements**





In
      addition to the historical information contained herein, this Annual Report
      contains certain forward-looking statements. Forward-looking statements often
      use words such as “believe,” “expect,” “plan,” “may,” “will,” “should,”
“project,” “contemplate,” “anticipate,” “forecast,” “intend” or other words of
      similar meaning. You can also identify them by the fact that they do not relate
      strictly to historical or current facts. These forward-looking statements
      include statements regarding profitability, liquidity, allowance for loan
      losses, interest rate sensitivity, market risk and financial and other goals.




These
        forward-looking statements are based on our beliefs, assumptions and on
        information available to us as of the date of this Annual Report, and involve
        risks and uncertainties. These risks and uncertainties include, among others,
        the effect of rising interest rates on our profits and asset values; risks
        related to our intended increased focus on commercial real estate and commercial
        business loans; our limited recognition and reputation in our markets; adverse
        economic conditions in our market area; the dependence on key personnel;
        competitive factors within our market area; the effect of developments in
        technology on our business; adverse changes in the overall national economy
        as
        well as adverse economic conditions in our specific market area; adequacy
        of the
        allowance for loan losses; expenses as a result of our stock benefit plans;
        our
        ability to successfully utilize the proceeds from our recent stock offering
        and
        changes in regulatory requirements
 
 Our
        actual results and the actual outcome of our expectations and strategies
        could
        be different from that described in this Annual Report because of these risks
        and uncertainties and you should not put undue reliance on any forward-looking
        statements.





20




**SFSB,
        Inc. and Subsidiaries**


**TABLE
          OF CONTENTS**
  **Page
                    No.****Consolidated
                    Financial Statements**Report
                    of Independent Registered Public Accounting Firm
                1Consolidated
                    Statements of Financial Condition
                2Consolidated
                    Statements of Operations
                3Consolidated
                    Statements of Stockholders’ Equity
                4Consolidated
                    Statements of Cash Flows
                5Notes
                    to Consolidated Financial Statements
                6
                    - 24
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 
 Board
        of
        Directors
 SFSB,
        Inc.
 Bel
        Air,
        Maryland
 
 We
        have
        audited the accompanying consolidated statements of financial condition of
        SFSB,
        Inc. and Subsidiaries as of December 31, 2005 and 2004, and the related
        consolidated statements of operations, stockholders’ equity and cash flows for
        the years then ended. These consolidated financial statements are the
        responsibility of the Company’s management. Our responsibility is to express an
        opinion on these consolidated financial statements based on our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the
        consolidated financial statements are free of material misstatement. The
        Company
        is not required to have, nor were we engaged to perform, an audit of its
        internal control over financial reporting. Our audits included consideration
        of
        internal control over financial reporting as a basis of designing audit
        procedures that are appropriate in the circumstances, but not for the purpose
        of
        expressing an opinion on the effectiveness of the Company’s internal control
        over financial reporting. Accordingly, we express no such opinion. An audit
        also
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the consolidated financial statements, assessing the accounting
        principles used and significant estimates made by management, as well as
        evaluating the overall consolidated financial statement presentation. We
        believe
        that our audits provide a reasonable basis for our opinion.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of SFSB, Inc. and Subsidiaries
        as of December 31, 2005 and 2004, and the results of their operations and
        their
        cash flows for the years then ended, in conformity with accounting principles
        generally accepted in the United States of America.
 
 /s/
                    Beard Miller Company
                    LLP
 
 Beard
        Miller Company LLP
 Baltimore,
        Maryland
 January
        28, 2006
 
 
 
 
 **SFSB,
        Inc. and Subsidiaries**
 **CONSOLIDATED
        STATEMENTS OF FINANCIAL CONDITION**
  **December
                  31,**
              ********
              ****
              **2005**
              
              **2004**(In
                  thousands, except for per share data)**ASSETS**Cash
                  and due from banks
              
              **$**
              **710**
              
              $
              746Federal
                  funds sold
              
              
              **632**
              
              
              14,851Cash
                  and cash equivalents
              
              
              **1,342**
              
              
              15,597Investment
                  securities - available for sale
              
              
              **8,153**
              
              
              7,981Investment
                  securities - held to maturity
              
              
              **3,998**
              
              
              3,996Mortgage
                  backed securities - held to maturity
              
              
              **4,525**
              
              
              6,981Loans
                  receivable - net of allowance for loanlosses
                  2005 $474; 2004 $413
              
              
              **144,609**
              
              
              117,900Federal
                  Home Loan Bank of Atlanta stock at cost
              
              
              **1,955**
              
              
              1,446Premises
                  and equipment, at cost, less accumulated depreciation
              
              
              **5,612**
              
              
              5,842Accrued
                  interest receivable
              
              
              **487**
              
              
              426Other
                  assets
              
              
              **386**
              
              
              264**Total
                  assets**
              
              **$**
              **171,067**
              
              $
              160,433**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY****Liabilities**Deposits
              
              **$**
              **109,623**
              
              $
              109,711Checks
                  outstanding in excess of bank balance
              
              
              **1,919**
              
              
              628Borrowings
              
              
              **36,000**
              
              
              26,500Advance
                  payments by borrowers for taxes and insurance
              
              
              **372**
              
              
              329Other
                  liabilities
              
              
              **348**
              
              
              645**Total
                  liabilities**
              
              
              **148,262**
              
              
              137,813**Commitments
                  and contingencies****Stockholders’
                  Equity**Preferred
                  stock, no par value, 1,000,000 shares authorized,none
                  issued and outstanding
              
              
              -
              
              
              -Common
                  stock, par value $.01, 9,000,000 shares authorized,2,975,625
                  shares issued and outstanding atDecember
                  31, 2005 and 2004
              
              
              **30**
              
              
              30Additional
                  paid-in capital
              
              
              **12,730**
              
              
              12,680Retained
                  earnings (substantially restricted)
              
              
              **11,375**
              
              
              11,136Unearned
                  Employee Stock Ownership Plan shares
              
              
              **(1,108**
              **)**
              
              (1,166
              )Treasury
                  stock at cost, 2005 10,000 shares
              
              
              **(96**
              **)**
              
              -Accumulated
                  other comprehensive loss
              
              
              **(126**
              **)**
              
              (60
              )**22,805**
              
              
              22,620**Total
                  liabilities and stockholders’ equity**
              
              **$**
              **171,067**
              
              $
              160,433
 See
        notes
        to consolidated financial statements.
 
 **SFSB,
            Inc. and Subsidiaries**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
  **Years
                    Ended December 31,****2005**
                
                **2004**(In
                    thousands, except for per share data)Interest
                    and fees on loans
                
                **$**
                **6,875**
                
                $
                5,785Interest
                    and dividends on investment securities
                
                
                **432**
                
                
                340Interest
                    on mortgage backed securities
                
                
                **204**
                
                
                288Other
                    interest income
                
                
                **209**
                
                
                104**Total
                    interest income**
                
                
                **7,720**
                
                
                6,517Interest
                    on deposits
                
                
                **2,988**
                
                
                2,528Interest
                    on short-term borrowings
                
                
                **119**
                
                
                305Interest
                    on long-term borrowings
                
                
                **688**
                
                
                242**Total
                    interest expense**
                
                
                **3,795**
                
                
                3,075**Net
                    interest income**
                
                
                **3,925**
                
                
                3,442Provision
                    for loan losses
                
                
                **58**
                
                
                50**Net
                    interest income after provision for loan**l**osses**
                
                
                **3,867**
                
                
                3,392**Other
                    Income**Loss
                    on sale of ground rents
                
                
                **-**
                
                
                (102
                )Rental
                    income
                
                
                **139**
                
                
                107Other
                    income
                
                
                **94**
                
                
                72Gain
                    on sale of loan
                
                
                **1**
                
                
                1**Net
                    other income**
                
                
                **234**
                
                
                78**Non-Interest
                    Expenses**Compensation
                    and other related expenses
                
                
                **1,777**
                
                
                1,465Occupancy
                    expense
                
                
                **472**
                
                
                399Advertising
                    expense
                
                
                **179**
                
                
                184Service
                    bureau expense
                
                
                **155**
                
                
                149Furniture,
                    fixtures and equipment
                
                
                **230**
                
                
                213Telephone,
                    postage and delivery
                
                
                **88**
                
                
                88Other
                    expenses
                
                
                **799**
                
                
                510**Total
                    non-interest expenses**
                
                
                **3,700**
                
                
                3,008**Income
                    before income tax provision**
                
                
                **401**
                
                
                462Income
                    tax provision
                
                
                **162**
                
                
                192**Net
                    income**
                
                **$**
                **239**
                
                $
                270**Basic
                    Earnings per Share**
                
                **$**
                **0.08**
                
                
                N/A**Diluted
                    Earnings Per Share**
                
                **$**
                **0.08**
                
                
                N/A
 See
        notes
        to consolidated financial statements.
  **SFSB,
            Inc. and Subsidiaries**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS’ EQUITY**
 **YEARS
        ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004**
 
 
 **Unearned****Employee**
              
              
              
              **Accumulated****Additional**
              
              
              
              **Stock**
              
              
              
              **Other****Common**
              
              **Paid-In**
              
              **Retained**
              
              **Ownership**
              
              **Treasury**
              
              **Comprehensive****Stock**
              
              **Capital**
              
              **Earnings**
              
              **Plan
                  Shares**
              
              **Stock**
              
              **(Loss)**
              
              **Total**(Dollars
                  in Thousands)**BALANCE
                  - JANUARY 1, 2004**
              
              $
              -
              
              $
              -
              
              $
              10,966
              
              $
              -
              
              $
              -
              
              $
              (26
              )
              $
              10,940Comprehensive
                  income:Net
                  income
              
              
              -
              
              
              -
              
              
              270
              
              
              -
              
              
              -
              
              
              -
              
              
              270Net
                  unrealized loss on securitiesavailable
                  for sale, net of taxes of $21
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (34
              )
              
              (34
              )Total
                  Comprehensive Income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              236Issuance
                  of common stock
              
              
              30
              
              
              12,680
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              12,710Stock
                  purchased by EmployeeStock
                  Ownership Plan
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,166
              )
              
              -
              
              
              -
              
              
              (1,166
              )Capitalization
                  of mutual holdingcompany
              
              
              -
              
              
              -
              
              
              (100
              )
              
              -
              
              
              -
              
              
              -
              
              
              (100
              )**BALANCE
                  - DECEMBER 31, 2004**
              
              
              30
              
              
              12,680
              
              
              11,136
              
              
              (1,166
              )
              
              -
              
              
              (60
              )
              
              22,620Comprehensive
                  income:Net
                  income
              
              
              -
              
              
              -
              
              
              **239**
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **239**Net
                  unrealized loss on securitiesavailable
                  for sale, net of taxes of $41
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              **-**
              ****
              ****
              **(66**
              **)**
              ****
              **(66**
              **)**Total
                  Comprehensive Income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              **-**
              ****
              ****
              **173**Compensation
                  underStock
                  based benefit plans
              
              
              -
              
              
              **50**
              ****
              ****
              **-**
              ****
              ****
              **58**
              
              
              -
              
              
              -
              
              
              **108**Purchase
                  of treasury stock (10,000 shares)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              **(96**
              **)**
              
              -
              
              
              **(96**
              **)****BALANCE
                  - DECEMBER 31, 2005**
              ****
              **$**
              **30**
              ****
              **$**
              **12,730**
              ****
              **$**
              **11,375**
              ****
              **$**
              **(1,108**
              **)**
              **$**
              **(96**
              **)**
              **$**
              **(126**
              **)**
              **$**
              **22,805**
  See
        notes
        to consolidated financial statements.
  **SFSB,
            Inc. and Subsidiaries**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
  **Years
                    Ended December 31,**
                ********
                **2005**
                ****
                **2004**(In
                    thousands)**Cash
                    Flows From Operating Activities**Net
                    income
                
                **$**
                **239**
                
                $
                270Adjustments
                    to reconcile net income to net cashprovided
                    by operating activities:Non-cash
                    compensation under stock based benefit plans
                
                
                **108**
                
                
                -Net
                    amortization of premiums and discounts
                
                
                **26**
                
                
                40Amortization
                    of deferred loan fees
                
                
                **(72**
                **)**
                
                (98
                )Provision
                    for loan losses
                
                
                **58**
                
                
                50Gain
                    on sale of loans
                
                
                **(1**
                **)**
                
                (1
                )Loss
                    on ground rents
                
                
                **-**
                
                
                102Provision
                    for depreciation
                
                
                **373**
                
                
                323Increase
                    in accrued interest receivableand
                    other assets
                
                
                **(141**
                **)**
                
                (79
                )Increase
                    in accrued interest payable
                
                
                **31**
                
                
                20Increase
                    (decrease) in other liabilities
                
                
                **(332**
                **)**
                
                419**Net
                    Cash Provided by Operating Activities**
                
                
                **289**
                
                
                1,046**Cash
                    Flows from Investing Activities**Purchase
                    of available for sale securities
                
                
                **(278**
                **)**
                
                (187
                )Principal
                    collected on mortgage backed securities
                
                
                **2,426**
                
                
                3,242Net
                    increase in loans
                
                
                **(26,693**
                **)**
                
                (24,642
                )Purchase
                    of Federal Home Loan Bank of Atlanta stock
                
                
                **(735**
                **)**
                
                (921
                )Redemption
                    of Federal Home Loan Bank of Atlanta Stock
                
                
                **226**
                
                
                300Purchases
                    of premises and equipment
                
                
                **(143**
                **)**
                
                (115
                )Proceeds
                    from redemption of ground rents
                
                
                **-**
                
                
                53**Net
                    Cash Used in Investing Activities**
                
                
                **(25,197**
                **)**
                
                (22,270
                )**Cash
                    Flows from Financing Activities**Net
                    (decrease) increase in deposits
                
                
                **(85**
                **)**
                
                11,884(Decrease)
                    increase in checks outstanding in excess of bank balance
                
                
                **1,291**
                
                
                (55
                )Proceeds
                    from borrowings
                
                
                **14,500**
                
                
                10,000Repayment
                    of borrowings
                
                
                **(5,000**
                **)**
                
                -Increase
                    in advance payments by borrowersfor
                    taxes and insurance
                
                
                **43**
                
                
                50Proceeds
                    from common stock offering
                
                
                **-**
                
                
                12,710Purchase
                    of shares for ESOP
                
                
                **-**
                
                
                (1,166
                )Purchase
                    of treasury stock
                
                
                **(96**
                **)**
                
                -Capitalization
                    of mutual holding company
                
                
                **-**
                
                
                (100
                )**Net
                    Cash Provided by Financing Activities**
                
                
                **10,653**
                
                
                33,323(Decrease)
                      increase in cash and cash equivalents
                
                
                **(14,255**
                **)**
                
                12,099Cash
                      and cash equivalents at beginning of year
                
                
                **15,597**
                
                
                3,498**Cash
                    and cash equivalents at end of year**
                
                **$**
                **1,342**
                
                $
                15,597**Supplemental
                    Disclosures of Cash Flows Information:****Cash
                    paid during the year for:**Income
                    taxes
                
                **$**
                **202**
                
                $
                81Interest
                    expense
                
                **$**
                **3,764**
                
                $
                3,056
 See
        notes
        to consolidated financial statements.
  **SFSB,
            Inc. and Subsidiaries**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        1 - Summary of Significant Accounting Policies**
 
 **Principles
        of Consolidation**
 
 The
        consolidated financial statements include the accounts of SFSB, Inc. (“the
        Company”), its wholly-owned subsidiaries, Slavie Federal Savings Bank (“the
        Bank”) and the Bank’s wholly-owned subsidiary, Slavie Holdings, LLC
        (“Holdings”). The accompanying consolidated financial statements include the
        accounts and transactions of these companies on a consolidated basis since
        inception. All intercompany accounts and transactions have been eliminated
        in
        the consolidated financial statements.
 
 On
        December 30, 2004, the Bank reorganized from a federally chartered mutual
        savings bank to a federally chartered stock savings bank. Simultaneously,
        the
        Bank consummated the formation of a new holding company, SFSB, Inc. Also
        simultaneously, a mutual holding company was formed, Slavie Bancorp, MHC.
        In
        connection with the reorganization, the Company issued 2,975,625 shares of
        its
        common stock. A majority of that stock (1,636,594 shares) was issued to Slavie
        Bancorp, MHC. The remainder was sold and issued to depositors of the Bank
        and to
        the Employee Stock Ownership Plan for a total price of $13,390,000. Costs
        associated with the conversion, totaling $680,000 were deducted from the
        sale
        proceeds. Prior to the consummation of the reorganization, the Company had
        no
        assets or liabilities. Accordingly, the Company’s financial statements consist
        of those of the Bank for periods prior to December 30, 2004.
 
 **Business**
 
 The
        Company’s primary business is the ownership and operation of the Bank. The
        Bank’s primary business activity is the acceptance of deposits from the general
        public and the use of the proceeds for investments and loan originations.
        The
        Bank is subject to competition from other financial institutions. The Bank
        is
        subject to the regulations of certain federal agencies and undergoes periodic
        examinations by those regulatory authorities.
 
 Holdings,
        formed on August 18, 1999 as a Maryland limited liability company, was created
        to acquire and manage certain real property located at 1614 Churchville Road,
        Bel Air, Maryland. This property includes the main office and corporate
        headquarters of the Bank. In addition, the property houses mixed use office
        space, which is available for lease. As of December 31, 2005, approximately
        81%
        of the available space to non-affiliated tenants was leased.
 
 **Significant
        Group Concentrations of Credit Risk**
 
 Most
        of
        the Bank’s activities are with customers located within the greater Baltimore
        metropolitan area. The Bank does not have any significant concentrations
        to any
        one industry or customer.
 
 **Estimates**
 
 The
        consolidated financial statements have been prepared in conformity with
        accounting principles generally accepted in the United States of America.
        In
        preparing the financial statements, management is required to make estimates
        and
        assumptions that affect the reported amounts of assets and liabilities as
        of the
        date of the statement of financial condition and revenues and expenses for
        the
        period. Actual results could differ significantly from those estimates. The
        material estimate that is particularly susceptible to significant change
        in the
        near-term relates to the determination of the allowance for loan losses.
  
 **SFSB,
          Inc. and Subsidiaries**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        1 - Summary of Significant Accounting Policies - Continued**
 
 **Investments
        and Mortgage Backed Securities**
 
 Available
        for sale investment securities consist of an investment in Adjustable Rate
        Mortgage Portfolio Mutual Funds. Securities available for sale are carried
        at
        fair value. Unrealized gains and losses, net of tax, on available for sale
        securities are reported as other comprehensive income until realized. Realized
        gains and losses on sales, determined using the specific identification method,
        are included in earnings.
 
 Investments
        and mortgage-backed securities held to maturity are carried at amortized
        cost
        since management has the ability and intention to hold them to maturity.
        Amortization of related premiums and discounts are computed using the level
        yield method over the terms of the securities.
 
 The
        Company evaluates securities for other-than-temporary impairment on a quarterly
        basis. Consideration is given to (1) the length of time and the extent to
        which
        the fair value has been less than the cost, (2) the financial condition and
        near-term prospects of the issuer, and (3) the intent and ability of the
        Company
        to retain its investment in the issuer for a period of time sufficient to
        allow
        for an anticipated recovery in fair value. In evaluating 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.
 
 **Loans
        Receivable**
 
 Loans
        receivable that management has the intent and ability to hold until maturity
        or
        payoff are stated at their outstanding unpaid principal balances, net of
        an
        allowance for loan losses and any deferred fees. Interest income is accrued
        on
        the unpaid principal balance. Loan origination fees and certain direct loan
        origination costs are deferred and recognized by the level yield method over
        the
        contractual life of the related loan as an adjustment of yield.
 
 The
        accrual of interest is generally discontinued when contractual payment of
        principal or interest has become 90 days past due or management has serious
        doubts about further collectibility of principal or interest, even though
        the
        loan is currently performing. A loan may remain on accrual status if it is
        in
        the process of collection and is either guaranteed or well secured. When
        a loan
        is placed on nonaccrual status, unpaid interest credited to income in the
        current year is reversed and unpaid interest accrued in prior years is charged
        against the allowance for loan losses. Interest received on nonaccrual loans
        generally is either applied against principal or reported as interest income,
        according to management’s judgment as to the collectibility of principal.
        Generally, loans are restored to accrual status when the obligation is brought
        current, has performed in accordance with the contractual terms for a reasonable
        period of time and the ultimate collectibility of the total contractual
        principal and interest is no longer in doubt.
 
  
 **SFSB,
          Inc. and Subsidiaries**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        1 - Summary of Significant Accounting Policies - Continued**
 
 **Allowance
        for Loan Losses**
 
 An
        allowance for loan losses is provided through charges to income in an amount
        that management believes necessary for known and inherent losses in the loan
        portfolio that are both probable and estimable, based on evaluations of the
        collectibility of loans and prior loan loss experience. The evaluations take
        into consideration such factors as changes in the nature and volume of the
        loan
        portfolio, overall portfolio quality, review of specific problem loans, and
        current economic conditions that may affect the borrowers' ability to pay.
        Determining the amount of the allowance for loan losses requires the use
        of
        estimates and assumptions, which is permitted under accounting principles
        generally accepted in the United States of America. Actual results could
        differ
        significantly from those estimates. While management uses available information
        to estimate losses on loans, future additions to the allowances may be necessary
        based on changes in economic conditions, particularly in the State of Maryland.
        In addition, various regulatory agencies, as an integral part of their
        examination process, periodically review the Bank’s allowances for losses on
        loans. Such agencies may require the Bank to recognize additions to the
        allowances based on their judgments about information available to them at
        the
        time of their examination. Statement of Financial Accounting Standards (“SFAS”)
        No. 114, as amended by SFAS No. 118 addresses the accounting by creditors
        for
        impairment of certain loans. It is generally applicable for all loans except
        large groups of smaller balance homogeneous loans that are evaluated
        collectively for impairment, including residential mortgage loans and consumer
        installment loans. It also applies to all loans that are restructured in
        a
        troubled debt restructuring involving a modification of terms. SFAS No. 114
        requires that the impaired loans be measured based on the present value of
        expected future cash flows discounted at the loan’s effective interest rate, or
        at the loan’s observable market price or the fair value of the collateral if the
        loan is collateral dependent. A loan is considered impaired when, based on
        current information and events, it is probable that a creditor will be unable
        to
        collect all amounts due according to the contractual terms of the loan
        agreement. Loans are reviewed for impairment on a monthly basis. The Company’s
        methodology for assessing the adequacy of the allowance for loan losses consists
        of three key elements: (i) specific allowances for identified problem loans,
        including certain impaired or collateral-dependent loans; (ii) a general
        valuation allowance on certain identified problem loans; and (iii) a general
        valuation allowance on the remainder of the loan portfolio.
 
 *Specific
        Allowance on Identified Problem Loans.* The
        loan
        portfolio is segregated first between loans that are on the “watch list” and
        loans that are not. Each loan on the watch list is reviewed and an individual
        reserve allocation is established on certain loans based on such factors
        as: (i)
        the strength of the customer’s personal or business cash flow; (ii) the
        availability of other sources of repayment; (iii) the amount due or past
        due;
        (iv) the type and value of collateral; (v) the strength of the collateral
        position; (vi) the estimated cost to sell the collateral; and (vii) the
        borrower’s effort to cure the delinquency. If necessary, an allowance for
        certain impaired loans is established for the amounts by which the discounted
        cash flows (or collateral value or observable market price) are lower than
        the
        carrying value of the loan.
 
 
 
  
 **SFSB,
          Inc. and Subsidiaries**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        1 - Summary of Significant Accounting Policies - Continued**
 
 **Allowance
        for Loan Losses - continued**
 
 *General
        Valuation Allowance on Certain Identified Problem Loans.* A
        general allowance is established for watch list loans that do not have an
        individual allowance. These loans are segregated by loan category and allowance
        percentages are assigned to each category based on inherent losses associated
        with each type of lending and consideration that these loans, in the aggregate,
        represent an above-average credit risk and that more of these loans will
        prove
        to be uncollectible compared to loans in the general portfolio.
 
 *General
        Valuation Allowance on the Remainder of the Loan Portfolio.* A
        general allowance is established for loans that are not on the watch list
        to
        recognize the inherent losses associated with lending activities, but which,
        unlike specific allowances, has not been allocated to particular problem
        assets.
        This general valuation allowance is determined by segregating the loans by
        loan
        category and assigning allowance percentages based on the historical loss
        experience and delinquency trends. The allowance may be adjusted for significant
        factors that, in management’s judgment, affect the collectibility of the
        portfolio as of the evaluation date. These significant factors may include
        changes in lending policies and procedures, changes in existing general economic
        and business conditions affecting primary lending areas, credit quality trends,
        collateral value, loan volumes and concentrations, seasoning of the loan
        portfolio, specific industry conditions within portfolio segments, recent
        loss
        experience in a particular segment of the portfolio, duration of the current
        business cycle and bank regulatory examination results. The applied loss
        factors
        are reevaluated regularly to ensure their relevance in the current
        environment.
 
 **Premises
        and Equipment**
 
 Premises
        and equipment are recorded at cost. Depreciation is computed on the
        straight-line method, based on the useful lives of the respective
        assets.
 
 **Income
        Taxes**
 
 Deferred
        income taxes are recognized for temporary differences between the financial
        reporting basis and income tax basis of assets and liabilities based on enacted
        tax rates expected to be in effect when such amounts are realized or settled.
        Deferred tax assets are recognized only to the extent that is more likely
        than
        not that such amounts will be realized based on consideration of available
        evidence. The effect on deferred tax assets and liabilities of a change in
        tax
        rates is recognized in income in the period that includes the enactment
        date.
 
 **Advertising
        Costs**
 
 Advertising
        costs are expensed as incurred.
 
 **Cash
        and Cash Equivalents**
 
 For
        the
        statement of cash flows, cash and cash equivalents include cash on hand,
        cash in
        banks, Federal Home Loan Bank overnight deposits and federal funds sold.
        Generally, federal funds are sold for one day periods.
  
 **SFSB,
          Inc. and Subsidiaries**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        1 - Summary of Significant Accounting Policies - Continued**
 
 **Off-Balance
        Sheet Financial Instruments**
 
 In
        the
        ordinary course of business, the Bank has entered into off-balance sheet
        financial instruments consisting of commitments to extend credit. Such financial
        instruments are recorded in the balance sheet when they are funded.
 
 **Comprehensive
        Income**
 
 Accounting
        principles generally require that recognized revenue, expenses, gains and
        losses
        be included in net income. Although certain changes in assets and liabilities,
        such as unrealized gains and losses on securities available for sale, are
        reported as a separate component of the equity section of the balance sheet,
        such items, along with net income, are components of comprehensive
        income.
 
 **Earnings
        Per Share**
 
 Basic
        earnings per share is computed by dividing net income by the weighted average
        number of common shares outstanding for the appropriate period. Unearned
        Employee Stock Ownership Plan (“ESOP”) shares are not included in outstanding
        shares. Diluted earnings per share is computed by dividing net income by
        the
        weighted average shares outstanding as adjusted for the dilutive effect of
        stock
        options and unvested stock awards based on the “treasury stock” method. Earnings
        per share has not been presented for the year ended December 31, 2004 since
        the
        company converted to stock form on December 30, 2004 and such information
        would
        not be meaningful. Information related to the calculation of earnings per
        share
        is summarized for the year ended December 31, 2005, as follows:
 
 (in
                  thousands, except per share data)
              
              **Year
                  ended****December
                  31, 2005**Basic
              
              DilutedNet
                  income
              
              $
              239
              
              $
              239Weighted
                  average common shares outstanding
              
              
              2,853
              
              
              2,853Diluted
                  securities:Stock
                  options
              
              
              **-**
              
              
              1Adjusted
                  weighted average shares
              
              
              2,853
              
              
              2,854Per
                  share amount
              
              $
              0.08
              
              $
              0.08
 
  
 **SFSB,
          Inc. and Subsidiaries**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        1 - Summary of Significant Accounting Policies - Continued**
 
 **Employee
        Stock Ownership Plan**
 
 The
        Company accounts for its employee stock ownership plan (“ESOP”) in accordance
        with American Institute of Certified Public Accountants (AICPA) Statement
        of
        Position 93-6. The cost of shares issued to the ESOP but not yet allocated
        to
        participants is presented in the consolidated balance sheet as a reduction
        of
        stockholders’ equity. Compensation expense is recorded based on the market price
        of the shares as they are committed to be released for allocation to participant
        accounts. The difference between the market price and the cost of shares
        committed to be released is recorded as an adjustment to additional paid-in
        capital. Dividends on allocated ESOP shares are recorded as a reduction of
        retained earnings; dividends on unallocated ESOP shares are reflected as
        a
        reduction of debt.
 
 Shares
        are considered outstanding for earnings per share calculations when they
        are
        committed to be released; unallocated shares are not considered outstanding.
 
 
 **Note
        2 - Investment Securities - Available for Sale**
 
 The
        amortized cost and fair value of available for sale investment securities
        are as
        follows:
 
 **Gross**
              
              **Gross****Amortized**
              
              **Unrealized**
              
              **Unrealized**
              
              **Fair****Cost**
              
              **Gains**
              
              **Losses**
              
              **Value**(In
                  thousands)**December
                  31, 2005:**Adjustable
                  Rate MortgagePortfolio
                  Mutual Funds
              
              $
              8,358
              
              $
              -
              
              $
              205
              
              $
              8,153**December
                  31, 2004:**Adjustable
                  Rate MortgagePortfolio
                  Mutual Funds
              
              $
              8,078
              
              $
              -
              
              $
              97
              
              $
              7,981
 
 No
        gains
        or losses were realized for the years ended December 31, 2005 and 2004. The
        mutual funds have no stated maturity date.
  
 **SFSB,
          Inc. and Subsidiaries**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        3 - Investment Securities - Held to Maturity**
 
 The
        amortized cost and fair value of held to maturity investment securities are
        as
        follows:
  **Amortized**Cost
              
              **Gross**UnrealizedGains
              
              **Gross**UnrealizedLosses
              
              **Fair**Value(In
                  thousands)**December
                  31, 2005:**FNMA
                  Note
              
              **$**
              **998**
              
              **$**
              **-**
              
              **$**
              **40**
              
              **$**
              **958**FHLB
                  Notes
              
              
              **2,000**
              
              
              **-**
              
              
              **48**
              
              
              **1,952**FFCB
                  Note
              
              
              **1,000**
              
              
              **-**
              
              
              **26**
              
              
              **974**Total
              
              **$**
              **3,998**
              
              **$**
              **-**
              
              **$**
              **114**
              
              **$**
              **3,884****December
                  31, 2004:**FNMA
                  Note
              
              $
              996
              
              $
              -
              
              $
              18
              
              $
              978FHLB
                  Notes
              
              
              2,000
              
              
              -
              
              
              11
              
              
              1,989FFCB
                  Note
              
              
              1,000
              
              
              -
              
              
              10
              
              
              990Total
              
              $
              3,996
              
              $
              -
              
              $
              39
              
              $
              3,957
  The
        scheduled maturities of held to maturity investment securities at December
        31,
        2005 are shown below:
  **Amortized**
              
              **Fair****Cost**
              
              **Value**(In
                  thousands)Due
                  after one year throughfive
                  years
              
              **$**
              **2,998**
              
              **$**
              **2,910**Due
                  after ten years
              
              
              **1,000**
              
              
              **974**Total
              
              **$**
              **3,998**
              
              **$**
              **3,884**
  **Note
        4 - Mortgage Backed Securities - Held to Maturity**
 
 The
        amortized cost and fair value of mortgage backed securities - held to maturity
        are as follows:
  **Amortized**Cost
              
              **Gross**UnrealizedGains
              
              **Gross**UnrealizedLosses
              
              **Fair**Value(In
                  Thousands)**December
                  31, 2005**FHLMC
              
              **$**
              **2,175**
              
              **$**
              **-**
              
              **$**
              **79**
              
              **$**
              **2,096**GNMA
              
              
              **2,054**
              
              
              **1**
              
              
              **19**
              
              
              **2,036**FNMA
              
              
              **296**
              
              
              **_2**
              
              
              **-**
              
              
              **298****$**
              **4,525**
              
              **$**
              **3**
              
              **$**
              **98**
              
              **$**
              **4,430****December
                  31, 2004**FHLMC
              
              $
              2,986
              
              $
              1
              
              $
              37
              
              $
              2,950GNMA
              
              
              3,529
              
              
              11
              
              
              6
              
              
              3,534FNMA
              
              
              466
              
              
              8
              
              
              -
              
              
              474$
              6,981
              
              $
              20
              
              $
              43
              
              $
              6,958
 
 **SFSB,
            Inc. and Subsidiaries**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        5 - Gross Unrealized Losses of Investment Securities**
 
 Below
        are
        schedules of securities with unrealized losses as of December 31, 2005 and
        2004.
        The Company’s unrealized losses are the result of interest rate levels differing
        from those existing at the time of purchase of the securities and, as to
        mortgage backed securities, actual and estimated prepayment speeds. These
        unrealized losses are considered temporary as they reflect market values
        on
        December 31, 2005 and are subject to change daily as interest rates fluctuate.
        The Company has the ability and intent to hold the securities until the earlier
        of recovery or maturity. At December 31, 2005 the company’s equity securities
        have unrealized loss depreciation of 2.50% from the company’s cost basis. No
        credit risk issues have been identified that cause management to believe
        the
        declines in fair value are other than temporary. In analyzing the issuer’s
        financial condition, management considers industry analysts’ reports, financial
        performance and projected target prices of investment analysts.
 
 
 The
        following table shows the Company’s gross unrealized losses and fair value on
        investments at December 31, 2005 and 2004:
  ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ********
              ****
              **Continuous
                  Unrealized Losses****For
                  Less than**
              
              **For
                  More Than****12
                  Months**
              
              **12
                    Months**
              
              **Total****Fair**
              
              **Unrealized**
              
              **Fair**
              
              **Unrealized**
              
              **Fair**
              
              **Unrealized****Value**
              
              **Losses**
              
              **Value**
              
              **Losses**
              
              **Value**
              
              **Losses**(In
                  thousands)
              ******December
                  31, 2005**
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ******Available
                  for Sale Securities**
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****Adjustable
                  Rate Mortgage
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****Portfolio
                  Mutual Funds
              ****
              **$**
              **-**
              ****
              **$**
              **-**
              ****
              **$**
              **8,153**
              ****
              **$**
              **205**
              ****
              **$**
              **8,153**
              ****
              **$**
              **205**
              ******Held
                  to Maturity Securities**
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****FNMA
                  Note - 1 security
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **958**
              ****
              ****
              **40**
              ****
              ****
              **958**
              ****
              ****
              **40**
              ****FHLB
                  Note - 2 securities
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **1,952**
              ****
              ****
              **48**
              ****
              ****
              **1,952**
              ****
              ****
              **48**
              ****FFCB
                  Note - 1 security
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **974**
              ****
              ****
              **26**
              ****
              ****
              **974**
              ****
              ****
              **26**
              ********
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ******Mortgage
                  Backed Securities**
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****FHLMC
                  - 3 securities
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **2,078**
              ****
              ****
              **79**
              ****
              ****
              **2,078**
              ****
              ****
              **79**
              ****GNMA
                  - 2 securities
              ****
              ****
              **715**
              ****
              ****
              **5**
              ****
              ****
              **1,127**
              ****
              ****
              **14**
              ****
              ****
              **1,842**
              ****
              ****
              **19**
              ********
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ******Total
                    temporarily impaired**securities
              ****
              **$**
              **715**
              ****
              **$**
              **5**
              ****
              **$**
              **15,242**
              ****
              **$**
              **412**
              ****
              **$**
              **15,957**
              ****
              **$**
              **417**
              ********
              ****
              ****
              
              ****
              ****
              
              ****
              ****
              
              ****
              ****
              
              ****
              ****
              
              ****
              ****
              
              ****
 
  
 **SFSB,
          Inc. and Subsidiaries**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        5 - Gross Unrealized Losses of Investment Securities -
        Continued**
 
 **Continuous
                  Unrealized Losses****For
                  Less than**
              
              **For
                  More Than****12
                  Months**
              
              **12
                    Months**
              
              **Total****Fair**
              
              **Unrealized**
              
              **Fair**
              
              **Unrealized**
              
              **Fair**
              
              **Unrealized****Value**
              
              **Losses**
              
              **Value**
              
              **Losses**
              
              **Value**
              
              **Losses**(In
                  thousands)**December
                  31, 2004****Available
                  for Sale Securities**Mortgage
                  Portfolio MutualFunds
              
              $
              7,981
              
              $
              97
              
              $
              -
              
              $
              -
              
              $
              7,981
              
              $
              97**Held
                  to Maturity Securities**FNMA
                  Note - 1 security
              
              
              978
              
              
              18
              
              
              -
              
              
              -
              
              
              978
              
              
              18FHLB
                  Note - 2 securities
              
              
              1,989
              
              
              11
              
              
              -
              
              
              -
              
              
              1,989
              
              
              11FFCB
                  Note - 1 security
              
              
              990
              
              
              10
              
              
              -
              
              
              -
              
              
              990
              
              
              10**Mortgage
                  Backed Securities**FHLMC
                  - 3 securities
              
              
              -
              
              
              -
              
              
              2,916
              
              
              37
              
              
              2,916
              
              
              37GNMA
                  - 1 security
              
              
              -
              
              
              -
              
              
              2,031
              
              
              7
              
              
              2,031
              
              
              7**Total
                    temporarily impaired**securities
              
              $
              11,938
              
              $
              136
              
              $
              4,947
              
              $
              44
              
              $
              16,885
              
              $
              180
 
 
 **Note
        6 - Loans Receivable**
  Loans
          receivable consist of the following:
 **December
                  31,****2005**
              
              **2004**(In
                  thousands)Mortgage
                  loans 1- 4 family residential
              
              **$**
              **122,262**
              
              $
              104,854Construction
                  loans
              
              
              **1,515**
              
              
              300Commercial
                  mortgage loans
              
              
              **5,402**
              
              
              2,990Commercial
                  non-mortgage loans
              
              
              **1,481**
              
              
              516Home
                  equity loans
              
              
              **10,439**
              
              
              8,066Land
                  loans
              
              
              **4,299**
              
              
              1,254Home
                  improvement loans
              
              
              **203**
              
              
              260Consumer
                  loans
              
              
              **407**
              
              
              410Total
                  Gross Loans Receivable
              
              
              **146,008**
              
              
              118,650Allowance
                  for loan losses
              
              
              **(474**
              **)**
              
              (413
              )Deferred
                  loan fees
              
              
              **(125**
              **)**
              
              (142
              )Loans
                  in process
              
              
              **(800**
              **)**
              
              (195
              )Total
                  Loans Receivable - Net
              
              **$**
              **144,609**
              
              $
              117,900
 
 
 **SFSB,
            Inc. and Subsidiaries**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        6 - Loans Receivable - Continued**
 
 Directors
        and officers of the Company are permitted to borrow from the Bank to the
        extent
        permitted by applicable laws and regulations. The following table shows the
        activity in these related party loans:
 
 (In
                  thousands)Beginning
                  balance
              
              **$**
              **1,077**
              ****Loans
                  made
              ****
              ****
              **-**
              ****Principal
                  repayments
              ****
              ****
              **(80**
              **)**Ending
                  balance
              ****
              **$**
              **997**
              ****
 
 Residential
        lending is generally considered to involve less risk than other forms of
        lending, although payment experience on these loans is dependent to some
        extent
        on economic and market conditions in the Bank's lending area. Construction
        loan
        repayments are generally dependent on the operations of the related properties
        or the financial condition of its borrower or guarantor. Accordingly, repayment
        of such loans can be more susceptible to adverse conditions in the real estate
        market and the regional economy.
 
 Activity
        in the Bank's allowance for loan losses for the periods indicated is as
        follows:
  **Years
                  Ended****December
                  31,****2005**
              
              **2004**(In
                  thousands)Balance
                  at beginning of period
              
              **$**
              **413**
              
              $
              362Provision
                  for loan losses
              
              
              **58**
              
              
              50Charge-offs
              
              
              **(2**
              **)**
              
              -Recoveries
              
              
              **5**
              
              
              1Balance
                  at end of period
              ****
              **$**
              **474**
              
              $
              413
  The
        recorded investment in impaired loans at December 31, 2005 consisted of one
        loan
        for $1,080,000. The average recorded investment in impaired loans during
        2005
        was $1,080,000. There was an allowance for loss related to this loan of
        $108,000. The amount of interest that would have been recorded on non-accrual
        loans at December 31, 2005 had the loan performed in accordance with its
        terms
        was approximately $54,000. No interest income was recorded on this loan during
        2005. The Company is not obligated to lend any additional monies to the
        aforementioned impaired and non-accrual loan. The impaired loan was on
        non-accrual status. Non-accrual loans amounted to $1,245,000 and $365,000
        at
        December 31, 2005 and 2004, respectively. There were no impaired loans at
        December 31, 2004. The Bank did not have any loan balances past due 90 days
        or
        more and still accruing interest at December 31, 2005 or December 31,
        2004.
  
 **SFSB,
          Inc. and Subsidiaries**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        6 - Loans Receivable - Continued**
 
 Interest
        income that would have been recorded under the original terms of non-accrual
        loans and the interest income actually recognized are summarized
        below:
  **Years
                  Ended****December
                  31,****2005**
              
              **2004**(In
                  thousands)Interest
                  income that would have been recorded
              
              **$**
              **78**
              
              $
              25Interest
                  income recognized
              
              
              **11**
              
              
              17Interest
                  income not recognized
              
              **$**
              **67**
              
              $
              8
 
 The
        Bank
        is a party to financial instruments with off-balance-sheet risk in the normal
        course of business to meet the financial needs of its customers. The financial
        instruments are limited to commitments to extend credit and involve, to varying
        degrees, elements of credit risk in excess of the amount recognized in the
        statement of financial position. The contract amounts of these instruments
        express the extent of involvement the Bank has in each class of financial
        instruments.
 
 The
        Bank's exposure to credit loss from non-performance by the other party to
        the
        above-mentioned financial instruments is represented by the contractual amount
        of those instruments. The Bank uses the same credit policies in making
        commitments and conditional obligations as it does for on-balance-sheet
        instruments.
 
 Unless
        otherwise noted, the Bank does not require collateral or other security to
        support financial instruments with off-balance-sheet credit risk.
 
 **Financial
                    Instruments Whose**
              
              **Contract
                  Amount At****Contract
                    Amount Represents**Credit Risk
              
              **December
                  31, 2005**
              
              **December
                  31, 2004**(In
                  thousands)Lines
                  of credit - commercial
              
              **$**
              **1,018**
              
              $
              442Lines
                  of credit - home equity
              
              
              **5,073**
              
              
              3,603Lines
                  of credit - overdraft checking
              
              
              **95**
              
              
              14Mortgage
                  loan commitments
              
              
              **2,425**
              
              
              2,429
 
 Commercial
        lines of credit are generally secured by a blanket lien on assets of the
        borrower. Revolving Lines of Credit (RLOC) are typically used for short term
        working capital needs and are based most heavily on the accounts receivable
        and
        inventory components of the borrower’s balance sheet. RLOC have terms of one
        year, are subject to annual reaffirmation and carry variable rates of interest.
        The Bank generally receives a one percent fee, based on the commitment
        amount.
 
 Equipment
        lines of credit are secured by equipment being purchased and sometimes by
        a
        blanket lien on assets of the borrower as well. Each advance is repaid over
        a
        three to five years term and carries a variable or prevailing fixed rate
        of
        interest. The Bank will generally advance up to 80% of the cost of the new
        or
        used equipment. These credit facilities are revolving in nature and the
        commitment is subject to annual reaffirmation.
 
 For
        both
        types of credit facilities listed above, the Bank evaluates each customer’s
        credit worthiness on a case-by-case basis.
  **SFSB,
            Inc. and Subsidiaries**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        6 - Loans Receivable - Continued**
 
 Home
        equity lines of credit are secured by second deeds of trust on residential
        real
        estate. They have fixed expiration dates as long as there is no violation
        of any
        condition established in the contract. The Bank evaluates each customer’s credit
        worthiness on a case-by-case basis.
 
 Overdraft
        lines of credit on checking accounts are unsecured. Linked to any Slavie
        Federal
        personal checking account, the line will automatically make a deposit to
        the
        customer’s checking account if the balance falls below the amount needed to pay
        an item presented for payment.
 
 The
        credit risk involved in these financial instruments is essentially the same
        as
        that involved in extending loan facilities to customers. No amount has been
        recognized in the statement of financial condition at December 31, 2005 and
        2004
        as a liability for credit loss.
 
 The
        Bank's outstanding commitments to make mortgages are at fixed rates ranging
        from
        5.00% to 6.00% and 4.875% to 5.75% at December 31, 2005 and December 31,
        2004
        respectively.
 
 
 
 **Note
        7 - Investment in Federal Home Loan Bank of Atlanta Stock**
 
 The
        Bank
        is required to maintain an investment in the stock of the Federal Home Loan
        Bank
        of Atlanta ("FHLB"). On December 17, 2004, the FHLB adopted a new capital
        plan
        under which member institutions are required to maintain capital stock based
        upon two components. The first component is a stock requirement equal to
        0.20%
        of the member’s total assets as of the preceding year end. The second component
        is a stock requirement equal to 4.50% of the member’s outstanding advances.
        Purchases and sales of stock are made directly with the FHLB at par value.
        This
        restricted stock is carried at cost.
 
 
 
 **Note
        8 - Premises and Equipment**
 
 Premises
        and equipment are summarized by major classification as follows:
 
 **December
                  31,**
              
              **Useful
                  Life****2005**
              
              **2004**
              
              **in
                  Years**(In
                  thousands)Land
              
              **$**
              **1,128**
              
              $
              1,128
              
              
              -Office
                  building
              
              
              **5,141**
              
              
              5,076
              
              
              40Furniture,
                  fixtures and equipment
              
              
              **1,337**
              
              
              1,259
              
              
              3-10**7,606**
              
              
              7,463Accumulated
                  depreciation
              
              
              **1,994**
              
              
              1,621**$**
              **5,612**
              
              $
              5,842
  The
        provision for depreciation charged to operations for the years ended December
        31, 2005 and 2004 amounted to $373,000 and $323,000, respectively. The Bank
        approved the closing of one of its branches and, accordingly, reset the
        depreciation for the leasehold improvements that will be abandoned to correspond
        to their new life.
  **SFSB,
            Inc. and Subsidiaries**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        8 - Premises and Equipment - Continued**
 
 The
        Company has entered into an operating lease for the premises of its branch
        office in Edgewood, Maryland. Rental expense under this lease for the years
        ended December 31, 2005 and 2004 was $26,000 and $25,000, respectively. At
        December 31, 2005, the minimum rental commitments under the noncancellable
        lease
        are as follows:
 
 **Year
                  Ended December 31,**
              
              **Total**(In
                  thousands)2006
              
              **$**
              **9****$**
              **9**
  Holdings
        has negotiated and rented office space to non-bank tenants in the Churchville
        Road property under various noncancellable operating leases. Credit is extended
        based on an evaluation of the lessee’s financial condition and, generally,
        collateral is not required. These leases included no commitments to provide
        for
        various tenant-finishing costs at December 31, 2005.
 
 The
        cost
        and accumulated depreciation of the property, which is included in premises
        and
        equipment of the Company, was $5,379,000 and $496,000, respectively, at December
        31, 2005.
 
 Future
        minimum rentals to be received from non-Company tenants under noncancellable
        operating leases in effect at December 31, 2005, and in the aggregate, are
        as
        follows:
  (In
                  thousands)2006
              
              **$**
              **144**
              ****2007
              ****
              ****
              **145**
              ****2008
              ****
              ****
              **149**
              ****2009
              ****
              ****
              **154**
              ****2010
              ****
              ****
              **159**
              ****Thereafter
              ****
              ****
              **455**
              ********
              **$**
              **1,206**
  **Note
        9 - Deposits**
 
 The
        Bank
        has the following deposits:
  **December
                  31,****2005**
              
              **2004**(In
                  thousands)Non-interest
                  bearing demand deposits
              
              **$**
              **818**
              
              $
              1,696NOW
                  and money market demand deposits
              
              
              **15,117**
              
              
              17,812Savings
                  deposits
              
              
              **16,787**
              
              
              22,711Certificates
                  of deposit
              
              
              **76,900**
              
              
              67,487**109,622**
              
              
              109,706Accrued
                  interest on deposits
              
              
              **1**
              
              
              5**$**
              **109,623**
              
              $
              109,711
  **SFSB,
            Inc. and Subsidiaries**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        9 - Deposits - Continued**
 
 The
        aggregate amount of certificates of deposit accounts with a minimum denomination
        of $100,000 was $20,442,000 and $17,252,000 as of December 31, 2005 and 2004,
        respectively. Deposits in excess of $100,000 are not federally insured.
 
 
 Scheduled
        maturities of certificates of deposit are as follows:
  **December
                  31,****2005****Maturing
                  Within**
              
              
              (In
                  thousands)One
                  year
              
              **$**
              **41,073**Two
                  years
              
              
              **12,653**Three
                  years
              
              
              **7,471**Four
                  years
              
              
              **7,353**Five
                  years
              
              
              **8,350**Total
              
              **$**
              **76,900**
  **Years
                    Ended December 31,**
                ********
                **2005**
                ****
                **2004****Interest
                      Expense on Deposits**
                
                
                (In
                    thousands)NOW
                    and money market demand deposits
                
                **$**
                **120**
                
                $
                147Savings
                    deposits
                
                
                **331**
                
                
                191Certificates
                    of deposit
                
                
                **2,537**
                
                
                2,190**$**
                2,988
                
                $
                2,528
 
 
 **Note
        10 - Borrowings**
 
 The
        Bank
        has a line of credit from the Federal Home Loan Bank of Atlanta (“FHLB”). The
        line is secured by the FHLB stock and a blanket lien on mortgages. There
        is no
        set limit. Each borrowing is evaluated on a case-by-case basis by the lender.
        The Bank also has a $1 million unsecured line of credit with its correspondent
        bank, M & T Bank, however no advances have been made on this line.
 
 At
        December 31, 2005 and 2004, outstanding borrowings with the FHLB were $36
        million and $26.5 million respectively. Borrowings at December 31, 2005
        consisted of $5 million short term fixed rate FHLB advances bearing interest
        at
        2.83% and $26.5 million long term fixed rate FHLB advances with interest
        rates
        ranging from 3.08% to 4.90%. There is also $4.5 million short term daily
        rate
        FHLB advances bearing an interest rate of 4.44% as of December 31, 2005.
        Borrowings at December 31, 2004 consisted of $20 million short term fixed
        rate
        FHLB advances bearing interest at rates ranging from 1.57% to 2.44% and $6.5
        million long term fixed rate FHLB advances with interest rates ranging from
        2.83% to 4.90%.
  **SFSB,
          Inc. and Subsidiaries**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        10 - Borrowings - Continued**
 
 The
        maturities of advances outstanding as of December 31, 2005 are as
        follows:
 **Due
                  Within**
              
              (In
                  thousands)One
                  year
              
              **$**
              **9,500**Two
                  years
              
              
              -Three
                  years
              
              
              **1,500**Four
                  years
              
              
              -Five
                  years
              
              
              -Beyond
                  five years
              
              
              **25,000****$**
              **36,000**
 
 **Note
        11 - 401(k) Plan and Deferred Compensation Agreement**
 
 The
        Bank
        has a 401(k) plan. Employees could contribute up to $14,000 in 2005, with
        those
        over fifty years old allowed an additional $4,000 catch-up contribution.
        The
        Bank will match 25% of the employee’s contribution up to the amount as permitted
        by law. The Bank’s cost was $13,000 and $9,000, respectively, for the years
        ended December 31, 2005 and 2004.
  The
        Bank
        also entered into a deferred compensation agreement with one of its former
        officers. The liability under this agreement was accrued by charges to operating
        expense during prior periods. The liability balances were $55,000 and $64,000
        at
        December 31, 2005 and 2004.
 
 
 **Note
        12 - Stock-Based Compensation**
  On
        July
        21, 2005, stockholders approved long-term stock-based compensation plans
        that
        enable the Company to grant stock options, restricted stock awards and other
        equity based awards to employees and directors. The Company has elected to
        early
        implement the requirements of Statement of Financial Accounting Standards
        No.
        123R, “Share-Based Payment”.
 
 During
        2005, the Company granted stock options covering 102,061 shares of common
        stock
        to certain employees and directors of the Company. The options were granted
        at
        the then fair market value of $9.15 per share, vest over five years and expire
        10 years from the date of grant. The company estimated the grant date fair
        value
        of each option awarded in fiscal 2005 using the Black-Scholes Option-Pricing
        model with the following assumptions: dividend yield 0%, risk-free rate interest
        rate of 4.22%, and expected lives of 7 years. The assumption for the expected
        volatility was 11.42%. The estimated fair value of each option granted was
        computed to be $2.53. At December 31, 2005, there were no vested option shares
        and no options were exercised during the year.
 
 During
        2005, the Company granted 40,824 shares of restricted stock to certain employees
        and directors of the Company, with a fair market value of $9.40  per
        share. If a participant terminates employment for reasons other than death,
        disability, normal retirement following a change of control, he or she forfeits
        all right to the unvested shares. The awards vest over a five-year period
        and,
        therefore, the fair value of such awards will be accrued ratably over a
        five-year period as compensation expense. At December 31, 2005, there were
        no
        vested shares.
  **SFSB,
            Inc. and Subsidiaries**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **Note
        12 - Stock-Based Compensation - Continued**
 
 The
        compensation cost charged against income for these stock-based compensation
        plans was $54,000 and the total income tax benefit recognized was $12,000
        for
        the year ended December 31, 2005. No share based compensation plans were
        in
        effect for the year ended December 31, 2004.
 
 At
        December 31, 2005, there is $589,000 of total unrecognized compensation cost
        related to unvested share-based compensation arrangements granted under the
        plans. The cost is expected to be recognized over a weighted average period
        of
        4.6 years.
 
 **Note
        13 - Common Stock**
 
 In
        2004,
        the Bank reorganized from a federally chartered mutual savings bank to a
        federally chartered stock savings bank. Simultaneously, the Bank consummated
        the
        formation of a new holding company, SFSB, Inc. Also simultaneously, a mutual
        holding company was formed, Slavie Bancorp, MHC. In connection with the
        reorganization, the Company issued 2,975,625 shares of its common stock.
        A
        majority of that stock (1,636,594 shares) was issued to Slavie Bancorp, MHC.
        The
        remainder was sold and issued to depositors of the Bank and the Employee
        Stock
        Ownership Plan for a total price of $13,390,000. Costs associated with the
        conversion, totaling $680,000 were deducted from the sale proceeds. In December
        2005, the Company repurchased 10,000 shares of its stock at $9.60 per share.
        The
        Treasury Stock of $96,000 is recorded at cost and is shown as a reduction
        of
        stockholders’ equity.
 
 At
        the
        same time as the reorganization and conversion, the Bank established an Employee
        Stock Ownership Plan (“ESOP”) for its employees. On December 30, 2004 the ESOP
        acquired 116,630 shares of the Company’s common stock in the conversion with
        funds provided by a loan from the Company. Accordingly, $1,166,000 of common
        stock acquired by the ESOP was recorded as a reduction of stockholders’ equity.
        The ESOP loan will be repaid principally from the Bank’s contributions to the
        ESOP. The loan is being repaid in 20 equal annual installments through 2024
        and
        bears interest at the Wall Street Journal prime rate adjusted monthly. Shares
        are released to participants proportionately as the loan is repaid. The Bank
        recognizes compensation expense as shares are committed for release from
        collateral at their current market price. Dividends on allocated shares are
        recorded as a reduction of retained
        earnings and dividends on unallocated shares are recorded as a reduction
        of
        Debt. The compensation cost for the year ended December 31, 2005 was $54,000.
        The ESOP holds the common stock in a trust for allocation among participating
        employees, in trust or allocated to the participants’ accounts; and an annual
        contribution from the Bank to the ESOP; and earnings thereon. There were
        110,798
        shares of unearned ESOP shares at December 31, 2005. The fair value of unearned
        ESOP shares at December 31, 2005 is $1,064,000.
 
 All
        employees of the Bank who attain the age of 21 and complete one year of service
        with the Bank will be eligible to participate in the ESOP. Each participant’s
        vested interest under the ESOP is determined according to the following
        schedule: 0% for less than 5 years of service with the Company and 100% for
        more
        than 5 years of service. For vesting purposes, a year of service means any
        plan
        year in which an employee completes at least 1,000 hours of service (whether
        before or after the ESOP’s January 1, 2004 effective date). Vesting accelerates
        to 100% upon a participant’s attainment of normal retirement age 65, death or
        disability.
  
 **SFSB,
          Inc. and Subsidiaries**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        14 - Retained Earnings**
 
 The
        Bank
        is required to maintain cash reserve balances in vault cash or with the Federal
        Reserve Bank. The total of these reserve balances at December 31, 2005 was
        approximately $150,000.
 
 The
        Bank
        is subject to various regulatory capital requirements administered by the
        federal banking agencies. Failure to meet minimum capital requirements can
        initiate certain mandatory and possibly additional discretionary actions
        by
        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 specific
        capital guidelines that involve quantitative measures of the Bank's assets,
        liabilities, and certain off-balance-sheet items as calculated under regulatory
        accounting principles. The Bank's capital amounts and classification are
        also
        subject to qualitative judgments by the regulators about components, risk
        weightings, and other factors. Quantitative measures established by regulation
        to ensure capital adequacy require the Bank to maintain minimum amounts and
        ratios (set forth in the table below) of total and Tier I capital (as defined
        in
        the regulations) to risk-weighted assets (as defined), and of Tier I capital
        (as
        defined) to average assets (as defined). Management believes, as of December
        31,
        2005, that the Bank meets all capital adequacy requirements to which it is
        subject.
 
 As
        of
        December 31, 2005, the most recent notification from the Office of Thrift
        Supervision has categorized the Bank as well capitalized under the regulatory
        framework for prompt corrective action. To be categorized as well capitalized
        the Bank must maintain minimum total risk-based, Tier I risk-based and Tier
        I
        leverage ratios as set forth in the table. There have been no conditions
        or
        events since that notification that management believes have changed the
        Bank's
        category.
 
 
 The
        following table summarizes the Bank's regulatory capital position at December
        31, 2005.
 
 **To
                  Be Well****Capitalized
                  Under****For
                  Capital**
              
              
              **Prompt
                  Corrective****Actual**
              
              
              **Adequacy
                    Purposes**
              
              
              **Action
                  Provision****Amount**
              
              **%**
              
              
              **Amount**
              
              **%**
              
              
              **Amount**
              
              **%****December
                  31, 2005**
              
              (In
                  thousands)Tangible
                  (1)
              
              **$**
              **16,651**
              
              
              **9.70**
              **%**
              
              **$**
              **2,574**
              
              
              **1.50**
              **%**
              
              
              **N/A**
              
              
              **N/A**Tier
                  I risk-based (2)
              
              
              **16,651**
              
              
              **17.76**
              **%**
              
              
              **N/A**
              
              
              **N/A**
              
              
              **$**
              **5,627**
              
              
              **6.00**
              **%**Core
                  (leverage) (1)
              
              
              **16,651**
              
              
              **9.70**
              **%**
              
              
              **6,864**
              
              
              **4.00**
              **%**
              
              
              **8,580**
              
              
              **5.00**
              **%**Total
                  risk-based (2)
              
              
              **17,125**
              
              
              **18.26**
              **%**
              
              
              **7,502**
              
              
              **8.00**
              **%**
              
              
              **9,378**
              
              
              **10.00**
              **%****December
                  31, 2004**Tangible
                  (1)
              
              $
              16,308
              
              
              9.72
              %
              
              $
              2,517
              
              
              1.50
              %
              
              
              N/A
              
              
              N/ATier
                  I risk-based (2)
              
              
              16,308
              
              
              18.97
              %
              
              
              N/A
              
              
              N/A
              
              
              $
              5,157
              
              
              6.00
              %Core
                  (leverage) (1)
              
              
              16,308
              
              
              9.72
              %
              
              
              6,712
              
              
              4.00
              %
              
              
              8,390
              
              
              5.00
              %Total
                  risk-based (2)
              
              
              16,721
              
              
              19.45
              %
              
              
              6,876
              
              
              8.00
              %
              
              
              8,595
              
              
              10.00
              %
 (1)
        To
        adjusted total assets.
 (2)
        To
        risk-weighted assets.
  **SFSB,
            Inc. and Subsidiaries**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        14 - Retained Earnings - Continued**
 
 The
        following table provides a reconciliation of total equity per the consolidated
        financial statements to capital amounts reflected in the above
        table:
 
 **December
                  31,**
              ********
              ****
              **2005**
              ****
              **2004**(In
                  thousands)Total
                  equity
              
              **$**
              **22,805**
              
              $
              22,620Adjustment
                  for accumulated other comprehensive loss
              
              
              **126**
              
              
              60Adjustment
                  for intangible assets
              
              
              **(35**
              **)**
              
              (17
              )Adjustment
                  for parent company equity
              
              
              **(6,245**
              **)**
              
              (6,355
              )Tangible,
                  Tier 1 and Core capital
              
              
              **16,651**
              
              
              16,308Allowance
                  for loan losses
              
              
              **474**
              
              
              413Total
                  risk-based capital
              
              **$**
              **17,125**
              
              $
              16,721
 
 The
        Bank
        was allowed a special bad debt deduction at various percentages of otherwise
        taxable income for various years effectively through December 31, 1987. If
        the
        amounts, which qualified as deductions for federal income tax purposes prior
        to
        December 31, 1987, are later used for purposes other than to absorb loan
        losses,
        including distributions in liquidations, they will be subject to federal
        income
        tax at the then current corporate rate and mortgage loans must be maintained
        at
        the December 31, 1987 level to receive current tax deductions for loan losses.
        Retained earnings at December 31, 2005 and 2004 include $1,580,000, for which
        no
        provision for federal income tax has been provided. The unrecorded deferred
        income tax liability on the above amount was approximately
        $610,000.
 
 
 
 **Note
        15 - Income Taxes**
 
 The
        income tax provision consists of the following for the years ended December
        31,
        2005 and 2004.
  **December
                  31,****2005**
              
              **2004****Current**
              
              (In
                  thousands)Federal
              
              **$**
              **201**
              
              $
              179State
              
              
              **31**
              
              
              24**232**
              
              
              203**Deferred**Federal
              
              
              **(59**
              **)**
              
              (9
              )State
              
              
              **(11**
              **)**
              
              (2
              )**(70**
              **)**
              
              (11
              )****
              **$**
              **162**
              
              $
              192
  
 **SFSB,
          Inc. and Subsidiaries**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        15 - Income Taxes - Continued**
 
 
 The
        amounts computed by applying the statutory federal income tax rate to the
        income
        before taxes is greater than the taxes provided for the following
        reasons:
  ****
                
                ****
                
                
                ****
                
                ********
                
                **Years
                    Ended December
                    31,****************2005**
                
                
                **2004**(In
                    thousands)**Percent**
                
                
                
                
                **Percent****of
                    Pretax**
                
                
                
                
                **of
                    Pretax****Amount**
                
                **Income**
                
                
                **Amount**
                
                **Income****Federal
                    tax at statutory rate**
                
                **$**
                **136**
                
                
                **34.00**
                **%**
                
                $
                157
                
                
                34.00
                %**Increases
                    (Decreases) in Taxes**State
                    tax, net of federal income tax benefit
                
                
                **13**
                
                
                **3.24**
                
                
                
                14
                
                
                3.13Other
                
                
                **13**
                
                
                **3.24**
                
                
                
                21
                
                
                4.50**$**
                **162**
                
                
                **40.48**
                **%**
                
                $
                192
                
                
                41.63
                %
 The
          tax
          effects of temporary differences that give rise to significant portions
          of the
          deferred tax assets and deferred tax liabilities at December 31, 2005 and
          2004
          are presented below:
 
 **December
                    31,****2005**
                
                **2004****Deferred
                    Tax Assets:**
                
                (In
                    thousands)Allowance
                    for loan losses
                
                **$**
                **183**
                
                $
                159Deferred
                    compensation
                
                
                **21**
                
                
                25Reserve
                    - uncollected interest
                
                
                **3**
                
                
                -Market
                    value adjustment on availablefor
                    sale securities
                
                
                **79**
                
                
                38Stock-based
                    compensation
                
                
                **12**
                
                
                -Other
                
                
                **5**
                
                
                10**Total
                    gross deferred tax assets**
                
                
                **303**
                
                
                232**Deferred
                    Tax Liabilities:**Federal
                    Home Loan Bank of Atlanta stockdividends
                
                
                **(100**
                **)**
                
                (100
                )Depreciation
                
                
                **(62**
                **)**
                
                (102
                )**Total
                    gross deferred tax liabilities**
                
                
                **(162**
                **)**
                
                (202
                )**Net
                    deferred tax assets**
                
                **$**
                **141**
                
                $
                30
 
  **SFSB,
            Inc. and Subsidiaries**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        16 - Disclosures about Fair Value of Financial Instruments**
 
 The
        estimated fair values of the Company's financial instruments are summarized
        below. The fair values of a significant portion of these financial instruments
        are estimates derived using present value techniques prescribed by the FASB
        and
        may not be indicative of the net realizable or liquidation values. Also,
        the
        calculation of estimated fair values is based on market conditions at a specific
        point in time and may not reflect current or future fair values.
 
 The
        carrying amount is a reasonable estimate of fair value for cash, federal
        funds,
        interest bearing deposits in other banks, accrued interest receivable and
        accrued interest payable due to the short-term nature of these investments.
        Fair
        value is based upon market prices quoted by dealers for investment securities
        and mortgage backed securities. The carrying amount of Federal Home Loan
        Bank of
        Atlanta stock is a reasonable estimate of fair value. Loans receivable were
        discounted using the current rates at which similar loans would be made to
        borrowers with similar credit ratings and for the same remaining maturities.
        These rates were used for each aggregated category of loans as reported on
        the
        Office of Thrift Supervision Quarterly Report. The fair value of demand
        deposits, savings accounts and money market deposits is the amount payable
        on
        demand at the reporting date. The fair value of fixed-maturity certificates
        of
        deposit is estimated using the rates currently offered on deposits of similar
        remaining maturities. The fair value of borrowings is estimated using discounted
        cash flow analyses, based on rates currently available to the Bank for
        borrowings with similar terms and remaining maturities.
 
 The
        fair
        value of commitments to extend credit is estimated using the fees currently
        charged to enter into similar agreements, taking into account market interest
        rates, the remaining terms and present credit worthiness of the
        counterparties.
  
 **SFSB,
          Inc. and Subsidiaries**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        16 - Disclosures about Fair Value of Financial Instruments -
        Continued**
 
 
 The
        estimated fair values of the Company's financial instruments are as
        follows:
 **December
                    31,****2005**
                
                **2004****Carrying**
                
                **Fair**
                
                **Carrying**
                
                **Fair****Value**
                
                **Value**
                
                **Value**
                
                **Value**(In
                    thousands)**Financial
                    Assets**Cash
                    and due from banksand
                    federal funds sold
                
                **$**
                **1,342**
                
                **$**
                **1,342**
                
                $
                15,597
                
                $
                15,597Investment
                    securities availablefor
                    sale
                
                
                **8,153**
                
                
                **8,153**
                
                
                7,981
                
                
                7,981Investment
                    securities held tomaturity
                
                
                **3,998**
                
                
                **3,884**
                
                
                3,996
                
                
                3,957Mortgage
                    backed securitiesheld
                    to maturity
                
                
                **4,525**
                
                
                **4,430**
                
                
                6,981
                
                
                6,958Federal
                    Home Loan Bank stock
                
                
                **1,955**
                
                
                **1,955**
                
                
                1,446
                
                
                1,446Loans
                    receivable - net
                
                
                **144,609**
                
                
                **141,103**
                
                
                117,900
                
                
                116,927Accrued
                    interest receivable
                
                
                **487**
                
                
                **487**
                
                
                426
                
                
                426**Financial
                    Liabilities**Deposits
                
                **$**
                **109,623**
                
                **$**
                **109,655**
                
                $
                109,711
                
                $
                109,856Borrowings
                
                
                **36,000**
                
                
                **35,665**
                
                
                26,500
                
                
                26,473Accrued
                    interest payable
                
                
                **91**
                
                
                **91**
                
                
                60
                
                
                60**Financial
                    Instruments - Off-Balance Sheet**Loan
                    commitments
                
                **$**
                **-**
                
                **$**
                **-**
                
                $
                -
                
                $
                -Lines
                    of credit
                
                
                **-**
                
                
                **-**
                
                
                -
                
                
                -
 
 **Note
        17 - Recent Accounting Pronouncements**
 
 In
        March
        2004, the EITF reached a consensus on Issue No. 03-1, “The Meaning of
        Other-Than-Temporary Impairment and Its Application to Certain Investments.”
EITF 03-1 provides guidance on other-than-temporary impairment models for
        marketable debt and equity securities accounted for under SFAS 115 and
        non-marketable equity securities accounted for under the cost method. The
        EITF
        developed a basic three-step model to evaluate whether an investment is
        other-than-temporarily impaired. In November 2005, the FASB approved the
        issuance of FASB Staff Position FAS No. 115-1 and FAS 124-1, “The Meaning
        of Other-Than-Temporary Impairment and Its Application to Certain Investments.”
The FSP addresses when an investment is considered impaired, whether the
        impairment is other-than-temporary and the measurement of an impairment loss.
        The FSP also includes accounting considerations subsequent to the recognition
        of
        an other-than-temporary impairment and requires certain disclosures about
        unrealized losses that have not been recognized as other-than-temporary.
        The FSP
        is effective for reporting periods beginning after December 15, 2005 with
        earlier application permitted. The effective date for SFSB, Inc. will be
        the
        first quarter of 2006. The adoption of this accounting principle is not expected
        to have a significant impact on our financial position or results of operations.
  **SFSB,
            Inc. and Subsidiaries**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        18 - Related Party Transactions**
 
 Since
        August 2003, Mr. James Benson Brown, a Director of the Bank, has provided
        the
        Bank with real estate consulting services. For the years ended December 31,
        2005
        and 2004, Slavie Federal Savings Bank paid Mr. Brown $4,000 and $5,000,
        respectively, for these services.
 
 In
        June
        2004 the Company sold its ground rent portfolio to an entity controlled by
        Mr.
        Brown for $54,000 and recognized a loss on the sale of $102,000.  The sale
        was approved by the Company’s Board of Directors, other than Mr. Brown and Mr.
        Thomas L. Drechsler (who has served as counsel to Mr. Brown on unrelated
        matters). In August, 2005, Mr. Brown paid an additional $18,000 for the ground
        rent portfolio. This amount is recorded as miscellaneous income.
 
 Mr.
        Thomas L. Drechsler, a director of the Company, currently serves as the Bank’s
        general counsel through Kearney, Drechsler & Awalt, LLC, of which Mr.
        Drechsler is a 33% owner. Through other firms, Mr. Drechsler has served as
        Slavie Federal Savings Bank’s general counsel since 2000. For the years ended
        December 31, 2005 and 2004, Slavie Federal Savings Bank paid law firms that
        Mr.
        Drechsler was associated with $6,000 and $8,000, respectively, for legal
        services. Through Universal Title, LLC, Mr. Drechsler also provides settlement
        related services to the Bank’s borrowers in connection with loans originated by
        the Bank. In those circumstances, Universal Title, LLC is compensated by
        the
        borrower. For the years ended December 31, 2005 and 2004, borrowers paid
        Universal Title, LLC $145,000 and $169,000, respectively, for those
        services.
 
 
 **Note
        19 -** **Ground** **Rents**
 
 The
        Company recorded income from Ground Rents, which is included in other income,
        in
        the amount of $2,000 for the year ended December 31, 2004. The Company recorded
        losses on sale/redemption of Ground Rents of $102,000 for the year ended
        December 31, 2004. During 2004, the Company decided to sell off its entire
        Ground Rent portfolio and in doing so sold the entire portfolio to a related
        party (see Note 18). The sale price was based on the value of an independent
        appraisal adjusted for estimated selling expenses. The Company sold the
        portfolio due to the servicing and collection burden associated with a large
        group of small balances and small individual invoice amounts.
  
 **SFSB,
          Inc. and Subsidiaries**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        20 - Condensed Financial Information (Parent Company Only)**
  Statements
        of Operations and Cash Flow for the year ended December 31, 2004 are not
        presented because SFSB, Inc. operated for only one day in 2004 and had no
        income
        to report, therefore, such Statements would not be meaningful.
  **December
                    31, 2005**
                
                **December
                    31, 2004**(In
                    thousands)**Statements
                    of Financial Condition**
                ****
                ****
                ****
                ****
                ****
                ****
                ******ASSETS**Cash
                    and cash equivalents
                
                **$**
                **5,136**
                
                $
                12,224Note
                    receivable - ESOP
                
                
                **1,108**
                
                
                1,166Investment
                    in subsidiary
                
                
                **16,560**
                
                
                16,265Other
                    assets
                
                
                **9**
                
                
                -**Total
                    assets**
                
                **$**
                **22,813**
                
                $
                29,655**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY****Liabilities**Intercompany
                    payable
                
                **$**
                **-**
                
                $
                7,035Other
                    liabilities
                
                
                **8**
                
                
                -**Total
                    liabilities**
                
                
                **8**
                
                
                7,035**Total
                    stockholders’ equity**
                
                
                **22,805**
                
                
                22,620**Total
                    liabilities and stockholders’ equity**
                
                **$**
                **22,813**
                
                $
                29,655
   **Year
                  Ended****December
                  31, 2005**(In
                  thousands)**Statement
                  of Income**Total
                  Revenue
              
              **$**
              **73**Non-interest
                  Expense
              
              
              **97****Loss
                  before equity in undistributed net****income
                  of subsidiary and income taxes**
              
              
              **(24**
              **)****Undistributed
                  net income of subsidiary**
              
              
              **254****Income
                  before income tax provision**
              
              
              **230**Income
                  tax provision (benefit)
              
              
              **(9**
              **)****Net
                  income**
              
              **$**
              **239**
  **SFSB,
            Inc. and Subsidiaries**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        20 - Condensed Financial Information (Parent Company Only) -
        Continued**
 **Year
                    Ended****December
                    31, 2005**(In
                    thousands)**Statement
                    of Cash Flows****Operating
                    activities**Net
                    income
                
                **$**
                **239**Adjustments
                    to reconcile net income to net cashprovided
                    by operating activities:Equity
                    in undistributed net income of subsidiary
                
                
                **(254**
                **)**Decrease
                    in note receivable - ESOP
                
                
                **58**Decrease
                    in intercompany payable
                
                
                **(7,035**
                **)**Increase
                    in other assets
                
                
                **(9**
                **)**Increase
                    in other liabilities
                
                
                **9****Net
                    cash used in operating activities**
                
                
                **(6,992**
                **)****Financial
                    activities**Purchase
                    of treasury stock
                
                
                **(96**
                **)****Net
                    cash used in financial activities**
                
                
                **(96**
                **)**Decrease
                    in cash and cash equivalents
                
                
                **(7,088**
                **)**Cash
                    and cash equivalents at beginning of year
                
                
                **12,224****Cash
                    and cash equivalents at end of year**
                
                **$**
                **5,136**


**DIRECTORS
      AND OFFICERS**








**Directors
                of SFSB, Inc. and Slavie Federal Savings
                Bank****J.
                Benson Brown**
              Real
                estate consulting,
              JB
                Brown Associates
            **James
                D. Wise**
              Financial
                and investment consulting,
              Ronald
                Blue & Co., LLC**Thomas
                J. Drechsler**
              Practicing
                attorney,
              Kearny
                Drechsler, LLC
            **Philip
                E. Logan**
              President,
                Chief Executive Officer and Chairman**Robert
                M. Stahl IV**
              Practicing
                attorney and a Certified Public Accountant,
              Law
                Offices of Robert M. Stahl
            **Charles
                E. Wagner, Jr.**
              Executive
                Vice President, Chief Lending Officer and Secretary





**Officers
                of SFSB, Inc.****Philip
                E. Logan**
              President
                and Chief Executive Officer
            **Sophie
                T. Wittelsberger**
              Vice
                President and Chief Financial Officer**Charles
                E. Wagner, Jr.**
              Senior
                Vice President and Secretary





**Officers
                of Slavie Federal Savings Bank****Philip
                E. Logan**
              President
                and Chief Executive Officer
            **Gary
                E. Barnoff**
              Vice
                President - Branch Operations**Charles
                E. Wagner, Jr.**
              Executive
                Vice President, Chief Lending Officer and Secretary
            **Sophie
                T. Wittelsberger**
              Vice
                President and Chief Financial Officer**Thomas
                M. Esposito**
              Vice
                President - Commercial Lending








23


**INVESTOR
      AND CORPORATE INFORMATION**





**Annual
      Meeting**





The
      annual meeting of stockholders will be held at 4:30 p.m. on May 18, 2006 at
      the
      Slavie Federal Savings Bank Community Room located at 1614 Churchville Road,
      Bel
      Air, Maryland.





**Stock
      Listing and Market Information**





SFSB,
      Inc.’s common stock is traded on the Over the Counter Bulletin Board (“OTCBB”)
      under the symbol “SFBI.OB.” As of March  24,
      2006,
      the number of holders of record of SFSB, Inc.’s common stock was approximately
      143.





SFSB,
      Inc. first issued shares of common stock on December 30, 2004 and trading began
      on the OTCBB on December 31, 2004. The following table represents the Company’s
      common stock, based on high and low sales information as reported on the OTCBB.
      This information reflects inter-dealer prices, without retail mark-up,
      mark-down, or commission and may not necessarily represent actual transactions.




High
            
            LowDecember
                31, 2004
            
            $
            11.00
            
            $
            10.75March
                31, 2005
            
            
            10.95
            
            
            9.00June
                30, 2005
            
            
            9.35
            
            
            8.40September
                30, 2005
            
            
            9.40
            
            
            8.95December
                31, 2005
            
            
            9.90
            
            
            9.10





SFSB,
      Inc. has not paid any cash dividends.





**Stockholder
                and General Inquiries**
            **Transfer
                Agent**SFSB,
                Inc.
            Illinois
                Stock Transfer Company1614
                Churchville Road
            209
                West Jackson Boulevard, Suite 903Bel
                Air, Maryland 21015
            Chicago,
                Illinois 60606-6905(443)
                265-5570
            (312)
                427-2953Attention:
                Charles E. Wagner, Jr.Executive
                Vice President





Please
      contact our transfer agent directly for assistance in changing your address,
      elimination of duplicate mailing, transferring stock, or replacing lost, stolen
      or destroyed stock certificates.





**Annual
      Reports**





A
      copy of
      the SFSB, Inc. Annual Report on Form 10-KSB without exhibits for the year ended
      December 31, 2005 as filed with the Securities and Exchange Commission, may
      be
      obtained without charge by contacting Charles E. Wagner, Jr., Executive Vice
      President, SFSB, Inc., 1614 Churchville Road, Bel Air, Maryland
      21015.





**Independent
                Registered Public Accounting Firm**
            **Special
                Counsel**Beard
                Miller Company LLP
            Ober,
                Kaler, Grimes & Shriver7621
                Fitch Lane
            A
                Professional CorporationBaltimore,
                Maryland 21236
            120
                E. Baltimore StreetBaltimore,
                Maryland 21202




24


**Slavie
      Federal Savings Bank’s Office Locations**




Main
                Office
            Branch
                Office1614
                Churchville Road
            3700
                East Northern PkwyBel
                Air, MD 21015
            Baltimore,
                MD 21206










25