Exhibit
13                                ANNNUAL
REPORT TO STOCKHOLDERS





SFSB,
INC.





2008
ANNUAL REPORT





Page
      #Letter
      to StockholdersSelected
      Consolidated Financial and Other Data
              3Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              5Consolidated
      Financial Statements
              25Directors
      and Officers
              26Investor
      and Corporate Information
              27











SFSB,
Inc.
 1614
Churchville Road
 Bel
Air, Maryland 21015
 (443)
265-5570
 
 Dear
Fellow Stockholder:
 
 Our
company’s financial results for the year ending December 31, 2008 are detailed
on the pages that follow.  The company made a decision to take a
non-cash pre-tax charge to earnings of $2,477,000 as a result of an
other-than-temporary impairment (OTTI) in the value of the AMF Ultra Short
Mortgage Fund it holds in its investment portfolio.  This write-down
resulted in a net loss of $2,153,000 for the year ended December 31, 2008
compared to net income of $103,000 for the year ended December 31,
2007.
 
 The
impairment is related to the continuing uncertainty in spreads in the bond
market for mortgage related securities.  This uncertainty has
negatively impacted the market value of the securities in the fund and thus the
net asset value of the fund itself.  While the majority of the
underlying securities in the fund continues to carry investment grades and
acceptable market yields, current accounting rules and related SEC guidance
resulted in our determination that the impairment was other-than
temporary.
 
 Without
the write-down of the AMF Ultra Short Mortgage Fund, SFSB, Inc. would have
reported net income of $324,000 for the year ended December 31, 2008 compared to
net income of $103,000 for the year ended December 31, 2007, an increase of
$221,000 or 214.56%.
 
 We
continue to improve core earnings with regard to our operating
results.  The stability of our core banking operations and being well
capitalized, has enabled SFSB, Inc. to withstand the lower values recorded in
our investment portfolio without having a material impact on the health of our
bank.  In the current environment, our top priority is to maintain the
strength of our balance sheet.  We were successful in this regard
during 2008 as both loans and deposits increased over the prior year, while our
capital levels remained healthy.
 
 As of
December 31, 2008, SFSB, Inc. had risk weighted capital of 14.15%, while the OTS
requires a 10% ratio to be considered well capitalized.  Net interest
margin as of December 31, 2008 was 2.47% compared to 1.99% as of December 31,
2007, an increase of 24.12%
 
 As in
2008, our business strategy for 2009 is to grow and improve profitability by
increasing loan diversification with an emphasis on commercial real estate
lending, building sources of fee income to increase non-interest income,
increasing residential loan originations to sell on the secondary market and
leveraging excess equity to increase net interest margin.  Our
directors, officers, management and staff remain committed in a unified effort
to preserve capital, diligently manage asset quality, maintain liquidity,
increase earnings and monitor sensitivity and risk.
 
 Although
fiscal year 2009 will likely be another challenging year for the banking
industry, we are confident we are well-poised to weather current storms and can
eventually emerge from them a stronger financial institution.  On
behalf of the directors, officers, management and staff, I thank you for your
patience, support and confidence during these turbulent times in the financial
marketplace.
 
 Sincerely,Philip
      E. LoganPresident,
      Chief Executive Officer andChairman
      of the Board


2





SELECTED
CONSOLIDATED FINANCIAL AND OTHER DATA





The
information at and for the years ended December 31, 2008, 2007 and 2006 is
derived in part from the audited consolidated financial statements of SFSB,
Inc.  The following information is only a summary, and should be read
together with “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and our consolidated financial statements and the related
notes included elsewhere in this annual report.  Results for past
periods are not necessarily indicative of results that may be expected for any
future period.





At
      December 31,2008
                        
                        
                        2007
                        
                        
                        2006(In
      Thousands)Selected
      Financial Condition Data:Total
      assets
                        
                        $
                        178,882
                        
                        
                        $
                        172,244
                        
                        
                        $
                        174,225Cash
      and cash
      equivalents
                        
                        
                        3,856
                        
                        
                        
                        1,277
                        
                        
                        
                        2,851Loans
      receivable(1)
                        
                        
                        157,309
                        
                        
                        
                        147,744
                        
                        
                        
                        147,118Investment
      securities
                        
                        
                        8,592
                        
                        
                        
                        14,189
                        
                        
                        
                        15,726Deposits
                        
                        
                        123,203
                        
                        
                        
                        114,098
                        
                        
                        
                        111,823Borrowings
                        
                        
                        35,300
                        
                        
                        
                        34,000
                        
                        
                        
                        39,000Equity
                        
                        
                        19,137
                        
                        
                        
                        21,769
                        
                        
                        
                        22,365





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





Years
      Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006(In
      Thousands, except for per share data)Selected
      Operating Data:Total
      interest
      income
                      
                      $
                      9,858
                      
                      
                      $
                      9,414
                      
                      
                      $
                      9,091Total
      interest
      expense
                      
                      
                      5,722
                      
                      
                      
                      6,137
                      
                      
                      
                      5,467Net
      interest
      income
                      
                      
                      4,136
                      
                      
                      
                      3,277
                      
                      
                      
                      3,624Provision
      for loan
      losses
                      
                      
                      180
                      
                      
                      
                      244
                      
                      
                      
                      376Net
      interest income after provision for loan losses
                      
                      
                      3,956
                      
                      
                      
                      3,033
                      
                      
                      
                      3,248Other
      (loss)
      income
                      
                      
                      (2,034
                      )
                      
                      
                      434
                      
                      
                      
                      277Non-interest
      expense
                      
                      
                      3,845
                      
                      
                      
                      3,286
                      
                      
                      
                      3,482Income
      taxes
                      
                      
                      230
                      
                      
                      
                      78
                      
                      
                      
                      25Net
      (loss)
      income
                      
                      $
                      (2,153
                      )
                      
                      $
                      103
                      
                      
                      $
                      18Basic
      (Loss) Earnings per
      Share
                      
                      $
                      (0.80
                      )
                      
                      $
                      0.04
                      
                      
                      $
                      0.01Diluted
      (Loss) Earnings per
      Share
                      
                      $
                      (0.80
                      )
                      
                      $
                      0.04
                      
                      
                      $
                      0.01





3





At
      or for the Years Ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006Selected
      Financial Ratios and Other Data:Performance Ratios:Return
      on average assets(1)
                          
                          
                          (1.22
                          )%
                          
                          
                          0.06
                          %
                          
                          
                          0.01
                          %Return
      on average equity
                          
                          
                          (10.27
                          )
                          
                          
                          0.46
                          
                          
                          
                          0.08Net
      loans to total assets
                          
                          
                          87.94
                          
                          
                          
                          85.78
                          
                          
                          
                          84.44Net
      yield on average interest-earning assets
                          
                          
                          5.88
                          
                          
                          
                          5.70
                          
                          
                          
                          5.43Net
      cost of average interest bearing liabilities
                          
                          
                          3.78
                          
                          
                          
                          4.19
                          
                          
                          
                          3.68Net
      interest rate spread(2)
                          
                          
                          2.10
                          
                          
                          
                          1.51
                          
                          
                          
                          1.75Net
      interest margin(3)
                          
                          
                          2.47
                          
                          
                          
                          1.99
                          
                          
                          
                          2.17Average
      interest-earning assets to average interest bearing
      liabilities
                          
                          
                          1.10
                          x
                          
                          
                          1.12
                          x
                          
                          
                          1.12
                          xNon-interest
      expense to average assets
                          
                          
                          2.19
                          %
                          
                          
                          1.91
                          %
                          
                          
                          2.00
                          %Average
      equity to average assets
                          
                          
                          11.91
                          
                          
                          
                          12.89
                          
                          
                          
                          12.93Efficiency
      ratio(4)
                          
                          
                          83.97
                          
                          
                          
                          88.55
                          
                          
                          
                          89.26Capital Ratios:Tangible
      ratio
                          
                          
                          8.28
                          %
                          
                          
                          9.81
                          %
                          
                          
                          9.62
                          %Tier
      1 core ratio
                          
                          
                          8.28
                          
                          
                          
                          9.81
                          
                          
                          
                          9.62Total
      risk-based capital ratio
                          
                          
                          14.15
                          
                          
                          
                          17.36
                          
                          
                          
                          17.79Asset Quality Ratios:Net
      charge-offs to average nonperforming assets
                          
                          
                          0.09
                          %
                          
                          
                          9.94
                          %
                          
                          
                          -
                          %Net
      charge-offs to average loans outstanding
                          
                          
                          -
                          
                          
                          
                          0.08
                          
                          
                          
                          -Allowance
      for loan losses to gross loans outstanding
                          
                          
                          0.70
                          
                          
                          
                          0.65
                          
                          
                          
                          0.57Non-performing
      loans to total assets
                          
                          
                          0.85
                          
                          
                          
                          0.28
                          
                          
                          
                          0.85Non-performing
      assets to total assets
                          
                          
                          1.46
                          
                          
                          
                          0.91
                          
                          
                          
                          0.85Non-performing
      loans to total loans
                          
                          
                          0.97
                          
                          
                          
                          0.32
                          
                          
                          
                          1.01Other Data:Number
      of full-service offices
                          
                          
                          2
                          
                          
                          
                          2
                          
                          
                          
                          2





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


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


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


(4)
            The
      efficiency ratio represents the ratio of non-interest expenses divided by
      the sum of net interest income and non-interest income, excluding
      impairment charges on investment
securities.





4





MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL


CONDITION
AND RESULTS OF OPERATIONS





SFSB,
Inc. is a federal corporation, which was organized in 2004 as part of the mutual
holding company reorganization of Slavie Federal Savings Bank.  Our
principal asset is our investment in Slavie Federal Savings Bank.  We
are a majority owned subsidiary of Slavie Bancorp, MHC, a federally chartered
mutual holding company. In connection with the reorganization, we sold 1,339,031
shares of our common stock and issued 1,636,594 shares to our mutual holding
company parent.  The net proceeds from our stock offering totaled
$12,710,000.  At December 31, 2008, we had consolidated assets of
$178,882,000, deposits of $123,203,000 and shareholders' equity of
$19,137,000.





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





Overview





We
incurred a net loss of $2,153,000 in 2008 as compared to net income of $103,000
in 2007.  This decline was primarily due to a non-cash charge to
earnings of $2,477,000 as a result of an other-than-temporary impairment in the
value of the AMF Ultra Short Mortgage Fund held in our investment
portfolio.  The loss in the value of the AMF Fund was reported as
unrealized losses included in accumulated other comprehensive income (loss) on
the consolidated statement of financial condition in 2007.  The
decline in earnings is also the result of an increase in non-interest expenses
primarily as a result of an increase in compensation expenses related to the
hiring of two experienced commercial loan originators in 2007, a certified
financial planner in June 2007, an investment advisor in November 2008, an
administrative assistant to complement the latter two positions in late 2008 and
the approval of a performance based bonus plan by our compensation committee due
to the attainment of definitive goals and objectives.  These declines
were partially offset by improvements in net interest income primarily as a
result of an increase in higher yielding commercial real estate loan
originations and a decrease in the interest rates we pay on deposit accounts as
a result of the decrease in the prime rate instituted by the Federal Reserve
Board in response to the current challenging economy.  Non-interest
income decreased $2,468,000, or 568.66%, and non-interest expenses increased
$559,000, or 17.01%.  These declines were partially offset by a
$444,000, or 4.72%, increase in interest income and a $415,000, or 6.76%,
decrease in interest expense.





Assets
increased to $178,882,000 in 2008 as compared to $172,244,000 in 2007 primarily
because we increased our loan portfolio by $9,565,000, or 6.47%, to $157,309,000
at December 31, 2008 from $147,744,000 at December 31, 2007.  The
increase is also a result of an increase in cash and cash equivalents of 201.96%
at December 31, 2008, partially offset by decreases in investment securities
held to maturity of 100.00% (to $0 at December 31, 2008), a decrease in
investment securities available for sale of 21.27% and a decrease in mortgage
backed securities held to maturity of 30.93% compared to December 31,
2007.





We hold a
19% participation (approximately $1,096,000 in unpaid principal balance) in an
acquisition and development loan.  This loan is a foreclosed real estate
participation loan.  As we previously disclosed, the foreclosed
property had previously been under a contract of sale that was subject to a
feasibility study that expired on June 15, 2008.  The property is
currently under a new purchase agreement contract.  The purchase
agreement is subject to a feasibility study which allows the buyer to perform
due diligence with regard to environmental approvals and permits and a zoning
change, from partially residential and commercial development to strictly
commercial development.  Once the zoning change is approved by the
city’s council government, the buyer expects to settle on the subject
property.  The zoning change approval is expected by June 2009, which
is expected to coincide with the results of the environmental due diligence
mentioned above.  We still believe that we will recover the carrying
amount of the real estate, although there can be no assurance that this will be
the case.  Additionally, a $100,000 business line of credit loan,
restructured in the third quarter of 2007, is classified as impaired, because we
believe that there is a substantial likelihood that we will not collect the
total amount of the outstanding principal balance on this loan.  A
specific reserve of $100,000, or 100%, of the remaining loan balance continues
to remain in our allowance for loan losses with respect to this
loan.  Furthermore, two commercial real estate loans totaling $239,000
are also classified as impaired as we believe that it may become difficult to
collect the outstanding principal balances on these loans.





5





To remain
competitive and offer even more choices to our customers, in 2008, we
implemented remote deposit for commercial accountholders and check imaging
services for our checking accountholders.  We expanded our Automated
Teller Machine network to include access to more than 52,500 ATMs throughout the
United States.  We offer a thirteen month relationship certificate of
deposit and a premium rate checking account with what we believe are attractive
interest rates.  In addition, we implemented a Slavie credit card,
foreign currency services for our customers traveling abroad and coin counting
services in each of our branch lobbies.





As a
gesture of our commitment to our customers and neighbors, and as a result of
successful events held in 2007 and 2006, the Bank celebrated Customer
Appreciation Days at each of its two branch locations again in 2008, promoting
its newest products.  We also offer a comprehensive and full service
approach to managing finances and investing in the future.  The
creation of Slavie Financial Services, the addition of a certified financial
planner in mid-2007 and an investment planner in November 2008 enabled us to
bring investment guidance and financial planning expertise to our customers,
while expanding our ability to provide personalized services that focus on the
successful financial well being of our customers.  In Today’s Slavie,
a quarterly newsletter, which we started to publish in the second quarter of
2007, we keep our customers informed of what is happening at the
Bank.





In
addition to the variety of products we offer and the new ones mentioned above,
our product development and review committee expects to have the Bank implement
on-line account opening for a special “on-line only” savings account paying a
competitive rate.  We also plan to implement a new children’s savings
program.  We will also participate in the Maryland Saves “Roll in the
Dough” campaign designed to encourage individuals to save.  We expect
to develop and offer these services during 2009.





We
continue to implement strategies formed during strategic planning meetings of
the Board of Directors and the Company’s officers during 2006 and in the third
quarter of 2008.  In our continued efforts to boost the yield of our
interest earning assets during a period of net interest margin compression,
management, along with our two experienced commercial loan originators,
continues to increase and diversify the Bank’s mix of commercial loans to other
types of loans in its portfolio.  In addition, we intensified our
marketing strategy by offering incentives to attract new checking accounts in an
effort to attain our goal of decreasing the yield on our interest bearing
liabilities.  Our directors, officers, management and staff remain
committed in a unified effort to improve the Bank’s profitability and net
interest margin.





Key
measurements and events for year ended December 31, 2008 include the
following:





·
            Total
      assets at December 31, 2008 increased by 3.85% to $178,882,000 as compared
      to $172,244,000 as of December 31,
2007.





·
            Total
      borrowings increased by 3.82% from $34,000,000 at December 31, 2007 to
      $35,300,000 as of December 31,
2008.





·
            Net
      loans outstanding increased by 6.47% from $147,744,000 as of December 31,
      2007 to $157,309,000 as of December 31,
2008.





·
            Nonperforming
      loans and foreclosed real estate totaled $2,615,000 at December 31, 2008
      as compared with a total of $1,551,000 at December 31, 2007.  We
      believe an appropriate allowance for loan losses continues to be
      maintained.





·
            Deposits
      at December 31, 2008 were $123,203,000, an increase of $9,105,000 or 7.98%
      from $114,098,000 at December 31,
2007.





6





·
            We
      realized a net loss of $2,153,000 for the year ended December 31, 2008,
      compared to net income of $103,000 for the year ended December 31,
      2007.  This decrease reflects primarily a $2,477,000 non-cash
      charge to earnings, as a result of an other-than-temporary impairment in
      the value of an investment in our investment
  portfolio.





·
            Net
      interest income, our main source of income, was $4,136,000 during the year
      ended December 31, 2008 compared to $3,277,000 for the year ended December
      31, 2007.  This represents a 26.21% increase for the year ended
      December 31, 2008 as compared to the same period in 2007.  Our
      interest rate spread increased by 59 basis points, from 1.51% at December
      31, 2007 to 2.10% at December 31, 2008.  Our net interest margin
      was 2.47% at December 31, 2008 as compared to 1.99% at December 31, 2007,
      an increase of 48 basis points, or
24.12%.





·
            We
      had four overdraft protection loan charge-offs totaling $3,000 during the
      year ended December 31, 2008.  We had a commercial non-real
      estate loan charge-off of $120,000 and four overdraft protection loan
      charge-offs totaling $2,000 during the same period in
  2007.





·
            Non-interest
      income decreased by $2,468,000, or 568.66%, for the year ended December
      31, 2008, as compared to the year ended December 31, 2007.  The
      decline between the periods is primarily the result of an investment
      securities write-down.





·
            Non-interest
      expense increased by $559,000 or 17.01% for the year ended December 31,
      2008, as compared to the year ended December 31, 2007.  The
      increase between the periods is primarily the result of an increase in
      compensation expenses relating to the hiring of a certified financial
      planner in June 2007, the addition of an administrative assistant and an
      investment advisor for Slavie Financial Services in the fourth quarter of
      2008, the hiring of two experienced commercial loan originators, one in
      February 2007 and the other in November 2007, an average compensation
      increase of 3% for non-executive personnel and the approval of a
      performance based bonus plan by our compensation committee due to the
      attainment of definitive goals and
objectives.





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





General





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





Our
non-interest income, which currently consists primarily of rental income, gain
on sale of loans and other miscellaneous income, historically nominal, had
improved over the past few years.  However, the decline during 2008 is
primarily the result of an investment securities write down.  Despite
the current loss, one of our strategies is to continue to build our sources of
non-interest income.  See “Business Strategy.”  Non-interest
expense currently consists primarily of compensation and related expenses,
occupancy expense, deposit insurance premiums, advertising expense, data
processing expense, furniture, fixture and equipment expenses, telephone,
postage and delivery expenses and other general and administrative
expenses.





7




Critical
Accounting Policies





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





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





Securities
available for sale are carried at fair value.  As disclosed in Note 2
to the Consolidated Financial Statements, there are certain securities in an
unrealized loss position that management believes at this time are temporarily
impaired.  Unrealized gains and losses, net of tax, on available for
sale securities are reported as accumulated other comprehensive income (loss)
until realized, unless management deems the investment to be
other-than-temporarily impaired.  If the fair value of these
securities does not recover in a reasonable period of time or management can no
longer demonstrate the ability and intent to hold them until recovery, a write
down through the statement of operations would be necessary.  Realized
gains and losses on sales, determined using the specific identification method,
and other than temporary impairment of investment securities are included in
earnings.  As declines in the fair value of available for sale and
held to maturity securities that cause them to drop below their cost are deemed
to be other-than-temporary in nature, such declines are reflected in earnings as
realized losses.  Investments and mortgage-backed securities held to
maturity are carried at amortized cost since management has the ability and
intention to hold them to maturity.  Amortization of related premiums
and discounts are computed using the level yield method over the terms of the
securities.





The
Company evaluates securities for other-than-temporary impairment on a quarterly
basis. Consideration is given to (1) the length of time and the extent to which
the fair value has been less than the cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the Company
to retain its investment with the issuer for a period of time sufficient to
allow for an anticipated recovery in fair value.  In evaluating an
issuer’s financial condition, management considers whether the securities are
issued by the federal government or its agencies, whether downgrades by bond
rating agencies have occurred and industry analysts’ reports.





The
Company purchased Shay Asset Management Fund (AMF) Ultra Short Mortgage Fund,
consisting primarily of short-term adjustable rate mortgage securities, to
control its interest rate risks and to generate interest income.  It
purchased the mutual funds incrementally between the years 2001 and
2003.  As of December 31, 2008, the mutual fund has a fair value of
$7,040,000.  Management has identified the Shay AMF Ultra Short
Mortgage Fund as an impaired asset, meaning that the fair value is below the
cost of the investment and these securities available for sale are carried at
fair value.  At the end of the third quarter of 2008, the Company
identified the Shay AMF Ultra Short Mortgage Fund as being
other-than-temporarily impaired and realized an impairment loss of $1,678,000 on
these securities.  We realized an additional impairment loss of
$799,000 in the fourth quarter of 2008, for a total impairment loss of
$2,477,000 for 2008.  The write-down is a result of declines in
pricing levels differing from those existing at the time of the purchase of the
fund due to the deterioration of the underlying collateral
portfolio.  The loss on our investments of $2,477,000 is treated as a
capital loss and we would only be able to recognize a tax benefit for the year
ended December 31, 2008 if we have a feasible plan implemented to generate
capital gains to offset the capital losses.  We would have to
implement a feasible plan, such as the sale of a branch building, within the
next five years, in order to be able to recognize the tax
benefit.  Since we do not intend to sell a branch or take any other
action that would create a capital gain, we do not expect to be able to utilize
this potential tax benefit.  A full valuation allowance was recorded
on the tax benefit attributable to the investment loss due to our uncertain
ability to generate sufficient capital gains to utilize the capital
loss.  The mutual funds have no stated maturity date.





8





The Shay
Asset Management Fund continues to pay an attractive yield, as has been the case
since our initial investment.  However, although the mutual fund holds
primarily the highest quality credit rating adjustable rate mortgages and the
investment is paying as agreed, management could no longer maintain that the
increased unrealized losses on the fund were temporary in nature.  In
order to adhere to Statement of Financial Accounting Standards (“SFAS”) No. 115,
“Accounting for Certain Investments in Debt Equity Securities,” which requires
an asset that is other-than-temporarily impaired to be written down, management
considered the duration and the severity of its impaired asset and felt that the
sharp decline in the security’s value over the past twelve months forced us to
recognize the Shay AMF Ultra Short Mortgage Fund as being an
other-than-temporarily impaired asset and recognized an impairment loss of
$2,477,000 on these securities.  Further, in order to reduce our
exposure to continued short-term volatility in the value of this asset,
Management initiated a $250,000 90 day rolling period redemption of shares in
the fund, beginning with the first quarter of 2009.  Management
anticipates that, over time, the asset values of the fund will improve as
liquidity is restored to the market.  Management has the intent and
ability to hold these securities for the foreseeable future.





Assets
acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at fair value less cost to sell at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower of
carrying amount or fair value less cost to sell.  Revenue and expenses
from operations and changes in the valuation allowance are included in other
expenses.  In determining the allowance evaluation, Management
considers the estimated net realizable value of the property collateralizing the
loan, including liquidation expenses and legal fees incurred.





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





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





9





Management
has significant discretion in making the judgments inherent in the determination
of the provision and allowance for loan losses, including in connection with the
valuation of collateral and the financial condition of the
borrower.  The establishment of allowance factors is a continuing
exercise and allowance factors may change over time, resulting in an increase or
decrease in the amount of the provision or allowance based upon volume and
classification of loans.Changes in allowance
factors or in management’s interpretation of those factors will have a direct
impact on the amount of the provision, and a corresponding effect on income and
assets.  Also, errors in management’s perception and assessment of the
allowance factors could result in the allowance not being adequate to cover
losses in the portfolio, and may result in additional provisions or charge-offs,
which would adversely affect income and capital.  For additional
information regarding the allowance for loan losses, see “Results of Operations
for the Years Ended December 31, 2008 and 2007 - Provision for Loan Losses and
Analysis of Allowance for Loan Losses.”





Business
Strategy





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





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





·
            Leveraging
      excess equity to improve earnings;





·
            Increasing
      loan diversification with an emphasis on commercial
    lending;





·
            Increasing
      residential loan originations to sell on the secondary market, while
      retaining  jumbo residential loans in our
    portfolio;





·
            Increasing
      customer access through enhanced electronic delivery
    systems;





·
            Building
      sources of fee revenue to increase non-interest
  income;





·
            Maintaining
      a high quality loan portfolio through prudent underwriting practices;
      and





·
            Adding
      new products and services and improving channels of communication with our
      customers.





Leveraging excess equity to improve
earnings.  Leveraging excess equity means that we have
sufficient regulatory capital to increase our deposits and borrowings to finance
a greater amount of interest earning assets.  Our borrowings increased
$1,300,000 during 2008 and decreased $5,000,000 during 2007.





Increasing loan diversification,
particularly with respect to commercial business and commercial real estate
loans.  We believe that increasing loan diversification has
increased our competitive profile and improved net interest income through
higher yields.  Established in April 2004, our commercial loan
department added two experienced commercial lenders in 2007.  We focus
our commercial lending activities on small to mid-size businesses in our market
area.  We seek to distinguish ourselves by providing responsive
personal service and local decision making.  Our goal is to grow the
commercial business and commercial real estate loan portfolio to 30% of
total loans over the next two years.  During 2008, our commercial
real estate loans increased from $12,273,000 to $19,408,000, or 11.82% of our
loan portfolio and our commercial business loans decreased slightly from
$3,593,000 to $3,501,000, or 2.13% of our loan portfolio.  We have
also expanded our consumer lending activities by cross-selling to a larger base
of transaction accounts.





10





Increasing residential loan
originations.  During 2008, we continued to originate
residential mortgage loans within our market area.  As of December 31,
2008 and December 31, 2007, $110,061,000 and $112,198,000, respectively, or
67.04% and 74.55%, respectively, of our total loan portfolio consisted of one-
to four-family residential loans, including acquisition and renovation loans and
non-owner occupied rehabilitation loans.  During the years ended
December 31, 2008 and December 31, 2007, we originated $22,435,000 and
$23,868,000, respectively, of one- to four-family residential mortgage loans,
including acquisition and renovation loans, and non-owner occupied
rehabilitation loans.





Our
growth strategy contemplates that we will only retain for our portfolio those
loans meeting our interest rate risk and balance sheet composition targets and
will sell the remaining loans in the secondary market on a servicing released
basis and with recourse provisions that are standard in the
industry.  Our goal continues to be to increase the number of
fixed rate residential loans that we sell in the secondary
market.  While continuing to emphasize our prudent underwriting
standards, we intend to retain jumbo residential loan originations in our
portfolio as a means to increase interest income, since these loans generally
yield a higher rate of interest than conforming loans.  We continue to
evaluate selling loans on a servicing retained basis.  During 2008, we
sold five residential mortgage loans with a total principal balance of
$843,000.  The reason for the lack of loan volume in 2008 was due to
not having a residential loan officer in the first half of 2008 and the rapid
decline in residential home values, making it difficult for borrowers to attain
acceptable loan-to-value ratios.  We hired an experienced residential
loan officer in the first quarter of 2009 in anticipation of a refinance surge
due to the lower interest rates on this type of loan and we expect to sell a
higher volume of loans during 2009.  Decisions to sell loans are based
on prevailing market interest rate conditions and interest rate risk management
and not on the anticipated collectibility of the loan sold.





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





Increasing customer access through
enhanced electronic delivery systems.We believe that our
electronic delivery systems will increase transaction accounts, emphasize
cross-selling, increase non-interest income and raise our profile.  We
offer remote deposit to our commercial accountholders and check imaging to our
checking accountholders, with an option for e-statement delivery.  We
are affiliated with an expanded Automated Teller Machine network, allowing our
customers to use over 52,500 ATM machines throughout the United States, without
charge.  Also, we continue to offer free ServiceFirst Internet
Banking, Simplicity Bill Pay to our retail customers, and Turn Key Business Bill
Pay to our commercial account holders, allowing them to view their account
information online, transfer balances among Slavie accounts and pay their bills
electronically at any time.  We expect to implement an on-line savings
account opening option in the first half of 2009.





Building sources of fee
income.  We have increased our fee income by, among other
things, intensifying the marketing of transaction accounts and business checking
accounts and broadening the financial products and services we
offer.  We offer a money market account with what we believe is an
attractive tri-tiered interest rate level option, a business checking account
with an earnings credit feature to counterbalance the typical service fees
charged, and a premium rate personal checking account, requiring higher balances
but paying a very competitive interest rate without the standard service
fees.  We provide financial planning and investment guidance services
to our customers.  Our activities to date in this area have improved
significantly over prior years.  Fee income increased by $80,000
during 2008 compared to 2007.





Maintaining a high quality loan
portfolio through prudent underwriting practices.  We believe
that high asset quality is a key to long-term success.  We have sought
to maintain a high level of asset quality and moderate credit risk by focusing,
in part, on residential mortgage lending and by using conservative underwriting
standards.  At December 31, 2008, our nonperforming loans (loans that
were 90 days or more past due) were 0.97% of our


total
loan portfolio and 0.85% of total assets.  Although we intend to
continue to increase our commercial mortgage and commercial business lending,
which have greater credit risk than residential mortgage loans, we will continue
to use conservative underwriting standards.





Adding new products and services and
improving upon how we inform our customers of Today’s
Slavie.  In 2008, we implemented a Slavie credit card, foreign
currency services for our customers traveling abroad, and coin counting services
in each of our branch lobbies.  We extended our financial services
operation, adding a financial planning expert to join our certified financial
planner, both of whom sell non-insured investment products, offering our
customers a wide variety of investing guidance to reach their financial well
being potential.  We have informed our customers of the launching of
these new products and services through the distribution of a quarterly
newsletter, entitled Today’s Slavie, which we started to publish in the second
quarter of 2007.





11





Comparison
of Financial Condition at December 31, 2008 and 2007





Assets.  Our total
assets increased by $6,638,000, or 3.85%, to $178,882,000 at December 31, 2008,
from $172,244,000 at December 31, 2007.  The increase in total assets
resulted primarily from increases of $9,565,000, or 6.47%, in net loans
receivable, from $147,744,000 at December 31, 2007 to $157,309,000 at December
31, 2008 and $2,579,000, or 201.96% in cash and cash equivalents, from
$1,277,000 at December 31, 2007 to $3,856,000 at December 31,
2008.  These increases were partially offset by decreases of
$3,000,000, or 100.00%, in investment securities - held to maturity, from
$3,000,000 at December 31, 2007 to $0 at December 31, 2008, $695,000, or 30.93%,
in mortgage backed securities - held to maturity, from $2,247,000 at December
31, 2007 to $1,552,000 at December 31, 2008, and $1,902,000, or 21.27% in
investment securities - available for sale, from $8,942,000 at December 31, 2007
to $7,040,000 at December 31, 2008.





Approximately
74.59% of the $9,565,000 increase in net loans receivable was the result of
additional commercial real estate loan originations, which is consistent with
our intended growth strategy in this area.  Cash and cash equivalents
increased primarily due to a concerted effort to increase our liquidity levels,
particularly in the current economic environment.  In general, the
decrease in mortgage-backed securities resulted from scheduled repayments and
payoffs and our use of the received funds to originate loans.  We may
elect to purchase mortgage-backed securities in the future, but have no definite
plans to do so at this time.





Liabilities.  Total
liabilities increased by $9,270,000, or 6.16%, to $159,745,000 at December 31,
2008, from $150,475,000 at December 31, 2007.  The increase in total
liabilities resulted primarily from increases of $9,105,000, or 7.98%, in
deposits, from $114,098,000 at December 31, 2007 to $123,203,000 at December 31,
2008 and $1,300,000, or 3.82% in borrowings, from $34,000,000 at December 31,
2007 to $35,300,000 at December 31, 2008, partially offset by decreases of
$744,000, or 69.08% in checks outstanding in excess of bank balance, from
$1,077,000 at December 31, 2007 to $333,000 at December 31, 2008 and $421,000,
or 43.81%, in other liabilities, from $961,000 at December 31, 2007 to $540,000
at December 31, 2008.  The increase in borrowings is the result of
taking additional Federal Home Loan Bank (“FHLB”) advances to fund our loan
originations.  The balance in checks outstanding in excess of bank
balance at the end of a period is dependent on the number and amounts of checks
issued on checking accounts drawn on the Company, as well as a correspondent
bank account and when such checks are presented for payment.  Any
excess funds are automatically transferred into an interest-earning federal
funds account.  Therefore, changes in checks outstanding in excess of
bank balances as reflected on the statements of financial condition, generally,
do not reflect any underlying changes in the Company’s financial
condition.  The other liabilities consist primarily of accrued federal
and state income taxes and accrued interest on Federal Loan Home Bank
borrowings.





Stockholders’
Equity.  Total equity decreased by $2,632,000, or 12.09% to
$19,137,000 at December 31, 2008, compared to $21,769,000 at December 31, 2007
due to a non-cash charge to earnings of $2,477,000 for an other-than-temporary
impairment in the value of investments in our investment portfolio, resulting in
a net loss of $2,153,000. We also repurchased $798,000 of our common stock
during the year.  We are considered “well capitalized” under the
risk-based capital guidelines applicable to us.





12





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





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





At December 31,
                          
                          
                          Years Ended December 31,2008
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          2006Outstanding
                            Balance
                          
                          
                          Yield/
                            Rate
                          
                          
                          Average
                            Outstanding
                            Balance
                          
                          
                          Interest
                            Earned/
                            Paid
                          
                          
                          Yield/
                            Rate
                          
                          
                          Average
                            Outstanding
                            Balance
                          
                          
                          Interest
                            Earned/
                            Paid
                          
                          
                          Yield/
                            Rate
                          
                          
                          Average
                            Outstanding
                            Balance
                          
                          
                          Interest
                            Earned/
                            Paid
                          
                          
                          Yield/
                            Rate(Dollars
      in Thousands)Interest-earning
      assets:Loans
      receivable(1)
                          
                          $
                          157,309
                          
                          
                          
                          5.89
                          %
                          
                          $
                          153,580
                          
                          
                          $
                          9,260
                          
                          
                          
                          6.03
                          %
                          
                          $
                          145,659
                          
                          
                          $
                          8,435
                          
                          
                          
                          5.79
                          %
                          
                          $
                          147,238
                          
                          
                          $
                          8,165
                          
                          
                          
                          5.55
                          %Mortgage-backed
      securities
                          
                          
                          1,552
                          
                          
                          
                          5.15
                          
                          
                          
                          1,850
                          
                          
                          
                          80
                          
                          
                          
                          4.32
                          
                          
                          
                          2,683
                          
                          
                          
                          118
                          
                          
                          
                          4.40
                          
                          
                          
                          3,773
                          
                          
                          
                          157
                          
                          
                          
                          4.16Investment securities
      (available for sale)
                          
                          
                          7,040
                          
                          
                          
                          5.36
                          
                          
                          
                          8,209
                          
                          
                          
                          377
                          
                          
                          
                          4.59
                          
                          
                          
                          8,751
                          
                          
                          
                          452
                          
                          
                          
                          5.17
                          
                          
                          
                          8,339
                          
                          
                          
                          390
                          
                          
                          
                          4.68Investment securities
      (held to maturity)
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,083
                          
                          
                          
                          42
                          
                          
                          
                          3.88
                          
                          
                          
                          3,583
                          
                          
                          
                          138
                          
                          
                          
                          3.85
                          
                          
                          
                          4,000
                          
                          
                          
                          151
                          
                          
                          
                          3.78Other
      interest-earning assets
                          
                          
                          4,165
                          
                          
                          
                          2.38
                          
                          
                          
                          2,927
                          
                          
                          
                          99
                          
                          
                          
                          3.38
                          
                          
                          
                          4,383
                          
                          
                          
                          271
                          
                          
                          
                          6.18
                          
                          
                          
                          3,931
                          
                          
                          
                          228
                          
                          
                          
                          5.80Total
      interest-earning assets
                          
                          
                          170,066
                          
                          
                          
                          5.80
                          %
                          
                          
                          167,649
                          
                          
                          
                          9,858
                          
                          
                          
                          5.88
                          %
                          
                          
                          165,059
                          
                          
                          
                          9,414
                          
                          
                          
                          5.70
                          %
                          
                          
                          167,281
                          
                          
                          
                          9,091
                          
                          
                          
                          5.43
                          %Non-interest
      earning assets
                          
                          
                          8,816
                          
                          
                          
                          
                          
                          
                          
                          8,250
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          7,406
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          7,074Total
      assets
                          
                          $
                          178,882
                          
                          
                          
                          
                          
                          
                          $
                          175,899
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          172,465
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          174,355Interest-bearing
      liabilities:Savings
      deposits
                          
                          $
                          12,961
                          
                          
                          
                          0.87
                          %
                          
                          $
                          13,536
                          
                          
                          
                          113
                          
                          
                          
                          0.83
                          %
                          
                          $
                          16,113
                          
                          
                          
                          172
                          
                          
                          
                          1.07
                          %
                          
                          $
                          23,132
                          
                          
                          
                          288
                          
                          
                          
                          1.25
                          %Demand and NOW
      accounts
                          
                          
                          11,102
                          
                          
                          
                          2.01
                          
                          
                          
                          10,592
                          
                          
                          
                          223
                          
                          
                          
                          2.11
                          
                          
                          
                          7,552
                          
                          
                          
                          198
                          
                          
                          
                          2.62
                          
                          
                          
                          4,055
                          
                          
                          
                          68
                          
                          
                          
                          1.68Certificates of
      deposit
                          
                          
                          97,245
                          
                          
                          
                          4.30
                          
                          
                          
                          95,239
                          
                          
                          
                          4,177
                          
                          
                          
                          4.39
                          
                          
                          
                          88,964
                          
                          
                          
                          4,290
                          
                          
                          
                          4.82
                          
                          
                          
                          82,037
                          
                          
                          
                          3,497
                          
                          
                          
                          4.26Escrows
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          11
                          
                          
                          
                          -
                          
                          
                          
                          -Borrowings
                          
                          
                          35,300
                          
                          
                          
                          3.42
                          
                          
                          
                          32,158
                          
                          
                          
                          1,209
                          
                          
                          
                          3.76
                          
                          
                          
                          33,917
                          
                          
                          
                          1,477
                          
                          
                          
                          4.35
                          
                          
                          
                          39,250
                          
                          
                          
                          1,614
                          
                          
                          
                          4.11Total
      interest-bearing liabilities
                          
                          
                          156,608
                          
                          
                          
                          3.65
                          %
                          
                          
                          151,527
                          
                          
                          
                          5,722
                          
                          
                          
                          3.78
                          %
                          
                          
                          146,551
                          
                          
                          
                          6,137
                          
                          
                          
                          4.19
                          %
                          
                          
                          148,485
                          
                          
                          
                          5,467
                          
                          
                          
                          3.68
                          %Non-interest-bearing
      liabilities
                          
                          
                          3,137
                          
                          
                          
                          
                          
                          
                          
                          3,417
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3,691
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3,330Total
      liabilities
                          
                          
                          159,745
                          
                          
                          
                          
                          
                          
                          
                          154,944
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          150,242
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          151,815Total
      equity(2)
                          
                          
                          19,137
                          
                          
                          
                          
                          
                          
                          
                          20,955
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          22,223
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          22,540Total
      liabilities and equity
                          
                          $
                          178,882
                          
                          
                          
                          
                          
                          
                          $
                          175,899
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          172,465
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          174,355Net
      interest income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          4,136
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          3,277
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          3,624Interest
      rate spread(3)
                          
                          
                          
                          
                          
                          
                          2.15
                          %
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          2.10
                          %
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1.51
                          %
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1.75
                          %Net
      interest-earning assets
                          
                          $
                          13,458
                          
                          
                          
                          
                          
                          
                          $
                          16,122
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          18,508
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          18,796Net
      interest margin(4)
                          
                          
                          
                          
                          
                          
                          2.43
                          %
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          2.47
                          %
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1.99
                          %
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          2.17
                          %Ratio
      of interest earning assets to interest bearing liabilities
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1.10
                          x
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1.12
                          x
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1.12
                          x





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


(2)
            Total
      equity includes retained earnings and accumulated other comprehensive
      income (loss).


(3)
            Net
      interest rate spread represents the difference between the average yield
      on interest earning assets and the average cost of interest bearing
      liabilities.


(4)
            Net
      interest margin represents net interest income as a percentage of average
      interest earning assets.





13





Rate/Volume
Analysis





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





Years
      Ended December 31,
              
              
              Years
      Ended December 31,2008
      vs. 2007
              
              
              2007
      vs. 2006Increase/(Decrease)
                  Due
      to
              
              
              
              
              
              Increase/(Decrease)
                  Due
      toVolume
              
              
              Rate
              
              
              Total
                Increase
                  (Decrease)
              
              
              Volume
              
              
              Rate
              
              
              Total
                  Increase
                  (Decrease)(Dollars
      in Thousands)Interest
      income:Loans
receivable
              
              $
              468
              
              
              $
              357
              
              
              $
              825
              
              
              $
              (87
              )
              
              $
              357
              
              
              $
              270Mortgage-backed
      securities
              
              
              (36
              )
              
              
              (2
              )
              
              
              (38
              )
              
              
              (48
              )
              
              
              9
              
              
              
              (39
              )Investment securities
      (available for sale)
              
              
              (25
              )
              
              
              (50
              )
              
              
              (75
              )
              
              
              20
              
              
              
              42
              
              
              
              62Investment securities (held to
      maturity)
              
              
              (97
              )
              
              
              1
              
              
              
              (96
              )
              
              
              (16
              )
              
              
              3
              
              
              
              (13
              )Other interest-earnings
      assets
              
              
              (73
              )
              
              
              (99
              )
              
              
              (172
              )
              
              
              27
              
              
              
              16
              
              
              
              43Total interest
      income
              
              
              237
              
              
              
              207
              
              
              
              444
              
              
              
              (104
              )
              
              
              427
              
              
              
              323Interest
      expense:Savings
deposits
              
              
              (25
              )
              
              
              (34
              )
              
              
              (59
              )
              
              
              (79
              )
              
              
              (37
              )
              
              
              (116
              )Demand and NOW
      deposits
              
              
              69
              
              
              
              (44
              )
              
              
              25
              
              
              
              79
              
              
              
              51
              
              
              
              130Certificates of
      deposits
              
              
              288
              
              
              
              (401
              )
              
              
              (113
              )
              
              
              310
              
              
              
              483
              
              
              
              793Escrow.
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0Borrowings
              
              
              (74
              )
              
              
              (194
              )
              
              
              (268
              )
              
              
              (227
              )
              
              
              90
              
              
              
              (137
              )Total interest
      expense
              
              
              258
              
              
              
              (673
              )
              
              
              (415
              )
              
              
              83
              
              
              
              587
              
              
              
              670Net
      interest income
              
              $
              (21
              )
              
              $
              880
              
              
              $
              859
              
              
              $
              (187
              )
              
              $
              (160
              )
              
              $
              (347
              )





Comparison
of Operating Results for the Years Ended December 31, 2008 and 2007





Net Income.  Net
income decreased by $2,256,000, or 2,190.29%, to a net loss of $2,153,000 for
the year ended December 31, 2008, from net income of $103,000 for the year ended
December 31, 2007.  The decrease was primarily due to a non-cash
charge to earnings of $2,477,000 as a result of an other-than-temporary
impairment in the value of the AMF Ultra Short Mortgage Fund held in our
investment portfolio.  The loss in the value of the AMF Fund was
reported as unrealized losses on the consolidated statements of financial
condition in 2007.  The decline in earnings is also the result of an
increase in non-interest expenses of $559,000, or 17.01%, primarily due to an
increase in compensation expenses related to the hiring of two experienced
commercial loan originators in 2007, a certified financial planner in June 2007,
an investment advisor and an administrative assistant in the fourth quarter of
2008 and the approval of a performance based bonus plan by our compensation
committee due to the attainment of definitive goals and
objectives.  These declines were partially offset by an improvement of
$859,000, or 26.21%, in net interest income and a $64,000, or 26.23% decrease in
the provision for loan losses.





Net Interest
Income.  Net interest income increased $859,000, or 26.21%, to
$4,136,000 for the year ended December 31, 2008, from $3,277,000 for the year
ended December 31, 2007.  The increase was primarily a result of a
$2,590,000, or 1.57%, increase in average interest earning assets to
$167,649,000 from $165,059,000, an 18 basis point increase in the yield on
average interest earning assets, from 5.70% to 5.88%, and a 41 basis point
decrease in the cost of average interest bearing liabilities, from 4.19% to
3.78%.  These were partially offset by a $4,976,000, or 3.40%,
increase in average interest bearing liabilities to $151,527,000 from
$146,551,000.





14





Our
interest rate spread increased to 2.10% during the year ended December 31, 2008
from 1.51% during the year ended December 31, 2007, reflecting an increase in
the yield of our average interest earning assets and an even greater decrease in
the cost of our average interest bearing liabilities.  Our net
interest margin increased to 2.47% from 1.99% because of a higher yield on
average interest earning assets and a decrease in the cost of our average
interest bearing liabilities.





The ratio
of interest earning assets to interest bearing liabilities decreased slightly to
1.10 times for the year ended December 31, 2008 from 1.12 times for the same
period in 2007.





Interest
Income.  Interest income increased by $444,000, or 4.72%, to
$9,858,000 for the year ended December 31, 2008, from $9,414,000 for the year
ended December 31, 2007.  The increase in interest income resulted
primarily from an increase of $825,000, or 9.78%, in interest and fee income
from loans, partially offset by decreases of $171,000, or 28.98%, in interest
income from investment securities, $38,000, or 32.20% in interest income from
mortgage backed securities and $172,000, or 63.47%, in interest income from
other interest earning assets (primarily consisting of interest earned on
federal funds sold and Federal Home Loan Bank stock).





The
increase in interest income reflected a $2,590,000, or 1.57%, increase in the
average balance of interest earning assets to $167,649,000 from $165,059,000 and
an 18 basis point increase in the yield on average interest earning assets to
5.88% for the year ended December 31, 2008 from 5.70% for the year ended
December 31, 2007, reflecting an increase in our loan volume, primarily
commercial real estate loans, and the higher interest rates those loans
yield.





The
increase in interest income and fees on loans was due to a $7,921,000, or 5.44%,
increase in average net loans receivable, from $145,659,000 for the year ended
December 31, 2007 to $153,580,000 for the year ended December 31, 2008 and a 24
basis point increase in the average yield on net loans
receivable.  The decrease in interest income from investment
securities was primarily reflective of a 27 basis point decrease in the average
yield and a $3,042,000, or 24.66%, decrease in the average balance of investment
securities.  The decrease in the average balance and average yield of
investments is consistent with our strategic plan of using the proceeds of
matured investments to fund commercial real estate loan originations at higher
yields.





The
decrease in interest income from other interest earning assets (federal funds
sold and Federal Home Loan Bank stock) was due to a $1,456,000, or 33.22%,
decrease in average other interest earning assets, from $4,383,000 for the year
ending December 31, 2007 to $2,927,000 for the year ending December 31, 2008 (as
a result of using federal funds to fund commercial real estate loan
originations) and a 280 basis point decrease in the average yield on these
assets (as a result of decreases in short term market interest
rates).





The
decrease in interest income from mortgage-backed securities was primarily the
result of a $833,000, or 31.05%, decrease in average mortgage-backed securities
and a slight decrease of 8 basis point in the yield on these
securities.  The decrease in the average yield on the mortgage backed
securities is due to the repricing of our Ginnie Mae Adjustable Rate
Mortgage  investments at a lower rate than the prior
period.





Interest
Expense.  Interest expense, which consists of interest paid on
deposits and borrowings, decreased by $415,000, or 6.76% to $5,722,000 for the
year ended December 31, 2008, from $6,137,000 for the year ended December 31,
2007.  The decrease in interest expense reflects a 41 basis point
decrease in the cost of average interest bearing liabilities, to 3.78% for the
year ended December 31, 2008 from 4.19% for the year ended December 31, 2007,
while the balance of average interest bearing liabilities increased to
$151,527,000 for the year ended December 31, 2008 from $146,551,000 for the same
period of 2007.  Interest paid on deposits decreased due to a decrease
of 36 basis points in the average cost of deposits as a result of lower market
interest rates, partially offset by an increase in the average balance of
interest bearing deposits to $119,367,000 for the year ended December 31, 2008
from $112,629,000 for the same period of 2007.  Interest on borrowings
decreased because the average balance of borrowings decreased to $32,158,000 for
the year ended December 31, 2008 from $33,917,000 in the same period of 2007 and
the average cost of borrowings decreased by 59 basis points as a result of
borrowings at lower interest rates.





15





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





Based on
our evaluation of these factors, management made a provision of $180,000 and
$244,000 for the years ended December 31, 2008 and December 31, 2007,
respectively.  There were four overdraft protection line of credit
loan charge-offs of $3,000 during the year ended December 31,
2008.  There was one commercial non-real estate loan charge-off of
$120,000 and four overdraft protection line of credit loan charge-offs of $2,000
during the year ended December 31, 2007.  As discussed in the section
of our Form 10-K for the year ended December 31, 2008 entitled “Business of
Slavie Federal Savings Bank – Allowance for Loan Losses -
Specific Allowance on Identified Problem Loans,” we fully reserved for a
commercial non-real estate loan in the allowance for loan losses because,
although the borrower is paying as agreed per a workout agreement, we believe
there is a substantial likelihood that we will not collect the total amount of
the outstanding principal balance.  In 2008, we developed a more
stringent methodology for computing the allowance, which reflects credit quality
and composition trends, loan volumes and concentrations, seasoning of the loan
portfolio and economic and business conditions, which management believes will
more accurately reflect current real estate values and any potential decline of
the current economic conditions.





The
provision for 2008 reflects the effects of an increase of $7,135,000 in
commercial real estate loans and the classification of two real estate
commercial loans as impaired, as well as an increase in non-performing loans
during the year ended December 31, 2008.  Non-performing loans
increased to $1,519,000 at December 31, 2008 from $468,000 at December 31, 2007,
or 224.57% for the period.  Non-performing loans were 0.97% and 0.32%
of total loans at December 31, 2008 and 2007.





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





The
allowance for loan losses totaled $1,149,000, or 0.70%, of gross loans
outstanding of $164,164,000 at December 31, 2008, compared to an allowance for
loan losses of $972,000, or 0.65% of gross loans outstanding of $150,501,000 at
December 31, 2007.  The increase to the loan loss reserve is due to
the increased commercial real estate loan balances, which creates a mix of
riskier loan products since commercial loans are considered to be higher risk
than residential mortgage loans, as well as an increase in non-accrual loans at
December 31, 2008.  We also classified two commercial real estate
loans, with balances totaling $239,000 at December 31, 2008, as impaired as we
believe there is a possibility that we may not collect all outstanding balances
due.  In the first quarter of 2008, the borrowers of the two
commercial real estate loans filed Chapter 13 personal bankruptcy, which was
denied and dismissed in the third quarter of 2008.  They filed Chapter
13 personal bankruptcy again near the end of the third quarter of 2008 and it
was converted to a Chapter 7 personal bankruptcy on October 3,
2008.  Our attorney filed an Order of Relief from Stay on November 19,
2008.  Our attorney is in the process of sending the Notice of Intent
to Foreclose.  We have adequate allowance for loan loss provisions for
these two loans.  As of December 31, 2008 and December 31, 2007,
pursuant to regulatory requirements, we have specific reserves of $100,000
within the allowance for loan losses because we believe there is a substantial
likelihood that we will not collect the total amount of the outstanding
principal balance on a commercial non-real estate loan that is classified as
impaired.  The corporate commercial loan borrower filed Chapter 7
corporate bankruptcy in the third quarter of 2006 and filed Chapter 7 personal
bankruptcy in the second quarter of 2007.  We restructured the
remaining debt to facilitate repayment of the loan in the third quarter of 2007
and the borrower has been making payments in accordance with the terms of the
restructured loan agreement.





16





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





Other Income
(Loss).  Non-interest income decreased $2,468,000 or 568.66%,
to a loss of $2,034,000 for the year ended December 31, 2008, as compared to
income of $434,000 for the year ended December 31, 2007.  The decrease
in non-interest income is primarily the result of a $2,477,000 increase in
losses on investments, as a result of other-than-temporary impairment in the
value of the AMF Ultra Short Mortgage Fund held in our investment
portfolio.  Management felt that the fund was no longer temporarily
impaired due to the longevity of its impairment and a credit rating downgrade,
from AAA to Af, as a result of an increase of delinquencies in the underlying
collateral.  There were also decreases of $88,000, or 83.02%, in gains
on sale of loans to $18,000 for the year ended December 31, 2008 (as a result of
not being able to sell as many loans on the secondary market due to the
depressed market for the sale and purchase of these loans in the current
economic environment), as compared to $106,000 for the same period of
2007.  Rental income from our headquarters building increased $17,000,
or 10.43%, to $180,000 for the year ended December 31, 2008 as compared to
$163,000 for the year ended December 31, 2007.  The increase in rental
income is a result of an $11,500 early termination penalty and an increase in
rental rates provided for in the applicable lease agreements of certain
non-affiliated tenants during the past year, slightly offset by the loss of rent
from a tenant we lost during the first half of 2008, who paid rent due pursuant
to the agreed upon rent schedule only through July 2008.





Our other
income (generally, fees from sales of non-insured investment products,
processing fees and late charges on loan products and income from checking
accounts and ATM usage) increased by $80,000, or 48.48%, to $245,000 for the
year ended December 31, 2008, as compared to $165,000 for the year ended
December 31, 2007.  The increase is primarily due to $43,000 earned
from commissions of non-insured investment products sales through our financial
services operation, $18,000 in checking account fees and $8,000 in loan
processing fees.





Non-interest
Expense.  Non-interest expense was $3,845,000 for the year
ended December 31, 2008 as compared to $3,286,000 for the year ended December
31, 2007, an increase of $559,000, or 17.01%.  The increase was due
primarily to increases of $367,000, or 21.09%, in compensation and related
expenses, $82,000, or 20.71% in other expenses, $39,000, or 23.49%, in service
bureau expenses, $23,000, or 11.98%, in advertising expenses and $12,000, or
85.71%, in FDIC insurance assessments.





The
increase in compensation and related expenses is primarily the result of the
hiring of two experienced commercial loan originators, one in February 2007 and
the other in November 2007, a certified financial planner in June 2007 and an
investment advisor in November 2008, along with the addition of an
administrative assistant to support the latter two positions, as well as payroll
accruals of $124,000 for a performance based bonus plan, allocated in the first
quarter of 2009.  The performance based bonus plan, established in
2007, is determined on an annual basis by our compensation committee, comprised
of outside directors, and is measured based on improvements in profitability and
net interest margins.  The bonus plan was determined based on net
income after taxes of $324,000, exclusive of the nonrecurring
other-than-temporary impairment write down.  No bonuses were allocated
in 2007.  The increase in other expenses is the result primarily of a
loss in an investment in which we have a minor interest, office supplies
expenses, and expenses related to our financial planning
services.  The increase in service bureau expenses is the result of
multiple information technology conversions, upgrades and the addition of new
products for our customers throughout 2008.





Income Tax
Expense.  The provision for income taxes increased to $230,000
for the year ended December 31, 2008 from $78,000 for the year ended December
31, 2007, representing an increase of $152,000, or 194.87%.  We
calculated a provision for income taxes even though we show a loss before income
taxes of $1,923,000 for the year ended December 31, 2008 because the loss on our
investments of $2,477,000 is treated as a capital loss and resulted in a
deferred tax asset with a valuation allowance in the tax provision
computation.  We would only be able to recognize a tax benefit for the
year ended December 31, 2008, if we had implemented a feasible plan to
generate capital gains to offset the capital losses.  We have not
implemented such a plan because it would entail selling a branch building or
taking any other action that would create a capital gain and we do not expect
such action to be part of our strategic plan within the next five
years.  A full valuation allowance was recorded on the tax benefit
attributable to the investment loss due to our uncertain ability to generate
sufficient capital gains to utilize the capital loss.  The effective
tax rate, excluding the effects of the impairment charge on investment
securities for which a full valuation allowance was recorded, was 41.51% and
43.09% for 2008 and 2007, respectively.





17





Management
of Market Risk





General.  The
majority of our assets and liabilities are monetary in
nature.  Consequently, our most significant form of market risk is
interest rate risk.  Our assets, consisting primarily of mortgage
loans, have longer maturities than our liabilities, consisting of deposits and
borrowings.  As a result, a principal part of our business strategy is
to manage interest rate risk and reduce the exposure of our net interest income
to changes in market interest rates.  Accordingly, we have an
asset/liability management committee, which consists of senior management and
one outside director operating under a policy adopted by the board of
directors.  The committee is responsible for evaluating the interest
rate risk inherent in our assets and liabilities, for determining the level of
risk that is appropriate given our business strategy, operating environment,
capital, liquidity and performance objectives, and for managing this risk
consistent with the guidelines approved by the board of
directors.  Senior management monitors the level of interest rate risk
on a regular basis and the asset/liability management committee meets at least
monthly to review our asset/liability and liquidity policies and interest rate
risk position.  With record levels of unemployment, credit tightening,
bankruptcies and home foreclosures, management has become more stringent with
their already very conservative underwriting standards.  We view the
current market volatility as a business opportunity to leverage existing
business relationships, our reputation for exceptional customer service and our
reliance on experienced personnel in order to increase our loan growth with
managed loan concentrations.





Net Portfolio Value and Interest
Rate Risk.  In past years, many savings institutions have
measured interest rate sensitivity by computing the “gap” between the assets and
liabilities which are expected to mature or reprice within certain time periods,
based on assumptions regarding loan prepayment and deposit decay rates formerly
provided by the Office of Thrift Supervision.  However, the Office of
Thrift Supervision now requires the computation of amounts by which the net
present value of an institution’s cash flow from assets, liabilities and off
-balance sheet items (the institution’s net portfolio value or “NPV”) would
change in the event of a range of assumed changes in market interest
rates.  The Office of Thrift Supervision provides all institutions
that file a Consolidated Maturity/Rate Schedule as a part of their quarterly
Thrift Financial Report with an interest rate sensitivity report of net
portfolio value.  The Office of Thrift Supervision simulation model
uses a discounted cash flow analysis and an option-based pricing approach to
measuring the interest rate sensitivity of net portfolio
value.  Historically, the Office of Thrift Supervision model estimated
the economic value of each type of asset, liability and off-balance sheet
contract under the assumption that the United States Treasury yield curve
increases or decreases instantaneously on any given day by 50 to 300 basis
points in 100 basis point increments, except for the first 50 basis
points.  However, given the current low level of market interest
rates, we did not receive a NPV calculation for an interest rate decrease of
greater than 100 basis points.  A basis point equals one-hundredth of
one percent, and 100 basis points equals one percent.  An increase in
interest rates from 3% to 4% would mean, for example, a 100 basis point increase
in the “Change in Interest Rates” column below.  The Office of Thrift
Supervision provides us the results of the interest rate sensitivity model,
which is based on information we provide to the Office of Thrift Supervision to
estimate the sensitivity of our net portfolio value.





18





The table
below sets forth, as of December 31, 2008, the estimated changes in our net
portfolio value that would result from the designated instantaneous changes in
the United States Treasury yield curve.





Net
      Portfolio Value
                  
                  
                  Net
      Portfolio Value as a % of Present
                    Value
      of AssetsChange
      in Interest
                    Rates
                    (basis
      points)
                  
                  Estimated
                    NPV
                  
                  
                  Amount
      of
                    Change
                  
                  
                  Percent
                    Of
                    Change
                  
                  
                  NPV
                    Ratio
                  
                  Change
      in Basis
                    Points(Dollars
      in Thousands)+300
                  
                  $
                  8,926
                  
                  
                  $
                  (3,392
                  )
                  
                  
                  (28
                  )%
                  
                  
                  5.08
                  %
                  (158)
      basis points+200
                  
                  
                  10,880
                  
                  
                  
                  (1,439
                  )
                  
                  
                  (12
                  )
                  
                  
                  6.07
                  
                  (59)
      basis points+100
                  
                  
                  12,154
                  
                  
                  
                  (164
                  )
                  
                  
                  (1
                  )
                  
                  
                  6.66
                  
                  -
      basis points+50
                  
                  
                  12,376
                  
                  
                  
                  58
                  
                  
                  
                  -
                  
                  
                  
                  6.74
                  
                  7
      basis points0
                  
                  
                  12,319
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6.67
                  
                  -
      basis points-50
                  
                  
                  12,057
                  
                  
                  
                  (261
                  )
                  
                  
                  (2
                  )
                  
                  
                  6.50
                  
                  (17)
      basis points-100
                  
                  
                  11,659
                  
                  
                  
                  (660
                  )
                  
                  
                  (5
                  )
                  
                  
                  6.27
                  
                  (40)
      basis points





The table
above indicates that at December 31, 2008, in the event of a 100 basis point
increase in interest rates, we would experience a 1% decrease in net portfolio
value.  In the event of a 200 basis point increase in interest rates,
we would experience a 12% decrease in net portfolio value.





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





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




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




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




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




·
            Placing
      a greater emphasis on building sources of non-interest income through
      expanded offerings of products and services and selling mortgage loans on
      the secondary market; and




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





19





Liquidity
Management





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





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





Our most
liquid assets are cash and cash equivalents.  The levels of these
assets depend on our operating, financing, lending and investing activities
during any given period.  At December 31, 2008, cash and cash
equivalents totaled $3,856,000.  Securities classified as
available-for-sale, which can provide additional sources of liquidity, totaled
$7,040,000 at December 31, 2008.  However, because management has the
intent and ability to hold these securities until recovery, management does not
consider these securities as a source of liquidity at December 31,
2008.  Also, at December 31, 2008, we had advances outstanding of
$35,300,000 from the Federal Home Loan Bank of Atlanta.  On that date,
we had the ability to borrow an additional $18,365,000.





At
December 31, 2008, we had outstanding commitments to originate loans of
$3,841,000 (excluding the undisbursed portions of loans).  These
commitments do not necessarily represent future cash requirements since certain
of these instruments may expire without being funded, although this is
unusual.  We also extend lines of credit to customers, primarily home
equity lines of credit.  The borrower is able to draw on these lines
as needed, thus the funding is generally unpredictable.  Unused home
equity lines of credit amounted to $4,896,000 at December 31, 2008 and unused
commercial lines of credit amounted to $9,849,000 at December 31,
2008.  Since the majority of unused lines of credit expire without
being funded, it is anticipated that our obligation to fund the above commitment
amounts will be substantially less than the amounts reported.





Certificate
of deposit accounts scheduled to mature within one year totaled $61,909,000, or
50.25%, of total deposits at December 31, 2008.  Management
believes that the large percentage of deposits in shorter-term certificates of
deposit reflects customers’ hesitancy to invest their funds in long-term
certificates of deposit in the current interest rate environment.  If
these deposits do not remain with us, we will be required to seek other sources
of funds, including other certificates of deposit and/or additional
borrowings.  Depending on market conditions, we may be required to pay
higher rates on such deposits or other borrowings than we currently pay on the
certificates of deposit due on or before December 31, 2009.  We
believe, however, based on past experience, a significant portion of our
certificates of deposit will remain with us.  We also believe we have
the ability to attract and retain deposits by adjusting the interest rates
offered.





20





The
following table presents certain of our contractual obligations as of December
31, 2008.





Total
              
              
              Less
      than
                  One
      Year
              
              
              One
      to
                  Three
      Years
              
              
              Three
      to
                  Five
      Years
              
              
              More
      than
                  Five
      Years(Dollars
      in thousands)Contractual
      ObligationsLong
      and short-term debt obligations
              
              $
              35,300
              
              
              $
              10,300
              
              
              $
              -
              
              
              $
              -
              
              
              $
              25,000Certificate
      of deposit maturities
              
              
              97,245
              
              
              
              61,909
              
              
              
              22,913
              
              
              
              12,423
              
              
              
              -Total
              
              $
              132,545
              
              
              $
              72,209
              
              
              $
              22,913
              
              
              $
              12,423
              
              
              $
              25,000





Our
borrowings are with the Federal Home Loan Bank of Atlanta and are secured by
Federal Home Loan Bank of Atlanta stock that we own and a blanket lien on
mortgages.  Borrowings at December 31, 2008 consisted of $500,000
short term fixed rate FHLB advances bearing interest at 2.77% and $25,000,000
long term convertible rate FHLB advances with fixed interest rates ranging from
3.63% to 4.59%.  If not repaid or converted to a different product,
the convertible rate advances will convert from a fixed to a floating rate after
the initial borrowing periods ranging from three to sixty
months.  There is also $9,800,000 short term daily rate FHLB advance
bearing an interest rate of 0.46% as of December 31, 2008.  Borrowings
at December 31, 2007 consisted of $6,000,000 short term fixed rate FHLB advances
bearing interest at 4.52% and $26,500,000 long term fixed rate FHLB advances
with interest rates ranging from 3.63% to 4.90%.  There was also
$1,500,000 short term daily rate FHLB advance bearing an interest rate of 4.40%
as of December 31, 2007.





The
following table represents information regarding short term FHLB borrowings
during the years ended December 31, 2008 and 2007.




December 31,
                  
                  December 31,2008
                  
                  2007(Dollars
      in thousands)Total
      outstanding at period-end
                  
                  $
                  10,300
                  
                  
                  $
                  7,500Average
      interest rate at period-end
                  
                  
                  0.57
                  %
                  
                  
                  4.56
                  %Average
      balance during the period
                  
                  $
                  6,033
                  
                  
                  $
                  7,792Average
      interest rate during the period
                  
                  
                  2.27
                  %
                  
                  
                  5.17
                  %Maximum
      balance during the period
                  
                  $
                  10,300
                  
                  
                  $
                  11,500





Our
primary investing activity is the origination of loans, primarily one- to
four-family residential mortgage loans, commercial real estate loans, and the
purchase of securities.  Our primary financing activity consists of
activity in deposit accounts and Federal Home Loan Bank of Atlanta
advances.  Deposit growth outpaced asset growth over the past two
years and the increased liquidity has been placed in a federal funds account
with our correspondent bank, used to pay down borrowed funds and to fund
commercial and acquisition and renovation loans.  Deposit flows are
affected by the overall level of interest rates, the interest rates and products
offered by us and our local competitors and other factors.  We
generally manage the pricing of our deposits to be
competitive.  Occasionally, we offer promotional rates on certain
deposit products to attract deposits.





21





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





Year
      Ended December 31,2008
                                      
                                      
                                      2007(Dollars
      in Thousands)Investing
      Activities:One- to four-family loan
      originations
                                      
                                      $
                                      22,435
                                      
                                      
                                      $
                                      23,868Other loan
      originations
                                      
                                      
                                      20,814
                                      
                                      
                                      
                                      9,825Financing
      Activities:Increase in
    deposits
                                      
                                      
                                      9,105
                                      
                                      
                                      
                                      2,275Increase (Decrease) in FHLB
      advances
                                      
                                      
                                      1,300
                                      
                                      
                                      
                                      (5,000
                                      )





The
foregoing was consistent with our expectations and the pricing policies we
implemented.  Deposit products other than savings deposits increased
during 2008.  Specifically, certificates of deposit increased by
$7,570,000, NOW and money market demand deposits increased by $1,465,000 and
non-interest bearing demand deposits increase by $594,000, while savings
deposits decreased by $524,000.





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




Capital
Management





We are
subject to various regulatory capital requirements administered by the Office of
Thrift Supervision, including a risk-based capital measure.  The
risk-based capital guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning balance sheet assets
and off-balance sheet items to broad risk categories.  At December 31,
2008, we exceeded all of our regulatory capital requirements.  We are
considered “well capitalized” under regulatory guidelines.  See Note
10 of the notes to the consolidated financial statements.




Off-Balance
Sheet Arrangements




In the
normal course of operations, we engage in a variety of financial transactions
that, in accordance with generally accepted accounting principles, are not
recorded in our financial statements.  These transactions involve, to
varying degrees, elements of credit, interest rate, and liquidity
risk.  Such transactions are used primarily to manage customers’
requests for funding and take the form of loan commitments and lines of
credit.  Our exposure to credit loss from non-performance by the other
party to the above-mentioned financial instruments is represented by the
contractual amount of those instruments.  We use the same credit
policies in making commitments and conditional obligations as we do for
on-balance sheet instruments, therefore, the credit risk involved in these
financial instruments is essentially the same as that involved in extending loan
facilities to customers.  We evaluate each customer’s credit
worthiness on a case-by-case basis on all types of credit
extension.





Financial
      Instruments WhoseContract
      Amount Represents
                  
                  Contract Amount
      AtCredit
    Risk
                  
                  December 31, 2008
                  
                  
                  December 31, 2007Lines
      of credit – commercial real estate
                  
                  $
                  9,849
                  
                  
                  $
                  3,819Lines
      of credit – home equity
                  
                  
                  4,896
                  
                  
                  
                  4,964Lines
      of credit – overdraft checking
                  
                  
                  125
                  
                  
                  
                  129Mortgage
      loan commitments
                  
                  
                  3,841
                  
                  
                  
                  1,541





22





Commercial
real estate lines of credit, including equipment lines of credit discussed
below, are generally secured by a blanket lien on assets of the
borrower.  Revolving Lines of Credit (RLOC) are typically used for
short term working capital needs and are based most heavily on the accounts
receivable and inventory components of the borrower’s balance
sheet.  RLOC have terms of one year, are subject to annual
reaffirmation and carry variable rates of interest.  We generally
receive a one percent fee, based on the commitment amount.  The
available line of credit for commercial real estate loans and non-real estate
loans, as well as acquisition and development loans and construction loans
increased by $6,030,000, or 157.89%, from $3,819,000 at December 31, 2007 to
$9,849,000 at December 31, 2008.  The increase is due to an increase
in the number of commercial real estate loans originated in the year ended
December 31, 2008 and the fact that many of the loans have only used a small
portion of their available lines of credit, leaving us additional funds
available for lending.  The borrower is able to draw on these lines as
needed, thus the funding is generally unpredictable.





Equipment lines of credit are secured
by equipment being purchased and sometimes by a blanket lien on assets of the
borrower as well.  Each advance is repaid over a term of three to five
years and carries a variable or prevailing fixed rate of interest.  We
will generally advance up to 75% of the cost of the new or used
equipment.  These credit facilities are revolving in nature and the
commitment is subject to annual reaffirmation.





Home equity lines of credit are secured
by second deeds of trust on residential real estate.  They have fixed
expiration dates as long as there is no violation of any condition established
in the contract.





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





Our
outstanding commitments to make mortgages are at fixed rates ranging from 4.250%
to 8.500% and 6.250% to 8.250% at December 31, 2008 and December 31, 2007,
respectively.  Loan commitments expire 60 days from the date of the
commitment.





For the
years ended December 31, 2008 and December 31, 2007, we engaged in no
off-balance-sheet transactions reasonably likely to have a material effect on
our financial condition, results of operations or cash flows.





Impact
of Inflation and Changing Prices





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





23





Forward
Looking Statements





In
addition to the historical information contained herein, this Annual Report
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including with respect to our future business
plans and strategy.  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.





Our
goals, objectives, expectations and intentions, including statements regarding
the development and introduction of new products and services, the allowance for
loan losses, repayment of impaired loans, improvement in the value of the Shay
AMF Ultra Short Mortgage Fund, retention of maturing certificates of deposit,
liquidity management and the establishment of a liquidity plan in a distressed
financial environment, funding of unused lines of credit, the impact on us of
weakening economic conditions, potential increases in foreclosure rates, our
holding of mortgage-backed securities, sources of revenues or income, deposit
growth, underwriting standards, cross-selling opportunities, interest rate
sensitivity, loan mix and growth, growth strategy,  expected recovery
of the carrying amount of real estate in connection with foreclosed property,
market risk and management of market risk, the expectation of increasing the
volume of loans sold to the secondary market and financial and other goals are
forward looking.  These statements are based on our beliefs,
assumptions and on information available to us as of the date of this Annual
Report, and involve risks and uncertainties.  These risks and
uncertainties include, among others: those discussed in our Annual Report on
Form 10-K for the year ended December 31, 2008; the effect of changing interest
rates on our profits and asset values; risks related to our intended increased
focus on commercial real estate and commercial business loans; further
deterioration of economic conditions in our market area and nationally; our
dependence on key personnel; competitive factors within our market area; the
effect of developments in technology on our business; adequacy of the allowance
for loan losses; and changes in regulatory requirements and/or restrictive
banking legislation.





Our
actual results and the actual outcome of our expectations and strategies could
differ materially from those described in this Annual Report.  Because
of these risks and uncertainties, you should not put undue reliance on any
forward-looking statements.  All forward-looking statements speak only
as of the date of this report, and we undertake 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.





24




SFSB,
Inc. and Subsidiaries
 TABLE
OF CONTENTS
 
 Page
      No.Consolidated
      Financial StatementsReport
      of Independent Registered Public Accounting Firm
                    
                    F -
      1Consolidated
      Statements of Financial Condition
                    
                    F -
      2Consolidated
      Statements of Operations
                    
                    F -
      3Consolidated
      Statements of Stockholders’ Equity
                    
                    F -
      4Consolidated
      Statements of Cash Flows
                    
                    F -
      5Notes
      to Consolidated Financial Statements
                    
                    F –
      6
   
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders
 SFSB,
Inc.
 Bel Air,
Maryland
 
 We have audited the accompanying
consolidated statements of financial condition of SFSB, Inc. and subsidiaries
(the “Company”) as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity and cash flows for the years then
ended. SFSB, Inc.’s management is responsible for these consolidated financial
statements. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
 
 We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
 
 In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of SFSB, Inc. and subsidiaries as of
December 31, 2008 and 2007, and the results of their operations and their cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
 
 Beard
      Miller Company LLPBaltimore,
      MarylandMarch
      23, 2009
  F-1
  SFSB,
INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
 
 December 31,2008
                        
                        
                        2007(Dollars in thousands, except share data)ASSETSCash
      and due from banks
                        
                        $
                        1,622
                        
                        
                        $
                        612Federal
      funds sold
                        
                        
                        2,234
                        
                        
                        
                        665Cash
      and cash equivalents
                        
                        
                        3,856
                        
                        
                        
                        1,277Investment
      securities - available for sale
                        
                        
                        7,040
                        
                        
                        
                        8,942Investment
      securities - held to maturity (fair value of 2007 $2,987)
                        
                        
                        -
                        
                        
                        
                        3,000Mortgage
      backed securities - held to maturity (fair value of 2008 $1,525; 2007
      $2,221)
                        
                        
                        1,552
                        
                        
                        
                        2,247Loans
      receivable - net of allowance for loan losses of 2008 $1,149; 2007
      $972
                        
                        
                        157,309
                        
                        
                        
                        147,744Foreclosed
      real estate
                        
                        
                        1,096
                        
                        
                        
                        1,083Federal
      Home Loan Bank of Atlanta stock, at cost
                        
                        
                        1,899
                        
                        
                        
                        1,844Premises
      and equipment, net
                        
                        
                        4,979
                        
                        
                        
                        5,107Accrued
      interest receivable
                        
                        
                        648
                        
                        
                        
                        564Other
      assets
                        
                        
                        503
                        
                        
                        
                        436Total
      assets
                        
                        $
                        178,882
                        
                        
                        $
                        172,244LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilitiesDeposits
                        
                        $
                        123,203
                        
                        
                        $
                        114,098Checks
      outstanding in excess of bank balance
                        
                        
                        333
                        
                        
                        
                        1,077Short
      term borrowings
                        
                        
                        10,300
                        
                        
                        
                        7,500Long
      term borrowings
                        
                        
                        25,000
                        
                        
                        
                        26,500Advance
      payments by borrowers for taxes and insurance
                        
                        
                        369
                        
                        
                        
                        339Other
      liabilities
                        
                        
                        540
                        
                        
                        
                        961Total
      liabilities
                        
                        
                        159,745
                        
                        
                        
                        150,475Stockholders’
      EquityPreferred
      stock, no par value, 1,000,000 shares authorized, none issued and
      outstanding
                        
                        
                        -
                        
                        
                        
                        -Common
      stock, par value $.01, 9,000,000 shares authorized, 2,975,625 shares
      issued at December 31, 2008 and 2007 and 2,707,652 and 2,817,644 shares
      outstanding at December 31, 2008 and 2007, respectively
                        
                        
                        30
                        
                        
                        
                        30Additional
      paid-in capital
                        
                        
                        12,864
                        
                        
                        
                        12,828Retained
      earnings (substantially restricted)
                        
                        
                        9,343
                        
                        
                        
                        11,496Unearned
      Employee Stock Ownership Plan shares
                        
                        
                        (933
                        )
                        
                        
                        (992
                        )Treasury
      stock at cost, 2008, 267,973 shares and 2007, 157,981
    shares
                        
                        
                        (2,167
                        )
                        
                        
                        (1,434
                        )Accumulated
      other comprehensive income (loss)
                        
                        
                        -
                        
                        
                        
                        (159
                        )Total
      stockholders’ equity
                        
                        
                        19,137
                        
                        
                        
                        21,769Total
      liabilities and stockholders’ equity
                        
                        $
                        178,882
                        
                        
                        $
                        172,244
 
 See
notes to consolidated financial statements.
  F-2
  SFSB,
Inc. and Subsidiaries
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 
 Years Ended December 31,2008
                              
                              
                              2007(Dollars in thousands, except for per share data)Interest
      and fees on loans
                              
                              $
                              9,260
                              
                              
                              $
                              8,435Interest
      and dividends on investment securities
                              
                              
                              419
                              
                              
                              
                              590Interest
      on mortgage backed securities
                              
                              
                              80
                              
                              
                              
                              118Other
      interest income
                              
                              
                              99
                              
                              
                              
                              271Total
      interest income
                              
                              
                              9,858
                              
                              
                              
                              9,414Interest
      on deposits
                              
                              
                              4,513
                              
                              
                              
                              4,660Interest
      on short-term borrowings
                              
                              
                              144
                              
                              
                              
                              411Interest
      on long-term borrowings
                              
                              
                              1,065
                              
                              
                              
                              1,066Total
      interest expense
                              
                              
                              5,722
                              
                              
                              
                              6,137Net
      interest income
                              
                              
                              4,136
                              
                              
                              
                              3,277Provision
      for loan losses
                              
                              
                              180
                              
                              
                              
                              244Net
      interest income after provision for loan losses
                              
                              
                              3,956
                              
                              
                              
                              3,033Other
      (Loss) IncomeImpairment
      charge on investment securities
                              
                              
                              (2,477
                              )
                              
                              
                              -Rental
      income
                              
                              
                              180
                              
                              
                              
                              163Gain
      on sale of loans
                              
                              
                              18
                              
                              
                              
                              106Other
      income
                              
                              
                              245
                              
                              
                              
                              165Total
      other (loss) income
                              
                              
                              (2,034
                              )
                              
                              
                              434Non-Interest
      ExpensesCompensation
      and other related expenses
                              
                              
                              2,107
                              
                              
                              
                              1,740Occupancy
      expense
                              
                              
                              387
                              
                              
                              
                              370Advertising
      expense
                              
                              
                              215
                              
                              
                              
                              192Service
      bureau expense
                              
                              
                              205
                              
                              
                              
                              166Furniture,
      fixtures and equipment
                              
                              
                              129
                              
                              
                              
                              129Telephone,
      postage and delivery
                              
                              
                              91
                              
                              
                              
                              83Professional
      fees
                              
                              
                              151
                              
                              
                              
                              141OTS
      assessment
                              
                              
                              56
                              
                              
                              
                              55FDIC
      assessment
                              
                              
                              26
                              
                              
                              
                              14Other
      expenses
                              
                              
                              478
                              
                              
                              
                              396Total
      non-interest expenses
                              
                              
                              3,845
                              
                              
                              
                              3,286(Loss)
      Income before income tax provision
                              
                              
                              (1,923
                              )
                              
                              
                              181Income
      tax provision
                              
                              
                              230
                              
                              
                              
                              78Net
      (loss) income
                              
                              $
                              (2,153
                              )
                              
                              $
                              103Basic
      and Diluted (Loss) Earnings per Share
                              
                              $
                              (0.80
                              )
                              
                              $
                              0.04
 
 See
notes to consolidated financial statements.
  F-3
  SFSB,
Inc. and Subsidiaries
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 YEARS
ENDED DECEMBER 31, 2008 AND DECEMBER 31, 2007
 
 UnearnedEmployee
                        
                        
                        
                        
                        
                        AccumulatedAdditional
                        
                        
                        
                        
                        
                        Stock
                        
                        
                        
                        
                        
                        OtherCommon
                        
                        
                        Paid-In
                        
                        
                        Retained
                        
                        
                        Ownership
                        
                        
                        Treasury
                        
                        
                        ComprehensiveStock
                        
                        
                        Capital
                        
                        
                        Earnings
                        
                        
                        Plan Shares
                        
                        
                        Stock
                        
                        
                        Income (Loss)
                        
                        
                        Total(Dollars in thousands)BALANCE
      - JANUARY 1, 2007
                        
                        $
                        30
                        
                        
                        $
                        12,788
                        
                        
                        $
                        11,393
                        
                        
                        $
                        (1,050
                        )
                        
                        $
                        (660
                        )
                        
                        $
                        (136
                        )
                        
                        $
                        22,365Comprehensive
      income:Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        103
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        103Net
      unrealized loss on investment securities available for sale, arising
      during the period, net of taxes of $17
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (23
                        )
                        
                        
                        (23
                        )Total
      Comprehensive Income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        80Stock
      options exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        67
                        
                        
                        
                        -
                        
                        
                        
                        67Compensation
      under stock
      based benefit plans
                        
                        
                        -
                        
                        
                        
                        40
                        
                        
                        
                        -
                        
                        
                        
                        58
                        
                        
                        
                        73
                        
                        
                        
                        -
                        
                        
                        
                        171Purchase
      of treasury stock (104,986 shares)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (914
                        )
                        
                        
                        -
                        
                        
                        
                        (914
                        )BALANCE
      - DECEMBER 31, 2007
                        
                        
                        30
                        
                        
                        
                        12,828
                        
                        
                        
                        11,496
                        
                        
                        
                        (992
                        )
                        
                        
                        (1,434
                        )
                        
                        
                        (159
                        )
                        
                        
                        21,769Comprehensive
      loss:Net
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (2,153
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (2,153
                        )Unrealized
      losses on investment securities available for sale, arising during the
      period, net of tax benefit of $878 prior to valuation
      allowance
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,341
                        )
                        
                        
                        (1,341
                        )Reclassification
      adjustment for impairment charges included in net loss, net of tax benefit
      of $977 prior to valuation allowance
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,500
                        
                        
                        
                        1,500Total
      Comprehensive Loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,994
                        )Compensation
      under stock based benefit plans
                        
                        
                        -
                        
                        
                        
                        36
                        
                        
                        
                        -
                        
                        
                        
                        59
                        
                        
                        
                        65
                        
                        
                        
                        -
                        
                        
                        
                        160Purchase
      of treasury stock (117,573 shares)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (798
                        )
                        
                        
                        -
                        
                        
                        
                        (798
                        )BALANCE
      - DECEMBER 31, 2008
                        
                        $
                        30
                        
                        
                        $
                        12,864
                        
                        
                        $
                        9,343
                        
                        
                        $
                        (933
                        )
                        
                        $
                        (2,167
                        )
                        
                        $
                        -
                        
                        
                        $
                        19,137
 
 See
notes to consolidated financial statements.
  F-4
  SFSB,
Inc. and Subsidiaries
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 Years Ended December 31,2008
                      
                      
                      2007(Dollars in thousands)Cash
      Flows From Operating ActivitiesNet
      (loss) income
                      
                      $
                      (2,153
                      )
                      
                      $
                      103Adjustments
      to Reconcile Net (Loss) Income to Net Cash (used in) Provided by Operating
      Activities:Non-cash
      compensation under stock based compensation plans and Employee Stock
      Ownership Plan
                      
                      
                      160
                      
                      
                      
                      171Net
      amortization of premiums and discounts of mortgage backed
      securities
                      
                      
                      10
                      
                      
                      
                      14Deferred
      tax (benefit) expense
                      
                      
                      (37
                      )
                      
                      
                      104Amortization
      of deferred loan fees
                      
                      
                      (218
                      )
                      
                      
                      (89
                      )Provision
      for loan losses
                      
                      
                      180
                      
                      
                      
                      244Impairment
      charge on investment securities
                      
                      
                      2,477
                      
                      
                      
                      -Gain
      on sale of loans
                      
                      
                      (18
                      )
                      
                      
                      (106
                      )Loans
      originated for sale
                      
                      
                      (843
                      )
                      
                      
                      (7,142
                      )Proceeds
      from loans sold
                      
                      
                      861
                      
                      
                      
                      7,248Provision
      for depreciation
                      
                      
                      224
                      
                      
                      
                      233(Increase)
      decrease in accrued interest receivable and other assets
                      
                      
                      (226
                      )
                      
                      
                      77(Decrease)
      increase in other liabilities
                      
                      
                      (421
                      )
                      
                      
                      658Net
      Cash (Used in) Provided by Operating Activities
                      
                      
                      (4
                      )
                      
                      
                      1,515Cash
      Flows from Investing ActivitiesPurchase
      of available for sale investment securities
                      
                      
                      (317
                      )
                      
                      
                      (452
                      )Proceeds
      from redemption of held to maturity investment securities
                      
                      
                      3,000
                      
                      
                      
                      1,000Net
      increase in loans originated
                      
                      
                      (9,527
                      )
                      
                      
                      (1,865
                      )Principal
      collected on mortgage-backed securities
                      
                      
                      685
                      
                      
                      
                      939Purchase
      of Federal Home Loan Bank of Atlanta stock
                      
                      
                      (216
                      )
                      
                      
                      (23
                      )Redemption
      of Federal Home Loan Bank of Atlanta Stock
                      
                      
                      161
                      
                      
                      
                      277Purchases
      of premises and equipment
                      
                      
                      (96
                      )
                      
                      
                      (75
                      )Net
      Cash Used in Investing Activities
                      
                      
                      (6,310
                      )
                      
                      
                      (199
                      )Cash
      Flows from Financing ActivitiesNet
      increase in deposits
                      
                      
                      9,105
                      
                      
                      
                      2,275(Decrease)
      increase in checks outstanding in excess of bank
    balance
                      
                      
                      (744
                      )
                      
                      
                      693Proceeds
      from long term borrowings
                      
                      
                      -
                      
                      
                      
                      10,000Repayment
      of long term borrowings
                      
                      
                      (1,500
                      )
                      
                      
                      (10,000
                      )Net
      change in short term borrowings
                      
                      
                      2,800
                      
                      
                      
                      (5,000
                      )Increase
      (decrease) in advance payments by borrowers for taxes and
      insurance
                      
                      
                      30
                      
                      
                      
                      (11
                      )Issuance
      of common stock
                      
                      
                      -
                      
                      
                      
                      67Purchase
      of treasury stock
                      
                      
                      (798
                      )
                      
                      
                      (914
                      )Net
      Cash Provided by (Used in) Financing Activities
                      
                      
                      8,893
                      
                      
                      
                      (2,890
                      )Increase
      (decrease) in cash and cash equivalents
                      
                      
                      2,579
                      
                      
                      
                      (1,574
                      )Cash
      and cash equivalents at beginning of year
                      
                      
                      1,277
                      
                      
                      
                      2,851Cash
      and cash equivalents at end of year
                      
                      $
                      3,856
                      
                      
                      $
                      1,277Supplemental Disclosures of
      Cash Flows Information:Incomes
      taxes paid
                      
                      $
                      313
                      
                      
                      $
                      -Interest
      expense paid
                      
                      $
                      5,741
                      
                      
                      $
                      6,144Non-cash
      transfer of loan to foreclosed real estate
                      
                      $
                      -
                      
                      
                      $
                      1,083
 
 See
notes to consolidated financial statements.
  F-5
  SFSB,
Inc. and Subsidiaries
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
1 – Organizational Structure and Summary of Significant Accounting
Policies
 
 Principles
of Consolidation
 
 The consolidated financial statements
include the accounts of SFSB, Inc. (“the Company”), its wholly-owned subsidiary,
Slavie Federal Savings Bank (“the Bank”) and the Bank’s wholly-owned subsidiary,
Slavie Holdings, LLC (“Holdings”). The accompanying consolidated financial
statements include the accounts and transactions of these companies on a
consolidated basis since inception. All intercompany accounts and transactions
have been eliminated in the consolidated financial statements.
 
 Slavie Bancorp, MHC, a mutual holding
company whose activity is not included in the accompanying consolidated
financial statements, owns 60.44% and 58.08% of the outstanding common stock of
the Company as of December 31, 2008 and December 31, 2007,
respectively.
 
 Business
 
 The
Company’s primary business is the ownership and operation of the Bank. The
Bank’s primary business activity is the acceptance of deposits from the general
public and the use of the proceeds for investments and loan originations. The
Bank is subject to competition from other financial institutions. The Bank is
subject to the regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
 
 Holdings,
formed on August 18, 1999 as a Maryland limited liability company, was created
to acquire and manage certain real property located at 1614 Churchville Road,
Bel Air, Maryland. This property includes the main office and corporate
headquarters of the Bank. In addition, the property houses mixed use office
space, which is available for lease.
 
 Significant
Group Concentrations of Credit Risk
 
 Most of
the Bank’s activities are with customers located within the greater Baltimore
metropolitan area. The Bank does not have any significant concentrations to any
one industry or customer.
 
 Estimates
 
 The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the statement of financial condition and revenues and expenses for the
period. Actual results could differ significantly from those estimates. The
material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses, the
valuation of foreclosed real estate, the potential impairment of Federal Home
Loan Bank stock, the valuation of deferred tax assets, and the determination of
other than temporary impairment of investment securities.
  F-6
  SFSB,
Inc. and Subsidiaries
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
1 – Organizational Structure and Summary of Significant Accounting Policies –
(continued)
 
 Segment
Information
 
 The
Company has one reportable segment, “Community Banking.”  All of the
Company’s activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company supports the
others.  For example, lending is dependent upon the ability of the
Company to fund itself with deposits and other borrowings and manage interest
rate and credit risk.  Accordingly, all significant operating
decisions are based upon analysis of the Company as one segment or
unit.
 
 Cash
and Cash Equivalents
 
 For the
statement of cash flows, cash and cash equivalents include cash on hand, cash in
banks, Federal Home Loan Bank overnight deposits and federal funds sold.
Generally, federal funds are sold for one day periods.
 
 Investments
and Mortgage Backed Securities
 
 Securities
available for sale are carried at fair value. Unrealized gains and losses, net
of tax, on available for sale securities are reported as accumulated other
comprehensive income (loss) until realized. Other-than-temporary impairment
charges and realized gains and losses on sales, determined using the specific
identification method, are included in earnings.
 
 Investments
and mortgage-backed securities held to maturity are carried at amortized cost
since management has the ability and intention to hold them to maturity.
Amortization of related premiums and discounts are computed using the level
yield method over the terms of the securities.
 
 The
Company evaluates securities for other-than-temporary impairment on a quarterly
basis. Consideration is given to (1) the length of time and the extent to which
the fair value has been less than the cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the Company
to retain its investment in the issuer for a period of time sufficient to allow
for an anticipated recovery in fair value. In evaluating an issuer’s financial
condition, management considers whether the securities are issued by the federal
government or its agencies, whether downgrades by bond rating agencies have
occurred and industry analysts’ reports.
 
 Federal
Home Loan Bank Stock
 
 Restricted
stock, which represents a required investment in the common stock of a
correspondent bank, is carried at cost and as of December 31, 2008 and 2007,
consists of the common stock of the Federal Home Loan Bank (FHLB) of Atlanta. In
December 2008, the FHLB of Atlanta notified its member banks that it was
suspending dividend payments and the repurchase of capital
stock.
  F-7
  SFSB,
Inc. and Subsidiaries
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
1 – Organizational Structure and Summary of Significant Accounting Policies –
(continued)
 
 Management
evaluates the restricted stock for impairment in accordance with Statement of
Position (SOP) 01-6, Accounting by Certain Entities
(Including Entities with Trade Receivables) that Lend to or Finance the
Activities of Others. Management’s determination of whether these
investments are impaired is based on their assessment of the ultimate
recoverability of their cost rather than by recognizing temporary declines in
value. The determination of whether a decline affects the ultimate
recoverability of their cost is influenced by criteria such as (1) the
significance of the decline in net assets of the FHLB as compared to the capital
stock amount for the FHLB and the length of time this situation has persisted,
(2) commitments by the FHLB to make payments required by law or regulation and
the level of such payments in relation to the operating performance of the FHLB,
and (3) the impact of legislative and regulatory changes on institutions and,
accordingly, on the customer base of the FHLB.
 
 Management
believes no impairment charge is necessary related to the FHLB stock as of
December 31, 2008.
 
 Reclassification
 
 Certain
amounts in the 2007 consolidated financial statements have been reclassified to
conform to the 2008 presentations.
 
 Loans
Receivable
 
 Loans
receivable that management has the intent and ability to hold until maturity or
payoff are stated at their outstanding unpaid principal balances, net of an
allowance for loan losses and any deferred fees and costs. Interest income is
accrued on the unpaid principal balance. Loan origination fees and certain
direct loan origination costs are deferred and recognized by the level yield
method over the contractual life of the related loan as an adjustment of
yield.
 
 The
accrual of interest is generally discontinued when contractual payment of
principal or interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan is currently performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well secured. When a loan
is placed on nonaccrual status, unpaid interest credited to income in the
current year is reversed and unpaid interest accrued in prior years is charged
against the allowance for loan losses. Interest received on nonaccrual loans
generally is either applied against principal or reported as interest income,
according to management’s judgment as to the collectibility of principal.
Generally, loans are restored to accrual status when the obligation is brought
current, has performed in accordance with the contractual terms for a reasonable
period of time and the ultimate collectibility of the total contractual
principal and interest is no longer in doubt.
 
 Allowance
for Loan Losses
 
 The
allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Allowances are provided for specific loans when
losses are both probable and estimable.  When this occurs, management
considers the remaining principal balance, fair value and estimated net
realizable value of the property collateralizing the loan. Current and future
operating and/or sales conditions are also considered. These estimates are
susceptible to changes that could result in material adjustments to results of
operations. Recovery of the carrying value of such loans is dependent to a great
extent on economic, operating and other conditions that may be beyond
management’s control.
  F-8
  SFSB,
Inc. and Subsidiaries
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
1 – Organizational Structure and Summary of Significant Accounting Policies –
(continued)
 
 General
loan loss reserves are established as an allowance for losses based on inherent
probable risk of loss in the loan portfolio. In assessing risk, management
considers historical experience, changes in the volume and composition of
lending conducted by the Company, industry standards, overall portfolio quality
and the status of nonperforming loans, general economic conditions as they
relate to the market area and other factors related to the collectibility of the
Company’s loan portfolio.
 
 Impaired
loans are predominantly measured based on the fair value of the collateral. The
provision for loan losses charged to expense is based upon past loan loss
experience and an evaluation of probable losses and impairment existing in the
current loan portfolio. A loan is considered to be impaired when, based upon
current information and events, it is probable that the Company will be unable
to collect all amounts due according to the original contractual terms of the
loan. An insignificant delay or insignificant shortfall in amounts of payments
does not necessarily result in the loan being identified as impaired. For this
purpose, delays less than 90 days are considered to be insignificant. Large
groups of smaller balance homogeneous loans, including residential real estate
and consumer loans, are collectively evaluated for impairment, except for loans
restructured under a troubled debt restructuring.
 
 Accrued
Interest Receivable
 
 Interest
on loans is recognized as earned.  Accrual of loan interest is
discontinued and a reserve established on existing accruals if management
believes that after considering collateral value, economic and business
conditions and collection efforts, the borrower’s financial condition is such
that collection of interest is doubtful.
 
 Premises
and Equipment
 
 Land is
carried at cost.  Premises and equipment are carried at cost less
accumulated depreciation. Depreciation is computed on the straight-line method,
based on the useful lives of the respective assets.
 
 Foreclosed
Real Estate
 
 Assets
acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at fair value less cost to sell at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower of
carrying amount or fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in other
expenses.
 
 Income
Taxes
 
 Deferred
income taxes are recognized for temporary differences between the financial
reporting basis and income tax basis of assets and liabilities based on enacted
tax rates expected to be in effect when such amounts are realized or settled.
Deferred tax assets are recognized only to the extent that it is more likely
than not that such amounts will be realized based on consideration of available
evidence. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
  F-9
  SFSB,
Inc. and Subsidiaries
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
1 – Organizational Structure and Summary of Significant Accounting Policies –
(continued)
 
 The
Company entered into a tax sharing agreement (under the Internal Revenue Section
1552) between SFSB, Inc. and Slavie Federal Savings Bank. The agreement provides
that the tax liability shall be apportioned among the entities in accordance
with the ratio for which the portion of the consolidated taxable income
attributed to each company realizing taxable income bears upon the consolidated
taxable income. SFSB, Inc. had $-0- and $24,000 due to Slavie Federal Savings
Bank at December 31, 2008 and 2007, respectively.
 
 Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes”. The Interpretation provides
clarification on accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB No. 109, “Accounting
for Income Taxes.” The Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax provision taken or expected to be taken in a tax return, and also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. As a result of the Company’s
evaluation of the implementation of FIN 48, no significant income tax
uncertainties were identified. Therefore, the Company recognized no adjustment
for unrecognized income tax benefits for the years ended December 31, 2008 and
2007. Our policy is to recognize interest and penalties on unrecognized tax
benefits in income taxes expense in the Consolidated Statement of Operations.
The Company did not recognize any interest and penalties for the years ended
December 31, 2008 and 2007.  Tax years 2001 through 2008 remain open
and subject to Internal Revenue Services examination.
 
 Transfers
of Financial Assets
 
 Transfers
of financial assets are accounted for as sales when control over the assets has
been surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the Company, (2) the transferee
obtains the right (free of conditions that constrain it from taking advantage of
that right) to pledge or exchange the transferred assets, and (3) the Company
does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
 
 Advertising
Costs
 
 Advertising
costs are expensed as incurred.
 
 Off-Balance
Sheet Financial Instruments
 
 In the
ordinary course of business, the Company has entered into off-balance sheet
financial instruments consisting of commitments to extend credit. Such financial
instruments are recorded in the balance sheet when they are funded.
 
 Comprehensive
Income (Loss)
 
 Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and liabilities,
such as unrealized gains and losses on securities available for sale, are
reported as a separate component of the stockholders’ equity section of the
balance sheet, such items, along with net income (loss), are components of
comprehensive income (loss).
  F-10
  SFSB,
Inc. and Subsidiaries
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
1 – Organizational Structure and Summary of Significant Accounting Policies –
(continued)
 
 Earnings
Per Share
 
 Basic
(loss) earnings per share is computed by dividing net (loss) income by the
weighted average number of common shares outstanding for the appropriate period.
Unearned Employee Stock Ownership Plan (“ESOP”) shares are not included in
outstanding shares. Diluted (loss) earnings per share is computed by dividing
net (loss) income by the weighted average shares outstanding as adjusted for the
dilutive effect of outstanding stock options and unvested stock awards.
Potential common shares related to stock options and unvested stock awards are
determined based on the “treasury stock” method. There are 65,568 and 11,028
anti-dilutive shares at December 31, 2008 and 2007, respectively. Information
related to the calculation of (loss) earnings per share is summarized for the
years ended December 31, 2008 and 2007, as follows:
 
 (In thousands, except for per share data)
                                    
                                    Year endedDecember 31, 2008Basic
                                    
                                    
                                    DilutedNet
      loss
                                    
                                    $
                                    (2,153
                                    )
                                    
                                    $
                                    (2,153
                                    )Weighted
      average common shares outstanding
                                    
                                    
                                    2,686
                                    
                                    
                                    
                                    2,686Diluted
      securities:Stock
      options
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Unvested
      Stock Awards
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Adjusted
      weighted average shares
                                    
                                    
                                    2,686
                                    
                                    
                                    
                                    2,686Per
      share amount
                                    
                                    $
                                    (0.80
                                    )
                                    
                                    $
                                    (0.80
                                    )
 
 (In thousands, except for per share data)
                            
                            Year EndedDecember 31, 2007Basic
                            
                            
                            DilutedNet
      income
                            
                            $
                            103
                            
                            
                            $
                            103Weighted
      average common shares outstanding
                            
                            
                            2,772
                            
                            
                            
                            2,772Diluted
      securities:Stock
      options
                            
                            
                            -
                            
                            
                            
                            -Unvested Stock Awards
                            
                            
                            -
                            
                            
                            
                            -Adjusted weighted average
      shares
                            
                            
                            2,772
                            
                            
                            
                            2,772Per share amount
                            
                            $
                            0.04
                            
                            
                            $
                            0.04
  F-11
 
 SFSB,
Inc. and Subsidiaries
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
1 – Organizational Structure and Summary of Significant Accounting Policies –
(continued)
 
 Share
Based Compensation
 
 The
Company measures compensation expense of all stock-based awards at fair value on
the date of grant and recognizes compensation expense over the vesting period
for all awards granted. Compensation costs are recognized over the period that
an employee provides service in exchange for the award.
 
 Employee
Stock Ownership Plan
 
 The
Company accounts for its employee stock ownership plan (“ESOP”) in accordance
with American Institute of Certified Public Accountants (AICPA) Statement of
Position 93-6. The cost of shares issued to the ESOP but not yet allocated to
participants is presented in the consolidated balance sheet as a reduction of
stockholders’ equity. Compensation expense is recorded based on the market price
of the shares as they are committed to be released for allocation to participant
accounts. The difference between the market price and the cost of shares
committed to be released is recorded as an adjustment to additional paid-in
capital. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are reflected as a
reduction of debt.
 
 Shares
are considered outstanding for earnings per share calculations when they are
committed to be released; unallocated shares are not considered
outstanding.
 
 Recent
Accounting Pronouncements
 
 In
December 2007, the FASB issued FASB statement No. 141 (R) “Business
Combinations”.  This Statement establishes principles and requirements
for how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquired entity. The Statement also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. The guidance will become effective as of the beginning of
a company’s fiscal year beginning after December 15, 2008.  This new
pronouncement will impact the Company’s accounting for business combinations
completed beginning January 1, 2009.
 
 In
October 2008, the FASB issued FSP SFAS No. 157-3,“Determining the Fair Value
of a Financial Asset When The Market for That Asset Is Not
Active”  (FSP 157-3), to clarify the application of the
provisions of SFAS 157 in an inactive market and how an entity would
determine fair value in an inactive market. FSP 157-3 is effective
immediately and applies to our December 31, 2008 financial statements. The
application of the provisions of FSP 157-3 did not materially affect our
results of operations or financial condition as of and for the periods ended
December 31, 2008.
  F-12
  SFSB,
Inc. and Subsidiaries
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
1 – Organizational Structure and Summary of Significant Accounting Policies –
(continued)
 
 In
September 2008, the FASB issued FSP 133-1 and FIN 45-4, “Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161” (FSP 133-1 and FIN 45-4). FSP 133-1 and FIN 45-4 amends
and enhances disclosure requirements for sellers of credit derivatives and
financial guarantees. It also clarifies that the disclosure requirements of SFAS
No. 161 are effective for quarterly periods beginning after November 15, 2008,
and fiscal years that include those periods. FSP 133-1 and FIN 45-4 is effective
for reporting periods (annual or interim) ending after November 15, 2008. The
implementation of this standard did not have a material impact on our
consolidated financial position and results of operations.
 
 In
September 2008, the FASB ratified EITF Issue No. 08-5, “Issuer’s Accounting for
Liabilities Measured at Fair Value With a Third-Party Credit Enhancement” (EITF
08-5). EITF 08-5 provides guidance for measuring liabilities issued with an
attached third-party credit enhancement (such as a guarantee). It clarifies that
the issuer of a liability with a third-party credit enhancement should not
include the effect of the credit enhancement in the fair value measurement of
the liability. EITF 08-5 is effective for the first reporting period beginning
after December 15, 2008. The implementation of this standard will not have a
material impact on our consolidated financial position and results of
operations.
  In
December 2008, the FASB issued FSP SFAS 140-4 and FASB Interpretation (FIN)
46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of
Financial Assets and Interests in Variable Interest Entities” (FSP SFAS 140-4
and FIN 46(R)-8). FSP SFAS 140-4 and FIN 46(R)-8 amends FASB SFAS 140
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities”, to require public entities to provide additional disclosures
about transfers of financial assets. It also amends FIN 46(R), “Consolidation of
Variable Interest Entities”, to require public enterprises, including sponsors
that have a variable interest in a variable interest entity, to provide
additional disclosures about their involvement with variable interest entities.
Additionally, this FSP requires certain disclosures to be provided by a public
enterprise that is (a) a sponsor of a qualifying special purpose entity (SPE)
that holds a variable interest in the qualifying SPE but was not the transferor
of financial assets to the qualifying SPE and (b) a servicer of a qualifying SPE
that holds a significant variable interest in the qualifying SPE but was not the
transferor of financial assets to the qualifying SPE. The disclosures required
by FSP SFAS 140-4 and FIN 46(R)-8 are intended to provide greater transparency
to financial statement users about a transferor’s continuing involvement with
transferred financial assets and an enterprise’s involvement with variable
interest entities and qualifying SPEs. FSP SFAS 140-4 and FIN 46(R) is effective
for reporting periods (annual or interim) ending after December 15, 2008. The
implementation of this standard did not have a material impact on our
consolidated financial position.
  In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment of
Guidance of EITF Issue No. 99-20” (FSP EITF 99-20-1). FSP EITF 99-20-1 amends
the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income
and Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets”, to achieve
more consistent determination of whether an other-than-temporary impairment has
occurred. FSP EITF 99-20-1 also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure
requirements in SFAS No. 115, “Accounting for Certain Investments in Debt and
Equity Securities”, and other related guidance. FSP EITF 99-20-1 is effective
for interim and annual reporting periods ending after December 15, 2008, and
shall be applied prospectively. Retrospective application to a prior interim or
annual reporting period is not permitted. The implementation of this standard
did not have a material impact on our consolidated financial
position.
  F-13
  SFSB,
Inc. and Subsidiaries
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
1 – Organizational Structure and Summary of Significant Accounting Policies –
(continued)
  In
November 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue
No. 08-6,“Equity Method
Investment Accounting Considerations”. EITF 08-6 clarifies the accounting
for certain transactions and impairment considerations involving equity method
investments. EITF 08-6 is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited. The implementation of
this standard will not have a material impact on our consolidated financial
position.
 
 Restrictions
on Cash and Due from Banks
  The Bank
is required to maintain average reserve balances, in the form of cash and
balances with the Federal Reserve Bank, against its deposit liabilities. For the
years 2008 and 2007, the average amount of $250,000 was maintained as reserve
balances.
 
 Note
2 - Investment and Mortgage Backed Securities
 
 Investment
Securities - Available for Sale
 
 The
amortized cost and fair value of available for sale investment securities are as
follows:
 
 Gross
                          
                          
                          GrossAmortized
                          
                          
                          Unrealized
                          
                          
                          Unrealized
                          
                          
                          FairCost
                          
                          
                          Gains
                          
                          
                          Losses
                          
                          
                          Value(Dollars in thousands)December
      31, 2008:Mutual
      Funds
                          
                          $
                          7,040
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          7,040December
      31, 2007:Mutual
      Funds
                          
                          $
                          9,200
                          
                          
                          $
                          -
                          
                          
                          $
                          258
                          
                          
                          $
                          8,942
 
 The
Company recognized an impairment charge of $2,477,000 on these mutual funds as
of December 31, 2008. The mutual funds have no stated maturity
date.
  F-14
  SFSB,
Inc. and Subsidiaries
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
2 – Investment and Mortgage Backed Securities – (continued)
 
 Investment
Securities - Held to Maturity
 
 The
Company had no held to maturity investment securities at December 31, 2008. The
amortized cost and fair value of held to maturity investment securities at
December 31, 2007 are as follows:
  Gross
                        
                        
                        GrossAmortized
                        
                        
                        Unrealized
                        
                        
                        Unrealized
                        
                        
                        FairCost
                        
                        
                        Gains
                        
                        
                        Losses
                        
                        
                        Value(Dollars in thousands)December
      31, 2007:FNMA
      Note
                        
                        $
                        1,000
                        
                        
                        $
                        -
                        
                        
                        $
                        8
                        
                        
                        $
                        992FHLB
      Notes
                        
                        
                        2,000
                        
                        
                        
                        -
                        
                        
                        
                        5
                        
                        
                        
                        1,995Total
                        
                        $
                        3,000
                        
                        
                        $
                        -
                        
                        
                        $
                        13
                        
                        
                        $
                        2,987
 
 Mortgage
Backed Securities - Held to Maturity
 
 The
amortized cost and fair value of mortgage backed securities - held to maturity
are as follows:
  Gross
                          
                          
                          GrossAmortized
                          
                          
                          Unrealized
                          
                          
                          Unrealized
                          
                          
                          FairCost
                          
                          
                          Gains
                          
                          
                          Losses
                          
                          
                          Value(Dollars in thousands)December
      31, 2008FHLMC
                          
                          $
                          1,018
                          
                          
                          $
                          -
                          
                          
                          $
                          19
                          
                          
                          $
                          999GNMA
                          
                          
                          463
                          
                          
                          
                          -
                          
                          
                          
                          8
                          
                          
                          
                          455FNMA
                          
                          
                          71
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          71$
                          1,552
                          
                          
                          $
                          -
                          
                          
                          $
                          27
                          
                          
                          $
                          1,525December
      31, 2007FHLMC
                          
                          $
                          1,355
                          
                          
                          $
                          -
                          
                          
                          $
                          28
                          
                          
                          $
                          1,327GNMA
                          
                          
                          720
                          
                          
                          
                          3
                          
                          
                          
                          3
                          
                          
                          
                          720FNMA
                          
                          
                          172
                          
                          
                          
                          2
                          
                          
                          
                          -
                          
                          
                          
                          174$
                          2,247
                          
                          
                          $
                          5
                          
                          
                          $
                          31
                          
                          
                          $
                          2,221
  F-15
  SFSB,
Inc. and Subsidiaries
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
2 – Investment and Mortgage Backed Securities – (continued)
 
 The
following table shows the Company’s gross unrealized losses and fair value of
investments at December 31, 2008 and 2007:
 
 Continuous Unrealized LossesFor Less than
                        
                        
                        For More Than12 Months
                        
                        
                        12 Months
                        
                        
                        TotalFair
                        
                        
                        Unrealized
                        
                        
                        Fair
                        
                        
                        Unrealized
                        
                        
                        Fair
                        
                        
                        UnrealizedValue
                        
                        
                        Losses
                        
                        
                        Value
                        
                        
                        Losses
                        
                        
                        Value
                        
                        
                        Losses(Dollars in thousands)December
      31, 2008Mortgage
      Backed SecuritiesFHLMC
      - 2 securities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        999
                        
                        
                        
                        19
                        
                        
                        
                        999
                        
                        
                        
                        19GNMA
      - 3 securities
                        
                        
                        235
                        
                        
                        
                        4
                        
                        
                        
                        220
                        
                        
                        
                        4
                        
                        
                        
                        455
                        
                        
                        
                        8Total
      temporarily impaired Securities
                        
                        $
                        235
                        
                        
                        $
                        4
                        
                        
                        $
                        1,219
                        
                        
                        $
                        23
                        
                        
                        $
                        1,454
                        
                        
                        $
                        27
 
 Continuous Unrealized LossesFor Less than
                        
                        
                        For More Than12 Months
                        
                        
                        12 Months
                        
                        
                        TotalFair
                        
                        
                        Unrealized
                        
                        
                        Fair
                        
                        
                        Unrealized
                        
                        
                        Fair
                        
                        
                        UnrealizedValue
                        
                        
                        Losses
                        
                        
                        Value
                        
                        
                        Losses
                        
                        
                        Value
                        
                        
                        Losses(Dollars
      in thousands)December
      31, 2007Available
      for Sale SecuritiesMutual
      Funds
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        8,942
                        
                        
                        $
                        258
                        
                        
                        $
                        8,942
                        
                        
                        $
                        258Held
      to Maturity SecuritiesFNMA
      Note - 1 security
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        992
                        
                        
                        
                        8
                        
                        
                        
                        992
                        
                        
                        
                        8FHLB
      Notes - 2 securities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,995
                        
                        
                        
                        5
                        
                        
                        
                        1,995
                        
                        
                        
                        5Mortgage
      Backed SecuritiesFHLMC
      - 2 securities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,327
                        
                        
                        
                        28
                        
                        
                        
                        1,327
                        
                        
                        
                        28GNMA
      - 1 security
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        384
                        
                        
                        
                        3
                        
                        
                        
                        384
                        
                        
                        
                        3Total
      temporarily impaired securities
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        13,640
                        
                        
                        $
                        302
                        
                        
                        $
                        13,640
                        
                        
                        $
                        302
 
 The
Company’s unrealized losses at December 31, 2008 are the result of interest rate
levels differing from those existing at the time of the purchase of the
securities, overall economic conditions and, as to mortgage backed securities,
actual and estimated prepayment speeds. None of the losses appear to be
attributable to specific credit quality concerns. The Company has the ability
and intent to hold the securities until the earlier of recovery or maturity. The
Company does not consider these investments to be other than temporarily
impaired at December 31, 2008.
 
 There
were no investment securities pledged as collateral at December 31, 2008 and
2007.
  F-16
  SFSB,
Inc. and Subsidiaries
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
3 - Loans Receivable
 
 Loans
receivable consist of the following:
 December 31,2008
                        
                        
                        2007(Dollars in thousands)Mortgage
      loans 1- 4 family residential
                        
                        $
                        110,061
                        
                        
                        $
                        112,198Construction
      loans
                        
                        
                        10,050
                        
                        
                        
                        2,205Commercial
      mortgage loans
                        
                        
                        19,408
                        
                        
                        
                        12,273Commercial
      non-mortgage loans
                        
                        
                        3,501
                        
                        
                        
                        3,593Home
      equity loans
                        
                        
                        15,586
                        
                        
                        
                        16,670Land
      loans
                        
                        
                        5,111
                        
                        
                        
                        3,135Home
      improvement loans
                        
                        
                        57
                        
                        
                        
                        95Consumer
      loans
                        
                        
                        390
                        
                        
                        
                        332Total
      Gross Loans Receivable
                        
                        
                        164,164
                        
                        
                        
                        150,501Allowance
      for loan losses
                        
                        
                        (1,149
                        )
                        
                        
                        (972
                        )Deferred
      loan fees
                        
                        
                        (429
                        )
                        
                        
                        (247
                        )Loans
      in process
                        
                        
                        (5,277
                        )
                        
                        
                        (1,538
                        )Total
      Loans Receivable - Net
                        
                        $
                        157,309
                        
                        
                        $
                        147,744
 
 Residential
lending is generally considered to involve less risk than other forms of
lending, although payment experience on these loans is dependent to some extent
on economic and market conditions in the Bank's lending area. Commercial loan
repayments are generally dependent on the operations of the related properties
or the financial condition of its borrower or guarantor. Accordingly, repayment
of such loans can be more susceptible to adverse conditions in the real estate
market and the regional economy.
 
 Directors and officers of the Company
are permitted to borrow from the Bank to the extent permitted by applicable laws
and regulations.  The following table shows the activity in these
related party loans:
 
 (Dollars in thousands)Beginning
      balance
                        
                        $
                        1,867Loans
      made
                        
                        
                        685Principal
      repayments
                        
                        
                        (628
                        )Ending
      balance
                        
                        $
                        1,924
 
 Activity
in the Bank's allowance for loan losses for the periods indicated is as
follows:
 
 Years EndedDecember 31,2008
                        
                        
                        2007(Dollars in thousands)Balance
      at beginning of period
                        
                        $
                        972
                        
                        
                        $
                        850Provision
      for loan losses
                        
                        
                        180
                        
                        
                        
                        244Charge-offs
                        
                        
                        (3
                        )
                        
                        
                        (122
                        )Recoveries
                        
                        
                        -
                        
                        
                        
                        -Balance
      at end of period
                        
                        $
                        1,149
                        
                        
                        $
                        972
  F-17
 
 SFSB,
Inc. and Subsidiaries
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
3 - Loans Receivable – (continued)
 
 The
following tables show a summary of information pertaining to impaired and
non-accrual loans:
  December 31,2008
                          
                          
                          2007(Dollars in thousands)Impaired
      loans without a valuation allowance
                          
                          $
                          239
                          
                          
                          $
                          -Impaired
      loans with a valuation allowance
                          
                          
                          100
                          
                          
                          
                          100Total
      impaired loans
                          
                          $
                          339
                          
                          
                          $
                          100Valuation
      allowance related to impaired loans
                          
                          $
                          100
                          
                          
                          $
                          100Total
      non-accrual loans
                          
                          $
                          1,519
                          
                          
                          $
                          468Total
      loans past-due ninety days or more and still accruing
                          
                          $
                          -
                          
                          
                          $
                          -
 
 YearsEndedDecember31,2008
                      
                      
                      2007(Dollars in thousands)Average
      investment in impaired loans
                      
                      $
                      338
                      
                      
                      $
                      134Interest
      income recognized on impaired loans, on a cash basis
                      
                      $
                      8
                      
                      
                      $
                      1
 
 No
additional funds are committed to be advanced in connection with impaired
loans.
 
 The Bank
is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financial needs of its customers. The financial
instruments are limited to commitments to extend credit and involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
statement of financial position. The contract amounts of these instruments
express the extent of involvement the Bank has in each class of financial
instruments.
 
 The
Bank's exposure to credit loss from non-performance by the other party to the
above-mentioned financial instruments is represented by the contractual amount
of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
 
 Unless
otherwise noted, the Bank does not require collateral or other security to
support financial instruments with off-balance-sheet credit risk.
 
 Financial
      Instruments Whose Contract Amount Represents
                      
                      Contract Amount AtCredit Risk
                      
                      December 31, 2008
                      
                      
                      December 31, 2007(Dollars
      in thousands)Lines
      of credit – commercial real estate
                      
                      $
                      9,849
                      
                      
                      $
                      3,819Lines
      of credit - home equity
                      
                      
                      4,896
                      
                      
                      
                      4,964Lines
      of credit - overdraft checking
                      
                      
                      125
                      
                      
                      
                      129Mortgage
      loan commitments
                      
                      
                      3,841
                      
                      
                      
                      1,541
  F-18
 
 SFSB,
Inc. and Subsidiaries
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
3 - Loans Receivable – (continued)
 
 Commercial
real estate lines of credit, including equipment lines of credit discussed
below, are generally secured by a blanket lien on assets of the borrower.
Revolving Lines of Credit (RLOC) are typically used for short term working
capital needs and are based most heavily on the accounts receivable and
inventory components of the borrower’s balance sheet. RLOC have terms of one
year, are subject to annual reaffirmation and carry variable rates of interest.
We generally receive a one percent fee, based on the commitment
amount.
 
 Equipment
lines of credit are secured by equipment being purchased and sometimes by a
blanket lien on assets of the borrower as well. Each advance is repaid over a
term of three to five years and carries a variable or prevailing fixed rate of
interest. We will generally advance up to 75% of the cost of the new or used
equipment. These credit facilities are revolving in nature and the commitment is
subject to annual reaffirmation.
 
 For both
types of credit facilities listed above, we evaluate each customer’s credit
worthiness on a case-by-case basis.
 
 Home
equity lines of credit are secured by second deeds of trust on residential real
estate. They have fixed expiration dates as long as there is no violation of any
condition established in the contract. We evaluate each customer’s credit
worthiness on a case-by-case basis.
 
 Overdraft
lines of credit on checking accounts are unsecured. Linked to any Slavie Federal
personal checking account, the line will automatically make a deposit to the
customer’s checking account if the balance falls below the amount needed to pay
an item presented for payment.
 
 The
credit risk involved in these financial instruments is essentially the same as
that involved in extending loan facilities to customers.
 
 Our
outstanding commitments to make mortgages are at fixed rates ranging from 4.250%
to 8.500% and 6.250% to 8.250% at December 31, 2008 and December 31, 2007
respectively. Loan commitments expire 60 days from the date of the
commitment.
 
 For the
year ended December 31, 2008, we engaged in no off-balance sheet transactions
reasonably likely to have a material effect on our financial condition, results
of operations or cash flows.
  F-19
  SFSB,
Inc. and Subsidiaries
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
4 - Premises and Equipment
 
 Premises
and equipment are summarized by major classification as follows:
 
 December 31,
                                  
                                  
                                  Useful Life2008
                                  
                                  
                                  2007
                                  
                                  
                                  in Years(Dollars In thousands)Land
                                  
                                  $
                                  1,128
                                  
                                  
                                  $
                                  1,128
                                  
                                  
                                  
                                  -Office
      building
                                  
                                  
                                  4,709
                                  
                                  
                                  
                                  4,695
                                  
                                  
                                  
                                  40Furniture,
      fixtures and equipment
                                  
                                  
                                  1,297
                                  
                                  
                                  
                                  1,221
                                  
                                  
                                  
                                  3-107,134
                                  
                                  
                                  
                                  7,044Accumulated
      depreciation
                                  
                                  
                                  2,155
                                  
                                  
                                  
                                  1,937$
                                  4,979
                                  
                                  
                                  $
                                  5,107
 
 The
provision for depreciation charged to operations for the years ended December
31, 2008 and 2007 amounted to $224,000 and $233,000, respectively.
 
 Holdings
has negotiated and rented office space to non-bank tenants in the Churchville
Road property under various non-cancellable operating leases. Credit is extended
based on an evaluation of the lessee’s financial condition and, generally,
collateral is not required. These leases included no commitments to provide for
various tenant-finishing costs at December 31, 2008.
 
 The cost
and accumulated depreciation of the property, which is included in premises and
equipment of the Company, was $5,482,000 and $948,000, respectively, at December
31, 2008.
 
 Future
minimum rentals to be received from non-Company tenants under noncancellable
operating leases in effect at December 31, 2008, and in the aggregate, are as
follows:
 
 (Dollars in thousands)2009
                            
                            $
                            1452010
                            
                            
                            1292011
                            
                            
                            1282012
                            
                            
                            1252013
                            
                            
                            129Thereafter
                            
                            
                            41$
                            697
 
 Rentals
received in 2008 and 2007 were $180,000 and $163,000 respectively and are
recorded in other income.
  F-20
 
 SFSB,
Inc. and Subsidiaries
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
  Note
5 - Deposits
 
 The Bank
has the following deposits:
 
 December 31,2008
                      
                      
                      2007(Dollars
      in thousands)Non-interest
      bearing demand deposits
                      
                      $
                      1,895
                      
                      
                      $
                      1,301NOW
      and money market demand deposits
                      
                      
                      16,856
                      
                      
                      
                      15,390Savings
      deposits
                      
                      
                      7,194
                      
                      
                      
                      7,718Certificates
      of deposit
                      
                      
                      97,245
                      
                      
                      
                      89,675123,190
                      
                      
                      
                      114,084Accrued
      interest on deposits
                      
                      
                      13
                      
                      
                      
                      14$
                      123,203
                      
                      
                      $
                      114,098
 
 The
aggregate amount of certificates of deposit accounts with a minimum denomination
of $100,000 was $35,127,000 and $29,714,000 as of December 31, 2008 and 2007,
respectively.
 
 Scheduled
maturities of certificates of deposit are as follows:
 
 December 31,2008Maturing
                          
                          
                          (Dollars in thousands)2009
                          
                          $
                          61,9092010
                          
                          
                          15,9102011
                          
                          
                          7,0032012
                          
                          
                          6,2742013
                          
                          6,149Total
                          
                          $
                          97,245
 
 Years Ended December 31,2008
                      
                      
                      2007Interest Expense on
Deposits
                      
                      (In
      thousands)NOW
      and money market demand deposits
                      
                      $
                      262
                      
                      
                      $
                      257Savings
      deposits
                      
                      
                      73
                      
                      
                      
                      113Certificates
      of deposit
                      
                      
                      4,178
                      
                      
                      
                      4,290$
                      4,513
                      
                      
                      $
                      4,660
  F-21
  SFSB,
Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 Note
6 - Borrowings
 
 The Bank
has a line of credit from the Federal Home Loan Bank of Atlanta (“FHLB”). The
line is secured by the FHLB stock and a blanket lien on mortgages. There is no
set limit. Each borrowing is evaluated on a case-by-case basis by the
lender.  The FHLB unused credit line amounted to $18.4 million and
$17.7 million at December 31, 2008 and 2007, respectively.
 
 At
December 31, 2008 and 2007, outstanding borrowings with the FHLB were $35.3
million and $34.0 million respectively. Borrowings at December 31, 2008
consisted of $500,000 short term fixed rate FHLB advances bearing interest at
2.77% and $25.0 million long term fixed rate FHLB advances with interest rates
ranging from 3.63% to 4.59%. There is also a $9.8 million short term daily rate
FHLB advance bearing an interest rate of 0.46% as of December 31, 2008.
Borrowings at December 31, 2007 consisted of $6.0 million short term fixed rate
FHLB advances bearing interest at 4.52% and $26.5 million long term fixed rate
FHLB advances with interest rates ranging from 3.63% to 4.90%. There was also
$1.5 million short term daily rate FHLB advances bearing an interest rate of
4.40% as of December 31, 2007.
 
 The
maturities of advances outstanding as of December 31, 2008 are as
follows:
 
 Due Within
                      
                      (Dollars in thousands)One
      year
                      
                      $
                      10,300Beyond
      five years
                      
                      
                      25,000$
                      35,300
 
 Note
7 - 401(k) Plan and Deferred Compensation Agreement
 
 The Bank
has a 401(k) plan. Employees could contribute up to $15,500 in 2008, with those
over fifty years old allowed an additional $5,000 catch-up contribution. The
Bank will match 25% of the employee’s contribution up to the amount as permitted
by law. The Bank’s cost was $16,000 and $10,000, respectively, for the years
ended December 31, 2008 and 2007.
 
 The Bank
also entered into a deferred compensation agreement with one of its former
officers. The liability under this agreement was accrued by charges to operating
expense during prior periods. The liability balance was $23,000 and $34,000 at
December 31, 2008 and 2007.
  F-22
 SFSB,
Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS  
 Note
8 – Stock Grants and Stock Option Plans
 
 The
compensation expense recognized pertaining to the stock-based compensation plans
was $119,000 for both of the years ended December 31, 2008 and
2007.  The related tax benefit was $34,000 and $33,000 for the years
ended December 31, 2008 and 2007.
 
 As of
December 31, 2008, there was $190,000 of total unrecognized compensation cost
related to unvested share-based compensation arrangements granted under the
plans. This cost is expected to be recognized over a weighted average period of
1.6 years.
 
 Under the
2005 Stock Option Incentive Plan (the Plan), the directors and certain employees
of the Company are eligible to receive options to purchase shares of common
stock with an exercise price equal to the fair market value of a share of common
stock on the grant date. Shares that may be issued under the Plan shall not
exceed in the aggregate 102,061 shares. No additional options remain available
for grant at December 31, 2008. Unless otherwise authorized by the Board of
Directors, each grant shall vest over a five-year period and will expire no
later than ten years from the date of the grant. No options were granted in 2008
and 2007.
 
 Under the
Plan, the Company recorded compensation cost of $48,000, which was credited to
additional paid-in-capital, for both 2008 and 2007.
 
 Information
regarding the Company's stock option plan as of and for the years ended
December 31, 2008 and 2007 is as follows:
 
 2008
                          
                          Shares
                          
                          
                          Weighted
                            Average
                            Price
                          
                          
                          Weighted
                            Average
                            Remaining
                            Life
                          
                          
                          Aggregate
                            Intrinsic
                            ValueOptions
      outstanding, beginning of year
                          
                          
                          94,771
                          
                          
                          $
                          9.15
                          
                          
                          
                          7.6Options
      granted
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Options
      exercised
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Options
      forfeited
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Options
      outstanding, end of year
                          
                          
                          94,771
                          
                          
                          $
                          9.15
                          
                          
                          
                          6.6
                          
                          
                          
                          -Options
      exercisable, end of year
                          
                          
                          56,862
                          
                          
                          $
                          9.15
                          
                          
                          
                          6.6
                          
                          
                          
                          -
  F-23
  SFSB,
Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  Note
8 – Stock Grants and Stock Option Plans – (continued)
 
 2007
                            
                            Shares
                            
                            
                            Weighted
                              Average
                              Price
                            
                            
                            Weighted
                              Average
                              Remaining
                              Life
                            
                            
                            Aggregate
                              Intrinsic
                              ValueOptions
      outstanding, beginning of year
                            
                            
                            102,061
                            
                            
                            $
                            9.15
                            
                            
                            
                            8.6Options
      granted
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Options
      exercised
                            
                            
                            7,290
                            
                            
                            $
                            9.15
                            
                            
                            
                            -Options
      forfeited
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Options
      outstanding, end of year
                            
                            
                            94,771
                            
                            
                            $
                            9.15
                            
                            
                            
                            7.6
                            
                            
                            
                            -Options
      exercisable, end of year
                            
                            
                            37,908
                            
                            
                            $
                            9.15
                            
                            
                            
                            7.6
                            
                            
                            
                            -
 
 Under the
2005 Recognition and Retention Stock Award Plan (the Award Plan), the directors
and certain employees of the Company are eligible to receive shares of
restricted stock. If a participant terminates employment for reasons other than
death, disability, normal retirement or following a change of control, he or she
forfeits all right to the unvested shares. The awards vest over a five-year
period and, therefore, the fair value of such awards are accrued ratably over a
five-year period as compensation expense.
 
 Under the
Award Plan, the Company recorded vested shares compensation cost of $71,000 and
$71,000, including $65,000 and $73,000 allocated to treasury stock and $6,000
and $(2,000) allocated to additional paid-in-capital, at December 31, 2008 and
2007, respectively.
 
 Information
regarding the Company's Award Plan as of and for the years ended
December 31, 2008 and 2007 is as follows:
 
 2008
                                
                                Shares
                                
                                
                                Weighted
                                  Average
                                  Grant Date
                                  Fair ValueNonvested
      shares outstanding, beginning of year
                                
                                
                                20,026
                                
                                
                                $
                                9.40Shares
      granted
                                
                                
                                -
                                
                                
                                
                                -Shares
      vested
                                
                                
                                (7,581
                                )
                                
                                $
                                9.40Shares
      forfeited
                                
                                
                                -
                                
                                
                                
                                -Nonvested
      shares, end of year
                                
                                
                                12,445
                                
                                
                                $
                                9.40
  F-24
  SFSB,
Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
  Note
8 – Stock Grants and Stock Option Plans – (continued)
 
 2007
                                
                                Shares
                                
                                
                                Weighted
                                  Average
                                  Grant Date
                                  Fair ValueNonvested
      shares outstanding, beginning of year
                                
                                
                                27,607
                                
                                
                                $
                                9.40Shares
      granted
                                
                                
                                -
                                
                                
                                
                                -Shares
      vested
                                
                                
                                (7,581
                                )
                                
                                $
                                9.40Shares
      forfeited
                                
                                
                                -
                                
                                
                                
                                -Nonvested
      shares, end of year
                                
                                
                                20,026
                                
                                
                                $
                                9.40
 
 Note
9 - Common Stock
 
 During the year ended December 31,
2008, the Company repurchased 117,573 shares of its stock at an average price of
$6.77 per share.  During the year ended December 31, 2007, the Company
repurchased 104,986 shares of its stock at an average price of $8.71 per share.
Treasury Stock is recorded at cost and is shown as a reduction of stockholders’
equity.
 
 In 2004, the Bank reorganized to a
federally chartered stock savings bank and established an Employee Stock
Ownership Plan (“ESOP”) for its employees. The ESOP acquired 116,630 shares of
the Company’s common stock with funds provided by a loan from the Company, to be
repaid principally from the Bank’s contributions to the ESOP with twenty equal
annual installments through 2024, bearing interest at the Wall Street Journal
prime rate adjusted monthly. Shares are released to participants proportionately
as the loan is repaid. The Bank recognizes compensation expense as shares are
committed for release from collateral at their current market price. Dividends
on allocated shares are recorded as a reduction of retained earnings and
dividends on unallocated shares are recorded as a reduction of debt. The
compensation cost for the years ended December 31, 2008 and 2007 was $40,000 and
$52,000, respectively.  The ESOP holds the common stock in a trust for
allocation among participating employees and on an annual basis a contribution
is allocated from the Bank to the participants’ accounts.  There were
93,304 and 99,136 of unearned ESOP shares at December 31, 2008 and 2007,
respectively. The fair value of unearned ESOP shares at December 31, 2008 is
estimated to be $541,000.
 
 The total
value of released unearned ESOP shares was $59,000 and $58,000 at December 31,
2008 and 2007, respectively. The difference between the amounts released from
unearned ESOP shares and the compensation cost was $(19,000) and $(6,000), and
was charged to additional paid-in-capital in 2008 and 2007,
respectively.
 
 All employees of the Bank who attain
the age of 21 and complete one year of service with the Bank will be eligible to
participate in the ESOP. Each participant’s vested interest under the ESOP is
determined according to the following schedule: 0% for less than 5 years of
service with the Company and 100% for more than 5 years of service. For vesting
purposes, a year of service means any plan year in which an employee completes
at least 1,000 hours of service (whether before or after the ESOP’s January 1,
2004 effective date). Vesting accelerates to 100% upon a participant’s
attainment of normal retirement age 65, death or disability.
  F-25
 SFSB,
Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 Note
10 – Regulatory Requirements
 
 The Bank
is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting principles. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. Quantitative measures established by regulation
to ensure capital adequacy require the Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2008, that the Bank meets all capital adequacy requirements to which it is
subject.
 
 As of
December 31, 2008, the most recent notification from the Office of Thrift
Supervision has categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the table. There have been no conditions or
events since that notification that management believes have changed the Bank's
category.
 
 The
following table summarizes the Bank's regulatory capital position at December
31, 2008 and 2007.
 
 MinimumTo Be WellMinimum
                        
                        
                        Capitalized UnderFor Capital
                        
                        
                        Prompt CorrectiveActual
                        
                        
                        Adequacy Purposes
                        
                        
                        Action ProvisionsAmount
                        
                        
                        %
                        
                        
                        Amount
                        
                        
                        %
                        
                        
                        Amount
                        
                        
                        %December 31, 2008
                        
                        (Dollars
      in thousands)Tangible
      (1)
                        
                        $
                        14,866
                        
                        
                        
                        8.28
                        %
                        
                        $
                        2,693
                        
                        
                        
                        1.50
                        %
                        
                        
                        N/A
                        
                        
                        
                        N/ATier
      I risk-based (2)
                        
                        
                        14,866
                        
                        
                        
                        13.14
                        %
                        
                        
                        N/A
                        
                        
                        
                        N/A
                        
                        
                        $
                        6,791
                        
                        
                        
                        6.00
                        %Core
      (leverage) (1)
                        
                        
                        14,866
                        
                        
                        
                        8.28
                        %
                        
                        
                        7,181
                        
                        
                        
                        4.00
                        %
                        
                        
                        8,977
                        
                        
                        
                        5.00
                        %Total
      risk-based (2)
                        
                        
                        16,015
                        
                        
                        
                        14.15
                        %
                        
                        
                        9,054
                        
                        
                        
                        8.00
                        %
                        
                        
                        11,318
                        
                        
                        
                        10.00
                        %December 31, 2007Tangible
      (1)
                        
                        $
                        16,948
                        
                        
                        
                        9.81
                        %
                        
                        $
                        2,591
                        
                        
                        
                        1.50
                        %
                        
                        
                        N/A
                        
                        
                        
                        N/ATier
      I risk-based (2)
                        
                        
                        16,948
                        
                        
                        
                        16.42
                        %
                        
                        
                        N/A
                        
                        
                        
                        N/A
                        
                        
                        $
                        6,194
                        
                        
                        
                        6.00
                        %Core
      (leverage) (1)
                        
                        
                        16,948
                        
                        
                        
                        9.81
                        %
                        
                        
                        6,909
                        
                        
                        
                        4.00
                        %
                        
                        
                        8,637
                        
                        
                        
                        5.00
                        %Total
      risk-based (2)
                        
                        
                        17,920
                        
                        
                        
                        17.36
                        %
                        
                        
                        8,259
                        
                        
                        
                        8.00
                        %
                        
                        
                        10,324
                        
                        
                        
                        10.00
                        %
 
 (1)  To
adjusted total assets.
 (2)  To
risk-weighted assets.
  F-26
  SFSB,
Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
  Note
10 – Regulatory Requirements – (continued)
 
 The
following table provides a reconciliation of total equity per the consolidated
financial statements to capital amounts reflected in the above
table:
 
 December 31,2008
                      
                      
                      2007(Dollars
      in thousands)Total
      consolidated equity
                      
                      $
                      19,137
                      
                      
                      $
                      21,769Adjustment
      for accumulated other comprehensive loss
                      
                      
                      -
                      
                      
                      
                      159Adjustment
      for intangible assets
                      
                      
                      (10
                      )
                      
                      
                      (6
                      )Adjustment
      for parent company equity in excess of its investment in the
      Bank
                      
                      
                      (4,261
                      )
                      
                      
                      (4,974
                      )Tangible,
      Tier 1 and Core capital
                      
                      
                      14,866
                      
                      
                      
                      16,948Allowance
      for loan losses
                      
                      
                      1,149
                      
                      
                      
                      972Total
      risk-based capital
                      
                      $
                      16,015
                      
                      
                      $
                      17,920
 
 Note
11 - Income Taxes
 
 The
income tax provision consists of the following for the years ended December 31,
2008 and 2007.
 
 December 31,2008
                            
                            
                            2007(Dollars
      in thousands)CurrentFederal
                            
                            $
                            213
                            
                            
                            $
                            (18
                            )State
                            
                            
                            54
                            
                            
                            
                            (8
                            )267
                            
                            
                            
                            (26
                            )DeferredFederal
                            
                            
                            (30
                            )
                            
                            
                            89State
                            
                            
                            (7
                            )
                            
                            15(37
                            )
                            
                            
                            104$
                            230
                            
                            
                            $
                            78
 
 The
amounts computed by applying the statutory federal income tax rate to the income
(loss) before taxes is less than the taxes provided for the following
reasons:
 
 Years Ended December 31,2008
                          
                          
                          2007(Dollars
      in thousands)Percent
                          
                          
                          
                          
                          
                          Percentof
      Pretax
                          
                          
                          
                          
                          
                          of
      PretaxAmount
                          
                          
                          Income
                          
                          
                          Amount
                          
                          
                          IncomeFederal
      tax at statutory rate
                          
                          $
                          (653
                          )
                          
                          
                          (34.00
                          )%
                          
                          $
                          61
                          
                          
                          
                          34.00
                          %Increases (Decreases) in
    TaxesState
      tax, net of federal income tax benefit
                          
                          
                          30
                          
                          
                          
                          1.56
                          
                          
                          
                          5
                          
                          
                          
                          2.76Impairment
      charge on investment securities
                          
                          
                          842
                          
                          
                          
                          43.83
                          
                          
                          
                          -
                          
                          
                          
                          -Other
                          
                          
                          11
                          
                          
                          
                          0.57
                          
                          
                          
                          12
                          
                          
                          
                          6.33$
                          230
                          
                          
                          
                          11.96
                          %
                          
                          $
                          78
                          
                          
                          
                          43.09
                          %
  F-27
 SFSB,
Inc. and Subsidiaries
 
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
  Note
11 – Income Taxes – (continued)
 
 The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2008 and 2007
are presented below:
 
 December 31,2008
                          
                          
                          2007(Dollars
      in thousands)Deferred Tax
      Assets:Allowance
      for loan losses
                          
                          $
                          453
                          
                          
                          $
                          383Deferred
      compensation
                          
                          
                          9
                          
                          
                          
                          13Reserve
      - uncollected interest
                          
                          
                          1
                          
                          
                          
                          1Market
      value adjustment on available for sale securities
                          
                          
                          -
                          
                          
                          
                          99Other
      than temporary impairment loss
                          
                          
                          977
                          
                          
                          
                          -Stock-based
      compensation
                          
                          
                          47
                          
                          
                          
                          34Total
      gross
      deferred tax assets
                          
                          
                          1,487
                          
                          
                          
                          530Deferred
      Tax Liabilities:Federal
      Home Loan Bank of Atlanta stock dividends
                          
                          
                          (102
                          )
                          
                          
                          (102
                          )Depreciation
                          
                          
                          (233
                          )
                          
                          (191)Total
      gross deferred tax liabilities
                          
                          
                          (335
                          )
                          
                          
                          (293
                          )Valuation
      allowance
                          
                          
                          (977
                          )
                          
                          -Net
      deferred tax assets
                          
                          $
                          175
                          
                          
                          $
                          237
 
 The other than temporary impairment
loss of $2,477,000 recorded during 2008 relates to mutual funds which are
considered to be capital assets.  The Company has recorded a full
valuation allowance related to the $977,000 deferred tax asset generated by the
impairment loss.  The capital loss carry forward period will not begin
until the Company actual chooses to redeem the mutual funds and would expire
five years from the redemption date.  Should the Company be able to
generate capital gains to offset such capital losses, the valuation allowance
could be reversed.
 
 The Bank
was allowed a special bad debt deduction at various percentages of otherwise
taxable income for various years through December 31, 1987. If the amounts,
which qualified as deductions for federal income tax purposes prior to December
31, 1987, are later used for purposes other than to absorb loan losses,
including distributions in liquidations, they will be subject to federal income
tax at the then current corporate rate and mortgage loans must be maintained at
the December 31, 1987 level to receive current tax deductions for loan losses.
Retained earnings at December 31, 2008 and 2007 include $1,580,000, for which no
provision for federal income tax has been provided. The unrecorded deferred
income tax liability on the above amount was approximately
$610,000.
  F-28
 SFSB,
Inc. and Subsidiaries
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
  Note
12 - Disclosures about Fair Value Measurements and Fair Values for Financial
Instruments
 
 Management
uses its best judgment in estimating the fair value of the Company’s financial
instruments; however, there are inherent weaknesses in any estimation technique.
Therefore, for substantially all financial instruments, the fair value estimates
herein are not necessarily indicative of the amounts the Company could have
realized in sale transactions on the dates indicated. The estimated fair value
amounts have been measured as of their respective year-ends and have not been
re-evaluated or updated for purposes of these financial statements subsequent to
those respective dates. As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than
the amounts reported at each year-end.
 
 In
September 2006, the Financial Accounting Standards Board issued FASB Statement
No. 157, Fair Value
Measurements (“SFAS 157”), which defines fair value, establishes a
framework for measuring fair value under Generally Accepted Accounting
Principles, and expands disclosures about fair value measurements. SFAS 157
applies to other accounting pronouncements that require or permit fair value
measurements. The Company adopted SFAS 157 effective for its fiscal year
beginning January 1, 2008. The primary effect of SFAS 157 on the Company
was to expand the required disclosures pertaining to the methods used to
determine fair values.
 
 In
December 2007, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No.
157 (“FSP 157-2”).  FSP 157-2 delays the effective date of SFAS
157 for all non-financial assets and liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008 and interim periods
within those fiscal years. As such, the Company only partially adopted the
provisions of SFAS 157, and will begin to account and report for non-financial
assets and liabilities in 2009. In October 2008, the FASB issued FASB Staff
Position 157-3,Determining the Fair Value of a Financial Asset When the Market for that Asset
is Not Active (“FSP 157-3”), to clarify the application of the
provisions of SFAS 157 in an inactive market and how an entity would
determine fair value in an inactive market. FSP 157-3 is effective
immediately and applies to the Company’s December 31, 2008 consolidated
financial statements. The adoption of SFAS 157 and FSP 157-3 had no
impact on the amounts reported in the financial statements.
 
 SFAS 157
establishes a fair value hierarchy that prioritizes the inputs to valuation
methods used to measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3
measurements).
 
  The three
levels of the fair value hierarchy under SFAS 157 are as follows:
  Level
      1:
                Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or
  liabilities.
  Level
      2:
                Quoted
      prices in markets that are not active, or inputs that are observable
      either directly     or indirectly, for
      substantially the full term of the asset or
  liability.
  Level
      3:
                Prices
      or valuation techniques that require inputs that are both significant to
      the fair value  measurement and unobservable (i.e. supported
      with little or no market activity).
 
 An
asset’s or liability’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement.
  F-29
 SFSB,
Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  Note
12 - Disclosures about Fair Value Measurements and Fair Values for Financial
Instruments – (continued)
 
 For
financial assets measured at fair value on a recurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31, 2008
are as follows:
 
 Description
                      
                      December 31,
                        2008
                      
                      
                      (Level
      1)
                        Quoted Prices
                        In Active
                        Markets for
                        Identical
                        Assets
                      
                      
                      (Level
      2)
                          Significant
                          Other
                          Observable
                        Inputs
                      
                      
                      (Level
      3)
                          Significant
                          Unobservable
                        Inputs(Dollars
      in thousands)Securities
      available for sale
                      
                      $
                      7,040
                      
                      
                      $
                      7,040
                      
                      
                      $
                      -
                      
                      
                      $
                      -
 
 The
following information should not be interpreted as an estimate of the fair value
of the entire Company since a fair value calculation is only provided for a
limited portion of the Company’s assets and liabilities. Due to a wide range of
valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Company’s disclosures and those of other
companies may not be meaningful. The following methods and assumptions were used
to estimate the fair values of the Company’s financial instruments at
December 31, 2008 and 2007:
  Cash
and Cash Equivalents (Carried at Cost)
  The
carrying value reported in the balance sheet for cash and short-term instruments
approximate those assets’ fair values.
  Investment
and Mortgage-Backed Securities
  The fair
value of securities available for sale (carried at fair value) and held to
maturity (carried at amortized cost) are determined by obtaining quoted market
prices on nationally recognized securities exchanges (level 1), or matrix
pricing (Level 2), which is a mathematical technique used widely in the industry
to value debt securities without relying exclusively on quoted market prices for
the specific securities but rather by relying on the securities’ relationship to
other benchmark quoted prices.
  FHLB
Stock (Carried at Cost)
  The
carrying value of FHLB stock approximates fair value based on redemption
provisions of the FHLB of Atlanta.
  Loans
Receivable (Carried at Cost)
  The fair
values of loans are estimated using discounted cash flow analyses, using market
rates at the balance sheet date that reflect the credit and interest rate-risk
inherent in the loans. Projected future cash flows are calculated based upon
contractual maturity or call dates, projected repayments and prepayments of
principal. Generally, for variable rate loans which reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values.
  Accrued
Interest Receivable and Payable (Carried at Cost)
  The
carrying values of accrued interest receivable and accrued interest payable
approximates their fair values.
  F-30
 SFSB,
Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 Note
12 - Disclosures about Fair Value Measurements and Fair Values for Financial
Instruments – (continued)
 
  Deposit
Liabilities (Carried at Cost)
  The fair
values disclosed for demand deposits (e.g., interest and noninterest checking,
passbook savings and money market accounts) are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying amounts).
Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered in the market on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
  Short-Term
Borrowings (Carried at Cost)
  The
carrying amounts of short-term borrowings approximate their fair
values.
  Long-Term
Debt (Carried at Cost)
  Fair
values of FHLB advances are estimated using discounted cash flow analysis, based
on quoted prices for new FHLB advances with similar credit risk characteristics,
terms and remaining maturity.  These prices obtained from this active
market represent a market value that is deemed to represent the transfer price
if the liability were assumed by a third party.
  Off-Balance
Sheet Financial Instruments (Disclosed at Cost)
  Fair
values for the Company’s off-balance sheet financial instruments (lending
commitments)  are based on fees currently charged in the market to
enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties’ credit standing.  At December 31,
2008 and 2007 such fees were not material.
  Impaired
Loans (Generally Carried at Fair Value)
  Impaired
loans are those that are accounted for under FASB Statement No. 114, Accounting by Creditors for
Impairment of a Loan(“SFAS 114”), in which the Company has measured
impairment generally based on the fair value of the loan’s
collateral.  Fair value is generally determined based upon independent
third-party appraisals of the properties, or discounted cash flows based upon
the expected proceeds.  These assets are included as Level 3 fair
values, based upon the lowest level of input that is significant to the fair
value measurements.  The fair value consists of a loan balance of
$100,000, net of a valuation allowance of $100,000, for a Level 3 value of
$0.
  F-31
 SFSB,
Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 Note
12 - Disclosures about Fair Value Measurements and Fair Values for Financial
Instruments – (continued)
  The
estimated fair values of the Company’s financial instruments at December 31,
2008 and 2007 were as follows:
  December 31,2008
                      
                      
                      2007Carrying
                      
                      
                      Fair
                      
                      
                      Carrying
                      
                      
                      FairValue
                      
                      
                      Value
                      
                      
                      Value
                      
                      
                      Value(Dollars
      in thousands)Financial
      AssetsCash
      and equivalents
                      
                      $
                      3,856
                      
                      
                      $
                      3,856
                      
                      
                      $
                      1,277
                      
                      
                      $
                      1,277Investment
      securities available for sale
                      
                      
                      7,040
                      
                      
                      
                      7,040
                      
                      
                      
                      8,942
                      
                      
                      
                      8,942Investment
      securities held to Maturity
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,000
                      
                      
                      
                      2,987Mortgage
      backed securities held to maturity
                      
                      
                      1,552
                      
                      
                      
                      1,525
                      
                      
                      
                      2,247
                      
                      
                      
                      2,221Federal
      Home Loan Bank stock
                      
                      
                      1,899
                      
                      
                      
                      1,899
                      
                      
                      
                      1,844
                      
                      
                      
                      1,844Loans
      receivable - net
                      
                      
                      157,309
                      
                      
                      
                      153,019
                      
                      
                      
                      147,744
                      
                      
                      
                      144,763Accrued
      interest receivable
                      
                      
                      648
                      
                      
                      
                      648
                      
                      
                      
                      564
                      
                      
                      
                      564Financial
      LiabilitiesDeposits
                      
                      $
                      123,203
                      
                      
                      $
                      123,924
                      
                      
                      $
                      114,098
                      
                      
                      $
                      114,446Borrowings
                      
                      
                      35,300
                      
                      
                      
                      35,975
                      
                      
                      
                      34,000
                      
                      
                      
                      35,251Accrued
      interest payable
                      
                      
                      76
                      
                      
                      
                      76
                      
                      
                      
                      95
                      
                      
                      
                      95Financial
      Instruments - Off-Balance SheetLoan
      commitments
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Lines
      of credit – commercial real estate
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Lines
      of credit – home equity
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Lines
      of credit – overdraft checking
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
 
 Note
13 - Related Party Transactions
 
 Since
August 2003, Mr. J. Benson Brown, a Director of the Bank, has provided the Bank
with real estate consulting services. For the years ended December 31, 2008 and
2007, Slavie Federal Savings Bank paid Mr. Brown $1,000 and $700, respectively,
for these services.
 
 Mr. Thomas L. Drechsler, a director of
the Company, currently serves as the Bank’s general counsel through Kearney,
Drechsler & Awalt, LLC, of which Mr. Drechsler is a 33% owner. Through other
firms, Mr. Drechsler has served as Slavie Federal Savings Bank’s general counsel
since 2000. For the years ended December 31, 2008 and 2007, Slavie Federal
Savings Bank paid law firms that Mr. Drechsler was associated with $14,000 and
$33,000, respectively, for legal services. Through Sage Title Group, LLC
(formerly Universal Title, LLC), Mr. Drechsler also provides settlement related
services to the Bank’s borrowers in connection with loans originated by the
Bank. In those circumstances, Sage Title Group, LLC (formerly Universal Title,
LLC) is compensated by the borrower. For the years ended December 31, 2008 and
2007, borrowers paid Sage Title Group, LLC (formerly Universal Title, LLC)
$26,000 and $31,000, respectively, for those services.
  F-32
 SFSB,
Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 Note
14 – Condensed Financial Information (Parent Company Only)
 
 December 31,2008
                    
                    
                    2007(Dollars
      in thousands)Statements
      of Financial ConditionASSETSCash
      and cash equivalents
                    
                    $
                    3,220
                    
                    
                    $
                    4,207Note
      receivable - ESOP
                    
                    
                    933
                    
                    
                    
                    991Investment
      in subsidiary
                    
                    
                    14,875
                    
                    
                    
                    16,795Other
      assets
                    
                    
                    115
                    
                    
                    -Total
      assets
                    
                    $
                    19,143
                    
                    
                    $
                    21,993LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilitiesOther
      liabilities
                    
                    $
                    6
                    
                    
                    $
                    224Total
      liabilities
                    
                    
                    6
                    
                    
                    
                    224Total
      stockholders’ equity
                    
                    
                    19,137
                    
                    
                    
                    21,769Total
      liabilities and stockholders’ equity
                    
                    $
                    19,143
                    
                    
                    $
                    21,993
 
 December 31,2008
                      
                      
                      2007(Dollars
      in thousands)Statements
      of IncomeTotal
      Revenue
                      
                      $
                      48
                      
                      
                      $
                      84Non-interest
      Expense
                      
                      
                      26
                      
                      
                      
                      16Income
      before equity in undistributed net(loss)
      income of subsidiary and income taxes
                      
                      
                      22
                      
                      
                      
                      68Undistributed
      net (loss) income of subsidiary
                      
                      
                      (2,166
                      )
                      
                      
                      61(Loss)
      income before income tax provision
                      
                      
                      (2,144
                      )
                      
                      
                      129Income
      tax provision
                      
                      
                      9
                      
                      
                      
                      26Net
      (loss) income
                      
                      $
                      (2,153
                      )
                      
                      $
                      103
  F-33
 SFSB,
Inc. and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 Note
14 – Condensed Financial Information (Parent Company Only)
 
 Years Ended December 31,2008
                      
                      
                      2007(Dollars
      in thousands)Statements
      of Cash FlowsOperating
      activitiesNet
      (loss) income
                      
                      $
                      (2,153
                      )
                      
                      $
                      103Adjustments
      to reconcile net (loss) income to net cash (used in)provided
      by operating activities:Non-cash
      compensation under stock based compensation plans And Employee Stock
      Ownership Plan
                      
                      
                      73
                      
                      
                      
                      73Equity
      in undistributed net loss (income) of subsidiary
                      
                      
                      2,166
                      
                      
                      
                      (61
                      )Decrease
      in note receivable - ESOP
                      
                      
                      58
                      
                      
                      
                      58Increase
      in other assets
                      
                      
                      (115
                      )
                      
                      
                      -(Decrease)
      increase in other liabilities
                      
                      
                      (218
                      )
                      
                      
                      197Net
      Cash (Used in) Provided by Operating Activities
                      
                      
                      (189
                      )
                      
                      
                      370Financing
      activitiesExercise
      of options
                      
                      
                      -
                      
                      
                      
                      67Purchase
      of treasury stock
                      
                      
                      (798
                      )
                      
                      
                      (914
                      )Net
      Cash Used in Financing Activities
                      
                      
                      (798
                      )
                      
                      
                      (847
                      )Decrease
      in cash and cash equivalents
                      
                      
                      (987
                      )
                      
                      
                      (477
                      )Cash
      and cash equivalents at beginning of year
                      
                      
                      4,207
                      
                      
                      
                      4,684Cash
      and cash equivalents at end of year
                      
                      $
                      3,220
                      
                      
                      $
                      4,207
 F-34


DIRECTORS
AND OFFICERS
 
 Directors of SFSB, Inc. and Slavie Federal Savings
      BankJ.
      Benson Brown
                      Real
      estate consulting,
                      JB
      Brown Associates
                    Robert
      M. Stahl IV
                      Practicing
      attorney and a Certified Public Accountant,
                      Law
      Offices of Robert M. StahlThomas
      J. Drechsler
                      Practicing
      attorney,
                      Kearney,
      Drechsler & Awalt, LLC
                    Charles
      E. Wagner, Jr.
                      Executive
      Vice President, Chief Lending Officer and SecretaryPhilip
      E. Logan
                      President,
      Chief Executive Officer and Chairman
                    James
      D. Wise
                      Financial
      and investment consulting,
                      Ronald
      Blue & Co.,
LLC
 
 Officers of SFSB, Inc.Philip
      E. Logan
                  President
      and Chief Executive Officer
                Sophie
      T. Wittelsberger
                  Vice
      President and Chief Financial OfficerCharles
      E. Wagner, Jr.
                  Executive
      Vice President, Chief Lending Officer and  Secretary
 
 Officers of Slavie Federal Savings
      BankPhilip
      E. Logan
                  President
      and Chief Executive Officer
                James
      T. Nichols
                  Vice
      President – Commercial Loan OfficerCharles
      E. Wagner, Jr.
                  Executive
      Vice President, Chief Lending Officer and Secretary
                Lauren
      Rebbel
                  Vice
      President – Slavie Financial ServicesSophie
      T. Wittelsberger
                  Vice
      President, Chief Financial Officer and CRA Officer
                Gary
      Geiss
                  Vice
      President – Slavie Financial ServicesGary
      E. Barnoff
                  Vice
      President – Branch Operations and Compliance Officer
                Andrea
      Niedzwicki
                  Assistant
      Vice President – Loan AdministrationMichael
      Tagg
                  Vice
      President – Commercial Loan Officer
                Patricia
      Zimmerman
                  Assistant
      Vice President – Overlea Branch
Manager
 
 25
 
 INVESTOR
AND CORPORATE INFORMATION
 
 Annual
Meeting
 
 The
annual meeting of stockholders will be held at 4:00 p.m. on May 21, 2009 at the
Slavie Federal Savings Bank Community Room located at 1614 Churchville Road, Bel
Air, Maryland.
 
 Stock Listing and Market
Information
 
 SFSB,
Inc.’s common stock is traded on the Over the Counter Bulletin Board (“OTCBB”)
under the symbol “SFBI.OB.”  As of March 25, 2009, the number of
holders of record of SFSB, Inc.’s common stock was approximately
135.
 
 SFSB,
Inc. first issued shares of common stock on December 30, 2004 and trading began
on the OTCBB on December 31, 2004.  The following table represents the
market value of the Company’s common stock, based on high and low sales
information as reported on the OTCBB.  This information reflects
inter-dealer prices, without retail mark-up, mark-down, or commission and may
not necessarily represent actual transactions.
 
 High
                    
                    
                    LowDecember
      31, 2004
                    
                    $
                    11.00
                    
                    
                    $
                    10.75March
      31, 2005
                    
                    
                    10.95
                    
                    
                    
                    9.00June
      30, 2005
                    
                    
                    9.35
                    
                    
                    
                    8.40September
      30, 2005
                    
                    
                    9.40
                    
                    
                    
                    8.95December
      31, 2005
                    
                    
                    9.90
                    
                    
                    
                    9.10March
      31, 2006
                    
                    
                    9.80
                    
                    
                    
                    9.10June
      30, 2006
                    
                    
                    10.05
                    
                    
                    
                    9.55September
      30, 2006
                    
                    
                    9.75
                    
                    
                    
                    9.60December
      31, 2006
                    
                    
                    9.95
                    
                    
                    
                    9.60March
      31, 2007
                    
                    
                    9.40
                    
                    
                    
                    9.40June
      30, 2007
                    
                    
                    9.30
                    
                    
                    
                    9.25September
      30, 2007
                    
                    
                    8.10
                    
                    
                    
                    8.10December
      31, 2007
                    
                    
                    8.25
                    
                    
                    
                    8.25March
      31, 2008
                    
                    
                    7.00
                    
                    
                    
                    7.00June
      30, 2008
                    
                    
                    6.90
                    
                    
                    
                    6.90September
      30, 2008
                    
                    
                    6.45
                    
                    
                    
                    6.45December
      31, 2008
                    
                    
                    5.80
                    
                    
                    
                    5.80
 
 SFSB,
Inc. has not paid any cash dividends.
 
 Stockholder and General
      Inquiries
                  
                  Transfer AgentSFSB,
      Inc.
                  
                  Illinois
      Stock Transfer Company1614
      Churchville Road
                  
                  209
      West Jackson Boulevard, Suite 903Bel
      Air, Maryland 21015
                  
                  Chicago,
      Illinois 60606-6905(443)
      265-5570
                  
                  (312)
      427-2953Attention:  Charles
      E. Wagner, Jr.Executive
      Vice President
 Please
contact our transfer agent directly for assistance in changing your address,
elimination of duplicate mailing, transferring stock, or replacing lost, stolen
or destroyed stock certificates.
 
 Annual
Reports
 
 A copy of
the SFSB, Inc. Annual Report on Form 10-K without exhibits for the year ended
December 31, 2008 as filed with the Securities and Exchange Commission, may be
obtained without charge by contacting Charles E. Wagner, Jr., Executive Vice
President, SFSB, Inc., 1614 Churchville Road, Bel Air, Maryland
21015.
 
 26
 
 Independent Registered Public Accounting
      Firm
                    
                    Special CounselBeard
      Miller Company LLP
                    
                    Ober,
      Kaler, Grimes & ShriverSuite
      404
                    
                    A
      Professional Corporation100
      West Road
                    
                    120
      E. Baltimore StreetBaltimore,
      Maryland  21204
                    
                    Baltimore,
      Maryland  21202
 
 Slavie Federal Savings
Bank’s Office Locations
 
 Main Office
                Branch
      Office1614 Churchville Road
                3700
      East Northern PkwyBel
      Air, MD 21015
                Baltimore,
      MD  21206






27