**United
      States**


**Securities
      and Exchange Commission**


**Washington,
      D.C. 20549**





**Form
      10-KSB**





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


For
                the fiscal year ended December 31,
                2005


OR


o
              TRANSITION
                  REPORT UNDER SECTION 13 OR 15(d) OF THE
                  SECURITIES
 EXCHANGE
                  ACT OF 1934 FOR THE TRASITION PERIOD
                  FROM________TO_________





Commission
      File Number 000-51037





**SFSB,
      INC.**


(Name
      of
      small business issuer in its charter)




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




1614
      Churchville Road, Bel Air,
      Maryland         21015


(Address
      of principal executive offices) (Zip
      Code)





(443)
      265-5570


(Issuer’s
      telephone number)





Securities
      registered under Section 12(b) of the Exchange Act:


None





Securities
      registered under Section 12(g) of the Exchange Act:


Common
      Stock: par value $0.01 per share





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act.  o





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


Yes
xNo
o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act):   Yes  o  No x





The
      issuer’s revenues for its most recent fiscal year were $7,954,000.





The
      aggregate market value of the common equity held by non-affiliates was
      $9,674,000 as of March 24, 2006, based on a sales price of $9.65 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 March 24, 2006.





The
      number of shares outstanding of the issuer’s Common Stock was 2,975,625 as of
      March 24, 2006.








**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the Annual Report to Stockholders for the Fiscal Year Ended December 31,
      2005, which is filed as an exhibit to this Annual Report on Form 10-KSB, are
      incorporated by reference in Part II of this Annual Report on Form 10-KSB.





Portions
      of the Proxy Statement for the 2006 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 in Part
      III of this Annual Report on Form 10-KSB.





Transitional
      Small Business Disclosure Format (check one):


YesoNox








**PART
      I**





**Item
      1. Description of 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 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 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, primarily in one- to four-family residential real
      estate loans and home equity loans. We also invest in commercial mortgage loans,
      land and construction loans, and investment securities.





We
      derive
      our income primarily from interest earned on loans, mortgage-backed securities
      and investment securities. 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,
      mortgage-backed and investment securities and operating revenue.





**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 north-east Baltimore City, near the Baltimore County border.
      Prior to February 25, 2006, we also serviced the Harford County market through
      a
      second office, located in Edgewood, Maryland. Opened in November 2001, our
      Edgewood branch had been an active part of the community it served, but it
      was
      unable to generate the business necessary to keep it a viable part of our
      strategic plan. In October 2005, the Board of Directors approved the closing
      of
      the Edgewood location and it closed on February 24, 2006.





1


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
      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.





**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.
      Historically, we have retained all loans that we have originated.





Our
      net
      loan portfolio totaled $144,609,000 at December 31, 2005, representing 84.52%
      of
      total assets. One- to four-family residential real estate mortgage loans
      represented $122,262,000, or 83.74%, of our total loan portfolio at December
      31,
      2005. 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 $5,402,000, $1,515,000 and $4,299,000,
      or
      3.70%, 1.04% and 2.94% of the total loan portfolio at December 31, 2005.
      Commercial non-mortgage loans amounted to $1,481,000, or 1.01% of our total
      loan
      portfolio at December 31, 2005. 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 and
      automobile loans. At December 31, 2005, home equity and other consumer loans
      totaled $10,439,000 and $610,000, respectively, or 7.15% and 0.42% of the total
      loan portfolio.





2


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 have on staff an experienced
      commercial lender who has complimented our commercial lending strategy
      initiative. We focus our commercial lending activities on small to mid-size
      businesses in our market area and we will 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 and 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, 2005, our regulatory limit on loans-to-one
      borrower was $2,568,000 and our five largest loans or groups of loans-to-one
      borrower, including related entities, aggregated $1,302,000, $1,205,000,
      $1,080,000, $994,000, $945,000. The third largest loan, a participation, was
      in
      default at December 31, 2005. Each of the remaining loans or groups of loans
      was
      performing in accordance with its terms at December 31, 2005.





*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,****2005**
            
            **2004****Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**(Dollars
                in Thousands)**Real
                Estate Loans:**One-
                to four-family
            
            $
            122,262
            
            
            83.74
            %
            $
            104,854
            
            
            88.37
            %Commercial
                mortgage
            
            
            5,402
            
            
            3.70
            
            
            2,990
            
            
            2.52Construction
            
            
            1,515
            
            
            1.04
            
            
            300
            
            
            0.25Acquisition
                and development
            
            
            4,299
            
            
            2.94
            
            
            1,254
            
            
            1.06Total
                real estate loans
            
            
            133,478
            
            
            91.42
            
            
            109,398
            
            
            92.20**Commercial
                non-real estate**
            
            
            1,481
            
            
            1.01
            
            
            516
            
            
            0.44**Consumer
                Loans:**Home
                equity
            
            
            10,439
            
            
            7.15
            
            
            8,066
            
            
            6.80Other
            
            
            610
            
            
            0.42
            
            
            670
            
            
            0.56Total
                consumer loans
            
            
            11,049
            
            
            7.57
            
            
            8,736
            
            
            7.36Total
                loans receivable, gross
            
            
            146,008
            
            
            100.0
            %
            
            118,650
            
            
            100.0
            %Less:Loan
                in process
            
            
            (800
            )
            
            
            
            
            (195
            )Allowance
                for loan losses
            
            
            (474
            )
            
            
            
            
            (413
            )Deferred
                loan fees (costs)
            
            
            (125
            )
            
            
            
            
            (142
            )Total
                loans receivable, net
            
            $
            144,609
            
            
            
            
            $
            117,900





3


*Maturity
      of Loan Portfolio.* The
      following table presents certain information at December 31, 2005 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.





**Commercial
                Non R/E**
            
            **Construction**
            
            **Acquisition
                and**
              **Development**(Dollars
                in Thousands)One
                year or less
            
            $
            688
            
            $
            1,515
            
            $
            2,382After
                one year:More
                than 1 to 5 years
            
            
            500
            
            
            -
            
            
            491More
                than 5 years
            
            
            293
            
            
            -
            
            
            1,426Total
            
            
            1,481
            
            
            1,515
            
            
            4,299Less:Loans
                in process
            
            
            -
            
            
            800
            
            
            -Allowance
                for loan losses
            
            
            15
            
            
            15
            
            
            43Deferred
                loan fees (costs)
            
            
            3
            
            
            -
            
            
            18Total,
                net
            
            $
            1,463
            
            $
            700
            
            $
            4,238Total
                due after one year with fixed interest rates
            
            $
            793
            
            $
            -
            
            $
            1,917Total
                due after one year with adjustable interest rates
            
            $
            -
            
            $
            -
            
            $
            -




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, 2005, $122,262,000,
      or
      83.74% 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 5, 7, 10, 15, 20 and 30 years. At December 31, 2005, $121,894,000, or 99.70%
      of our one- to four-family residential mortgage loans were fixed-rate loans.
      Also, at December 31, 2005, our largest loan secured by one- to four-family
      real
      estate had a principal balance of $994,000 and was secured by a single-family
      residence. This loan was performing in accordance with its terms.




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
      low
      interest rate environment, there has been very limited demand for these loans.
      We did not originate any adjustable rate one- to four-family residential loan
      during the year ended December 31, 2005. Our adjustable rate mortgage loans
      provide for maximum rate adjustments of 200 basis points per adjustment, with
      a
      lifetime maximum adjustment of 500 basis points. Our adjustable rate mortgage
      loans amortize over terms of up to 30 years.




Adjustable
      rate mortgage loans decrease the risk associated with changes in market interest
      rates by periodically repricing, but involve other risks because, as interest
      rates increase, the underlying payments by the borrower increase, thus
      increasing the potential for default by the borrower. At the same time, the
      marketability of the underlying collateral may be adversely affected by higher
      interest rates. Upward adjustment of the contractual interest rate is also
      limited by the maximum periodic and lifetime interest rate adjustments permitted
      by our loan documents, and therefore, is potentially limited in effectiveness
      during periods of rapidly rising interest rates. At December 31, 2005, only
      $368,000 or 0.30% of our one- to four-family residential mortgage loans had
      adjustable rates of interest.




4


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. In the future,
      we
      anticipate that we may originate these types of loans (option ARMs or loans
      where the borrower is not qualified by the fully indexed rate) if we have an
      agreement from a correspondent lender prior to settlement to purchase the loan.
      In such a case, these loans would be designated as held for sale and would
      be
      delivered to the purchaser as soon as possible following settlement.





*Commercial
      Real Estate Loans* .
      At
      December 31, 2005, $5,402,000, or 3.70% 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, 2005, we had
      21
      commercial real estate loans with an average outstanding balance of $257,000.
      At
      December 31, 2005, our largest loan secured by commercial real estate had an
      outstanding balance of $945,000. At December 31, 2005, this loan and all of
      our
      other loans secured by commercial real estate were performing in accordance
      with
      their 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, 2005, $20,000, or 0.01% of
      our
      total loan portfolio, consisted of a multi-family loan.





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 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.





*Residential
      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, 2005, $1,515,000, or 1.04% of our total loan portfolio, consisted
      of residential construction loans, and $4,299,000, or 2.94% of our total loan
      portfolio, consisted of acquisition and development loans. Of this amount,
      $2,702,000 constituted our interest in loan participations.





5


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, typically, 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, 2005, commercial business loans
      totaled $1,481,000, or 1.01% 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, 2005, consumer loans totaled
      $11,049,000 or 7.57% 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, 2005, home equity loans totaled $10 ,439,000 or 7.15%
      of the total loan portfolio. At December 31, 2005, $5,679,000, or 54.40% of
      our
      home equity loans were fixed-rate loans and $4,760,000 or 45.60% of our home
      equity loans had adjustable rates of interest.





6


As
      indicated, we also offer deposit account loans for personal purposes, home
      improvement loans, automobile loans and overdraft protection loans. At December
      31, 2005, $263,000 or 0.18% of our total loan portfolio consisted of deposit
      account loans, $203,000 or 0.14% of our total loan portfolio consisted of home
      improvement loans, $121,000 or 0.08% of our total loan portfolio consisted
      of
      automobile loans and $23,000 or 0.02% 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 loans. 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 service all
      loans that we originate.




New
      residential mortgage loans are generated primarily from current and former
      borrowers, walk-in customers, customer referrals and realtors. We grew our
      portfolio in this area as a result of hiring two in-house loan officers, one
      in
      March 2004 and the other in October 2005, 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 by hiring an experienced
      commercial lender in April 2004. 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 will retain for our portfolio those loans meeting our
      interest rate risk and balance sheet composition targets and will sell the
      remaining loans in the secondary market on a servicing released basis. Our
      goal
      is to gradually increase to 20% the amount of fixed rate loans that we sell
      on
      the secondary market. Over time, we may evaluate selling loans on a servicing
      retained basis. To date, our secondary market activities remain limited. During
      2005, we sold one residential mortgage loan with a principal balance of
      $155,000.




*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 loan
      servicing manager. 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 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.




7


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,****2005******
            
            **2004******(Dollars
                in Thousands)Balance
                outstanding at beginning of period
            
            $
            117,900
            
            $
            93,210Originations
                by Type:Real
                Estate:One-
                to four-family
            
            
            27,444
            
            
            30,228Commercial-real
                estate
            
            
            2,602
            
            
            1,386Commercial-non
                real estate
            
            
            1,492
            
            
            485Construction(1)
            
            
            2,654
            
            
            695Consumer
                loans:Home
                equity
            
            
            5,009
            
            
            3,013Other
            
            
            49
            
            
            201Total
                loans originated
            
            
            39,250
            
            
            36,008Total
                loans purchased
            
            
            9,071
            
            
            6,558Less:Total
                loans or participations sold
            
            
            155
            
            
            112Principal
                repayments
            
            
            21,457
            
            
            17,764Transfers
                to foreclosed real estate
            
            
            -
            
            
            -Other(2)
            
            
            -
            
            
            -Total
                deductions
            
            
            21,612
            
            
            17,876Balance
                outstanding at end of period
            
            $
            144,609
            
            $
            117,900




(1)
            Includes
                acquisition and development loans.


(2)
            Other
                items consist of loans in process, deferred loan origination fees,
                unearned interest and allowance for loan losses
                activity.





*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,
      2005,
      we had $125,000 in net deferred loan fees.





8


**Asset
      Quality**




*General* .
      One of
      our key operating objectives has been and 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 problem
      and
      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
      and the relatively favorable real estate market conditions have supported
      maintenance of low delinquency ratios. Our balance of non-performing assets
      equaled $1,245,000 or 0.86% of total loans at December 31, 2005 and consisted
      of
      non-accruing loans, of which two are secured by one- to four-family properties
      totaling $165,000 and one is a commercial land acquisition and development
      participation loan totaling $1,080,000.





*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 a loan and we 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. We did not have any
      real estate owned or other repossessed assets at December 31, 2005 or December
      31, 2004.





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 the $1,080,000 commercial land acquisition and development
      participation loan, even though management feels that we will be able to collect
      all amounts due under the contractual terms of the loan agreement. As of
      December 31, 2005, no other loans have been identified as impaired. We had
      no
      loans that were considered impaired at December 31, 2004.




9


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,****2005**
            
            **2004**(Dollars
                in Thousands)Non-accruing
                real estate loans:One-
                to four-family
            
            $
            165
            
            $
            365Commercial
                real estate
            
            
            -
            
            
            -Construction(1)
            
            
            1,080
            
            
            -Non-accruing
                consumer loans:Home
                equity
            
            
            -
            
            
            -Other
            
            
            -
            
            
            -Total
                non-accruing loans
            
            $
            1,245
            
            $
            365Accruing
                loans delinquent 90 days or more
            
            
            -
            
            
            -Total
                non-performing loans
            
            
            1,245
            
            
            365Real
                estate owned
            
            
            -
            
            
            -Total
                non-performing assets
            
            $
            1,245
            
            $
            365Total
                as a percentage of total assets
            
            
            0.73
            %
            
            0.23
            %Total
                as a percentage of total loans
            
            
            0.86
            %
            
            0.31
            %


_______________


(1)  Includes
      acquisition and development loans.





For
      the
      years ended December 31, 2005 and December 31, 2004, gross interest income
      which
      would have been recorded had our non-accruing loans been current in accordance
      with their original terms amounted to $78,000, and $25,000 respectively.
      Interest income recognized on such loans for the years ended December 31, 2005
      and December 31, 2004 was $11,000 and $17,000, respectively.




Of
      the
      non-accrual loans, at December 31, 2005, $1,080,000 consisted of a commercial
      land acquisition and development participation loan and $165,000 consisted
      of
      one-to-four residential mortgage loans. Non-accrual loans totaled 0.85% and
      .31%
      of net loans receivable at December 31, 2005 and December 31, 2004,
      respectively.





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




10




Other
      than as disclosed in the table and paragraph above, there are no other loans
      at
      December 31, 2005 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.





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, 2005, we had
      classified $1,245,000 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,
      2005, none of our assets were classified as special mention, doubtful or loss.
      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,****2005**
            
            **2004**(Dollars
                in Thousands)Special
                mention assets
            
            $
            -
            
            $
            -Substandard
                assets
            
            
            1,245
            
            
            324Doubtful
                assets
            
            
            -
            
            
            41Loss
                assets
            
            
            -
            
            
            -Total
                classified assets
            
            $
            1,245
            
            $
            365




11
 
  *Delinquencies.* The
          following tables sets forth information concerning delinquent loans at
          December
          31, 2005 and December 31, 2004, in dollar amounts and as a percentage of
          our
          total loan portfolio.


**At
                December 31, 2005**
            
            **At
                December 31, 2004****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
            
            $
            324
            
            
            0.22
            %
            $
            87
            
            
            0.06
            %
            $
            53
            
            
            0.04
            %
            $
            108
            
            
            0.09
            %Commercial
                real estate
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,080
            
            
            0.91
            
            
            -
            
            
            -Construction(1)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Commercial
                non-real estate:
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Consumer
                loans:Home
                equity
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            31
            
            
            0.03
            
            
            13
            
            
            0.01Other
            
            
            6
            
            
            0.00
            
            
            5
            
            
            0.00
            
            
            53
            
            
            0.05
            
            
            12
            
            
            0.01Total
                delinquent loans
            
            $
            330
            
            
            0.22
            %
            $
            92
            
            
            0.06
            %
            $
            1,217
            
            
            1.03
            %
            $
            133
            
            
            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 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 loans based on such factors as: (1) the strength
      of the customer’s personal or business cash flow; (2) the availability of other
      sources of repayment; (3) the amount due or past due; (4) the type and value
      of
      collateral; (5) the strength of our collateral position; (6) the estimated
      cost
      to sell the collateral; and (7) the borrower’s effort to cure the delinquency.




We
      also
      review and establish, if necessary, an allowance for certain impaired loans
      for
      the amounts by which the discounted cash flows (or collateral value or
      observable market price) are lower than the carrying value of the loan. 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 our $1,080,000 commercial land acquisition and development
      participation loan, we believe that the market value of the collateral is at
      least equal to our carrying value of the loan. Accordingly, we have not
      established a specific allowance for this loan.





*General
      Valuation Allowance on Certain Identified Problem Loans.* We
      also
      establish a general allowance for watch list loans that do not have an
      individual allowance. We segregate these loans by loan category and assign
      allowance percentages to each category based on inherent losses associated
      with
      each type of lending and consideration that these loans, in the aggregate,
      represent an above-average credit risk and that more of these loans will prove
      to be uncollectible compared to loans in the general portfolio.




*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,****2005**
            
            **2004**(Dollars
                in Thousands)Balance
                at beginning of period
            
            $
            413
            
            $
            362Charge-offs(1)
            
            
            (2
            )
            
            -Recoveries
            
            
            5
            
            
            1Net
                charge-offs
            
            
            3
            
            
            1Provision
                for loan losses
            
            
            58
            
            
            50Ending
                balance
            
            $
            474
            
            $
            413Ratio
                of net charge-offs (recoveries) during the period to average loans
                outstanding, net, during the period
            
            
            -
            %
            
            -
            %Ratio
                of allowance of loan losses to total loans outstanding
            
            
            0.32
            %
            
            0.35
            %Allowance
                for loan losses as a percent of total non-performing loans
            
            
            38.07
            %
            
            113.15
            %




(1)  Charge
      offs consisted of the principal loss on one automobile loan.


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 2005, 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 increase in the allocation to acquisition and development
      loans is due to the $1,080,000 participation described above. The allowance
      for
      this loan at December 31, 2005 was $108,000.





**At
                December 31,****2005**
            
            **2004****Amount
                of Loan Loss Allowance**
            
            **Loan
                amounts by Category**
            
            **Percent
                of Loans in Each Category to Total Loans**
            
            **Amount
                of Loan Loss Allowance**
            
            **Loan
                amounts by Category**
            
            **Percent
                of Loans in Each Category to Total Loans**(Dollars
                in Thousands)One-
                to four-family
            
            $
            219
            
            $
            122,262
            
            
            83.74
            %
            $
            238
            
            $
            104,854
            
            
            88.37
            %Commercial
                real estate
            
            
            54
            
            
            5,402
            
            
            3.70
            
            
            30
            
            
            2,990
            
            
            2.52Commercial
                non R/E
            
            
            15
            
            
            1,481
            
            
            1.01
            
            
            1
            
            
            516
            
            
            0.44Construction
            
            
            1
            
            
            1,515
            
            
            1.04
            
            
            3
            
            
            300
            
            
            0.25Acquisition
                and development
            
            
            140
            
            
            4,299
            
            
            2.94
            
            
            13
            
            
            1,254
            
            
            1.06Home
                equity
            
            
            5
            
            
            10,439
            
            
            7.15
            
            
            81
            
            
            8,066
            
            
            6.80Other
                consumer
            
            
            40
            
            
            610
            
            
            0.42
            
            
            47
            
            
            670
            
            
            0.56Total
            
            $
            474
            
            $
            146,008
            
            
            100.00
            %
            $
            413
            
            $
            118,650
            
            
            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 identified problem loans, the general
      allowance on certain identified problem loans and the general allowance on
      the
      remainder of the loan portfolio.





**At
                December 31,****2005**
            
            **2004****Amount
                of Allowance**
            
            **Percent
                of Allowance**
            
            **Amount
                of Allowance**
            
            **Percent
                of Allowance**(Dollars
                in Thousands)Specific
                allowance
            
            $
            -
            
            
            -
            %
            $
            -
            
            
            -
            %General
                (identified problem loans)
            
            
            125
            
            
            26.37
            
            
            53
            
            
            12.83General
                (all other loans)
            
            
            349
            
            
            73.63
            
            
            360
            
            
            87.17Total
            
            $
            474
            
            
            100.00
            %
            $
            413
            
            
            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.





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, 2005, our investment portfolio consisted of $3,998,000 in federal
      agency securities classified as held to maturity, $8,153,000 in mutual fund
      securities (which invests in adjustable rate mortgages) classified as available
      for sale, $1,955,000 in Federal Home Loan Bank of Atlanta stock and $632,000
      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, 2005, our mortgage-backed securities totaled
      $4,525,000, consisting of $2,471,000 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 $2,054,000 in
      adjustable rate mortgage-backed securities guaranteed by the Government National
      Mortgage Association (Ginnie Mae).





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 the
      offering, 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,****2005**
            
            **2004****Amortized
                Cost**
            
            **Fair
                Value**
            
            **Amortized
                Cost**
            
            **Fair**
              **Value**(Dollars
                in Thousands)Securities
                available for sale:ARM
                mutual fund
            
            $
            8,358
            
            $
            8,153
            
            $
            8,078
            
            $
            7,981Total
                available for sale
            
            $
            8,358
            
            $
            8,153
            
            $
            8,078
            
            $
            7,981Securities
                held to maturity:United
                States government agency securities
            
            $
            3,998
            
            $
            3,884
            
            $
            3,996
            
            $
            3,957Mortgage-backed
                securities:Ginnie
                Mae
            
            
            2,054
            
            
            2,036
            
            
            3,529
            
            
            3,534Fannie
                Mae
            
            
            296
            
            
            298
            
            
            466
            
            
            474Freddie
                Mac
            
            
            2,175
            
            
            2,096
            
            
            2,986
            
            
            2,950Total
                mortgage-backed securities
            
            
            4,525
            
            
            4,430
            
            
            6,981
            
            
            6,958Total
                held to maturity
            
            $
            8,523
            
            $
            8,314
            
            $
            10,977
            
            $
            10,915





17


The
      following table sets forth the maturities and weighted average yields of
      securities at December 31, 2005. 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
            
            $
            8,153
            
            
            4.22
            %
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            8,153
            
            
            4.22
            %Total
                available for sale
            
            
            8,153
            
            
            4.22
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            8,153
            
            
            4.22Securities
                held to maturity:United
                States government agency securities
            
            
            -
            
            
            -
            
            $
            2,998
            
            
            3.11
            %
            
            -
            
            
            -
            
            $
            1,000
            
            
            5.625
            %
            $
            3,998
            
            
            3.74
            %Mortgage-backed
                securities:Ginnie
                Mae
            
            
            2,054
            
            
            4.16
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,054
            
            
            4.16Fannie
                Mae
            
            
            -
            
            
            -
            
            
            296
            
            
            5.50
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            296
            
            
            5.50Freddie
                Mac
            
            
            -
            
            
            -
            
            
            2,175
            
            
            4.76
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,175
            
            
            4.76Total
                mortgage-backed securities
            
            
            2,054
            
            
            4.16
            
            
            2,471
            
            
            4.85
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,525
            
            
            4.54Total
                held to maturity
            
            
            2,054
            
            
            4.16
            
            
            5,469
            
            
            3.90
            
            
            -
            
            
            -
            
            
            1,000
            
            
            5.625
            
            
            8,523
            
            
            4.17Total
            
            $
            10,207
            
            
            4.21
            %
            $
            5,469
            
            
            3.90
            %
            
            -
            
            
            -
            
            $
            1,000
            
            
            5.625
            %
            $
            16,676
            
            
            4.19
            %





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, 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 last 24 months, we have increasingly relied upon borrowings
      from 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 it prices its deposits
      comparably to rates offered by its 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
      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 annual report.





To
      provide additional convenience to our customers, we affiliated with an ATM
      network and offer online banking with bill paying capabilities. 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 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 its deposits to be relatively stable. However,
      the ability to attract and maintain certificates of deposit, and the rates
      paid
      on these deposits, have been and will continue to be significantly affected
      by
      market conditions. At December 31, 2005, $76,900,000, or 70.15% of our deposit
      accounts were certificates of deposit, of which $41,073,000 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,****2005**
            
            **2004****Weighted**
              **Average**
              **Rate**
            
            **Amount**
            
            **Weighted**
              **Average**
              **Rate**
            
            **Amount**(Dollars
                in Thousands)NOW
                & Money Market Demand
            
            0.722
            %
            $15,117
            
            0.744
            %
            $17,812Savings
                deposits
            
            1.66
            
            16,787
            
            1.544
            
            22,711Certificates
                of deposit
            
            3.80
            
            76,900
            
            3.366
            
            67,487Accrued
                interest payable
            
            ---
            
            1
            
            --
            
            5Non-interest
                bearing deposit
            
            ---
            
            818
            
            --
            
            1,696Total
            
            3.022
            %
            $109,623
            
            2.511
            %
            $109,711





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






**Years
                Ended December 31,****2005**
            
            
            **2004**(Dollars
                in Thousands)Beginning
                of period
            
            $
            109,711
            
            $
            97,824Net
                deposits (withdrawals)
            
            
            (3,076
            )
            
            9,359Interest
                credited on deposit accounts
            
            
            2,988
            
            
            2,528Total
                increase (decrease) in deposit account
            
            
            (88
            )
            
            11,887Ending
                balance
            
            $
            109,623
            
            $
            109,711Percent
                increase (decrease)
            
            
            (0.08
            )%
            
            12.15
            %







Large
      Certificates of Deposits *.* The
      following table indicates the amount of certificates of deposit as of December
      31, 2005, 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
            
            $
            8,118
            
            $
            8,312
            
            $
            15,533
            
            $
            23,099
            
            $
            55,062$100,000
                or more
            
            
            2,511
            
            
            1,659
            
            
            4,940
            
            
            12,728
            
            
            21,838Total
            
            $
            10,629
            
            $
            9,971
            
            $
            20,473
            
            $
            35,827
            
            $
            76,900





*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, 2005, Slavie Federal Savings Bank was permitted to borrow up to
      $51,000,000 from the Federal Home Loan Bank of Atlanta. We had $36,000,000
      and
      $26,500,000 of Federal Home Loan Bank advances as of December 31, 2005 and
      December 31, 2004, respectively, and we averaged $26,250,000 and $23,917,000
      of
      Federal Home Loan Bank advances during the years ended December 31, 2005 and
      December 31, 2004, respectively. The increase in borrowings reflects a new
      $49,500,000 in Federal Home Loan Bank advances, offset by maturing advances
      of
      $40,000,000. We have relied on borrowing to a significant 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,****2005**
            
            **2004**(Dollars
                in Thousands)FHLB
                Advances:Maximum
                month-end balance
            
            $
            36,000
            
            $
            26,500Balance
                at end of period
            
            
            36,000
            
            
            26,500Average
                balance
            
            
            26,250
            
            
            23,917Weighted
                average interest rate at end of period
            
            
            3.68
            %
            
            2.42
            %Weighted
                average interest rate during period
            
            
            3.07
            %
            
            2.29
            %





**Personnel**





As
      of
      December 31, 2005, we had 28 full-time employees and 22 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.





**FEDERAL
      AND STATE TAXATION**





**Federal
      Taxation**





*General* .
      SFSB,
      Inc. and Slavie Federal Savings Bank are subject to federal income taxation
      in
      the same general manner as other corporations, with some exceptions discussed
      below. Slavie Federal Savings Bank’s tax returns have not been audited during
      the past six years. The following discussion of federal taxation is intended
      only to summarize certain pertinent federal income tax matters and is not a
      comprehensive description of the tax rules applicable to SFSB, Inc. or Slavie
      Federal Savings Bank.





21


*Method
      of Accounting.* For
      Federal income tax purposes, SFSB, Inc. and Slavie Federal Savings Bank
      currently report their income and expenses on the accrual method of accounting
      and use a tax year ending December 31 for filing their federal income tax
      returns.





*Alternative
      Minimum Tax.* The
      Internal Revenue Code of 1986, as amended (the “Code”) imposes an alternative
      minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus
      certain tax preferences (“alternative minimum taxable income” or “AMTI”). The
      AMT is payable to the extent such AMTI is in excess of an exemption amount
      and
      the AMT exceeds the regular income tax. Net operating losses can offset no
      more
      than 90% of AMTI. Payments of alternative minimum tax may be used as credits
      against regular tax liabilities in future years where the regular tax exceeds
      the alternative minimum tax. Slavie Federal Savings Bank has not been subject
      to
      the alternative minimum tax and has no such amounts available as credits for
      carryover.





*Net
      Operating Loss Carryovers* .
      A
      financial institution may carry back net operating losses to the preceding
      two
      taxable years and forward to the succeeding 20 taxable years. At December 31,
      2005, Slavie Federal Savings Bank had no net operating loss carryforwards for
      federal income tax purposes.





*Corporate
      Dividends-Received Deduction* .
      SFSB,
      Inc. may exclude from its income 100% of dividends received from Slavie Federal
      Savings Bank as a member of the same affiliated group of corporations.
      Corporations which own more than 20% of the stock of a corporation distributing
      a dividend and which is not a member of the same affiliated group may deduct
      80%
      of dividends received or accrued on their behalf. Corporations which own less
      than 20% of the stock of a corporation distributing a dividend may deduct 70%
      of
      dividends received or accrued on their behalf.





*Potential
      Tax Liability Attributable to Bad Debt Reserve.* Slavie
      Federal Savings Bank was allowed special deductions for additions to a reserve
      for bad debts calculated at various percentages of taxable income for taxable
      years through 1987. If the reserves deducted under that method are later used
      for purposes other than to absorb loan losses, including distributions in
      liquidations, they will be subject to federal income tax at the then current
      corporate rate. In addition, Slavie Federal Savings Bank must maintain mortgage
      loans at or above the December 31, 1987 level to receive current tax deductions
      for losses on loans. Retained earnings attributable to these reserves include
      $1,580,000 for which no provision for federal income tax has been made. The
      unrecorded potential income tax liability on this amount is $610,000 **.**





**State
      Taxation**





The
      State
      of Maryland imposes an income tax of 7% on income measured substantially the
      same as federally taxable income except for interest on certain investments
      that
      are exempt from Maryland tax.




**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 ANNUAL 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.
      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.





22


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.





At
      December 31, 2005, 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, 2005, 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 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.





23


“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, 2005, Slavie
      Federal Savings Bank maintained approximately 89.93% 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





·
            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 shall 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.





24


*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”). 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.





On
      April
      1, 2003, the Federal Reserve’s Regulation W, which comprehensively interprets
      Sections 23A and 23B of the Federal Reserve Act, became effective. The Federal
      Reserve Act and Regulation W are applicable to savings institutions such as
      Slavie Federal Savings Bank. The regulation unifies and updates staff
      interpretations issued over the years, incorporates several new interpretative
      proposals (such as to clarify when transactions with an unrelated third party
      will be attributed to an affiliate) and addresses new issues arising as a result
      of the expanded scope of non-banking activities engaged in by banks and bank
      holding companies in recent years and authorized for financial holding companies
      under the Gramm-Leach-Bliley Act.





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. 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.





*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.





25


*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.





At
      December 31, 2005, 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. Slavie Federal Savings Bank’s deposits therefore are subject
      to Federal Deposit Insurance Corporation deposit insurance assessments. The
      Federal Deposit Insurance Corporation has adopted a risk-based system for
      determining deposit insurance assessments. The Federal Deposit Insurance
      Corporation is authorized to raise the assessment rates as necessary to maintain
      the required ratio of reserves to insured deposits of 1.25%. In addition, all
      Federal Deposit Insurance Corporation-insured institutions must pay assessments
      to the Federal Deposit Insurance Corporation at an annual rate of approximately
      0.02% of insured deposits to fund interest payments on bonds maturing in 2017
      issued by a federal agency to recapitalize the predecessor to the Savings
      Association Insurance Fund.





*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, 2005, 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,
      2005, 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**





In
      response to the events of September 11th, the Uniting and Strengthening America
      by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
      Act
      of 2001, or the USA PATRIOT Act, was signed into law on October 26, 2001. The
      USA PATRIOT Act gives the federal government new powers to address terrorist
      threats through enhanced domestic security measures, expanded surveillance
      powers, increased information sharing and broadened anti-money laundering
      requirements. By way of amendments to the Bank Secrecy Act, Title III of the
      USA
      PATRIOT Act takes measures intended to encourage information sharing among
      bank
      regulatory agencies and law enforcement bodies. Further, certain provisions
      of
      Title III impose affirmative obligations on a broad range of financial
      institutions, including banks, thrifts, brokers, dealers, credit unions, money
      transfer agents and parties registered under the Commodity Exchange Act.





Among
      other requirements, Title III of the USA PATRIOT Act imposes the following
      requirements with respect to financial institutions:





·
            Pursuant
                to Section 352, all financial institutions must establish anti-money
                laundering programs that include, at minimum: (1) internal policies,
                procedures, and controls; (2) specific designation of an anti-money
                laundering compliance officer; (3) ongoing employee training programs;
                and
                (4) an independent audit function to test the anti-money laundering
                program.





·
            Section
                326 authorizes the Secretary of the Department of Treasury, in conjunction
                with other bank regulators, to issue regulations that provide for
                minimum
                standards with respect to customer identification at the time new
                accounts
                are opened.





·
            Section
                312 requires financial institutions that establish, maintain, administer,
                or manage private banking accounts or correspondence accounts in
                the
                United States for non-United States persons or their representatives
                (including foreign individuals visiting the United States) to establish
                appropriate, specific, and, where necessary, enhanced due diligence
                policies, procedures, and controls designed to detect and report
                money
                laundering.





·
            Financial
                institutions are prohibited from establishing, maintaining, administering
                or managing correspondent accounts for foreign shell banks (foreign
                banks
                that do not have a physical presence in any country), and will be
                subject
                to certain record keeping obligations with respect to correspondent
                accounts of foreign banks.




·
              Bank
                  regulators are directed to consider a holding company’s effectiveness in
                  combating money laundering when ruling on Federal Reserve Act and
                  Bank
                  Merger Act applications.
 
 The
        federal banking agencies have begun to propose and implement regulations
        pursuant to the USA PATRIOT Act. These proposed and interim regulations require
        and will require financial institutions to adopt the policies and procedures
        contemplated by the USA PATRIOT Act.





27





**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.





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.





28


*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. Under Office of Thrift Supervision regulations,
      our
      public 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.





*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 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.





**Federal
      Securities Laws**





*General* .
      SFSB,
      Inc.’s common stock is registered with the Securities and Exchange Commission
      under the Securities Exchange Act of 1934 and SFSB, Inc. is subject to the
      information, proxy solicitation, insider trading restrictions and other
      requirements under the Securities Exchange Act of 1934. Pursuant to Office
      of
      Thrift Supervision regulations and in connection with the reorganization, we
      have agreed to maintain such registration for a minimum of three years following
      the conversion.





As
      described below, certain aspects of the federal securities laws were recently
      substantially revised by the Sarbanes-Oxley Act of 2002.





*Sarbanes-Oxley
      Act of 2002.* **** On
      July
      30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 (the
      “Act”), which implemented legislative reforms intended to address corporate and
      accounting fraud. In addition to the establishment of a new accounting oversight
      board that will enforce auditing, quality control and independence standards
      and
      will be funded by fees from all publicly traded companies, the Act places
      certain restrictions on the scope of services that may be provided by accounting
      firms to their public company audit clients. Any non-audit services being
      provided to a public company audit client will require preapproval by the
      company’s audit committee. In addition, the Act makes certain changes to the
      requirements for partner rotation after a period of time. The Act requires
      chief
      executive officers and chief financial officers, or their equivalent, to certify
      to the accuracy of periodic reports filed with the Securities and Exchange
      Commission, subject to civil and criminal penalties if they knowingly or
      willingly violate this certification requirement. In addition, under the Act,
      counsel will be required to report evidence of a material violation of the
      securities laws or a breach of fiduciary duty by a company to its chief
      executive officer or its chief legal officer, and, if such officer does not
      appropriately respond, to report such evidence to the audit committee or other
      similar committee of the board of directors or the board itself.





29


Under
      the
      Act, longer prison terms will apply to corporate executives who violate federal
      securities laws; the period during which certain types of suits can be brought
      against a company or its officers is extended; and bonuses issued to top
      executives prior to restatement of a company’s financial statements are now
      subject to disgorgement if such restatement was due to corporate misconduct.
      Executives are also prohibited from insider trading during retirement plan
      “blackout” periods, and loans to company executives (other than loans by
      financial institutions permitted by federal rules and regulations) are
      restricted. In addition, a provision directs that civil penalties levied by
      the
      Securities and Exchange Commission as a result of any judicial or administrative
      action under the Act be deposited to a fund for the benefit of harmed investors.
      The Federal Accounts for Investor Restitution provision also requires the
      Securities and Exchange Commission to develop methods of improving collection
      rates. The legislation requires that the time frame for disclosures by public
      companies be accelerated. Also, directors and executive officers must provide
      information for most changes in ownership in a company’s securities within two
      business days of the change.





The
      Act
      also increases the oversight of, and codifies certain requirements relating
      to
      audit committees of public companies and how they interact with the company’s
“registered public accounting firm.” In addition, companies must disclose
      whether at least one member of the committee is a “financial expert” (as such
      term is defined by the Securities and Exchange Commission) and if not, why
      not.
      Under the Act, a company’s registered public accounting firm will be prohibited
      from performing statutorily mandated audit services for a company if such
      company’s chief executive officer, chief financial officer, comptroller, chief
      accounting officer or any person serving in equivalent positions had been
      employed by such firm and participated in the audit of such company during
      the
      one-year period preceding the audit initiation date. The Act also prohibits
      any
      officer or director of a company or any other person acting under their
      direction from taking any action to fraudulently influence, coerce, manipulate
      or mislead any independent accountant engaged in the audit of the company’s
      financial statements for the purpose of rendering the financial statements
      materially misleading. The Act also requires the company’s registered public
      accounting firm that issues the audit report to attest to and report on
      management’s assessment of the company’s internal controls, although this
      requirement has been delayed for small business issuers like us until 2007.





Although
      we anticipate that we will incur additional expense in complying with the
      provisions of the Sarbanes-Oxley Act and the regulations that have been
      promulgated to implement the Sarbanes-Oxley Act, management does not expect
      that
      such compliance will have a material impact on our results of operations or
      financial condition.





**FORWARD
      LOOKING STATEMENTS**





Some
      of
      the matters discussed in this annual report 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 in this annual report include
      forward-looking statements. These forward-looking statements include statements
      regarding profitability, liquidity, allowance for loan losses, interest rate
      sensitivity, 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 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 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.





30


**RISK
      FACTORS**





You
      should consider carefully the following risks, along with the other information
      contained in 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, although they have risen recently, are 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, 2005, $121,978,000, or 83.54%, of our loans had
      fixed rates. If interest rates continue to 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 2.22% for the year ended December 31, 2005
      compared to 2.46% for the year ended December 31, 2004. Our net interest margin
      (net interest income as a percentage of average interest-earning assets) was
      2.57% for the year ended December 31, 2005 compared to 2.58% for the year ended
      December 31, 2004. If interest rates continue to 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,
      2005,
      if interest rates increase by 1%, the net value of our assets (our net portfolio
      value) will decrease by 17%. If interest rates increase by 2%, the net value
      of
      our assets (our net portfolio value) will decrease by 37%. 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, an area in which we do not have
      substantial past experience, in order to increase both our interest and
      non-interest income. We may not be successful in implementing this strategy
      and/or in managing the anticipated growth as a result of this strategy.





**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.





31


**We
      Depend Heavily on our Key Personnel, Particularly Philip E. Logan, Charles
      E.
      Wagner, Jr. and Sophie T. Wittelsberger, and Our Business Could Suffer if
      Something Were to Happen to Mr. Logan, Mr. Wagner** **** **or
      Mrs. Wittelsberger or if They Were to Leave.**





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. Although we have entered
      into
      employment agreements with Mr. Logan, Mr. Wagner and Mrs. Wittelsberger, if
      any
      one of them 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.**





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 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, decreases in real estate values could adversely
      affect the value of property used as collateral. Adverse changes in the economy
      also 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.





32


**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 three 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 2005, these expenses totaled $108,000.
      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.





**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. 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.


33





**Item
      2. Description of Property**





We
      conduct our business through our main office and one branch offices. The net
      book value of our premises, land and equipment was $5,612,000 at December 31,
      2005. The following table provides certain information with respect to our
      offices as of December 31, 2005:





**Location**
            
            **Leased**
              **or
                Owned**
            
            **Year
                Acquired or****Leased**
            
            **Net
                Book Value of Property****and
                Leasehold Improvements**
            
            **Deposits
                at**
              **December
                31, 2005**(In
                Thousands)Main
                Office
              1614
                Churchville Road
              Bel
                Air, MD 21015
            
            Owned
            
            2001
            
            $5,150
            
            $18,259Branch
                Office
              3700
                East Northern Pkwy
              Baltimore,
                MD 21206
            
            Owned
            
            1976
            
            $
                338
            
            $86,539Branch
                Office
              601
                Edgewood Road
              Edgewood,
                MD 21040
            
            Leased(1)
            
            2001
            
            $
                124
            
            $
                4,825


____________________


(1)  The
      lease
      for this space expires on April 30, 2006 and it was not renewed. Although the
      Edgewood office had been an active part of the community it served, it was
      unable to generate the business necessary to keep it a viable part of our
      strategic plan. We closed this branch on February 24, 2005.





**Item
      3. Legal Proceedings**





We
      are
      not involved in any pending legal proceedings as a defendant other than routine
      legal proceedings occurring in the ordinary course of business. At December
      31,
      2005, we were not involved in any legal proceedings the outcome of which 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, 2005
      to a
      vote of security holders of SFSB, Inc.


34


**PART
        II**
 
 **Item
        5. Market for Common Equity and Related Stockholder
        Matters**
 
 Common
        Stock
 
 As
        of
        March 24, 2006, the number of holders of record of SFSB, Inc.’s common stock was
        approximately 143. SFSB, Inc.’s common stock is traded on the Over the Counter
        Bulletin Board (“OTCBB”) under the symbol “SFBI.OB.”
 
 SFSB,
        Inc. first issued shares of common stock on December 30, 2004 and trading
        began
        on the OTCBB on December 31, 2004. Accordingly, there was only one date of
        trading in the common stock during 2004. 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.
 
 2005
                Bid
                  Price Range
              
              
              2004
                Bid
                  Price RangeQuarter
              
              High
              
              
              Low
              
              
              High
              
              
              Low1st
              $
              10.95
              
              $
              9.00
              
              $
              -
              
              $
              -2nd
              
              9.35
              
              
              8.40
              
              
              -
              
              
              -3rd
              
              9.40
              
              
              8.95
              
              
              -
              
              
              -4th
              
              9.90
              
              
              9.10
              
              
              11.00
              
              
              10.75
 
 Dividends
 
 SFSB,
        Inc.’s board of directors intends to adopt a policy of paying regular cash
        dividends, but has not done so to date, nor has it decided the amount that
        may
        be paid or when the 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 reduce or eliminate dividends in the future.
 
 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 will waive dividends paid
        by
        us. As a result of Slavie Bancorp, MHC’s waiver of dividends, we will have
        additional capital (in the amount of the waived dividend), which we will
        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. Description of Business - Supervision and
        Regulation - Holding Company Regulation - Waivers of Dividends by Slavie
        Bancorp, MHC.”
 
 Dividends
        from us may depend, in part, upon receipt of dividends from Slavie Federal
        Savings Bank because we initially will 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
        can
        be paid by Slavie Federal Savings Bank.
 
 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.


35


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
      Repurchase





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. 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 will be undertaken within a 12-month period. As of
      December 31, 2005, SFSB, Inc. had repurchased 10,000 shares on the open market
      at an average cost of $9.60 per share to fund its employee stock ownership
      plan.
      In accordance with the terms of the stock repurchase program, SFSB, Inc. is
      authorized to purchase an additional 43,561 shares before November 21,
      2006.





**Item
      6. 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
      7. Financial Statements**





The
      financial statements identified in Item 13(a)(1) hereof are incorporated by
      reference hereunder.




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





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





**Item
      8A. Controls and Procedures**




As
      of the
      end of the period covered by this annual report on Form 10-KSB, 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. Disclosure
      controls and procedures are controls and other procedures that are designed
      to
      ensure that
      information requiredto 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 controls 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, 2004, that have
      materially affected, or are reasonably likely to materially affect, SFSB, Inc.’s
      internal control over financial reporting.




**Item
      8B. Other Information**


On
        October 3, 2005, our Board of Directors determined that we would close our
        Edgewood branch. On October 26, 2005, we sent a letter to Benfield Properties,
        LLC, the landlord of our Edgewood office, terminating the lease for 601 Edgewood
        Road. Absent the sending of such notice, by its terms the lease would have
        renewed for an additional five year term on April 1, 2006.
  Opened
        in
        November 2001, our Edgewood branch had been an active part of the community
        it
        served, but it was unable to generate the business necessary to keep it a
        viable
        part of our strategic plan. In November 2005, we received regulatory approval
        to
        close our Edgewood location and we closed the branch on February 24,
        2006.
  In
        2005,
        we incurred $49,000 in expenses related to the acceleration of depreciation
        on
        the leasehold improvements of the Edgewood branch. We will incur approximately
        $98,000 of additional expenses in the first quarter of 2006 in connection
        with
        closing the branch, primarily related to the acceleration of depreciation
        on the
        leasehold improvements.





36





**PART
      III.**





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





**Code
      of Ethics**





SFSB,
      Inc.’s Board of Directors has adopted a code of ethics that applies to its
      principal executive 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 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.





The
      remaining information required by this Item 9 is incorporated by reference
      to the information appearing under the captions “Election of Directors,” “Board
      Meetings and Committees,” “Executive Compensation” and “Section 16(a) Beneficial
      Ownership Reporting Compliance” in the Proxy Statement for the 2005 Annual
      Meeting of Stockholders of SFSB, Inc.





**Item
      10. Executive Compensation**





The
      information required by this Item 10 is incorporated by reference to the
      information appearing under the captions “Executive Compensation” and “Board
      Meetings and Committees” in the Proxy Statement for the 2005 Annual Meeting of
      Stockholders of SFSB, Inc.





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





The
      information required by this Item 11 is incorporated by reference to the
      information appearing under the captions “Security Ownership of Management and
      Certain Security Holders” in the Proxy Statement for the 2005 Annual Meeting of
      Stockholders of SFSB, Inc.





**Item
      12. Certain Relationships and Related Transactions**





The
      information required by this Item 12 is incorporated by reference to the
      information appearing under the captions “Certain Relationships and Related
      Transactions” in the Proxy Statement for the 2005 Annual Meeting of Stockholders
      of SFSB, Inc.





37


**Item
      13. Exhibits**




(a)
              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 FederalHome
                  Loan Bank of Atlanta10.1*
              Form
                  of Employee Stock Ownership Plan, as amended10.2**
              Loan
                  Documents relating to Employee Stock Ownership Plan10.3#
              Employment
                  Agreement between Slavie Federal Savings Bank and Philip E.
                  Logan10.4#
              Employment
                  Agreement between Slavie Federal Savings Bank and Charles E. Wagner,
                  Jr.10.5#
              Employment
                  Agreement between Slavie Federal Savings Bank and Sophie T.
                  Wittelsberger10.6*
              Lease
                  Agreement between Benfield Properties, LLC and Slavie Federal Savings
                  Bank10.7
              Termination
                  Letter for Lease Agreement between Benfield Properties, LLC and
                  Slavie
                  Federal Savings Bank10.8#
              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 Agreement10.15@
              Amendment
                  to Employment Agreement between Slavie Federal Savings Bank and
                  Philip E.
                  Logan10.16@
              Amendment
                  to Employment Agreement between Slavie Federal Savings Bank and
                  Charles E.
                  Wagner, Jr.10.17@
              Amendment
                  to Employment Agreement between Slavie Federal Savings Bank and
                  Sophie T.
                  Wittelsberger
  38
 10.18@@
              Amendment
                  to Employment Agreement between Slavie Federal Savings Bank and
                  Sophie T.
                  Wittelsberger13
              Annual
                  Report to Stockholders14#
              Code
                  of Ethics for Senior Financial Officers21
              Subsidiaries
                  of Registrant23.1
              Consent
                  of Beard Miller Company LLP31.1
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 200231.2
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 200232
              Certification
                  of Chief Executive Officer and Chief Financial Officer pursuant
                  to Section
                  906 of the Sarbanes-Oxley Act of
                  2002.





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
      exhibits which are denominated with one number 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, 2005.





The
      exhibit which are denominated with two number signs (##) were 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 5, 2005.





The
      exhibits which is denominated with three number signs (###) was 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 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
      Quarterly Report on Form 10-QSB filed on May 13, 2005.





The
      exhibit which is denominated with two @@ signs was previously filed by SFSB,
      Inc. as a part of, and is hereby incorporated by reference from, SFSB, Inc.’s
      Quarterly Report on Form 10-QSB filed on August 15, 2005.





Note:
      Exhibits 10.3 through 10.5, 10.13, and 10.15 through 10.18 relate to management
      contracts or compensatory plans or arrangements.


39




**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 year ended December 31, 2005 and the audit of Slavie Federal
      Savings Bank’s annual consolidated financial statements for the year ended
      December 31, 2004, and fees billed for other services rendered by Beard Miller
      Company LLP during those periods.








**Years
                Ended December 31,****2005**
            
            **2004**Audit
                Fees(1)
            
            $
            55,200
            
            $
            94,500Audit
                Related Fees(2)
            
            
            -
            
            
            -Tax
                Fees(3)
            
            
            5,400
            
            
            6,100All
                Other Fees(4)
            
            
            -
            
            
            -Total
            
            $
            60,600
            
            $
            100,600





(1) Audit
      Fees consist of fees billed for professional services rendered for the audit
      of
      the SFSB, Inc.’s consolidated (or Slavie Federal Savings Bank’s) 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. In 2004, these fees included costs affiliated with reviews and
      advisory services related to the stock offering.





(2)
      Audit-Related Fees 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.”





(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





**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




Date : March 29, 2006
            SFSB, INC.By:/s/ Philip E. LoganPhilip E. LoganPresident, Chairman &
              CEO




In
      accordance with the Exchange Act, 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
              Philip
                E. Logan
            President,
                CEO, Chairman and Principal Executive Officer; Director
            March
                29, 2006/s/
                Sophie T. Wittelsberger
              Sophie
                T. Wittelsberger
            Vice
                President and Chief
              Financial
                Officer, Principal
              Financial
                Officer and Principal
              Accounting
                Officer
            March
                29, 2006/s/
                J. Benson Brown
              J.
                Benson Brown
            Director
            March
                29, 2006/s/
                Thomas J. Drechsler
              Thomas
                J. Drechsler
            Director
            March
                29, 2006/s/
                Robert M. Stahl
              Robert
                M. Stahl
            Director
            March
                29, 2006/s/
                James D. Wise
              James
                D. Wise
            Director
            March
                29, 2006/s/
                Charles E. Wagner, Jr.
              Charles
                E. Wagner, Jr.
            ExecutiveVice
                President and
              Secretary;
                Director
            March
                29, 2006








41


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 Plan10.3#
                Employment
                    Agreement between Slavie Federal Savings Bank and Philip E.
                    Logan10.4#
                Employment
                    Agreement between Slavie Federal Savings Bank and Charles E.
                    Wagner,
                    Jr.10.5#
                Employment
                    Agreement between Slavie Federal Savings Bank and Sophie T.
                    Wittelsberger10.6*
                Lease
                    Agreement between Benfield Properties, LLC and Slavie Federal
                    Savings
                    Bank10.7
                Termination
                    Letter for Lease Agreement between Benfield Properties, LLC and
                    Slavie
                    Federal Savings Bank10.8#
                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 Agreement10.15@
                Amendment
                    to Employment Agreement between Slavie Federal Savings Bank and
                    Philip E.
                    Logan10.16@
                Amendment
                    to Employment Agreement between Slavie Federal Savings Bank and
                    Charles E.
                    Wagner, Jr.10.17@
                Amendment
                    to Employment Agreement between Slavie Federal Savings Bank and
                    Sophie T.
                    Wittelsberger
  10.18@@
                Amendment
                    to Employment Agreement between Slavie Federal Savings Bank and
                    Sophie T.
                    Wittelsberger13
                Annual
                    Report to Stockholders
  
 14#
                Code
                    of Ethics for Senior Financial Officers21
                Subsidiaries
                    of Registrant23.1
                Consent
                    of Beard Miller Company LLP31.1
                Certification
                    of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                    Act of 200231.2
                Certification
                    of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                    Act of 200232
                Certification
                    of Chief Executive Officer and Chief Financial Officer pursuant
                    to Section
                    906 of the Sarbanes-Oxley Act of
                    2002.


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
      exhibits which are denominated with one number 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, 2005.





The
      exhibit which are denominated with two number signs (##) were 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 5, 2005.





The
      exhibits which is denominated with three number signs (###) was 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 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
      Quarterly Report on Form 10-QSB filed on May 13, 2005.





The
      exhibit which is denominated with two @@ signs was previously filed by SFSB,
      Inc. as a part of, and is hereby incorporated by reference from, SFSB, Inc.’s
      Quarterly Report on Form 10-QSB filed on August 15, 2005.





Note:
      Exhibits 10.3 through 10.5, 10.13, and 10.15 through 10.18 relate to management
      contracts or compensatory plans or arrangements.