**United
      States**


**Securities
      and Exchange Commission**


**Washington,
      D.C. 20549**





**Form
      10-K**





x
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934


For
                the fiscal year ended December 31,
                2007


OR


o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES


EXCHANGE
                ACT OF 1934


For
                the transition period from
                ________to_________





Commission
      File Number 000-51037





**SFSB,
      INC.**


(Exact
      name of registrant as specified in its charter)





United
                States
            20-2077715(State
                or other jurisdiction of
              incorporation
                or organization)
            (I.R.S.
                Employer
              Identification
                No.)





1614
      Churchville Road, Bel Air, Maryland 21015


(Address
      of principal executive offices)  (Zip
      Code)





(443)
      265-5570


(Registrant’s
      telephone number, including area code)





Securities
      registered pursuant to Section 12(b) of the Act:


None





Securities
      registered pursuant to Section 12(g) of the Act:


Common
      Stock: par value $0.01 per share





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes oNo x




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or 15(d) of the Act. o





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.




Yes
xNo
o





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (§229.405 of this chapter) is not contained herein and will not
      be contained, to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form 10-K
      or any amendment to this Form 10-K. x





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act.





Large
                accelerated filer o
            Accelerated
                filer oNon-accelerated
                filer  o(Do not check if
                a smaller reporting company)
            Smaller
                reporting company x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).


Yes
o No
x





The
      aggregate market value of the common equity held by non-affiliates was
      $9,628,510 as of June 29, 2007, based on a sales price of $9.25 per share of
      Common Stock, which is the sales price at which shares of Common Stock were
      last
      sold in over the counter trading on June 29, 2007.





The
      number of shares outstanding of the registrant’s Common Stock was 2,817,644 as
      of March 20, 2008.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the Annual Report to Stockholders for the Fiscal Year Ended December 31,
      2007, which is filed as an exhibit to this Annual Report on Form 10-K, are
      incorporated by reference into Part II of this Annual Report on Form 10-K.





Portions
      of the Proxy Statement for the 2008 Annual Meeting of Stockholders of SFSB,
      Inc., to be filed with the Securities and Exchange Commission no later than
      120
      days after the close of the fiscal year, are incorporated by reference into
      Part
      III of this Annual Report on Form 10-K.





**PART
      I**





**Item
      1. Business**





**BUSINESS
      OF SFSB, INC.**





SFSB,
      Inc. is a federal corporation formed on December 30, 2004 for the purpose of
      acquiring all of the common stock of Slavie Federal Savings Bank (the “Bank”)
      concurrent with its mutual holding company reorganization. Pursuant to the
      reorganization, Slavie Federal Savings Bank converted from a mutual savings
      bank
      to a capital stock savings bank, with the concurrent formation of SFSB, Inc.
      as
      the stock, mid-tier holding company of Slavie Federal Savings Bank and the
      formation of Slavie Bancorp, MHC as a mutual holding company. SFSB, Inc.’s
      executive office is located at 1614 Churchville Road, Bel Air, Maryland 21015,
      and its telephone number is (443) 265-5570.





As
      part
      of the reorganization, we issued, at a price of $10.00 per share, 1,222,401
      shares of our common stock pursuant to a subscription offering to Slavie Federal
      Savings Bank’s depositors who held a deposit account at the Bank as of December
      31, 2002 and 116,630 shares to the Slavie Federal Savings Bank Employee Stock
      Ownership Plan, representing 45% of SFSB, Inc.’s outstanding common stock. The
      remaining 55% of SFSB, Inc.’s outstanding common stock is owned by Slavie
      Bancorp, MHC. Of the approximately $13,390,000 of gross proceeds, approximately
      $6,355,000 was contributed to Slavie Federal Savings Bank. So long as Slavie
      Bancorp, MHC exists, it will own a majority of the voting stock of SFSB, Inc.





Our
      cash
      flow depends on earnings from the investment of the net proceeds from the
      offering that we retained, and any dividends received from Slavie Federal
      Savings Bank. Currently, SFSB, Inc. does not own or lease any property. Instead,
      we use the premises, equipment and furniture of Slavie Federal Savings Bank.
      At
      the present time, we employ only persons who are officers of Slavie Federal
      Savings Bank to serve as officers of SFSB, Inc. We also use the support staff
      of
      Slavie Federal Savings Bank from time to time. We have not separately
      compensated these persons. We may hire additional employees, as appropriate,
      to
      the extent we expand our business in the future.





SFSB,
      Inc., as the holding company of Slavie Federal Savings Bank, is authorized
      to
      pursue other business activities permitted by applicable laws and regulations
      for savings and loan holding companies, which may include the acquisition of
      banking and financial services companies.





**BUSINESS
      OF SLAVIE FEDERAL SAVINGS BANK**





**General**





Our
      principal business consists of attracting deposits from the general public
      in
      our market area and investing those funds, together with funds generated from
      operations and borrowings, in one- to four-family residential real estate loans
      and commercial mortgage loans. We also invest in land and construction loans,
      home equity loans and investment securities.





We
      derive
      our income primarily from interest earned on loans, mortgage-backed securities
      and investment securities and commissions from the sale of non-insured
      investment products earned through Slavie Financial Services. Our principal
      expenses are interest expense on deposits and non-interest expenses, such as
      compensation and related expenses, occupancy expenses, deposit insurance
      expenses, advertising expenses, data processing expenses, furniture, fixtures
      and equipment expenses and other miscellaneous expenses. Funds for these
      activities are provided primarily by deposits, repayments (including
      prepayments) of outstanding loans and mortgage-backed and investment securities,
      commissions from the sale of non-insured investment products, and operating
      revenue.





*New
      products and services* .
      In
      mid-year 2007, we created an alternative means for our customers to reach their
      financial well being potential by offering them investing guidance and financial
      planning expertise through a financial services operation, with the addition
      of
      a certified financial planner, who sells non-insured investment products. During
      2007 we also developed a health savings account to assist customers in making
      medical expenses more affordable and began offering Coverdell Education Savings
      Accounts to assist our customers with planning for educational expenses. In
      addition, we offer a merchant bank card service through a third party vendor,
      offering the convenience of debit and credit card transaction processing to
      our
      commercial checking account customers. We have informed our customers of the
      launching of these new products and services through the distribution of a
      quarterly newsletter, entitled Today’s Slavie.


1


**Market
      Area**





Currently,
      our primary market area is Baltimore City, Baltimore County and Harford County,
      Maryland. We service this market area from two offices, one in Harford County,
      Maryland and one in northeast Baltimore City, near the Baltimore County border.





The
      primary market area reflects a diverse cross section of employment sectors,
      which partially mitigates the risk associated with a decline in any particular
      economic sector or industry. Once the backbone of the region’s employment base,
      the manufacturing sector continues to contract with most of the job growth
      during the past few years occurring in services. Government and
      finance/insurance/real estate-related employment also constitute major
      employment sectors in the market area.





The
      primary market area is characterized by two more populous but lower growth
      areas
      in Baltimore County and Baltimore City, and one smaller, but faster growth
      area
      in Harford County. Over the last several years, Baltimore City has experienced
      a
      decline in population, reflecting the outmigration of population to the
      surrounding suburban markets, while the population has grown in Baltimore County
      (at a rate slower than comparable U.S. and Maryland growth rates) and Harford
      County (at rates well above the comparable U.S. and Maryland growth rates).
      These trends reflect urban flight to suburban markets for better job
      opportunities, a lower cost of living and more affordable housing.





Income
      levels in the primary market area tend to reflect the nature of the markets
      served, with higher income levels in the more suburban markets. The greater
      wealth of the suburban markets is consistent with national trends, in which
      the
      white collar professionals who work in the cities generally reside in the
      surrounding suburbs. Additionally, much of the growth in white collar jobs
      has
      been occurring in suburban markets in the greater Baltimore area.





**Competition**





Our
      most
      direct competition for deposits has come historically from commercial banks,
      credit unions and other savings institutions located in our market area,
      including many large financial institutions which have greater financial and
      marketing resources than we have. In addition, we face significant competition
      for investors’ funds from short-term money market securities, mutual funds and
      other corporate and government securities. In the past, we relied upon the
      Slavic-American community in our market area for a material portion of our
      deposits. Today, we believe that deposits from this group account for no more
      than 10% of our total deposits. Our ability to attract and retain deposits
      depends on our ability to provide a rate of return, liquidity and risk
      comparable to that offered by competing investment opportunities.





Our
      competition for loans comes primarily from the same financial institutions
      that
      we compete with for deposits, mortgage companies and independent mortgage
      brokers. We compete for loan originations primarily through the interest rates
      and loan fees we charge, and the efficiency and quality of services we provide
      customers. Factors which affect competition include general and local economic
      conditions, current interest rate levels and volatility in the mortgage
      markets.





We
      expect
      competition to increase in the future as a result of legislative, regulatory
      and
      technological changes and the continuing trend of consolidation in the financial
      services industry. Technological advances, for example, have lowered barriers
      to
      entry, allowed banks to expand their geographic reach by providing services
      over
      the Internet and made it possible for non-depository institutions to offer
      products and services that traditionally have been provided by banks. Changes
      in
      federal law permit affiliation among banks, securities firms and insurance
      companies, which promotes a competitive environment in the financial services
      industry. Competition for deposits and the origination of loans could limit
      our
      growth in the future.


2


**Lending
      Activities**





*General.* Our
      principal lending activity has been the origination of first mortgage loans
      for
      the purchase or refinancing of one- to four-family residential real property
      and
      the origination of commercial loans, both mortgage and non-real estate loans.
      Historically, we have retained the loans that we originated, but in our
      continued efforts to boost the yield of our interest earning assets during
      a
      period of net interest margin compression, management decided to sell a larger
      percentage of the Bank’s residential loan originations to facilitate our goal of
      increasing and diversifying the mix of commercial loans to residential loans
      in
      our portfolio.





Our
      net
      loan portfolio totaled $147,744,000 at December 31, 2007, representing 85.78%
      of
      total assets. One- to four-family residential real estate mortgage loans
      represented $112,198,000, or 74.55%, of our total loan portfolio at December
      31,
      2007. Other loans secured by real estate include commercial mortgage loans,
      construction loans secured by single family properties and acquisition and
      development loans, which amounted to $12,273,000, $2,205,000 and $3,135,000,
      or
      8.15%, 1.47% and 2.08% of the total loan portfolio at December 31,
      2007.





Commercial
      non-mortgage loans amounted to $3,593,000, or 2.39% of our total loan portfolio
      at December 31, 2007. The remainder of our portfolio was comprised of consumer
      loans, consisting primarily of home equity loans and lines of credit and other
      loans such as deposit account loans, home improvement loans, automobile loans
      and overdraft protection loans. At December 31, 2007, home equity and other
      consumer loans totaled $16,670,000 and $427,000, respectively, or 11.08% and
      0.28% of the total loan portfolio.





We
      believe that increasing loan diversification will increase our competitive
      profile and improve earnings through higher yields. In that regard, we have
      and
      will continue to increase our commercial real estate loan portfolio and continue
      to grow our commercial business loan portfolio. We focus our commercial lending
      activities on small to mid-size businesses in our market area and we seek to
      distinguish ourselves by providing responsive personal service and local
      decision making.





The
      types
      of loans that we may originate are subject to federal and state laws and
      regulations. Interest rates charged on loans are affected principally by the
      demand for such loans, the supply of money available for lending purposes and
      the rates offered by our competitors. These factors are, in turn, affected
      by
      general economic conditions, the monetary policy of the federal government,
      including the Federal Reserve Board, legislative and tax policies and
      governmental budgetary matters.





A
      savings
      bank generally may not make loans to one borrower and related entities in an
      amount which exceeds 15% of its unimpaired capital and surplus, and an
      additional amount equal to 10% of unimpaired capital and surplus if the loan
      is
      secured by readily marketable collateral (generally financial instruments,
      but
      not real estate). At December 31, 2007, our regulatory limit on loans-to-one
      borrower was $2,665,000 and our five largest loans or groups of loans-to-one
      borrower, including related entities, aggregated $2,221,000, $2,093,000,
      $1,558,000, $1,500,000 and $1,234,000. Each loan or groups of loans was
      performing in accordance with its terms at December 31, 2007.


3


*Loan
      Portfolio Composition.* The
      following table sets forth the composition of our loan portfolio by type of
      loan
      as of the dates indicated, including a reconciliation of gross loans receivable
      after consideration of the allowance for loan losses and net deferred
      fees.





**At
                December 31,****2007**
            
            **2006****Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**(Dollars
                in Thousands)**Real
                Estate Loans:**One-
                to four-family
            
            $
            112,198
            
            
            74.55
            %
            $
            117,755
            
            
            79.48
            %Commercial
                mortgage
            
            
            12,273
            
            
            8.15
            
            
            5,753
            
            
            3.88Construction
            
            
            2,205
            
            
            1.47
            
            
            300
            
            
            0.20Acquisition
                and development
            
            
            3,135
            
            
            2.08
            
            
            4,160
            
            
            2.81Total
                real estate loans
            
            
            129,811
            
            
            86.25
            
            
            127,967
            
            
            86.37**Commercial
                non-real estate**
            
            
            3,593
            
            
            2.39
            
            
            2,800
            
            
            1.89**Consumer
                Loans:**Home
                equity
            
            
            16,670
            
            
            11.08
            
            
            16,857
            
            
            11.38Other
            
            
            427
            
            
            0.28
            
            
            536
            
            
            0.36Total
                consumer loans
            
            
            17,097
            
            
            11.36
            
            
            17,393
            
            
            11.74Total
                loans receivable, gross
            
            
            150,501
            
            
            100.0
            %
            
            148,160
            
            
            100.0
            %Less:Loan
                in process
            
            
            (1,538
            )
            
            
            
            
            (60
            )Allowance
                for loan losses
            
            
            (972
            )
            
            
            
            
            (850
            )Deferred
                loan fees (costs)
            
            
            (247
            )
            
            
            
            
            (132
            )Total
                loans receivable, net
            
            $
            147,744
            
            
            
            
            $
            147,118




4





*Maturity
      of Loan Portfolio.* The
      following tables present certain information at December 31, 2007 regarding
      the
      dollar amount of certain loans maturing in our portfolio based on their
      contractual terms to maturity or scheduled amortization, but does not include
      the effect of possible prepayments or due on sale clause payments.





**One Year**
              **or less**
            
            **More than**
              **1 to 5 years**
            
            **More than**
              **5 years**
            
            **Totals**(Dollars
                in Thousands)**Real
                Estate Loans:**One-
                to four-family
            
            $
            1,117
            
            $
            3,782
            
            $
            107,299
            
            $
            112,198Commercial
                mortgage
            
            
            4,771
            
            
            6,378
            
            
            1,124
            
            
            12,273Construction
            
            
            705
            
            
            1,500
            
            
            -
            
            
            2,205Acquisition
                and development
            
            
            1,857
            
            
            1,278
            
            
            -
            
            
            3,135Total
                real estate loans
            
            
            8,450
            
            
            12,938
            
            
            108,423
            
            
            129,811**Commercial
                non-real estate**
            
            
            1,382
            
            
            1,722
            
            
            489
            
            
            3,593**Consumer
                Loans:**Home
                equity
            
            
            4,204
            
            
            9,996
            
            
            2,470
            
            
            16,670Other
            
            
            102
            
            
            264
            
            
            61
            
            
            427Total
                consumer loans
            
            
            4,306
            
            
            10,260
            
            
            2,531
            
            
            17,097Total
                loans receivable, gross
            
            
            14,138
            
            
            24,920
            
            
            111,443
            
            
            150,501







**One- to**
              **four-**
              **family**
            
            **Commercial**
              **Mortgage**
            
            **Construction**
            
            **Acquisition**
              **and**
              **Development**
            
            **Commercial**
              **Non R/E**
            
            **Home**
              **Equity**
            
            **Other**
              **Consumer**
              **Loans**
            
            **Totals**(Dollars
                inThousands)Total
                due after one yearwith
                fixed interest rates
            
            $
            111,048
            
            $
            7,502
            
            $
            -
            
            $
            1,278
            
            $
            1,218
            
            $
            9,890
            
            $
            325
            
            $
            131,261Total
                due after one yearwith
                adjustable interest rates
            
            $
            33
            
            $
            -
            
            $
            1,500
            
            $
            -
            
            $
            993
            
            $
            2,576
            
            $
            -
            
            $
            5,102





Scheduled
      contractual maturities of loans do not necessarily reflect the actual expected
      term of the loan portfolio.





*One-
      to Four-Family Residential Loans* .
      Our
      primary lending activity consists of the origination of one- to four-family
      residential mortgage loans that are primarily secured by properties located
      in
      the greater Baltimore metropolitan area. At December 31, 2007, $112,198,000,
      or
      74.55% of our total loan portfolio, consisted of one- to-four family residential
      loans. Generally, one- to four-family residential mortgage loans are originated
      in amounts up to 80% of the lesser of the appraised value or purchase price
      of
      the property, with private mortgage insurance required on loans with a
      loan-to-value ratio in excess of 80%. Fixed-rate loans are originated for terms
      of 10, 15, 20, 30 and 40 years. At December 31, 2007, $112,165,000, or 99.97%
      of
      our one- to four-family residential mortgage loans were fixed-rate loans. Also,
      at December 31, 2007, our largest loan secured by one- to four-family real
      estate had a principal balance of $962,000 and was secured by a single-family
      residence. This loan was performing in accordance with its terms at December
      31,
      2007.




We
      also
      offer adjustable-rate mortgage loans with a one year adjustment period based
      on
      changes in a designated United States Treasury index. However, in the recent
      interest rate environment, there has been very limited demand for these loans.
      We did not originate any adjustable rate one- to four-family residential loans
      during the year ended December 31, 2007. Our adjustable rate mortgage loans
      provide for maximum rate adjustments of 200 basis points per adjustment, with
      a
      lifetime maximum adjustment of 600 basis points per term. Our adjustable rate
      mortgage loans amortize over terms of up to 30 years. At December 31, 2007,
      only
      $33,000 or 0.03% of our one- to four-family residential mortgage loans had
      adjustable rates of interest.




5


All
      one-
      to four-family residential mortgage loans that we originate include
“due-on-sale” clauses, which give us the right to declare a loan immediately due
      and payable in the event that, among other things, the borrower sells or
      otherwise disposes of the real property subject to the mortgage and the loan
      is
      not repaid.




Regulations
      limit the amount that a savings bank may lend relative to the appraised value
      of
      the real estate securing the loan, as determined by an appraisal of the property
      at the time the loan is originated. For all loans, we utilize outside
      independent appraisers approved by the board of directors. All borrowers are
      required to obtain title insurance. We also require homeowner’s insurance and
      fire and casualty insurance and, where circumstances warrant, flood insurance
      on
      properties securing real estate loans.





Currently,
      we do not hold any negative amortization or any type of option adjustable rate
      mortgage (option ARM) loans in our loan portfolio. Also, the debt to income
      ratio on all adjustable rate loan products that are or will be held in our
      loan
      portfolio are or will be qualified by using a minimum of the fully indexed
      rate
      to determine the ability of the borrower to repay the loan. We may originate
      these types of loans (option ARMs or loans where the borrower is not qualified
      by the fully indexed rate) and sell them to a correspondent lender. In such
      a
      case, these loans are designated as held for sale and are delivered to the
      purchaser as soon as possible following settlement.





*Commercial
      Real Estate Loans* .
      At
      December 31, 2007, $12,273,000, or 8.15% of our total loan portfolio, consisted
      of commercial real estate loans. Commercial **** real
      estate loans are secured by office buildings, mixed use properties and other
      commercial properties. We generally originate commercial real estate loans
      with
      maximum terms of up to 30 years with a call feature. The maximum loan-to-value
      ratio of commercial real estate loans is 80%. At December 31, 2007, we had
      58
      commercial real estate loans with an average outstanding balance of $212,000.
      At
      December 31, 2007, our largest loan secured by commercial real estate had an
      outstanding balance of $2,221,000. At December 31, 2007, this loan was
      performing in accordance with its terms.





Commercial
      real estate lending entails significant additional risks as compared with one-
      to four-family residential property lending. Commercial real estate loans
      typically involve larger loan balances to single borrowers or groups of related
      borrowers. The payment experience on such loans typically is dependent on the
      successful operation of the real estate project, retail establishment or
      business. These risks can be significantly impacted by supply and demand
      conditions in the market for office and retail space and, as such, may be
      subject to a greater extent to adverse conditions in the economy generally.
      It
      is generally our policy to obtain annual financial statements on the borrower’s
      business or the project for which commercial real estate loans are originated.
      In addition, in the case of commercial real estate loans made to a partnership,
      limited liability company or a corporation, we seek, whenever possible, to
      obtain personal guarantees and annual financial statements from the principals
      of the entity. In general, prior to settlement of a commercial real estate
      loan,
      we require an appraisal and a Phase I Environmental Site Assessment
      Report.





*Multi-Family
      Loans.* We offer
      fixed-rate and adjustable rate multi-family real estate loans with amortization
      schedules of up to 30 years. We generally lend up to 80% of the property’s
      appraised value. Appraised values are typically determined by independent
      appraisers. In deciding to originate a multi-family loan, we review the
      creditworthiness of the borrower, the expected cash flows from the property
      securing the loan, the cash flow requirements of the borrower, the value of
      the
      property and the quality of the management involved with the property. We
      generally obtain the personal guarantee of the principals when originating
      multi-family real estate loans. At December 31, 2007, we had  no
      multi-family loans in our loan portfolio.





Multi-family
      real estate lending is generally considered to involve a higher degree of credit
      risk than one- to four-family residential lending. Such lending may involve
      large loan balances concentrated on a single borrower or group of related
      borrowers. We generally require a Phase I Environmental Site Assessment Report
      on the property securing this type of financing. In addition, the payment
      experience on loans secured by income producing properties typically depends
      on
      the successful operation of the related real estate project. Consequently,
      the
      repayment of the loan may be subject to adverse conditions in the real estate
      market or the economy generally.





*Construction
      Loans and Acquisition and Development Loans.* We
      originate loans to finance the construction of residential dwellings and loans
      to acquire and develop land on which to construct residential dwellings. At
      December 31, 2007, $2,205,000, or 1.47% of our total loan portfolio, consisted
      of a commercial and two residential construction loans, and $3,135,000, or
      2.08%
      of our total loan portfolio, consisted of acquisition and development
      loans . Of
      this
      amount, $1,500,000 constituted our interest in a loan
      participation.


6





Construction
      loans generally provide for interest-only payments at fixed-rates of interest,
      which are typically fixed at origination, and have terms of six to 12 months.
      At
      the end of the construction period, the loan generally converts into a permanent
      loan at the same interest rate as the construction loan. Construction loans
      generally may be considered for loan-to-value ratios of up to 80%. Prior to
      committing to fund a construction loan, we require both an appraisal of the
      property and a study of projected construction costs. Loan proceeds are
      disbursed in increments as construction progresses and as inspections warrant.
      We generally use independent fee appraisers for construction disbursement
      purposes.





Acquisition
      and development loans typically are originated at the prime rate plus a
      negotiated margin and, generally, adjust at the effective date of any change
      in
      the Wall Street Journal published prime rate, with a term of up to 18 months
      plus any negotiated extensions. In some instances, loan structure includes
      an
      interest reserve account, under which the borrower finances projected interest
      costs as part of the loan amount. The bank draws this interest reserve account
      each month for the amount of interest owing until the project is completed.
      Loan-to-value ratios generally do not exceed 75%. Prior to settlement of an
      acquisition and development loan, we require an appraisal, Phase I Environmental
      Site Assessment Report and a budget of the development costs.





Acquisition,
      development and construction financing is generally considered to involve a
      higher degree of risk of loss than long-term financing on improved, occupied
      real estate. Risk of loss on such loans is dependent largely upon the accuracy
      of the initial estimate of the property’s value at completion of development or
      construction and the estimated cost (including interest) of development or
      construction. We attempt to mitigate this risk by closely monitoring
      construction of the project and granting funding draws only after periodic
      site
      inspections contracted by the bank and evidence of completed work is obtained.
      During the development or construction phase, a number of factors could result
      in delays and cost overruns. If the estimate of costs proves to be inaccurate,
      we may be required to advance funds beyond the amount originally committed
      to
      permit completion of the project. If the estimate of value proves to be
      inaccurate, we may be confronted, at or prior to the maturity of the loan,
      with
      a project having a value which is insufficient to assure full repayment. As
      a
      result of the foregoing, this type of lending often involves the disbursement
      of
      substantial funds with repayment dependent, in part, on the success of the
      ultimate project rather than the ability of the borrower or guarantor to repay
      principal and interest. If we are forced to foreclose on a project prior to
      or
      at completion due to a default, there can be no assurance that we will be able
      to recover all of the unpaid balance of, and accrued interest on, the loan
      as
      well as related foreclosure and holding costs.





*Commercial
      Business Loans* .
      To
      diversify our loan portfolio, we have grown our commercial business loan
      portfolio. We have focused our commercial business lending activities on small
      to mid-size businesses in our market area and the loans were made for working
      capital or equipment financing. Typically, these loans are secured by equipment,
      machinery and other corporate assets and have terms from three to five years
      with either fixed rates or variable rates of interest. Commercial business
      loans
      generally have higher interest rates and shorter terms than one- to four-family
      residential mortgage loans, but they also may involve higher average balances,
      increased difficulty of loan monitoring and a higher risk of default since
      their
      repayment generally depends on the successful operation of the borrower’s
      business. We attempt to minimize these risks by limiting these loans to viable
      businesses and by obtaining personal guarantees from the borrowers whenever
      possible. At December 31, 2007, commercial business loans totaled $3,593,000,
      or
      2.39% of the total loan portfolio.





*Consumer
      Loans* .
      We are
      authorized to originate loans for a wide variety of personal and consumer
      purposes. Consumer loans consist primarily of home equity loans and lines of
      credit, deposit account loans, home improvement loans, automobile loans and
      overdraft protection loans. At December 31, 2006, consumer loans totaled
      $17,097,000 or 11.36% of the total loan portfolio.





Home
      equity loans and lines of credit are secured by a real estate mortgage with
      a
      security interest in the borrower’s primary residence. These are fixed rate or
      variable rate loans indexed to the prime rate with terms of up to 20 years.
      At
      December 31, 2007, home equity loans totaled $16 ,670,000 or
      11.08% of the total loan portfolio. At December 31, 2007, $11,548,000, or 69.27%
      of our home equity loans were fixed-rate loans and $5,122,000 or 30.73% of
      our
      home equity loans had adjustable rates of interest.


7


As
      indicated, we also offer deposit account loans for personal purposes, home
      improvement loans, automobile loans and overdraft protection loans. At December
      31, 2007, $197,000 or 0.13% of our total loan portfolio consisted of deposit
      account loans, $95,000 or 0.06% of our total loan portfolio consisted of home
      improvement loans, $92,000 or 0.06% of our total loan portfolio consisted of
      automobile loans and $43,000 or 0.03% of our total loan portfolio consisted
      of
      overdraft protection loans.




Consumer
      loans generally have shorter terms and higher interest rates than residential
      mortgage loans. The procedures for underwriting consumer loans include an
      assessment of the applicant’s payment history on other debts and ability to meet
      existing obligations and payments on the proposed loan. The underwriting process
      also includes, particularly with respect to home equity loans, a comparison
      of
      the value of the collateral, if any, to the proposed loan amount.





Consumer
      loans entail greater risks than one to four-family residential mortgage loans,
      particularly consumer loans that are unsecured or that are secured by rapidly
      depreciable assets, such as automobiles. In these cases, the repossessed
      collateral securing a defaulted loan may not provide an adequate source of
      repayment of the outstanding balance, since there is a greater likelihood of
      damage, loss or depreciation of the underlying collateral. Further, consumer
      loan collections are dependent on the borrower’s continuing financial stability
      and are more likely to be adversely affected by job loss, divorce, illness
      or
      personal bankruptcy. For consumer loans secured by real estate, the risk is
      greater than that inherent in the one to four-family loan portfolio in that
      the
      security for home equity loans is generally not the first lien on the property
      and ultimate collection of the loan balance may be dependent on whether value
      remains after the collection by a holder with a higher lien. Finally, the
      application of various federal and state laws may limit the amount recoverable
      in the event of a default of a consumer loan.





*Origination
      and Servicing of Loans* .
      Loan
      origination activities are primarily concentrated in the greater Baltimore
      metropolitan area, and properties securing our real estate loans are primarily
      located in the greater Baltimore metropolitan area. Currently, we sell most
      loans that we originate without retaining servicing rights.




New
      residential mortgage loans are generated primarily from current and former
      borrowers, walk-in customers, referrals from customer and realtors, as well
      as  through
      several correspondent relationships we established with independent residential
      mortgage loan brokers who operate in our market area.




Construction
      and acquisition and development loan originations come from builders and the
      same channels as residential mortgage loans. Similarly, commercial real estate
      loans are generated through contacts in the local community and the same
      channels as residential mortgage loans. We have increased originations of
      commercial real estate and commercial business loans through established
      business relationships. Consumer loans are primarily obtained from existing
      and
      walk-in customers.





Loan
      origination is further supported by advertising, cross-selling and community
      service by Slavie employees. Also, from time to time, we will purchase loan
      participations which meet our underwriting criteria from other financial
      institutions in our market area.





Residential
      mortgage loans are typically underwritten to secondary market (Fannie Mae and
      Freddie Mac) standards to facilitate the ability to sell loans and thereby
      limit
      interest rate risk and meet loan portfolio objectives. Historically, we have
      generally retained all originated loans in our portfolio. Our growth strategy
      contemplates that we only retain for our portfolio those loans meeting our
      interest rate risk and balance sheet composition targets and sell the remaining
      loans in the secondary market on a servicing released basis. Our goal continues
      to be to increase the number of fixed rate loans that we sell on the secondary
      market. Over time, we may evaluate selling loans on a servicing retained basis.
      During 2007, we sold forty-four residential mortgage loans with a total
      principal balance of $7,142,000.




*Loan
      Approval Procedures and Authority* .
      The
      loan approval process is intended to assess the borrower’s ability to repay the
      loan, the viability of the loan, and the adequacy of the value of the property
      that will secure the loan. To assess the borrower’s ability to repay, among
      other things, we review the employment and credit history and information on
      the
      historical and projected income and expenses of mortgagors. We have established
      a loan committee consisting of the president/chief executive officer, senior
      vice-president/chief lending officer, vice-president of lending and the
      assistant vice-president/loan administration. Currently, any two members of
      this
      committee have the authority to approve loans up to $313,000; loan applications
      over $313,000 are submitted to the executive loan committee consisting of either
      the president/chief executive officer or the executive vice president/chief
      lending officer and one non-management member of the board of directors for
      approval. In addition, the board of directors ratifies all loans approved by
      the
      loan and executive loan committees. All loan applications are processed at
      our
      main office.


8


We
      require appraisals of all real property securing loans. Appraisals are performed
      by independent licensed appraisers. All appraisers are approved by the board
      of
      directors annually. We require fire and extended coverage insurance in amounts
      at least equal to the principal amount of the loan.





The
      following table shows our loan origination and repayment activities for the
      periods indicated.




**Years
                Ended December 31,****2007** ****
            
            **2006******(Dollars
                in Thousands)Balance
                outstanding at beginning of period
            
            $
            147,118
            
            $
            144,609Originations
                by Type:Real
                Estate:One-
                to four-family
            
            
            23,569
            
            
            14,400Commercial-real
                estate
            
            
            4,585
            
            
            1,404Commercial-non
                real estate
            
            
            -
            
            
            1,184Construction(1)
            
            
            -
            
            
            -Consumer
                loans:Home
                equity
            
            
            3,296
            
            
            9,500Other
            
            
            31
            
            
            134Total
                loans originated
            
            
            31,481
            
            
            26,622Total
                loans purchased
            
            
            2,212
            
            
            -Less:Total
                loans or participations sold
            
            
            7,602
            
            
            3,741Principal
                repayments
            
            
            24,382
            
            
            20,372Transfers
                to foreclosed real estate
            
            
            1,083
            
            
            -Total
                deductions
            
            
            33,067
            
            
            24,113Balance
                outstanding at end of period
            
            $
            147,744
            
            $
            147,118







(1)
            Includes
                acquisition and development loans.





*Loan
      Origination and Other Fees* .
      In
      addition to interest earned on loans, we may receive loan origination fees
      or
“points” for originating loans. Loan origination fees are a percentage of the
      principal amount of the mortgage loan and are charged to the borrower in
      connection with the origination of the loan. We also receive fees in connection
      with loan modifications, late payments and miscellaneous services related to
      loans.





In
      accordance with Statement of Financial Accounting Standards No. 91, which
      pertains to the accounting for non-refundable fees and costs associated with
      originating or acquiring loans, our loan origination fees and certain related
      direct loan origination costs are offset, and the resulting net amount is
      deferred and amortized as interest income over the contractual life of the
      related loans as an adjustment to the yield of such loans. At December 31,
      2007,
      we had $247,000 in net deferred loan fees.


9


**Asset
      Quality**




*General* .
      One of
      our key operating objectives continues to be to maintain a high level of asset
      quality. Through a variety of strategies, which include aggressive marketing
      of
      foreclosed properties and repossessed assets and borrower workout arrangements,
      we have been proactive in addressing problems with non-performing assets. These
      strategies, as well as our emphasis on originating relatively low risk one-
      to
      four-family residential mortgage loans, quality underwriting, maintenance of
      sound credit standards for new loan originations, even in these unfavorable
      real
      estate market conditions, have supported maintenance of low delinquency ratios.
      Our balance of non-performing assets equaled $468,000 or 0.32% of total loans
      at
      December 31, 2007 and consisted of three non-accruing loans, of which two are
      secured by one- to four-family properties totaling $368,000 and one is a
      commercial non-real estate loan totaling $100,000.





*Collection
      Procedures.* After a
      loan becomes 15 days delinquent, we deliver a computer generated delinquency
      notice to the borrower. A second delinquency notice is sent when the loan
      becomes 30 days delinquent. Once a loan becomes 60 days delinquent, we send
      an
      additional delinquency notice to the borrower and attempt to make personal
      contact with the borrower by letter from the head of the collection department
      or telephone to establish an acceptable repayment schedule. When a loan is
      90
      days delinquent and no acceptable resolution has been reached, we send the
      borrower a 15 day demand letter. After those 15 days, we will generally refer
      the matter to our attorney, who is authorized to commence foreclosure
      proceedings. Management is authorized to begin foreclosure proceedings on any
      loan after determining that it is prudent to do so. In cases where the borrower
      is willing to cooperate and implement a payment plan, we may delay the decision
      to foreclose.




*Non-performing
      Loans and Assets.* Loans
      are
      reviewed on a regular basis and are generally placed on non-accrual status
      when
      they become more than 90 days delinquent. When we classify a loan as
      non-accrual, we no longer accrue interest on such loan and reverse any interest
      previously accrued but not collected. Typically, payments received on a
      non-accrual loan are applied to the outstanding principal and interest as
      determined at the time of collection of the loan. We return a non-accrual loan
      to accrual status when factors indicating doubtful collection no longer exist
      and the loan has been brought current. We consider repossessed assets and loans
      that are 90 days or more past due to be non-performing assets.





Real
      estate and other assets that we acquire as a result of foreclosure or by
      deed-in-lieu of foreclosure or repossession on collateral-dependent loans are
      classified as real estate owned or other repossessed assets until sold. Such
      assets are recorded at foreclosure or other repossession and updated quarterly
      at the lower of cost or estimated fair value less estimated selling costs.
      Any
      portion of the outstanding loan balance in excess of fair value is charged
      off
      against the allowance for loan losses. If, upon ultimate disposition of the
      property, net sales proceeds exceed the net carrying value of the property,
      a
      gain on sale of real estate or other assets is recorded. At December 31, 2007,
      we have real estate owned of $1,083,000 pursuant to the foreclose of the
      property securing a commercial land acquisition and development participation
      loan. We did not have any real estate owned or other repossessed assets at
      December 31, 2006.





Under
      current accounting guidelines, a loan is defined as impaired when, based on
      current information and events, it is probable that a creditor will be unable
      to
      collect all amounts due under the contractual terms of the loan agreement.
      We
      consider one- to four-family mortgage loans and consumer installment loans
      to be
      homogeneous and, therefore, do not separately evaluate them for impairment.
      All
      other loans are evaluated for impairment on an individual basis. We generally
      classify non-accrual loans as impaired and we are doing so with respect to
      a
      $100,000 business line of credit, restructured in the third quarter of 2007,
      because, for the reasons discussed below, we believe that there is a substantial
      likelihood that we will not collect the total amount of the outstanding
      principal balance due under the contractual terms of the loan agreement.





As
      of
      December 31, 2007, we classified the commercial non-real estate loan mentioned
      above as impaired. The corporate commercial loan borrower filed Chapter 7
      corporate bankruptcy in the third quarter of 2006 and filed Chapter 7 personal
      bankruptcy in the second quarter of 2007. In the third quarter of 2007, as
      stated above, we restructured the remaining debt to facilitate repayment of
      the
      loan and the borrower has been paying as agreed.


10


The
      table
      below sets forth the amounts and categories of our non-performing assets at
      the
      dates indicated. During the periods presented, we did not have any troubled
      debt
      restructurings.





**At
                December 31,****2007**
            
            **2006**(Dollars
                in Thousands)Non-accruing
                real estate loans:One-
                to four-family
            
            $
            368
            
            $
            143Commercial
                non-real estate
            
            
            100
            
            
            260Construction(1)
            
            
            -
            
            
            1,083Non-accruing
                consumer loans:Home
                equity
            
            
            -
            
            
            -Other
            
            
            -
            
            
            -Total
                non-accruing loans
            
            $
            468
            
            $
            1,486Accruing
                loans delinquent 90 days or more
            
            
            -
            
            
            -Total
                non-performing loans
            
            
            468
            
            
            1,486Real
                estate owned
            
            
            1,083
            
            
            -Total
                non-performing assets
            
            $
            1,551
            
            $
            1,486Total
                as a percentage of total assets
            
            
            0.90
            %
            
            0.85
            %Total
                as a percentage of total loans
            
            
            1.05
            %
            
            1.01
            %





(1)
            Includes
                acquisition and development loans.





For
      the
      years ended December 31, 2007 and December 31, 2006, gross interest income
      which
      would have been recorded had our non-accruing loans been current in accordance
      with their original terms amounted to $37,000 and $159,000 respectively.
      Interest income recognized on such loans for the years ended December 31, 2007
      and December 31, 2006 was $1,000 and $29,000, respectively.




Of
      the
      non-accrual loans, at December 31, 2007, $100,000 consisted of a commercial
      non-real estate loan, and $368,000 consisted of one-to-four residential mortgage
      loans. Non-accrual loans totaled 0.32% and 1.01% of net loans receivable at
      December 31, 2007 and December 31, 2006, respectively.





We
      hold a
      19% participation (approximately $1,083,000 in unpaid principal balance) in
      an
      acquisition and development loan. This loan is a foreclosed real estate
      participation loan.





As
      we
      previously reported, the property securing this loan was sold at auction to
      the
      lead participating bank in the second quarter of 2007, at which time we
      reclassified the participation as foreclosed real estate. In June 2007, a real
      estate developer made an offer to purchase the property and the lead
      participating bank accepted a letter of intent on June 26, 2007 and executed
      a
      contract with a feasibility study period currently scheduled to expire on June
      15, 2008. Settlement on the sale of this property is expected within 90 days
      thereafter, or before the end of the third quarter of 2008. We expect to recover
      the carrying amount of the real estate pursuant to the sale of the property,
      although there can be no assurance that this will be the case.





Other
      than as disclosed in the table and paragraphs above, there are no other loans
      at
      December 31, 2007 about which management has serious doubts concerning the
      ability of the borrowers to comply with the present loan repayment terms.




*Classified
      Assets.* Federal
      regulations require that each insured savings institution classify its assets
      on
      a regular basis. In addition, in connection with examinations of insured
      institutions, federal examiners have authority to identify problem assets and,
      if appropriate, classify them. There are three classifications for problem
      assets: substandard, doubtful and loss. Substandard assets have one or more
      defined weaknesses and are characterized by the distinct possibility that the
      insured institution will sustain some loss if the deficiencies are not
      corrected. Doubtful assets have the weaknesses of substandard assets with the
      additional characteristic that the weaknesses make collection or liquidation
      in
      full on the basis of currently existing facts, conditions and values
      questionable, and there is a high possibility of loss. An asset classified
      loss
      is considered uncollectible and of such little value that continuance as an
      asset of the institution is not warranted. Another category designated “special
      mention” also must be established and maintained for assets which do not
      currently expose an insured institution to a sufficient degree of risk to
      warrant classification as substandard, doubtful or loss.


11





An
      insured institution is required to establish general allowances for loan losses
      in an amount deemed prudent by management for loans classified substandard
      or
      doubtful, as well as for other problem loans. General allowances represent
      loss
      allowances which have been established to recognize the inherent losses
      associated with lending activities, but which, unlike specific allowances,
      have
      not been allocated to particular problem assets. When an insured institution
      classifies problem assets as “loss,” it is required either to establish a
      specific allowance for losses equal to 100% of the amount of the asset so
      classified or to charge off such amount. An institution’s determination as to
      the classification of its assets and the amount of its valuation allowances
      is
      subject to review by the Office of Thrift Supervision which can order the
      establishment of additional general or specific loss allowances.




On
      the
      basis of management’s review of its assets, at December 31, 2007, we had
      classified $1,451,000 of our assets as substandard (which consisted of two
      non-accruing loans secured by one- to four-family residential properties and
      one
      commercial land acquisition and development participation loan). At December
      31,
      2007, we had classified $100,000, or 100% of one loan as “loss” (which consisted
      of a commercial non-real estate loan). At December 31, 2007, none of our assets
      were classified as special mention or doubtful. The loan portfolio is reviewed
      on a monthly basis to determine whether any loans require classification in
      accordance with applicable regulations. All classified assets are included
      in
      non-performing assets for all periods presented.




The
      following table shows the aggregate amounts of our classified assets at the
      dated indicated.





**At
                December 31,****2007**
            
            **2006**(Dollars
                in Thousands)Special
                mention assets
            
            $
            -
            
            $
            -Substandard
                assets
            
            
            1,451
            
            
            1,226Doubtful
                assets
            
            
            -
            
            
            -Loss
                assets
            
            
            100
            
            
            260Total
                classified assets
            
            $
            1,551
            
            $
            1,486





*Delinquencies.* The
      following tables sets forth information concerning delinquent loans at December
      31, 2007 and December 31, 2006, in dollar amounts and as a percentage of our
      total loan portfolio.




**At
                December 31, 2007**
            
            **At
                December 31, 2006****30-59
                Days**
            
            **60-89
                Days**
            
            **30-59
                Days**
            
            **60-89
                Days****Principal
                Balance of Loans**
            
            **%
                of Total Loans**
            
            **Principal
                Balance of Loans**
            
            **%
                of Total Loans**
            
            **Principal
                Balance of Loans**
            
            **%
                of Total Loans**
            
            **Principal
                Balance of Loans**
            
            **%
                of Total Loans**(Dollars
                in Thousands)Real
                estate loans:One-
                to four-family
            
            $
            749
            
            
            0.51
            %
            $
            361
            
            
            0.24
            %
            $
            251
            
            
            0.17
            %
            $
            142
            
            
            0.10
            %Commercial
                real estate
            
            
            90
            
            
            0.06
            
            
            138
            
            
            0.10
            
            
            -
            
            
            -
            
            
            -
            
            
            -Construction(1)
            
            
            -
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Commercial
                non-real estate:
            
            
            69
            
            
            0.05
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Consumer
                loans:
            
            
            
            
            
            
            
            
            -
            
            
            -Home
                equity
            
            
            71
            
            
            0.05
            
            
            -
            
            
            -
            
            
            10
            
            
            0.01
            
            
            24
            
            
            0.02Other
            
            
            49
            
            
            0.03
            
            
            4
            
            
            0.00
            
            
            1
            
            
            0.00
            
            
            2
            
            
            0.00Total
                delinquent loans
            
            $
            1,028
            
            
            0.70
            %
            $
            503
            
            
            0.34
            %
            $
            262
            
            
            0.18
            %
            $
            168
            
            
            0.11
            %





(1)
            Includes
                acquisition and development loans.




12


**Allowance
      for Loan Losses**





*General.* The
      allowance for loan losses is a valuation allowance for probable credit losses
      inherent in the loan portfolio. We evaluate the need to establish allowances
      against losses on loans on a monthly basis. When additional allowances are
      necessary, a provision for loan losses is charged to earnings.




Our
      methodology for assessing the adequacy of the allowance for loan losses consists
      of three key elements: (1) specific allowances for identified problem loans,
      including certain impaired or collateral-dependent loans; (2) a general
      valuation allowance on certain identified problem loans; and (3) 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 our “watch list” and
      loans that are not. Our watch list includes:




·
            loans
                90 or more days delinquent;





·
            loans
                with anticipated losses;





·
            loans
                referred to attorneys for collection or in the process of
                foreclosure;





·
            nonaccrual
                loans;





·
            loans
                classified as substandard, doubtful or loss by either our internal
                classification system or by regulators during the course of their
                examination of us; and





·
            troubled
                debt restructurings and other non-performing
                loans.





Two
      of
      our officers review each loan on the watch list and establish an individual
      allowance allocation on certain impaired 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.




The
      allowance for impaired loans is generally equal to the amounts by which the
      discounted cash flows (or collateral value or observable market price) are
      lower
      than the carrying value of the loan. Under current accounting guidelines, a
      loan
      is defined as impaired when, based on current information and events, it is
      probable that a creditor will be unable to collect all amounts due under the
      contractual terms of the loan agreement. With respect to the $100,000 commercial
      non-real estate loan, we have made a provision for 100% of the loan balance
      because the collateral has no value. Accordingly, we have established a specific
      allowance for this loan. The reserve for this impaired loan is
      $100,000.





*General
      Valuation Allowance on Certain Identified Problem Loans.* We
      also
      establish a general allowance for watch list loans that do not meet the
      definition of impaired and 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.




*General
      Valuation Allowance on the Remainder of the Loan Portfolio.* 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. These significant factors may include
      changes in lending policies and procedures, changes in existing general economic
      and business conditions affecting our 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 annually to ensure their
      relevance in the current environment.


13





Although
      we believe that we use the best information available to establish the allowance
      for loan losses, the evaluation is inherently subjective as it requires
      estimates that are susceptible to significant revisions as more information
      becomes available or as future events change. If circumstances differ
      substantially from the assumptions used in making our determinations, future
      adjustments to the allowance for loan losses may be necessary and our results
      of
      operations could be adversely affected. 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 increase the allowance for loan losses based on its judgments
      about information available to it at the time of its examination, which would
      adversely affect our results of operations.





The
      following table analyzes changes in the allowance for the periods presented.




**Years
                Ended**
              **December
                31,****2007**
            
            **2006**(Dollars
                in Thousands)Balance
                at beginning of period
            
            $
            850
            
            $
            474Charge-offs(1)
            
            
            122
            
            
            -Recoveries
            
            
            -
            
            
            -Net
                charge-offs
            
            
            122
            
            
            -Provision
                for loan losses
            
            
            244
            
            
            376Ending
                balance
            
            $
            972
            
            $
            850Ratio
                of net charge-offs during the period to average loans outstanding,
                net,
                during the period
            
            
            0.08
            %
            
            -
            %Ratio
                of allowance for loan losses to total loans outstanding
            
            
            0.66
            %
            
            0.57
            %Allowance
                for loan losses as a percent of total non-performing loans
            
            
            207.69
            %
            
            57.20
            %





(1)
            Charge
                offs consisted of the principal loss a commercial non-real estate
                loan of
                $120,000 and four overdraft protection lines of credit of $2,000
                in 2007
                and one overdraft protection line of credit for less than $1,000
                in
                2006.


14


The
      following table sets forth information concerning the allocation of the
      allowance for loan losses by loan category at the dates indicated. The
      allocation of the allowance to each category is not necessarily indicative
      of
      future loss in any particular category and does not restrict the use of the
      allowance to absorb losses in other categories. During 2007, based on the
      factors described above, we reallocated the allowance among our loan categories
      to reflect our current beliefs regarding the collectibility of loans in our
      portfolio. The large allocation to the commercial non-real estate loan category
      is due to the $100,000 commercial non-real estate loan described above. The
      allowance for this loan at December 31, 2007 was $100,000.





**At
                December 31,****2007**
            
            **2006****Amount of**
              **Loan Loss**
              **Allowance**
            
            **Loan**
              **amounts**
              **by**
              **Category**
            
            **Percent of**
              **Loans in**
              **Each**
              **Category to**
              **Total Loans**
            
            **Amount of**
              **Loan Loss**
              **Allowance**
            
            **Loanamounts**
              **by**
              **Category**
            
            **Percent**
              **of Loans**
              **in Each**
              **Category**
              **to Total**
              **Loans**(Dollars
                in Thousands)One-
                to four-family
            
            $
            246
            
            $
            112,198
            
            
            74.55
            %
            $
            276
            
            $
            117,755
            
            
            79.48
            %Commercial
                real estate
            
            
            172
            
            
            12,273
            
            
            8.15
            
            
            66
            
            
            5,752
            
            
            3.88Commercial
                non R/E
            
            
            338
            
            
            3,593
            
            
            2.39
            
            
            288
            
            
            2,800
            
            
            1.89Construction
            
            
            102
            
            
            2,205
            
            
            1.47
            
            
            3
            
            
            300
            
            
            0.20Acquisition
                and development
            
            
            35
            
            
            3,135
            
            
            2.08
            
            
            196
            
            
            4,160
            
            
            2.81Home
                equity
            
            
            77
            
            
            16,670
            
            
            11.08
            
            
            17
            
            
            16,857
            
            
            11.38Other
                consumer
            
            
            2
            
            
            427
            
            
            0.28
            
            
            4
            
            
            536
            
            
            0.36Total
            
            $
            972
            
            $
            150,501
            
            
            100.00
            %
            $
            850
            
            $
            148,160
            
            
            100.00
            %





The
      following table sets forth information concerning the amount of the allowance
      for loan losses that is allocated to each of the three key components of the
      allowance: the specific allowance for impaired loans, the general allowance
      on
      certain identified problem loans that do not meet the definition of impaired
      and
      the general allowance on the remainder of the loan portfolio.





**At
                December 31,****2007**
            
            **2006****Amount
                of**
              **Allowance**
            
            **Percent
                of**
              **Allowance**
            
            **Amount
                of**
              **Allowance**
            
            **Percent
                of**
              **Allowance**(Dollars
                in Thousands)Specific
                allowance
            
            $
            100
            
            
            10.29
            %
            $
            423
            
            
            49.77
            %General
                (identified problem loans)
            
            
            55
            
            
            5.66
            
            
            21
            
            
            2.47General
                (all other loans)
            
            
            817
            
            
            84.05
            
            
            406
            
            
            47.76Total
            
            $
            972
            
            
            100.00
            %
            $
            850
            
            
            100.00
            %




15


**Investments**





*General.* We have
      the authority to invest in various types of securities, including
      mortgage-backed securities, U.S. Treasury obligations, securities of various
      federal agencies and of state and municipal governments, certificates of deposit
      at federally-insured institutions, certain bankers’ acceptances and federal
      funds. As a member of the Federal Home Loan Bank of Atlanta, we are required
      to
      maintain an investment in its stock based on percentages specified by the
      Federal Home Loan Bank of Atlanta on our outstanding advances. Our investment
      strategy is established by our board of directors.





Our
      securities must be categorized as either “held to maturity,” “trading
      securities” or “available for sale,” based on management’s intent as to the
      ultimate disposition of each security. Debt securities may be classified as
      “held to maturity” and reported in financial statements at amortized cost only
      if management has the positive intent and ability to hold these securities
      to
      maturity. Securities that might be sold in response to changes in market
      interest rates, changes in the security’s prepayment risk, increases in loan
      demand, or other similar factors cannot be classified as “held to maturity.” We
      do not currently use or maintain a trading account. Debt and equity securities
      not classified as “held to maturity” are classified as “available for sale.”
These securities are reported at fair value, and unrealized gains and losses
      on
      the securities are excluded from earnings and reported, net of the related
      tax
      effect, as a separate component of equity until realized. Unrealized losses
      on
      any securities are charged to earnings when, in management’s view, the
      impairment becomes other than temporary.





Our
      investment policy is designed to provide and maintain adequate liquidity and
      to
      generate favorable rates of return without incurring undue interest rate or
      credit risk. From time to time, investment levels may be increased or decreased
      depending upon yields available on investment alternatives and management’s
      projections as to the demand for funds to be used in loan originations and
      other
      activities.





At
      December 31, 2007, our investment portfolio consisted of $3,000,000 in federal
      agency securities classified as held to maturity, $8,942,000 in mutual fund
      securities (which invests in adjustable rate mortgages) classified as available
      for sale, $1,844,000 in Federal Home Loan Bank of Atlanta stock and $665,000
      in
      other interest earning assets, consisting of federal funds sold. We also invest
      in mortgage-backed securities, all of which are guaranteed by the United States
      Government or agencies thereof, and all of which are classified as held to
      maturity. At December 31, 2007, our mortgage-backed securities totaled
      $2,247,000, consisting of $1,527,000 in fixed-rate mortgage-backed securities
      guaranteed by the Federal National Mortgage Association (Fannie Mae) and the
      Federal Home Loan Mortgage Corporation (Freddie Mac), and $720,000 in adjustable
      rate mortgage-backed securities guaranteed by the Government National Mortgage
      Association (Ginnie Mae). Management does not believe that the recent turmoil
      in
      the U.S. housing market with the sub-prime lending situation will have an
      adverse affect on its securities as these are high quality investments with
      short to medium term maturities.





Mortgage-backed
      securities represent a participation interest in a pool of one- to four-family
      or multi-family mortgages. The mortgage originators use intermediaries
      (generally U.S. Government agencies and government sponsored enterprises) to
      pool and repackage the participation interest in the form of securities, with
      investors receiving the principal and interest payments on the mortgages. Such
      U.S. Government agencies and government sponsored enterprises guarantee the
      payment of principal and interest to investors.





Mortgage-backed
      securities are typically issued with stated principal amounts, and the
      securities are backed by pools of mortgages that have loans with interest rates
      that are within a range and have varying maturities. The underlying pool of
      mortgages, *i.e* .,
      fixed-rate or adjustable rate, as well as prepayment risk, are passed on to
      the
      certificate holder. The life of a mortgage-backed pass-through security
      approximates the life of the underlying mortgages.





As
      indicated above, our mortgage-backed securities consist of Fannie Mae, Freddie
      Mac and Ginnie Mae securities. Fannie Mae is a private corporation chartered
      by
      the U.S. Congress with a mandate to establish a secondary market for mortgage
      loans. Fannie Mae guarantees the timely payment of principal and interest on
      Fannie Mae securities. Freddie Mac is a private corporation chartered by the
      U.S. Government. Freddie Mac issues participation certificates backed
      principally by conventional mortgage loans. Freddie Mac guarantees the timely
      payment of interest and the ultimate return of principal on participation
      certificates. Fannie Mae and Freddie Mac securities are not backed by the full
      faith and credit of the U.S. Government, but because Fannie Mae and Freddie
      Mac
      are U.S. Government-sponsored enterprises, these securities are considered
      to be
      among the highest quality investments with minimal credit risks. Ginnie Mae
      is a
      government agency within the Department of Housing and Urban Development which
      is intended to help finance government-assisted housing programs. Ginnie Mae
      securities are backed by loans insured by the Federal Housing Administration
      or
      guaranteed by the Veterans Administration. The timely payment of principal
      and
      interest on Ginnie Mae securities is guaranteed by Ginnie Mae and backed by
      the
      full faith and credit of the U.S. Government.


16


Mortgage-backed
      securities generally yield less than the loans which underlie such securities
      because of their payment guarantees or credit enhancements which offer nominal
      credit risk. In addition, mortgage-backed securities are more liquid than
      individual mortgage loans and may be used to collateralize borrowings or other
      obligations of Slavie Federal Savings Bank. In general, we purchase
      mortgage-backed securities as a means to deploy excess liquidity at more
      favorable yields than other investment alternatives. Given the increased equity
      from our initial public offering in 2004, we may consider a match funding
      strategy whereby mortgage-backed securities of various maturities are purchased
      with Federal Home Loan Bank advances.





*Amortized
      Cost and Estimated Fair Value of Securities.* The
      following table sets forth information regarding the amortized cost and
      estimated fair values of our securities portfolio at the dates indicated.




**At
                December 31,****2007**
            
            **2006****Amortized**
              **Cost**
            
            **Fair**
              **Value**
            
            **Amortized**
              **Cost**
            
            **Fair**
              **Value**(Dollars
                in Thousands)Securities
                available for sale:ARM
                mutual fund
            
            $
            9,200
            
            $
            8,942
            
            $
            8,747
            
            $
            8,526Total
                available for sale
            
            $
            9,200
            
            $
            8,942
            
            $
            8,747
            
            $
            8,526Securities
                held to maturity:United
                States government agency securities
            
            $
            3,000
            
            $
            2,987
            
            $
            4,000
            
            $
            3,910Mortgage-backed
                securities:Ginnie
                Mae
            
            
            720
            
            
            720
            
            
            1,246
            
            
            1,241Fannie
                Mae
            
            
            172
            
            
            174
            
            
            223
            
            
            223Freddie
                Mac
            
            
            1,355
            
            
            1,327
            
            
            1,731
            
            
            1,670Total
                mortgage-backed securities
            
            
            2,247
            
            
            2,221
            
            
            3,200
            
            
            3,134Total
                held to maturity
            
            $
            5,247
            
            $
            5,208
            
            $
            7,200
            
            $
            7,044


17


The
      following table sets forth the maturities and weighted average yields of
      securities at December 31, 2007. Adjustable rate mortgage-backed securities
      are
      included in the period in which interest rates are next scheduled to adjust.




**Less
                than 1 Year**
            
            **1
                to 5 Years**
            
            **5
                to 10 Years**
            
            **Over
                10 Years**
            
            **Total
                Securities****Carrying
                Value**
            
            **Weighted
                Average Yield**
            
            **Carrying
                Value**
            
            **Weighted
                Average Yield**
            
            **Carrying
                Value**
            
            **Weighted
                Average Yield**
            
            **Carrying
                Value**
            
            **Weighted
                Average Yield**
            
            **Carrying
                Value**
            
            **Weighted
                Average Yield**(Dollars
                in Thousands)Securities
                available for sale:ARM
                mutual fund
            
            $
            8,942
            
            
            5.12
            %
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            8,942
            
            
            5.12
            %Total
                available for sale
            
            
            8,942
            
            
            5.12
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            8,942
            
            
            5.12Securities
                held to maturity:United
                States government agency
                securities
            
            $
            2,000
            
            
            3.16
            %
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            1,000
            
            
            5.63
            %
            $
            3,000
            
            
            3.98
            %Mortgage-backed
                securities:Ginnie
                Mae
            
            
            720
            
            
            6.14
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            720
            
            
            6.14Fannie
                Mae
            
            
            -
            
            
            -
            
            
            172
            
            
            5.50
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            172
            
            
            5.50Freddie
                Mac
            
            
            6
            
            
            5.50
            
            
            1,349
            
            
            4.50
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,355
            
            
            4.50Total
                mortgage-backed
                securities
            
            
            726
            
            
            6.13
            
            
            1,521
            
            
            4.61
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,247
            
            
            5.10Total
                held to maturity
            
            
            2,726
            
            
            3.95
            
            
            1,521
            
            
            4.61
            
            
            -
            
            
            -
            
            
            1,000
            
            
            5.63
            
            
            5,247
            
            
            4.46Total
            
            $
            11,668
            
            
            4.85
            %
            $
            1,521
            
            
            4.61
            %
            
            -
            
            
            -
            
            
            1,000
            
            
            5.63
            %
            $
            14,189
            
            
            4.88
            %


18


**Sources
      of Funds**





*General* .
      Deposits have traditionally been the primary source of funds for use in lending
      and investment activities. In addition to deposits, funds are derived from
      repayments (including prepayments) of outstanding loans and mortgage-backed
      and
      investment securities and operating revenue. While scheduled loan payments
      and
      income on earning assets are relatively stable sources of funds, deposit inflows
      and outflows can vary widely and are influenced by various economic factors.
      Borrowings are also used on a short-term basis to compensate for reductions
      in
      the availability of funds, and on a longer term basis for general operational
      purposes. Over the past four years, we heavily relied upon borrowings from
      the
      Federal Home Loan Bank of Atlanta to support loan growth.





*Deposits* .
      Deposits are not actively solicited outside of the Baltimore metropolitan area,
      and substantially all of our depositors are persons who work or reside within
      Baltimore City, Baltimore County and Harford County, Maryland. We offer a
      selection of deposit instruments, including demand deposits (non-interest
      bearing), NOW accounts, savings accounts, money market accounts and certificates
      of deposit. Deposit account terms vary, with the principal differences being
      the
      minimum balance required, the amount of time the funds must remain on deposit
      and the interest rate.





Interest
      rates paid, maturity terms, service fees and withdrawal penalties are
      established on a periodic basis. Deposit rates and terms are based primarily
      on
      current operating strategies and market rates, liquidity requirements, rates
      paid by competitors and growth goals. Management believes we price our deposits
      comparably to rates offered by our competitors. We do not accept brokered
      deposits.





We
      rely
      substantially on competitive rates, customer service, convenience, advertising
      and long-standing relationships with customers to attract and retain deposits.
      We believe the image of a full service, locally-based institution will continue
      to contribute to our ability to attract and retain deposits, particularly with
      respect to deposit run-off that results from bank consolidation in the local
      market. We will also continue to evaluate opportunities to enhance deposit
      growth beyond what is currently projected, through such avenues as establishing
      additional branches or through acquisition of another financial institution
      or
      selected branches, although no such transactions are planned as of the date
      of
      this report.





To
      provide additional convenience to our customers, we are affiliated with an
      ATM
      network and offer online banking with bill paying capabilities as a convenience
      to our personal banking customers, as well as our commercial customers.
      Affiliating with an ATM network allows our customers to use the ATM machines
      of
      another larger financial institution without charge. Currently, we have three
      ATM machines, two drive-up machines at each of our offices and a cash dispensing
      machine located inside our corporate headquarters building.





The
      flow
      of deposits is influenced significantly by general economic conditions, changes
      in money market and other prevailing interest rates and levels of competition.
      We believe the variety of deposit accounts offered allows us to be competitive
      in obtaining funds and responding to changes in consumer demand. Based on
      experience, management believes our deposits to be relatively stable. However,
      the ability to attract and maintain certificates of deposit, and the rates
      paid
      on these deposits, has been and will continue to be significantly affected
      by
      market conditions. At December 31, 2007, $89,675,000, or 78.59% of our deposit
      accounts were certificates of deposit, of which $57,335,000 have maturities
      of
      one year or less.


19


Deposit
      Accounts .
      The
      following table sets forth the dollar amount of deposits in the various types
      of
      deposit accounts we offered as of the dates indicated. **




**At
                    December 31,****2007**
                
                **2006****Weighted**
                  **Average**
                  **Rate**
                
                **Amount**
                
                **Weighted**
                  **Average**
                  **Rate**
                
                **Amount**(Dollars
                    in Thousands)NOW
                    & Money Market Demand
                
                
                1.90
                %
                $
                15,390
                
                
                1.47
                %
                $
                15,368Savings
                    deposits
                
                
                1.26
                
                
                7,718
                
                
                1.45
                
                
                9,092Certificates
                    of deposit
                
                
                4.95
                
                
                89,675
                
                
                4.84
                
                
                85,996Accrued
                    interest payable
                
                
                -
                
                
                14
                
                
                -
                
                
                11Non-interest
                    bearing deposits
                
                
                -
                
                
                1,301
                
                
                -
                
                
                1,356Total
                
                
                4.23
                %
                $
                114,098
                
                
                4.04
                %
                $
                111,823





Deposit
      Activity *.* The
      following table sets forth the deposit activities for the periods
      indicated.


**Years
                  Ended December 31,****2007**
              
              **2006**(Dollars
                  in Thousands)Beginning
                  of period
              
              $
              111,823
              
              $
              109,623Net
                  deposits (withdrawals)
              
              
              (2,390
              )
              
              (1,653
              )Interest
                  credited on deposit accounts
              
              
              4,665
              
              
              3,853Total
                  increase in deposit accounts
              
              
              2,275
              
              
              2,200Ending
                  balance
              
              $
              114,098
              
              $
              111,823Percent
                  increase (decrease)
              
              
              2.03
              %
              
              2.01
              %







Large
      Certificates of Deposits *.* The
      following table indicates the amount of certificates of deposit as of December
      31, 2007, by time remaining until maturity.




**Three
                months**
              **or
                less**
            
            **Over
                three**
              **months
                to six months**
            
            **Over
                six**
              **months
                to**
              **twelve
                months**
            
            **Over
                twelve months**
            
            **Total**(Dollars
                in Thousands)Certificates
                of deposit:Less
                than $100,000
            
            $
            14,146
            
            $
            12,873
            
            $
            13,354
            
            $
            19,588
            
            $
            59,961$100,000
                or more
            
            
            5,000
            
            
            4,873
            
            
            7,089
            
            
            12,752
            
            
            29,714Total
            
            $
            19,146
            
            $
            17,746
            
            $
            20,443
            
            $
            32,340
            
            $
            89,675





*Borrowings* .
      Slavie
      Federal Savings Bank may obtain advances from the Federal Home Loan Bank of
      Atlanta upon the security of the common stock it owns in that bank and certain
      of its residential mortgage loans and mortgage-backed and other investment
      securities, provided certain standards related to creditworthiness have been
      met. These advances are made pursuant to several credit programs, each of which
      has its own interest rate and range of maturities. Federal Home Loan Bank of
      Atlanta advances are generally available to meet seasonal and other withdrawals
      of deposit accounts and to permit increased lending.


20





At
      December 31, 2007, Slavie Federal Savings Bank was permitted to borrow up to
      $51,667,000 from the Federal Home Loan Bank of Atlanta. We had $34,000,000
      and
      $39,000,000 of Federal Home Loan Bank advances as of December 31, 2007 and
      December 31, 2006, respectively, and we averaged $33,917,000 and $39,250,000
      of
      Federal Home Loan Bank advances during the years ended December 31, 2007 and
      December 31, 2006, respectively. The decrease in borrowings reflects $5,000,000
      in short term borrowing repayments. There was $10,000,000 in new long term
      borrowings as well as $10,000,000 in long term borrowing repayments. Total
      borrowings decreased by $5,000,000 from the prior year. We have relied on
      borrowings to an  extent
      since the third quarter of 2003 to fund loan growth.





The
      following table sets forth certain information regarding the Federal Home Loan
      Bank advances for the periods indicated. The table indicates both long and
      short-term borrowings.




**Years
                Ended December 31,****2007**
            
            **2006**(Dollars
                in Thousands)FHLB
                Advances:Maximum
                month-end balance
            
            $
            34,000
            
            $
            39,000Balance
                at end of period
            
            
            34,000
            
            
            39,000Average
                balance
            
            
            33,917
            
            
            39,250Weighted
                average interest rate at end of period
            
            
            3.47
            %
            
            4.35
            %Weighted
                average interest rate during period
            
            
            4.18
            %
            
            4.07
            %





**Personnel**





As
      of
      December 31, 2007, we had 26  full-time
      employees and 9 part-time employees. Our employees are not represented by any
      collective bargaining group. Management believes that we have good relations
      with our employees.





**Subsidiary
      Activities**





Office
      of
      Thrift Supervision regulations permit federal savings banks to invest in the
      capital stock, obligations or other specified types of securities of
      subsidiaries (referred to as “service corporations”) and to make loans to such
      subsidiaries and joint ventures in which such subsidiaries are participants
      in
      an aggregate amount not exceeding 2% of the bank’s assets, plus an additional 1%
      of assets if the amount over 2% is used for specified community or inner-city
      development purposes. In addition, federal regulations permit banks to make
      specified types of loans to such subsidiaries (other than special purpose
      finance subsidiaries) in which the bank owns more than 10% of the stock, in
      an
      aggregate amount not exceeding 50% of the bank’s regulatory capital if the
      bank’s regulatory capital is in compliance with applicable regulations.





Slavie
      Federal Savings Bank has one subsidiary, Slavie Holdings, LLC, which was formed
      as a Maryland limited liability company in August 1999 to acquire and manage
      the
      real property located at 1614 Churchville Road, Bel Air, Maryland. The
      Churchville Road property houses our main office and corporate headquarters.
      The
      property also houses mixed use office space, which is available for lease.




21


**SUPERVISION
      AND REGULATION**





**The
      following discussion of certain laws and regulations which are applicable to
      SFSB, Inc. and Slavie Federal Savings Bank, as well as descriptions of laws
      and
      regulations contained elsewhere in this Report, summarizes the aspects of such
      laws and regulations which are deemed to be material to SFSB, Inc. and Slavie
      Federal Savings Bank. However, the summary does not purport to be complete
      and
      is qualified in its entirety by reference to applicable laws and
      regulations.**





**General**





Slavie
      Federal Savings Bank is examined and supervised by the Office of Thrift
      Supervision and the Federal Deposit Insurance Corporation. This regulation
      and
      supervision establishes a comprehensive framework of activities in which an
      institution may engage and is intended primarily for the protection of the
      Federal Deposit Insurance Corporation’s deposit insurance funds and depositors
      and not stockholders. Under this system of federal regulation, financial
      institutions are periodically examined to ensure that they satisfy applicable
      standards with respect to their capital adequacy, assets, management, earnings,
      liquidity and sensitivity to market interest rates. Following completion of
      its
      examination, the federal agency critiques the institution’s operations and
      assigns its rating (known as an institution’s CAMELS rating). Under federal law,
      an institution may not disclose its CAMELS rating to the public. Slavie Federal
      Savings Bank also is a member of and owns stock in the Federal Home Loan Bank
      of
      Atlanta, which is one of the twelve regional banks in the Federal Home Loan
      Bank
      System. Slavie Federal Savings Bank also is regulated to a lesser extent by
      the
      Board of Governors of the Federal Reserve System, governing reserves to be
      maintained against deposits and other matters. The Office of Thrift Supervision
      examines Slavie Federal Savings Bank and prepares reports for the consideration
      of its board of directors on any operating deficiencies. Slavie Federal Savings
      Bank’s relationship with its depositors and borrowers also is regulated to a
      great extent by both federal and state laws, especially in matters concerning
      the ownership of deposit accounts and the form and content of Slavie Federal
      Savings Bank’s mortgage documents.





Any
      change in these laws or regulations, whether by the Federal Deposit Insurance
      Corporation, Office of Thrift Supervision or Congress, could have a material
      adverse impact on SFSB, Inc. and Slavie Federal Savings Bank and their
      operations.





**Federal
      Banking Regulation**





*Business
      Activities* .
      A
      federal savings bank derives its lending and investment powers from the Home
      Owners’ Loan Act and the regulations of the Office of Thrift Supervision. Under
      these laws and regulations, Slavie Federal Savings Bank may invest in mortgage
      loans secured by residential and commercial real estate, commercial business
      and
      consumer loans, certain types of debt securities and certain other assets.
      Certain types of lending, such as commercial and consumer loans, are subject
      to
      an aggregate limit calculated as a specified percentage of Slavie Federal
      Savings Bank’s capital assets. Slavie Federal Savings Bank also may establish
      subsidiaries that may engage in activities not otherwise permissible for Slavie
      Federal Savings Bank, including real estate investment and securities and
      insurance brokerage.





*Capital
      Requirements* .
      Office
      of Thrift Supervision regulations require savings banks to meet three minimum
      capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for
      banks receiving the highest rating on the CAMELS rating system) and an 8%
      risk-based capital ratio. The prompt corrective action standards discussed
      below, in effect, establish a minimum 2% tangible capital standard.





The
      risk-based capital standard for savings banks requires the maintenance of Tier
      1
      (core) and total capital (which is defined as core capital and supplementary
      capital) to risk-weighted assets of at least 4% and 8%, respectively. In
      determining the amount of risk-weighted assets, all assets, including certain
      off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%,
      assigned by the Office of Thrift Supervision based on the risks believed
      inherent in the type of asset. Core capital is defined as common stockholders’
equity (including retained earnings), certain noncumulative perpetual preferred
      stock and related surplus and minority interests in equity accounts of
      consolidated subsidiaries, less intangibles other than certain mortgage
      servicing rights and credit card relationships. The components of supplementary
      capital currently include cumulative preferred stock, long term perpetual
      preferred stock, mandatory convertible securities, subordinated debt and
      intermediate preferred stock, the allowance for loan and lease losses limited
      to
      a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized
      gains
      on available-for-sale equity securities with readily determinable fair market
      values. Overall, the amount of supplementary capital included as part of total
      capital cannot exceed 100% of core capital.


22


At
      December 31, 2007, Slavie Federal Savings Bank’s capital exceeded all applicable
      requirements.





*Loans-to-One
      Borrower* .
      A
      federal savings bank generally may not make a loan or extend credit to a single
      or related group of borrowers in excess of 15% of unimpaired capital and
      surplus. An additional amount may be loaned, equal to 10% of unimpaired capital
      and surplus, if the loan is secured by readily marketable collateral, which
      generally does not include real estate. As of December 31, 2007, Slavie Federal
      Savings Bank was in compliance with the loans-to-one borrower
      limitations.





*Qualified
      Thrift Lender Test* .
      As a
      federal savings bank, Slavie Federal Savings Bank is subject to a qualified
      thrift lender, or “QTL,” test. Under the QTL test, Slavie Federal Savings Bank
      must maintain at least 65% of its “portfolio assets” in “qualified thrift
      investments” in at least nine months of the most recent 12-month period.
“Portfolio assets” generally means total assets of a savings institution, less
      the sum of specified liquid assets up to 20% of total assets, goodwill and
      other
      intangible assets, and the value of property used in the conduct of the savings
      bank’s business.





“Qualified
      thrift investments” includes various types of loans made for residential and
      housing purposes, investments related to such purposes, including certain
      mortgage-backed and related securities, and loans for personal, family,
      household and certain other purposes up to a limit of 20% of portfolio assets.
      “Qualified thrift investments” also include 100% of an institution’s credit card
      loans, education loans and small business loans. Slavie Federal Savings Bank
      also may satisfy the QTL test by qualifying as a “domestic building and loan
      association” as defined in the Internal Revenue Code.





A
      savings
      bank that fails the qualified thrift lender test must either convert to a bank
      charter or operate under specified restrictions. At December 31, 2007, Slavie
      Federal Savings Bank maintained approximately 84.49% of its portfolio assets
      in
      qualified thrift investments.





*Capital
      Distributions* .
      Office
      of Thrift Supervision regulations govern capital distributions by a federal
      savings bank, which include cash dividends, stock repurchases and other
      transactions charged to the capital account. A savings bank must file an
      application for approval of a capital distribution if:





·
            the
                total capital distributions for the applicable calendar year exceed
                the
                sum of the bank’s net income for that year to date plus the bank’s
                retained net income for the preceding two years;





·
            the
                bank would not be at least adequately capitalized following the
                distribution;





·
            the
                distribution would violate any applicable statute, regulation, agreement
                or Office of Thrift Supervision-imposed condition; or





·
            the
                bank is not eligible for expedited treatment of its filings.





Even
      if
      an application is not otherwise required, every savings bank that is a
      subsidiary of a holding company must still file a notice with the Office of
      Thrift Supervision at least 30 days before the board of directors declares
      a
      dividend or approves a capital distribution.





The
      Office of Thrift Supervision may disapprove a notice or application if:





·
            the
                bank would be undercapitalized following the distribution;





·
            the
                proposed capital distribution raises safety and soundness concerns;
                or


23





·
            the
                capital distribution would violate a prohibition contained in any
                statute,
                regulation or agreement.





In
      addition, the Federal Deposit Insurance Act provides that an insured depository
      institution may not make any capital distribution, if after making such
      distribution, the institution would be undercapitalized.





*Liquidity.* **** A
      federal
      savings bank is required to maintain a sufficient amount of liquid assets to
      ensure its safe and sound operation.





*Community
      Reinvestment Act and Fair Lending Laws* .
      All
      savings banks have a responsibility under the Community Reinvestment Act and
      related regulations of the Office of Thrift Supervision to help meet the credit
      needs of their communities, including low- and moderate-income neighborhoods.
      In
      connection with its examination of a federal savings bank, the Office of Thrift
      Supervision is required to assess the bank’s record of compliance with the
      Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and
      the Fair Housing Act prohibit lenders from discriminating in their lending
      practices on the basis of characteristics specified in those statutes. A bank’s
      failure to comply with the provisions of the Community Reinvestment Act could,
      at a minimum, result in denial of certain corporate applications such as
      branches or mergers or other restrictions on its activities. The failure to
      comply with the Equal Credit Opportunity Act and the Fair Housing Act could
      result in enforcement actions by the Office of Thrift Supervision, as well
      as
      other federal regulatory agencies and the Department of Justice. Slavie Federal
      Savings Bank received a satisfactory  Community
      Reinvestment Act rating in its most recent federal examination.





*Transactions
      with Related Parties* .
      A
      federal savings bank’s authority to engage in transactions with its “affiliates”
is limited by Office of Thrift Supervision regulations and by Sections 23A
      and
      23B of the Federal Reserve Act (the “FRA”) and Regulation W of the Federal
      Reserve Bank (collectively, “Regulation W”). The term “affiliates” for these
      purposes generally means any company that controls, is controlled by, or is
      under common control with an institution. SFSB, Inc. is an affiliate of Slavie
      Federal Savings Bank. In general, transactions with affiliates must be on terms
      that are as favorable to the bank as comparable transactions with
      non-affiliates. In addition, certain types of these transactions are restricted
      to an aggregate percentage of the bank’s capital. Collateral in specified
      amounts must usually be provided by affiliates in order to receive loans from
      the bank. In addition, Office of Thrift Supervision regulations prohibit a
      savings bank from lending to any of its affiliates that are engaged in
      activities that are not permissible for bank holding companies and from
      purchasing the securities of any affiliate, other than a subsidiary.





In
      addition, under Regulation W:





·
            a
                bank and its subsidiaries may not purchase a low-quality asset from
                an
                affiliate;


·
            covered
                transactions and other specified transactions between a bank or its
                subsidiaries and an affiliate must be on terms and conditions that
                are
                consistent with safe and sound banking practices; and


·
            with
                some exceptions, each loan or extension of credit by a bank to an
                affiliate must be secured by collateral with a market value ranging
                from
                100% to 130%, depending on the type of collateral, of the amount
                of the
                loan or extension of credit.





Regulation
      W generally excludes all nonbank and nonsavings association subsidiaries of
      banks from treatment as affiliates, except to the extent that the Federal
      Reserve Board decides to treat these subsidiaries as affiliates.





Slavie
      Federal Savings Bank’s authority to extend credit to its directors, executive
      officers and 10% shareholders, as well as to entities controlled by such
      persons, is currently governed by the requirements of Sections 22(g) and 22(h)
      of the FRA and Regulation O of the Federal Reserve Board. Among other things,
      these provisions require that extensions of credit to insiders be made on terms
      that are substantially the same as, and follow credit underwriting procedures
      that are not less stringent than, those prevailing for comparable transactions
      with unaffiliated persons and that do not involve more than the normal risk
      of
      repayment or present other unfavorable features. However, there is an exception
      for loans made pursuant to a benefit or compensation program that is widely
      available to all employees of the institution and does not give preference
      to
      insiders over other employees.




24


These
      provisions also require that such extensions of credit not exceed certain
      limitations on the amount of credit extended to such persons, individually
      and
      in the aggregate, which limits are based, in part, on the amount of Slavie
      Federal Savings Bank’s capital. In addition, extensions of credit in excess of
      certain limits must be approved by Slavie Federal Savings Bank’s board of
      directors (with any “interested” director not participating in the voting).





*Enforcement.* **** The
      Office of Thrift Supervision has primary enforcement responsibility over federal
      savings institutions and has the authority to bring enforcement action against
      all “institution-affiliated parties,” including stockholders, and attorneys,
      appraisers and accountants who knowingly or recklessly participate in wrongful
      action likely to have an adverse effect on an insured institution. Formal
      enforcement action may range from the issuance of a capital directive or cease
      and desist order to removal of officers and/or directors of the institution,
      receivership, conservatorship or the termination of deposit insurance. Civil
      penalties cover a wide range of violations and actions, and range up to $25,000
      per day, unless a finding of reckless disregard is made, in which case penalties
      may be as high as $1 million per day. The Federal Deposit Insurance Corporation
      also has the authority to recommend to the Director of the Office of Thrift
      Supervision that enforcement action be taken with respect to a particular
      savings institution. If action is not taken by the Director, the Federal Deposit
      Insurance Corporation has authority to take action under specified
      circumstances.





*Standards
      for Safety and Soundness.* **** Federal
      law requires each federal banking agency to prescribe certain standards for
      all
      insured depository institutions. These standards relate to, among other things,
      internal controls, information systems and audit systems, loan documentation,
      credit underwriting, interest rate risk exposure, asset growth, compensation,
      and other operational and managerial standards as the agency deems appropriate.
      The federal banking agencies adopted Interagency Guidelines Prescribing
      Standards for Safety and Soundness to implement the safety and soundness
      standards required under federal law. The guidelines set forth the safety and
      soundness standards that the federal banking agencies use to identify and
      address problems at insured depository institutions before capital becomes
      impaired. The guidelines address internal controls and information systems,
      internal audit systems, credit underwriting, loan documentation, interest rate
      risk exposure, asset growth, compensation, fees and benefits. If the appropriate
      federal banking agency determines that an institution fails to meet any standard
      prescribed by the guidelines, the agency may require the institution to submit
      to the agency an acceptable plan to achieve compliance with the standard. If
      an
      institution fails to meet these standards, the appropriate federal banking
      agency may require the institution to submit a compliance plan.





*Prompt
      Corrective Action Regulations* .
      Under
      the prompt corrective action regulations, the Office of Thrift Supervision
      is
      required and authorized to take supervisory actions against undercapitalized
      savings banks. For this purpose, a savings bank is placed in one of the
      following five categories based on the bank’s capital:





·
            well-capitalized
                (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10%
                total
                risk-based capital);





·
            adequately
                capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital
                and 8% total risk-based capital);





·
            undercapitalized
                (less than 8% total risk-based capital, 4% Tier 1 risk-based capital
                or 3%
                leverage capital);





·
            significantly
                undercapitalized (less than 6% total risk-based capital, 3% Tier
                1
                risk-based capital or 3% leverage capital); and





·
            critically
                undercapitalized (less than 2% tangible capital).





Generally,
      the banking regulator is required to appoint a receiver or conservator for
      a
      bank that is “critically undercapitalized” within specific time frames. The
      regulations also provide that a capital restoration plan must be filed with
      the
      Office of Thrift Supervision within 45 days of the date a bank receives notice
      that it is “undercapitalized,” “significantly undercapitalized” or “critically
      undercapitalized,” the performance of which must be guaranteed by any company
      controlling the bank up to specified limits. In addition, numerous mandatory
      supervisory actions become immediately applicable to the bank, including, but
      not limited to, restrictions on growth, investment activities, capital
      distributions and affiliate transactions. The Office of Thrift Supervision
      may
      also take any one of a number of discretionary supervisory actions against
      undercapitalized banks, including the issuance of a capital directive and the
      replacement of senior executive officers and directors.


25





At
      December 31, 2007, Slavie Federal Savings Bank met the criteria for being
      considered “well-capitalized.”





*Insurance
      of Deposit Accounts* .
      Deposit
      accounts in Slavie Federal Savings Bank are insured by the Federal Deposit
      Insurance Corporation, generally up to a maximum of $100,000 per separately
      insured depositor and $250,000 for retirement accounts. Slavie Federal Savings
      Bank’s deposits therefore are subject to Federal Deposit Insurance Corporation
      deposit insurance assessments.





The
      Federal Deposit Insurance Corporation assesses insurance premiums based on
      risk,
      which allows it to tie each financial institution’s deposit insurance premiums
      to the risk it poses to the deposit insurance fund. Under the risk-based
      assessment system, the Federal Deposit Insurance Corporation evaluates the
      risk
      of each financial institution based on its supervisory rating, its financial
      ratios, and its long-term debt issuer rating. The rates for nearly all of the
      financial institution industry vary between five and seven cents for every
      $100
      of domestic deposits. Beginning in 2007, the assessments paid by the Bank were
      offset by the allocation of $103,000 in credits from the Federal Deposit
      Insurance Corporation for prior premiums paid by the Bank. At December 31,
      2007,
      there was a remaining credit balance of $47,000 to be allocated against future
      assessments.




In
      2006,
      the Federal Deposit Insurance Corporation merged the Bank Insurance Fund (“BIF”)
      and the Savings Association Insurance Fund (“SAIF”) into a single fund called
      the Deposit Insurance Fund. As a result of a merger, the BIF and the SAIF were
      abolished. The merger of the BIF and the SAIF into the Deposit Insurance Fund
      does not affect the authority of the Financing Corporation (“FICO”) to impose
      and collect, with the approval of the Federal Deposit Insurance Corporation,
      assessments for anticipated payments, issuance cost and custodial fees on bonds
      issued by the FICO in the 1980s to recapitalize the Federal Savings and Loan
      Insurance Corporation. The bonds issued by the FICO are due to mature in 2017
      through 2019. For the quarter ended December 31, 2007, the annualized FICO
      assessment was equal to 1.14 basis points for each $100 in domestic deposits
      maintained at an institution.





*Prohibitions
      Against Tying Arrangements* .
      Federal
      savings banks are prohibited, subject to some exceptions, from extending credit
      to or offering any other service, or fixing or varying the consideration for
      such extension of credit or service, on the condition that the customer obtain
      some additional service from the institution or its affiliates or not obtain
      services of a competitor of the institution.





*Federal
      Home Loan Bank System* .
      Slavie
      Federal Savings Bank is a member of the Federal Home Loan Bank System, which
      consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank
      System provides a central credit facility primarily for member institutions.
      As
      a member of the Federal Home Loan Bank of Atlanta, Slavie Federal Savings Bank
      is required to acquire and hold shares of capital stock in the Federal Home
      Loan
      Bank in an amount at least equal to 1% of the aggregate principal amount of
      its
      unpaid residential mortgage loans and similar obligations at the beginning
      of
      each year, or 1/20 of its borrowings from the Federal Home Loan Bank, whichever
      is greater. As of December 31, 2007, Slavie Federal Savings Bank was in
      compliance with this requirement.


26





**Federal
      Reserve System**





The
      Federal Reserve Board regulations require savings banks to maintain
      non-interest-earning reserves against their transaction accounts, such as
      negotiable order of withdrawal and regular checking accounts. At December 31,
      2007, Slavie Federal Savings Bank was in compliance with these reserve
      requirements.





**Privacy
      Requirements of the GLBA**




The
      Gramm-Leach-Bliley Act of 1999 provided for sweeping financial modernization
      for
      commercial banks, savings banks, securities firms, insurance companies, and
      other financial institutions operating in the United States. Among other
      provisions, the Gramm-Leach-Bliley Act places limitations on the sharing of
      consumer financial information with unaffiliated third parties. Specifically,
      the Gramm-Leach-Bliley Act requires all financial institutions offering
      financial products or services to retail customers to provide such customers
      with the financial institution’s privacy policy and provide such customers the
      opportunity to “opt out” of the sharing of personal financial information with
      unaffiliated third parties.





**The
      USA Patriot Act**





Under
      the
      Uniting and Strengthening America by Providing Appropriate Tools Required to
      Intercept and Obstruct Terrorism Act of 2001, commonly referred to as the “USA
      Patriot Act” or the “Patriot Act”, financial institutions are subject to
      prohibitions against specified financial transactions and account relationships,
      as well as enhanced due diligence standards intended to detect, and prevent,
      the
      use of the United States financial system for money laundering and terrorist
      financing activities. The Patriot Act requires financial institutions, including
      banks, to establish anti-money laundering programs, including employee training
      and independent audit requirements, meet minimum standards specified by the
      Act,
      follow minimum standards for customer identification and maintenance of customer
      identification records, and regularly compare customer lists against lists
      of
      suspected terrorists, terrorist organizations and money launderers .





The
      U.S.
      Treasury Department (“Treasury”) has issued a number of implementing regulations
      that apply to various requirements of the USA Patriot Act to financial
      institutions such as Slavie Federal Savings Bank. Those regulations impose
      new
      obligations on financial institutions to maintain appropriate policies,
      procedures and controls to detect, prevent and report money laundering and
      terrorist financing.





Failure
      of a financial institution to comply with the USA Patriot Act’s requirements
      could have serious legal and reputational consequences for the institution.
      We
      have adopted appropriate policies, procedures and controls to address compliance
      with the requirements of the USA Patriot Act under the existing regulations
      and
      will continue to revise and update our policies, procedures and controls to
      reflect changes required by the USA Patriot Act and Treasury’s regulations.





The
      costs
      or other effects of the compliance burdens imposed by the Patriot Act or future
      anti-terrorist, homeland security or anti-money laundering legislation or
      regulations cannot be predicted with certainty.





**Check
      21**




The
      Check
      Clearing for the 21st Century Act, also known as “Check 21” gives “substitute
      checks,” such as a digital image of a check and copies made from that image, the
      same legal standing as the original paper check. Some of the major provisions
      include:




·
            allowing
                check truncation without making it
                mandatory;


·
            requiring
                that every financial institution communicate to accountholders in
                writing
                a description of its substitute check processing program and their
                rights
                under the law;


·
            retaining
                in place the previously mandated electronic collection and return
                of
                checks between financial institutions only when individual agreements
                are
                in place;


27


·
            requiring
                that when accountholders request verification, financial institutions
                produce the original check (or a copy that accurately represents
                the
                original) and demonstrate that the account debit was accurate and
                valid;
                and


·
            requiring
                recrediting of funds to an individual’s account on the next business day
                after a consumer proves that the financial institution has
                erred.





**Consumer
      Credit Reporting** ****





The
      Fair
      and Accurate Credit Transactions Act amended the federal Fair Credit Reporting
      Act. These amendments to the Fair Credit Reporting Act (the “FCRA Amendments”)
      include, among other things:





·
            requirements
                for financial institutions to develop policies and procedures to
                identify
                relevant patterns, practices, and specific forms of activity that
                are “red
                flags” signaling potential identity theft and, upon the request of a
                consumer, place a fraud alert in the consumer's credit file stating
                that
                the consumer may be the victim of identity theft or other
                fraud;


·
            for
                entities that furnish information to consumer reporting agencies
                (which
                would include us), requirements to implement procedures and policies
                regarding the accuracy and integrity of the furnished information,
                and
                regarding the correction of previously furnished information that
                is later
                determined to be inaccurate; and


·
            a
                requirement for mortgage lenders to disclose credit scores to
                consumers.




The
      FCRA
      Amendments also prohibit a business that receives consumer information from
      an
      affiliate from using that information for marketing purposes unless the consumer
      is first provided a notice and an opportunity to direct the business not to
      use
      the information for such marketing purposes (the “opt-out”), subject to certain
      exceptions. We do not share consumer information among our affiliated companies
      for marketing purposes, except as allowed under exceptions to the notice and
      opt-out requirements. Because none of our affiliates is currently sharing
      consumer information with any other affiliate for marketing purposes, the
      limitations on sharing of information for marketing purposes do not have a
      significant impact on us.





**Other
      Regulations** ****




Interest
      and other charges we collect or contract for are subject to state usury laws
      and
      federal laws concerning interest rates. For example, under the Service Members
      Civil Relief Act, which amended the Soldiers’ and Sailors’ Civil Relief Act of
      1940, a lender is generally prohibited from charging an annual interest rate
      in
      excess of 6% on any obligation of a borrower who is on active duty with the
      United States military.




Our
      loan
      operations are also subject to federal laws applicable to credit transactions,
      such as the following:




·
            The
                Federal Truth-In-Lending Act, governing disclosures of credit terms
                to
                consumer borrowers;




·
            The
                Home Mortgage Disclosure Act of 1975, requiring financial institutions
                to
                provide information to enable the public and public officials to
                determine
                whether a financial institution is fulfilling its obligation to help
                meet
                the housing needs of the community it
                serves;




·
            The
                Fair Debt Collection Act, governing the manner in which consumer
                debts may
                be collected by collection agencies;
                and




·
            The
                rules and regulations of the various federal agencies charged with
                the
                responsibility of implementing these federal
                laws.




Our
      deposit operations are subject to the following:




·
            The
                Right to Financial Privacy Act, which imposes a duty to maintain
                confidentiality of consumer financial records and prescribes procedures
                for complying with administrative subpoenas of financial records;
                and


28


·
            The
                Electronic Funds Transfer Act and Regulation E issued by the Federal
                Reserve Board to implement that Act, which govern automatic deposits
                to
                and withdrawals from deposit accounts and customers' rights and
                liabilities arising from the use of automated teller machines and
                other
                electronic banking services.




**Proposed
      Legislation and Regulatory Actions**




** New
      regulations and statutes are regularly proposed that contain wide-ranging
      proposals for altering the structures, regulations, and competitive
      relationships of the nation’s financial institutions. We cannot predict whether
      or in what form any proposed regulation or statute will be adopted or the extent
      to which our business may be affected by any new regulation or
      statute.




**Effect
      of Governmental Monetary Policies** ****




Our
      earnings are affected by domestic economic conditions and the monetary and
      fiscal policies of the United States government and its agencies. The Federal
      Reserve Board’s monetary policies have had, and are likely to continue to have,
      an important impact on the operating results of financial institutions through
      its power to implement national monetary policy in order, among other things,
      to
      curb inflation or combat a recession. The monetary policies of the Federal
      Reserve Board affect the levels of bank loans, investments and deposits through
      its control over the issuance of United States government securities, its
      regulation of the discount rate applicable to member banks and its influence
      over reserve requirements to which member banks are subject. We cannot predict
      the nature or impact of future changes in monetary and fiscal
      policies.




**Holding
      Company Regulation**





*General* **.** Slavie
      Bancorp, MHC and SFSB, Inc. are nondiversified savings and loan holding
      companies within the meaning of the Home Owners’ Loan Act. As such, Slavie
      Bancorp, MHC and SFSB, Inc. are registered with the Office of Thrift Supervision
      and are subject to Office of Thrift Supervision regulations, examinations,
      supervision and reporting requirements. In addition, the Office of Thrift
      Supervision has enforcement authority over SFSB, Inc. and Slavie Bancorp MHC,
      and their subsidiaries. Among other things, this authority permits the Office
      of
      Thrift Supervision to restrict or prohibit activities that are determined to
      be
      a serious risk to the subsidiary savings institution. As federal corporations,
      SFSB, Inc. and Slavie Bancorp, MHC are generally not subject to state business
      organization laws.





*Permitted
      Activities* .
      Pursuant to Section 10(o) of the Home Owners’ Loan Act and Office of Thrift
      Supervision regulations and policy, a mutual holding company and a federally
      chartered mid-tier holding company such as SFSB, Inc. may engage in the
      following activities: (1) investing in the stock of a savings bank;
      (2) acquiring a mutual association through the merger of such association
      into a savings bank subsidiary of such holding company or an interim savings
      bank subsidiary of such holding company; (3) merging with or acquiring
      another holding company, one of whose subsidiaries is a savings bank;
      (4) investing in a corporation, the capital stock of which is available for
      purchase by a savings bank under federal law or under the law of any state
      where
      the subsidiary savings bank or banks share their home offices;
      (5) furnishing or performing management services for a savings bank
      subsidiary of such company; (6) holding, managing or liquidating assets
      owned or acquired from a savings subsidiary of such company; (7) holding or
      managing properties used or occupied by a savings bank subsidiary of such
      company; (8) acting as trustee under deeds of trust; (9) any other
      activity (a) that the Federal Reserve Board, by regulation, has determined
      to be permissible for bank holding companies under Section 4(c) of the Bank
      Holding Company Act of 1956, unless the Director of the Office of Thrift
      Supervision, by regulation, prohibits or limits any such activity for savings
      and loan holding companies or (b) in which multiple savings and loan
      holding companies were authorized (by regulation) to directly engage on March
      5,
      1987; (10) any activity permissible for financial holding companies under
      Section 4(k) of the Bank Holding Company Act, including securities and insurance
      underwriting; and (11) purchasing, holding, or disposing of stock acquired
      in connection with a qualified stock issuance if the purchase of such stock
      by
      such savings and loan holding company is approved by the Director of the Office
      of Thrift Supervision. If a mutual holding company acquires or merges with
      another holding company, the holding company acquired or the holding company
      resulting from such merger or acquisition may only invest in assets and engage
      in activities listed in (1) through (11) above, and has a period of two years
      to
      cease any nonconforming activities and divest of any nonconforming investments.


29





The
      Home
      Owners’ Loan Act prohibits a savings and loan holding company, including SFSB,
      Inc. and Slavie Bancorp, MHC, directly or indirectly, or through one or more
      subsidiaries, from acquiring more than 5% of another savings institution or
      holding company thereof, without prior written approval of the Office of Thrift
      Supervision. It also prohibits the acquisition or retention of, with certain
      exceptions, more than 5% of a nonsubsidiary company engaged in activities other
      than those permitted by the Home Owners’ Loan Act; or acquiring or retaining
      control of an institution that is not federally insured. In evaluating
      applications by holding companies to acquire savings institutions, the Office
      of
      Thrift Supervision must consider the financial and managerial resources, future
      prospects of the company and institution involved, the effect of the acquisition
      on the risk to the insurance fund, the convenience and needs of the community
      and competitive factors.





The
      Office of Thrift Supervision is prohibited from approving any acquisition that
      would result in a multiple savings and loan holding company controlling savings
      institutions in more than one state, subject to two exceptions: (1) the
      approval of interstate supervisory acquisitions by savings and loan holding
      companies and (2) the acquisition of a savings institution in another state
      if the laws of the state of the target savings institution specifically permit
      such acquisitions. The states vary in the extent to which they permit interstate
      savings and loan holding company acquisitions.





*Waivers
      of Dividends by Slavie Bancorp, MHC* .
      Office
      of Thrift Supervision regulations require Slavie Bancorp, MHC to notify the
      Office of Thrift Supervision of any proposed waiver of its receipt of dividends
      from SFSB, Inc. The Office of Thrift Supervision reviews dividend waiver notices
      on a case-by-case basis, and, in general, does not object to any such waiver
      if:
      (1) the mutual holding company’s board of directors determines that such
      waiver is consistent with such directors’ fiduciary duties to the mutual holding
      company’s members; (2) for as long as the savings bank subsidiary is
      controlled by the mutual holding company, the dollar amount of dividends waived
      by the mutual holding company is considered as a restriction on the retained
      earnings of the savings bank, which restriction, if material, is disclosed
      in
      the public financial statements of the savings bank as a note to the financial
      statements; (3) the amount of any dividend waived by the mutual holding
      company is available for declaration as a dividend solely to the mutual holding
      company, and, in accordance with SFAS 5, where the savings bank determines
      that
      the payment of such dividend to the mutual holding company is probable, an
      appropriate dollar amount is recorded as a liability; and (4) the amount of
      any waived dividend is considered as having been paid by the savings bank in
      evaluating any proposed dividend under Office of Thrift Supervision capital
      distribution regulations. We anticipate that Slavie Bancorp, MHC will waive
      dividends paid by SFSB, Inc.





*Conversion
      of Slavie Bancorp, MHC to Stock Form* .
      Office
      of Thrift Supervision regulations permit Slavie Bancorp, MHC to convert from
      the
      mutual form of organization to the capital stock form of organization (a
“Conversion Transaction”). There can be no assurance when, if ever, a Conversion
      Transaction will occur, and the board of directors has no current intention
      or
      plan to undertake a Conversion Transaction. In a Conversion Transaction a new
      holding company would be formed as the successor to SFSB, Inc. (the “New Holding
      Company”), Slavie Bancorp, MHC’s corporate existence would end, and certain
      depositors of Slavie Federal Savings Bank would receive the right to subscribe
      for additional shares of the New Holding Company. In a Conversion Transaction,
      each share of common stock held by stockholders other than Slavie Bancorp,
      MHC
      (“Minority Stockholders”) would be automatically converted into a number of
      shares of common stock of the New Holding Company determined pursuant to an
      exchange ratio that ensures that Minority Stockholders own the same percentage
      of common stock in the New Holding Company as they owned in SFSB, Inc.
      immediately prior to the Conversion Transaction. Under Office of Thrift
      Supervision regulations, Minority Stockholders would not be diluted because
      of
      any dividends waived by Slavie Bancorp, MHC (and waived dividends would not
      be
      considered in determining an appropriate exchange ratio), in the event Slavie
      Bancorp, MHC converts to stock form. The total number of shares held by Minority
      Stockholders after a Conversion Transaction also would be increased by any
      purchases by Minority Stockholders in the offering conducted as part of the
      Conversion Transaction.


30





**FORWARD
      LOOKING STATEMENTS**





Some
      of
      the matters discussed in this annual report and in the annual report to
      stockholders incorporated herein by reference, including under the captions
      “Business of SFSB, Inc.,” “Business of Slavie Federal Savings Bank,” “Risk
      Factors,” “Management’s Discussion And Analysis Of Financial Condition And
      Results Of Operations” and elsewhere include forward-looking statements. These
      forward-looking statements include statements regarding the development and
      introduction of new services, revenues and profitability, deposit growth, future
      additional branches, liquidity, allowance for loan losses, underwriting
      standards, interest rate sensitivity, loan mix, growth strategy, funding of
      unused lines of credit, changes in competitive conditions and our increased
      competitive profile, expected recovery of the carrying amount of real estate
      in
      connection with foreclosed property, market risk and financial and other goals.
      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. When
      you
      read a forward-looking statement, you should keep in mind the risk factors
      described below and any other information contained in and incorporated into
      this annual report which identifies a risk or uncertainty. SFSB, Inc.’s actual
      results and the actual outcome of SFSB, Inc.’s expectations and strategies could
      be different from that described in this annual report or the information
      incorporated into this annual report because of these risks and uncertainties
      and you should not put undue reliance on any forward-looking statements. All
      forward-looking statements speak only as of the date of this filing, and SFSB,
      Inc. undertakes no obligation to make any revisions to the forward-looking
      statements to reflect events or circumstances after the date of this filing
      or
      to reflect the occurrence of unanticipated events.





**Item
      1A. Risk Factors**





You
      should consider carefully the following risks, along with the other information
      contained in and incorporated into this annual report. The risks and
      uncertainties described below are not the only ones that may affect us.
      Additional risks and uncertainties also may adversely affect our business and
      operations. If any of the following events actually occur, our business and
      financial results could be materially adversely affected.





**Rising
      Interest Rates May Hurt Our Profits and Assets Value.**




Interest
      rates are still at historically low levels. As a result of low interest rates,
      we have experienced strong demand for fixed rate loans, and as of December
      31,
      2007, $135,101,000, or 89.77%, of our loans had fixed rates. If interest rates
      rise, our net interest income and the value of our assets likely would be
      reduced because the interest paid on interest-bearing liabilities, such as
      deposits and borrowings, would increase more quickly than interest received
      on
      interest-earning assets, such as loans and investments. Our interest rate spread
      (the difference between the average yield earned on our interest-earning assets
      and the average rate paid on our interest-bearing liabilities) was 1.51% for
      the
      year ended December 31, 2007 compared to 1.75% for the year ended December
      31,
      2006. Our net interest margin (net interest income as a percentage of average
      interest-earning assets) was 1.99% for the year ended December 31, 2007 compared
      to 2.17% for the year ended December 31, 2006. If interest rates rise, our
      interest rate spread and net interest margin could be further compressed, which
      would have a negative effect on our profitability.





Changes
      in interest rates also affect the value of our interest-earning assets.
      According to Office of Thrift Supervision calculations, as of December 31,
      2007,
      if interest rates increase by 1%, the net value of our assets (our net portfolio
      value) will decrease by 13%. If interest rates increase by 2%, the net value
      of
      our assets (our net portfolio value) will decrease by 30%. For further
      discussion of how changes in interest rates could impact us, see “Management’s
      Discussion and Analysis of Results of Operations and Financial Condition -
      Management of Market Risk.”





**Our
      Intended Increased Focus on Commercial Real Estate and Commercial Business
      Loans
      May Not be Successful.**





We
      intend
      to grow our commercial loan portfolio in order to increase both our interest
      and
      non-interest income. Even with the hiring of two experienced commercial lenders,
      we may not be successful in continuing to implement this strategy in a highly
      competitive market, where the larger commercial banks have refocused their
      marketing efforts to attract the smaller commercial customers we target. As
      our
      commercial loan origination volume increases, there is an inherent increase
      to
      our exposure of greater loan default since a commercial loan repayment stream
      generally depends on the successful operation of the borrower’s business and, to
      a greater extent, may be adversely affected by economic conditions in general.
      We attempt to minimize these risks by limiting these loans to viable businesses,
      by securing the loan with corporate assets, by monitoring loan activities
      closely and by obtaining personal guarantees from the borrowers whenever
      possible.


31


**We
      Have Limited Recognition and Reputation in the Markets in Which We Will Seek
      to
      Expand Our Business.**





In
      recent
      years we have proactively sought to position our offices in response to changing
      market dynamics and the outmigration of our historic target customer group,
      the
      Slavic-American population. Thus, in 1976, we relocated our Baltimore City
      office to the Baltimore County border. In November 2001, we opened two locations
      in  Harford
      County, Maryland, a suburban market which features rapid population growth
      and
      high per capita income, and moved our headquarters to Harford County. However,
      our small size, our closing the Edgewood (Harford County) office in February
      2006 and lack of a physical presence in Baltimore County, have resulted in
      limited name recognition and reputation in Harford County and Baltimore County.





**Because
      Slavie Federal Savings Bank Currently Serves a Limited Market Area, We Could
      be
      More Adversely Affected by an Economic Downturn in Our Market Area Than Our
      Larger Competitors Which are More Geographically Diverse.**





Currently,
      our primary market area is limited to Baltimore City, Baltimore County and
      Harford County, Maryland. If these areas or the Baltimore metropolitan area
      generally suffers an economic downturn, our business and financial condition
      may
      be severely affected. Our larger competitors serve a more geographically diverse
      market area, parts of which may not be affected by the same economic conditions
      that exist in our primary market area.








**We
      Depend Heavily on our Key Personnel, and the Loss of Any of These Personnel
      Could Disrupt Our Operations and Our Business Could Suffer.**





Mr.
      Logan
      is our chairman, president and chief executive officer, Mr. Wagner is our
      executive vice president, chief lending officer, secretary and a member of
      our
      board of directors, and Mrs. Wittelsberger is our vice president and chief
      financial officer. Mr. Logan, Mr. Wagner and Mrs. Wittelsberger provide valuable
      services to us and would be difficult to replace. We do not have employment
      agreements with Mr. Logan, Mr. Wagner or Mrs. Wittelsberger and they are
      therefore free to unilaterally terminate their employment with us; if any of
      Mr.
      Logan, Mr. Wagner or Mrs. Wittelsberger were to leave for any reason, our
      business could suffer. Moreover, we do not maintain “key-man” life insurance on
      Messrs. Logan or Wagner or Mrs. Wittelsberger.





**Strong
      Competition Within Our Market Area May Limit Our Growth and
      Profitability.**





Competition
      in the banking and financial services industry is intense. In our market area,
      we compete with, among others, commercial banks, savings institutions, mortgage
      brokerage firms, credit unions, mutual funds and insurance companies operating
      locally and elsewhere. Most of these competitors have substantially greater
      resources and lending limits than we have and offer certain services that we
      do
      not or cannot provide. In addition, some of our competitors have recently
      offered loans with lower fixed rates and loans on more attractive terms than
      Slavie Federal Savings Bank has been willing to offer. Our profitability depends
      upon our continued ability to successfully compete in our market area. The
      greater resources and deposit and loan products offered by our competition
      may
      limit our ability to increase our interest earning assets.





**Our
      Ability to Operate Profitably May Depend on our Ability to Implement Various
      Technologies into Our Operations.**


32


The
      market for financial services, including banking services, is increasingly
      affected by advances in technology, including developments in
      telecommunications, data processing, computers, automation, Internet-based
      banking and telebanking. Our ability to compete successfully in our markets
      may
      depend on the extent to which we are able to exploit such technological changes.
      However, we cannot assure you that the development of these or any other new
      technologies, or our failure in anticipating or responding to such developments,
      will not materially adversely affect our business, financial condition or
      operating results.





**If
      Economic Conditions Continue to Deteriorate, Our Results of Operations and
      Financial Condition Could be Adversely Affected as Borrowers’ Ability to Repay
      Loans Declines and the Value of the Collateral Securing Our Loans
      Decreases.**





Our
      financial results may be adversely affected by changes in prevailing economic
      conditions, including decreases in real estate values, changes in interest
      rates
      which may cause a decrease in interest rate spreads, adverse employment
      conditions, the monetary and fiscal policies of the federal government and
      other
      significant external events. Because most of our loan portfolio is comprised
      of
      real estate related loans, continued decreases in real estate values could
      adversely affect the value of property used as collateral. Although we have
      not
      been impacted by recent adverse economic changes due to our strict underwriting
      standards, further adverse changes in the economy may have a negative effect
      on
      the ability of our borrowers to make timely repayments of their loans, which
      would have an adverse impact on our earnings.





**If
      Our Allowance for Loan Losses is not Sufficient to Cover Actual Loan Losses,
      Our
      Earnings Could Decrease.**





We
      make
      various assumptions and judgments about the collectibility of our loan
      portfolio, including the creditworthiness of our borrowers and the value of
      the
      real estate and other assets serving as collateral for the repayment of many
      of
      our loans. In determining the amount of the allowance for loan losses, we
      review, among other things, our loans and our loss and delinquency experience,
      and we evaluate economic conditions. If our assumptions are incorrect, our
      allowance for loan losses may not be sufficient to cover losses inherent in
      our
      loan portfolio, resulting in additions to our allowance.





We
      are
      particularly susceptible to this risk because a large portion of our loans
      are
      of relatively recent origin due to our growth over the past six years. In
      general, loans do not begin to show signs of credit deterioration or default
      until they have been outstanding for some period of time, a process we refer
      to
      as “seasoning.” As a result, a portfolio of older loans will usually behave more
      predictably than a newer portfolio. Because a large portion of our loan
      portfolio is relatively new, the current level of delinquencies and defaults
      may
      not be representative of the level that will prevail when the portfolio becomes
      more seasoned, which may be higher than current levels. If delinquencies and
      defaults increase, we may be required to increase our provision for loan losses.





Material
      additions to our allowance would materially decrease our net income. In
      addition, bank regulators periodically review our allowance for loan losses
      and
      may require us to increase our provision for loan losses or recognize further
      loan charge-offs. Any increase in our allowance for loan losses or loan
      charge-offs may have a material adverse effect on our results of operations
      and
      financial condition.





**Our
      Stock Benefit Plans Increase Our Expenses, Which Reduce Our Profitability and
      Stockholders’ Equity.**





We
      have
      recognized annual material employee compensation and benefit expenses stemming
      from the securities purchased or granted to employees, officers and directors
      under our employee stock ownership plan and the equity benefit plans we adopted
      with shareholders’ approval in 2005. In 2007, these expenses totaled $171,000.
      We cannot predict the total actual amount of these expenses because applicable
      accounting practices require that they be based on the fair market value of
      the
      securities at specific points in the future. We recognize expenses for our
      employee stock ownership plan when shares are released to participants’ accounts
      and recognize expenses for restricted stock awards over the vesting period
      of
      awards made to recipients. We also recognize expenses in connection with grants
      of stock options.





33




**We
      Operate in a Highly Regulated Environment and May be Adversely Affected by
      Changes in Laws and Regulations.**





We
      are
      subject to extensive regulation, supervision and examination by the Office
      of
      Thrift Supervision, our chartering authority, and by the Federal Deposit
      Insurance Corporation, as insurer of deposits. Such regulation and supervision
      govern the activities in which a financial institution and its holding company
      may engage and are intended primarily for the protection of the insurance fund
      and depositors as opposed to stockholders. Regulatory authorities have extensive
      discretion in connection with their supervisory and enforcement activities,
      including the imposition of restrictions on the operation of an institution,
      the
      classification of assets by the institution and the adequacy of an institution’s
      allowance for loan losses. Any change in such regulation and oversight, whether
      in the form of regulatory policy, regulations, or legislation, may have a
      material impact on our operations.





**Our
      Profitability Depends On Interest Rates and Changes in Monetary Policy May
      Impact Us.**





Our
      results of operations depend to a large extent on our “net interest income,”
which is the difference between the interest expense incurred in connection
      with
      our interest-bearing liabilities, such as interest on deposit accounts, and
      the
      interest income received from our interest-earning assets, such as loans.
      Interest rates, because they are influenced by, among other things, expectations
      about future events, including the level of economic activity, federal monetary
      and fiscal policy and geo-political stability, are not predictable or
      controllable. In addition, competitive factors heavily influence the interest
      rates we can earn on our loan and investment portfolios and the interest rates
      we pay on our deposits. Community banks are often at a competitive disadvantage
      in managing their cost of funds compared to the large regional, super-regional
      or national banks that have access to the national and international capital
      markets. These factors influence our ability to maintain a stable interest
      margin.





**The
      Costs Of Being A Public Company Are Proportionately Higher For Small Companies
      Like Us Due To The Requirements Of The Sarbanes-Oxley Act.**





The
      Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated
      by
      the Securities and Exchange Commission have increased the scope, complexity,
      and
      cost of corporate governance, reporting, and disclosure practices. These
      regulations are applicable to SFSB, Inc. We have experienced increasing
      compliance costs, including costs related to internal controls, as a result
      of
      the Sarbanes-Oxley Act. These necessary costs are proportionately higher for
      a
      company of our size and will affect our profitability more than that of some
      of
      our larger competitors.





**Item
      1B. Unresolved Staff Comments**





Not
      applicable.


34





**Item
      2. Properties**





We
      conduct our business through our main office and one branch office. The net
      book
      value of our premises, land and equipment was $5,107,000 at December 31, 2007.
      The following table provides certain information with respect to our offices
      as
      of December 31, 2007:





**Location**
            
            **Leased**
              **or Owned**
            
            **Year Acquired or**
              **Leased**
            
            **Net Book Value of Property**
              **and Leasehold Improvements**
            
            **Deposits at**
              **December 31,**
              **2007**(Dollars in Thousands)Main
                Office
              1614
                Churchville Road
              Bel
                Air, MD 21015
            
            
            Owned
            
            
            2001
            
            $
            4,865
            
            $
            26,300Branch
                Office
              3700
                East Northern Pkwy
              Baltimore,
                MD 21206
            
            
            Owned
            
            
            1976
            
            $
            242
            
            $
            87,798







**Item
      3. Legal Proceedings**





From
      time
      to time we may be involved in litigation relating to claims arising out of
      the
      ordinary course of our business. At December 31, 2007, we were not involved
      in
      any legal proceedings the outcome of which, in management’s opinion, would be
      material to our financial condition or results of operations.





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





No
      matter
      was submitted during the fourth quarter of the year ended December 31, 2007
      to a
      vote of security holders of SFSB, Inc.


35


**PART
      II**





**Item
      5. Market for Registrant’s Common Equity Related Stockholder Matters and Issuer
      Purchases of Equity Securities**





Common
      Stock





As
      of
      March 21, 2008, the number of holders of record of SFSB, Inc.’s common stock was
      approximately 140. SFSB, Inc.’s common stock is traded on the Over the Counter
      Bulletin Board (“OTCBB”) under the symbol “SFBI.OB.”





The
      following table reflects the high and low sales information as reported on
      the
      OTCBB for the periods presented. Quotations reflect inter-dealer prices, without
      retail mark-up, mark-down, or commission and may not represent actual
      transactions.




2007
              Bid Price Range
            
            2006
              Bid Price RangeQuarter
            
            
            High
            
            
            Low
            
            
            High
            
            
            Low1st
            
            $
            9.80
            
            $
            9.15
            
            $
            9.80
            
            $
            9.102nd
            
            
            9.80
            
            
            8.75
            
            
            10.05
            
            
            9.553rd
            
            
            9.25
            
            
            7.50
            
            
            9.75
            
            
            9.604th
            
            
            8.65
            
            
            8.10
            
            
            9.95
            
            
            9.60





Dividends





To
      date,
      SFSB, Inc. has not declared or paid any dividends on its common stock. We intend
      to begin paying cash dividends at some point in the future but our board of
      directors has not determined the amount that may be paid or when such payments
      may begin. In determining whether to declare or pay any dividends, the board
      of
      directors will take into account, among other factors, our financial condition
      and results of operations, investment opportunities, expected growth and
      compliance with regulatory capital requirements, along with the prevailing
      economic, interest rate and stock market environments. Our board of directors
      will also consider the regulatory restrictions discussed below that affect
      the
      payment of dividends by Slavie Federal Savings Bank to us. We cannot guarantee
      that we will pay dividends or that, if paid, we will not subsequently reduce
      or
      eliminate dividends.





If
      we pay
      dividends to our stockholders, we also will be required to pay dividends to
      Slavie Bancorp, MHC, unless Slavie Bancorp, MHC elects to waive the receipt
      of
      dividends. We anticipate that Slavie Bancorp, MHC would waive dividends payable
      by us. Any such waiver of dividends would provide additional capital (in the
      amount of the waived dividend) that we would be able to use in our and/or Slavie
      Federal Savings Bank’s business. Any decision to waive dividends will be subject
      to regulatory approval. Under Office of Thrift Supervision regulations, public
      stockholders would not be diluted for any dividends waived by Slavie Bancorp,
      MHC in the event Slavie Bancorp, MHC converts to stock form. See “Item 1.
      Business - Supervision and Regulation - Holding Company Regulation - Waivers
      of
      Dividends by Slavie Bancorp, MHC.”





Our
      payment of any dividends currently depends upon receipt of dividends from Slavie
      Federal Savings Bank because we currently have no source of income other than
      dividends from Slavie Federal Savings Bank, earnings from the investment of
      the
      net proceeds from the offering that we retain, and interest payments with
      respect to our loan to the employee stock ownership plan. Office of Thrift
      Supervision regulations impose limitations on the amount of dividends that
      Slavie Federal Savings Bank can pay to us.





We
      currently have no intention to initiate any action which would lead to a return
      of capital (as distinguished from a dividend) to our stockholders. Regulations
      of the Office of Thrift Supervision prohibit a return of capital through
      December 31, 2008, the end of the term of the business plan that we submitted
      to
      the Office of Thrift Supervision in connection with our 2004 public
      offering.


36


Any
      payment of dividends by Slavie Federal Savings Bank to us that would be deemed
      to be paid out of Slavie Federal Savings Bank’s bad debt reserves would require
      Slavie Federal Savings Bank to pay federal income taxes at the then current
      income tax rate on the amount deemed distributed. We do not contemplate any
      distribution by Slavie Federal Savings Bank that would result in this type
      of
      tax liability.





Stock
      Repurchases





On
      November 21, 2005, SFSB, Inc.’s board of directors adopted a stock repurchase
      program to acquire up to 53,561 shares, or approximately 4% of its outstanding
      common stock held by persons other than Slavie Bancorp, MHC. SFSB, Inc’s board
      of directors approved additional repurchases of up to an additional 66,951
      shares on May 10, 2006, 62,334 shares on August 6, 2007 and 59,052 shares on
      February 19, 2008, in each case constituting approximately 5% of its outstanding
      common stock held by persons other than Slavie Bancorp, MHC at such time. Stock
      purchases are made from time to time in the open market at the discretion of
      the
      management. The repurchase program is dependent upon market conditions and
      other
      applicable legal requirements and is undertaken within a 12-month period. As
      of
      December 31, 2007, SFSB, Inc. had repurchased 183,347 shares on the open market
      at an average cost of $9.15 per share to fund a stock-based compensation plan.
      In accordance with the terms of the stock repurchase program, SFSB, Inc. is
      authorized to purchase an additional 58,551 shares before February 19,
      2009.





The
      table
      below summarizes our repurchases of equity securities during the fourth quarter
      of 2007.





**ISSUER
      PURCHASES OF EQUITY SECURITIES**


**Period**
              
              **Total**
                **Number of**
                **Shares**
                **Purchased**
              
              **Average Price**
                **Paid per**
                **Share**
              
              **Total Number of**
                **Shares Purchased**
                **as Part of Publicly**
                **Announced Plans**
                **or Programs**
              
              **Maximum Number**
                **of Shares That May**
                **Yet Be Purchased**
                **Under the Plan or**
                **Programs**October
                  1-31, 2007
              
              
              0
              
              
              n/a
              
              
              0
              
              
              56,730November
                  1-30, 2007
              
              
              0
              
              
              n/a
              
              
              0
              
              
              56,730December
                  1-31, 2007
              
              
              57,230
              
              $
              8.51
              
              
              57,230
              
              
              (500)***Total
                  Fourth Quarter**
              
              
              **57,230**
              
              **$**
              **8.51**
              
              
              **57,230**
              
              
              **(500)***




*The
      inadvertent purchase on our behalf of 500 shares in excess of the then-current
      authorization was subsequently approved and ratified by the board.





**Item
      6. Selected Financial Data**





The
      information contained under the section captioned “Selected Consolidated
      Financial and Other Data” of the Annual Report is incorporated herein by
      reference.





**Item
      7. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**





The
      information contained under the section captioned “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations” of the Annual Report
      is incorporated herein by reference.





**Item
      7A. Quantitative and Qualitative Disclosures About Market
      Risk**





The
      information contained under the section captioned “Management’s Discussion and
      Analysis of Management of Market Risk” of the Annual Report is incorporated
      herein by reference.


37


**Item
      8. Financial Statements and Supplementary Data**





The
      information contained under the section captioned “Consolidated Financial
      Statements” of the Annual Report is incorporated herein by
      reference.





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





There
      has
      been no occurrence requiring a response to this Item.





**Item
      9A. Controls and Procedures**





As
      of the
      end of the period covered by this annual report on Form 10-K, SFSB, Inc.’s Chief
      Executive Officer and Chief Financial Officer evaluated the effectiveness of
      SFSB, Inc.’s disclosure controls and procedures. Based upon that evaluation,
      SFSB, Inc.’s Chief Executive Officer and Chief Financial Officer concluded that
      SFSB, Inc.’s disclosure controls and procedures are effective as of December 31,
      2007. Disclosure controls and procedures are controls and other procedures
      that
      are designed to ensure that information required to be disclosed by SFSB, Inc.
      in the reports that it files or submits under the Securities Exchange Act of
      1934, as amended, is recorded, processed, summarized and reported within the
      time periods specified in the Securities and Exchange Commission’s rules and
      forms.





In
      addition, there were no changes in SFSB, Inc.’s internal control over financial
      reporting (as defined in Rule 13a-15 or Rule 15d-15 under the Securities Act
      of
      1934, as amended) during the quarter ended December 31, 2007, that have
      materially affected, or are reasonably likely to materially affect, SFSB, Inc.’s
      internal control over financial reporting.





**Management’s
      Report On Internal Control Over Financial Reporting**





The
      management of SFSB, Inc. (“the Company”) is responsible for establishing and
      maintaining adequate internal control over financial reporting. The internal
      control over financial reporting has been designed under our supervision to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of the Company’s consolidated financial statements for
      external reporting purposes in accordance with accounting principles generally
      accepted in the United States of America.




Management
      has conducted an assessment of the effectiveness of the Company’s internal
      control over financial reporting as of December 31, 2007, utilizing the
      framework established in *Internal
      Control-Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission. Based
      on this assessment, management has determined that the Company’s internal
      control over financial reporting as of December 31, 2007 is
      effective.




This
      annual report does not include an attestation report of the Company’s
      independent registered public accounting firm regarding internal control over
      financial reporting. Management’s report was not subject to attestation by the
      Company’s independent registered public accounting firm pursuant to temporary
      rules of the Securities and Exchange Commission that permit the Company to
      provide only management’s report in this annual report.





**Item
      9B. Other Information**





None





**PART
      III.**





**Item
      10. Directors, Executive Officers and Corporate Governance**





**Code
      of Ethics**





SFSB,
      Inc.’s Board of Directors has adopted a code of ethics that applies to its
      principal executive officer, principal financial officer, principal accounting
      officer or controller, or persons performing similar functions. That Code of
      Ethics for Senior Financial Officers has been posted on Slavie Federal Savings
      Bank’s internet website at www.slavie.com .
      A copy
      of the Code of Ethics for Senior Financial Officers is also included as an
      exhibit to this annual report.


38





The
      remaining information required by this Item 10 is incorporated by reference
      from the information appearing under the captions “Election of Directors,”
“Board Meetings and Committees,” “Executive Compensation - Information Regarding
      Executive Officers Who are Not Directors and Key Employees” and “Section 16(a)
      Beneficial Ownership Reporting Compliance” in the Proxy Statement for the 2008
      Annual Meeting of Stockholders of SFSB, Inc.





**Item
      11. Executive Compensation**





The
      information required by this Item 11 is incorporated by reference from the
      information appearing under the captions “Executive Compensation” and “Director
      Compensation” in the Proxy Statement for the 2008 Annual Meeting of Stockholders
      of SFSB, Inc.





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





The
      information required by this Item 12 is incorporated by reference from the
      information appearing under the captions “Security Ownership of Management and
      Certain Security Holders” in the Proxy Statement for the 2008 Annual Meeting of
      Stockholders of SFSB, Inc.





**Item
      13. Certain Relationships and Related Transactions, and Director
      Independence**





The
      information required by this Item 13 is incorporated by reference from the
      information appearing under the captions “Election of Directors” and “Certain
      Relationships and Related Transactions” in the Proxy Statement for the 2008
      Annual Meeting of Stockholders of SFSB, Inc.





**Item
      14. Principal Accountant Fees and Services**





**Audit
      and Non-Audit Fees**




The
      following table presents fees for professional audit services rendered by Beard
      Miller Company LLP for the audit of SFSB, Inc.’s annual consolidated financial
      statements for the years ended December 31, 2007 and December 31, 2006, and
      fees
      billed for other services rendered by Beard Miller Company LLP during those
      periods.








**Years
                Ended December 31,****2007**
            
            **2006**Audit
                Fees(1)
            
            $
            53,904
            
            $
            53,200Audit
                Related Fees(2)
            
            
            400
            
            
            -Tax
                Fees(3)
            
            
            9,946
            
            
            5,800All
                Other Fees(4)
            
            
            -
            
            
            -Total
            
            $
            64,250
            
            $
            59,000





(1) Audit
      Fees consist of fees billed for professional services rendered for the audit
      of
      SFSB, Inc.’s consolidated annual financial statements and review of the interim
      consolidated financial statements included in quarterly reports, and services
      that are normally provided by Beard Miller Company LLP in connection with
      statutory and regulatory filings or engagements.





(2)
      Audit-Related Fees would normally consist of fees billed for assurance and
      related services that are reasonably related to the performance of the audit
      or
      review of SFSB, Inc.’s consolidated (or Slavie Federal Savings Bank’s) financial
      statements and are not reported under “Audit Fees.”


39





(3)
      Tax
      Fees consist of fees billed for professional services rendered for federal
      and
      state tax compliance, tax advice and tax planning.





(4)
      All
      Other Fees would normally consist of fees for services other than the services
      reported above.





**Policy
      on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent
      Auditor**




Before
      the accountant is engaged by SFSB, Inc. or Slavie Federal Savings Bank to render
      any audit or non-audit services, the engagement is approved by SFSB, Inc.’s
      audit committee.


40





**Item
      15. Exhibits, Financial Statement Schedules**





(a)(1)
      Financial Statements.





The
      following are included in the Consolidated Financial Statements included in
      SFSB, Inc.’s Annual Report to Stockholders:





A.
            Consolidated
                Statements of Financial Condition


B.
            Consolidated
                Statements of Operations


C.
            Consolidated
                Statements of Stockholders’ Equity


D.
            Consolidated
                Statements of Cash Flows




(a)(1)
       Schedules.





All
      financial statement schedules are omitted because they are not applicable,
      not
      required under the instructions or all the information required is set forth
      in
      the financial statements or notes thereto.





(a)(3)  Exhibits.





Exhibit
                No.
            
            Description
                of Exhibits2*
            
            Slavie
                Federal Savings Bank Second Amended and Restated Plan of Reorganization
                from a Mutual Savings Bank to a Mutual Holding Company and Stock
                Issuance
                Plan3.1*
            
            Federal
                Stock Charter of SFSB, Inc.3.2*
            
            Bylaws
                of SFSB, Inc.4*
            
            Form
                of Common Stock certificate of SFSB, Inc.4.1@
            
            Advances
                and Security Agreement between Slavie Federal Savings Bank and the
                Federal
                Home Loan Bank of Atlanta10.1*
            
            Form
                of Employee Stock Ownership Plan, as amended10.2**
            
            Loan
                Documents relating to Employee Stock Ownership Plan10.8#
            
            Terms
                of Retirement Benefit Paid to Former President Roger
                Schueler10.9##
            
            Form
                of 2005 Stock Option Plan10.10##
            
            Form
                of 2005 Recognition and Retention Plan10.11##
            
            Form
                of Employee Stock Option Agreement10.12##
            
            Form
                of Director Stock Option Agreement10.13##
            
            SFSB,
                Inc. and Slavie Federal Savings Bank Director Compensation
                Policy10.14###
            
            Form
                of Restricted Stock Agreement13
            
            Annual
                Report to Stockholders21@
            
            Subsidiaries
                of Registrant


41





23.1
            
            Consent
                of Beard Miller Company LLP31.1
            
            Rule
                13a-14(a) Certification of Chief Executive Officer31.2
            
            Rule
                13a-14(a) Certification of Chief Financial Officer32
            
            Section
                1350 Certification of Chief Executive Officer and Chief Financial
                Officer




The
      exhibits which are denominated with one asterisk (*) were previously filed
      by
      SFSB, Inc. as a part of, and are hereby incorporated by reference from, SFSB,
      Inc.’s Registration Statement on Form SB-2, as amended, under the Securities Act
      of 1933, Registration Number 333-119128.





The
      exhibit which is denominated with two asterisks (**) was previously filed by
      SFSB, Inc. as a part of (and as Exhibit Number 99.1), and is hereby incorporated
      by reference from, SFSB, Inc.’s Current Report on Form 8-K filed on January 5,
      2005.





The
      exhibit which is denominated with one number sign (#) was previously filed
      by
      SFSB, Inc. as a part of, and is hereby incorporated by reference from, SFSB,
      Inc.’s Annual Report on Form 10-KSB filed on March 30, 2005.





The
      exhibits which are denominated with two number signs (##) were previously filed
      by SFSB, Inc. as a part of, and are hereby incorporated by reference from,
      SFSB,
      Inc.’s Current Report on Form 8-K filed on August 5, 2005.





The
      exhibit which is denominated with three number signs (###) was previously filed
      by SFSB, Inc. as a part of, and is hereby incorporated by reference from, SFSB,
      Inc.’s Current Report on Form 8-K filed on August 26, 2005.





The
      exhibits which are denominated with the @ sign were previously filed by SFSB,
      Inc. as a part of, and are hereby incorporated by reference from, SFSB, Inc.’s
      Annual Report on Form 10-KSB filed on March 30, 2006.


Note:
      Exhibits 10.8 through 10.14 relate to management contracts or compensatory
      plans
      or arrangements.


42





**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.





SFSB,
                INC.Date :
                March 31, 2008By:
            /s/
                Philip E. LoganPhilip
              E. LoganPresident,
              Chairman & CEO





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





Name
            
            Position
            
            Date/s/
                Philip E. Logan
            
            President,
                CEO, Chairman and
            
            March
                31, 2008Philip
                E. Logan
            
            Principal
              Executive Officer; Director/s/
                Sophie T. Wittelsberger
            
            Vice
                President and Chief Financial Officer,
            
            March
                31, 2008Sophie
                T. Wittelsberger
            
            Principal
              Financial Officer and Principal Accounting Officer/s/
                J. Benson Brown
            
            Director
            
            March
                31, 2008J.
                Benson Brown/s/
                Thomas J. Drechsler
            
            Director
            
            March
                31, 2008Thomas
                J. Drechsler/s/
                Robert M. Stahl, IV
            
            Director
            
            March
                31, 2008Robert
                M. Stahl, IV/s/
                James D. Wise
            
            Director
            
            March
                31, 2008James
                D. Wise/s/
                Charles E. Wagner, Jr.
            
            ExecutiveVice
                President and
            
            March
                31, 2008Charles
                E. Wagner, Jr.
            
            Secretary;
              Director




43


EXHIBIT
      INDEX





2*
            
            Slavie
                Federal Savings Bank Second Amended and Restated Plan of Reorganization
                from a Mutual Savings Bank to a Mutual Holding Company and Stock
                Issuance
                Plan3.1*
            
            Federal
                Stock Charter of SFSB, Inc.3.2*
            
            Bylaws
                of SFSB, Inc.4*
            
            Form
                of Common Stock certificate of SFSB, Inc.4.1@
            
            Advances
                and Security Agreement between Slavie Federal Savings Bank and the
                Federal
                Home Loan Bank of Atlanta10.1*
            
            Form
                of Employee Stock Ownership Plan, as amended10.2**
            
            Loan
                Documents relating to Employee Stock Ownership Plan10.8#
            
            Terms
                of Retirement Benefit Paid to Former President Roger
                Schueler10.9##
            
            Form
                of 2005 Stock Option Plan10.10##
            
            Form
                of 2005 Recognition and Retention Plan10.11##
            
            Form
                of Employee Stock Option Agreement10.12##
            
            Form
                of Director Stock Option Agreement10.13##
            
            SFSB,
                Inc. and Slavie Federal Savings Bank Director Compensation
                Policy10.14###
            
            Form
                of Restricted Stock Agreement13
            
            Annual
                Report to Stockholders21@
            
            Subsidiaries
                of Registrant23.1
            
            Consent
                of Beard Miller Company LLP31.1
            
            Rule
                13a-14(a) Certification of Chief Executive Officer31.2
            
            Rule
                13a-14(a) Certification of Chief Financial Officer32
            
            Section
                1350 Certification of Chief Executive Officer and Chief Financial
                Officer





The
      exhibits which are denominated with one asterisk (*) were previously filed
      by
      SFSB, Inc. as a part of, and are hereby incorporated by reference from, SFSB,
      Inc.’s Registration Statement on Form SB-2, as amended, under the Securities Act
      of 1933, Registration Number 333-119128.





The
      exhibit which is denominated with two asterisks (**) was previously filed by
      SFSB, Inc. as a part of, and is hereby incorporated by reference from, SFSB,
      Inc.’s Current Report on Form 8-K filed on January 5, 2005.





The
      exhibit which is denominated with one number sign (#) was previously filed
      by
      SFSB, Inc. as a part of, and is hereby incorporated by reference from, SFSB,
      Inc.’s Annual Report on Form 10-KSB filed on March 30, 2005.





The
      exhibits which are denominated with two number signs (##) were previously filed
      by SFSB, Inc. as a part of, and are hereby incorporated by reference from,
      SFSB,
      Inc.’s Current Report on Form 8-K filed on August 5, 2005.





The
      exhibit which is denominated with three number signs (###) was previously filed
      by SFSB, Inc. as a part of, and is hereby incorporated by reference from, SFSB,
      Inc.’s Current Report on Form 8-K filed on August 26, 2005.





The
      exhibits which are denominated with the @ sign were previously filed by SFSB,
      Inc. as a part of, and are hereby incorporated by reference from, SFSB, Inc.’s
      Annual Report on Form 10-KSB filed on March 30, 2006.


Note:
      Exhibits 10.8 through 10.14 relate to management contracts or compensatory
      plans
      or arrangements.