Exhibit
      13 ANNNUAL
      REPORT TO STOCKHOLDERS







**SFSB,
        INC.**
 
 **2007
        ANNUAL REPORT**
 
 Page #Letter
                  to Stockholders
              1Selected
                  Consolidated Financial and Other Data
              2Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              4Consolidated
                  Financial Statements
              22Directors
                  and Officers
              51Investor
                  and Corporate Information
              52





**SELECTED
      CONSOLIDATED FINANCIAL AND OTHER DATA**





The
      information at and for the year ended December 31, 2007, 2006 and 2005 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,****2007**
            
            **2006**
            
            **2005**(In
                Thousands)**Selected
                Financial Condition Data:**Total
                assets
            
            $
            172,244
            
            $
            174,225
            
            $
            171,067Cash
                and cash equivalents
            
            
            1,277
            
            
            2,851
            
            
            1,342Loans
                receivable(1)
            
            
            147,744
            
            
            147,118
            
            
            144,609Investment
                securities
            
            
            14,189
            
            
            15,726
            
            
            16,676Deposits
            
            
            114,098
            
            
            111,823
            
            
            109,623Borrowings
            
            
            34,000
            
            
            39,000
            
            
            36,000Equity
            
            
            21,769
            
            
            22,365
            
            
            22,805







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





**Years
                Ended December 31,****2007**
            
            **2006**
            
            **2005**(In
                Thousands, except for per share data)**Selected
                Operating Data:**Total
                interest income
            
            $
            9,414
            
            $
            9,091
            
            $
            7,720Total
                interest expense
            
            
            6,137
            
            
            5,467
            
            
            3,795Net
                interest income
            
            
            3,277
            
            
            3,624
            
            
            3,925Provision
                for loan losses
            
            
            244
            
            
            376
            
            
            58Net
                interest income after provision for loan losses
            
            
            3,033
            
            
            3,248
            
            
            3,867Other
                income
            
            
            434
            
            
            277
            
            
            234Non-interest
                expense
            
            
            3,286
            
            
            3,482
            
            
            3,700Income
                taxes
            
            
            78
            
            
            25
            
            
            162Net
                income
            
            $
            103
            
            $
            18
            
            $
            239Basic
                Earnings per Share
            
            $
            0.04
            
            $
            0.01
            
            $
            0.08Diluted
                Earnings per Share
            
            $
            0.04
            
            $
            0.01
            
            $
            0.08





1





**At
                or for the Years Ended December 31,****2007**
            
            **2006**
            
            **2005****Selected
                Financial Ratios and Other Data:**Performance
                Ratios:Return
                on average assets(1)
            
            
            0.06
            %
            
            0.01
            %
            
            0.15
            %Return
                on average equity
            
            
            0.46
            
            
            0.08
            
            
            1.05Net
                loans to total assets
            
            
            85.78
            
            
            84.44
            
            
            84.53Net
                yield on average interest-earning assets
            
            
            5.70
            
            
            5.43
            
            
            5.05Net
                cost of average interest bearing liabilities
            
            
            4.19
            
            
            3.68
            
            
            2.83Net
                interest rate spread(2)
            
            
            1.51
            
            
            1.75
            
            
            2.22Net
                interest margin(3)
            
            
            1.99
            
            
            2.17
            
            
            2.57Average
                interest-earning assets to average interest bearing
                liabilities
            
            
            1.13
            x
            
            1.13
            x
            
            1.14
            xNon-interest
                expense to average assets
            
            
            1.91
            %
            
            2.00
            %
            
            2.31
            %Average
                equity to average assets
            
            
            12.89
            
            
            12.93
            
            
            14.22Efficiency
                ratio(4)
            
            
            88.55
            
            
            89.26
            
            
            88.96Capital
                Ratios:Tangible
                ratio
            
            
            9.81
            %
            
            9.62
            %
            
            9.70
            %Tier
                1 core ratio
            
            
            9.81
            
            
            9.62
            
            
            9.70Total
                risk-based capital ratio
            
            
            17.36
            
            
            17.79
            
            
            18.26Asset
                Quality Ratios:Net
                charge-offs to average nonperforming assets
            
            
            9.94
            %
            
            -
            %
            
            -
            %Net
                charge-offs to average loans outstanding
            
            
            0.08
            
            
            -
            
            
            -Allowance
                for loan losses to gross loans outstanding
            
            
            0.65
            
            
            0.57
            
            
            0.32Non-performing
                loans to total assets
            
            
            0.27
            
            
            0.85
            
            
            0.73Non-performing
                assets to total assets
            
            
            0.90
            
            
            0.85
            
            
            0.73Non-performing
                loans to total loans
            
            
            0.32
            
            
            1.01
            
            
            0.86Other
                Data:Number
                of full-service offices(5)
            
            
            2
            
            
            2
            
            
            3





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


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


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


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


(5)
            We
                closed our Edgewood branch on February 24, 2006.





2





**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, 2007,
      we
      had consolidated assets of $172,244,000, deposits of $114,098,000 and
      shareholders' equity of $21,769,000.





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





**Overview**





Earnings
      increased to $103,000 in 2007 as compared to $18,000 in 2006 primarily due
      to an
      increase in interest income as a result of an increase in higher yielding
      commercial loan originations, a decrease in the provision for loan losses,
      an
      increase in fee income from loans sold and gain on sale of loans as a result
      of
      selling residential loan originations and an increase in fee income from
      commissions earned through a financial services operation established in
      mid-year. The increase also resulted from a decrease in non-interest expenses.
      These increases were partially offset by an increase in interest expense as
      a
      result of an increase in deposits in an interest rate environment in which
      our
      customers are moving their funds into shorter term accounts with higher interest
      rates. Interest income increased $323,000, or 3.55%, non-interest income
      increased $157,000, or 56.68% and non-interest expenses decreased $196,000,
      or
      5.63%. These improvements were partially offset by a $670,000, or 12.26%,
      increase in interest expenses.





Assets
      declined to $172,244,000 in 2007 as compared to $174,225,000 in 2006 primarily
      because of our use of cash to repay $5,000,000 of borrowings. The decline is
      also the result of a decrease in cash and cash equivalents of $1,574,000, or
      55.21%, to $1,277,000 at December 31, 2007 from $2,851,000 at December 31,
      2006,
      a decrease in investment securities held to maturity of $1,000,000, or 25.00%,
      to $3,000,000 at December 31, 2007 from $4,000,000 at December 31, 2006, a
      decrease in mortgage backed securities held to maturity of $953,000, or 29.78%,
      to $2,247,000 at December 31, 2007 from $3,200,000 at December 31, 2006, and
      a
      decrease in Federal Home Loan Bank stock of $254,000, or 12.11%, to $1,844,000
      at December 31, 2007 from $2,098,000 at December 31, 2006.  These
      decreases were partially offset by an increase in our loan portfolio of
      $626,000, or 0.43%, to $147,744,000 at December 31, 2007 from $147,118,000
      at
      December 31, 2006 and an increase in investment securities available for sale
      of
      $416,000, or 4.88%, to $8,942,000 at December 31, 2007 from $8,526,000 at
      December 31, 2006.





As
      discussed in the Asset Quality section of our Annual Report on Form 10K for
      the
      year ended December 31, 2007, we hold a 19% participation (approximately
      $1,083,000 in unpaid principal balance) in an acquisition and development
      loan.  This loan is a foreclosed real estate participation loan. In June
      2007, a real estate developer made an offer to purchase the foreclosed property
      and the lead participating bank accepted a letter of intent on June 26, 2007.
      The lead participating bank executed a contract with a 90 day feasibility study
      period on July 26, 2007, which was extended to expire on November 15, 2007.
      Prior to its expiration, the lead participating bank agreed to extend the
      contract to expire on January 19, 2008. Subsequently, the lead participating
      bank extended the contract to expire on June 15, 2008. With a pending settlement
      before the end of the third quarter of 2008, we expect to 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.





In
      addition, we now offer a comprehensive and full service approach to managing
      finances and investing in the future. The creation of Slavie Financial Services
      and the addition of a certified financial planner in June 2007 enables 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.





3





As
      a
      gesture of our commitment to our customers and neighbors, and as a result of
      successful events held in 2006, the Bank celebrated Customer Appreciation Days
      at each of its two branch locations again in 2007, promoting its newest
      products. To remain competitive and offer even more choices to our customers,
      in
      2007, we developed a  health
      savings account to assist customers in making medical expenses more affordable
      and began offering Coverdell Education Savings Accounts to assist our customers
      with planning for educational expenses. We also began offering an eight month
      certificate of deposit with what we believe is an attractive interest rate.
      In
      addition, we offer a merchant bank card service through a third party vendor,
      which offers our commercial checking account customers the convenience of
      processing their debit and credit transactions with ease. 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 implement remote deposit
      for commercial accountholders, a Slavie credit card, foreign currency services
      for our customers traveling abroad and check imaging services for our checking
      accountholders. We expect to develop and offer these services during 2008.





We
      continue to implement strategies formed during strategic planning meetings
      of
      the Board of Directors and the Company’s officers over the past year and a half.
      In our continued efforts to boost the yield of our interest earning assets
      during a period of net interest margin compression, management is selling a
      larger percentage of the Company’s residential loan originations to facilitate
      our goal of increasing and diversifying the mix of commercial loans to
      residential loans in our portfolio. This strategy has enabled us to increase
      our
      fee income on loans sold. In February 2007, we hired an experienced commercial
      loan originator who specializes in acquisition and rehabilitation programs
      for
      investors. And, to further our goal of increasing the average outstanding
      balance of our commercial loan portfolio, we hired another experienced
      commercial loan originator in November 2007, who specializes in commercial
      real
      estate development loans. 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.





Key
      measurements and events for year ended December 31, 2007 include the
      following:





·
            Total
                assets at December 31, 2007 decreased by 1.14% to $172,244,000 as
                compared
                to $174,225,000 as of December 31, 2006.





·
            Total
                borrowings decreased by 12.82% from $39,000,000 at December 31, 2006
                to
                $34,000,000 as of December 31, 2007.





·
            Net
                loans outstanding increased by 0.43% from $147,118,000 as of December
                31,
                2006 to $147,744,000 as of December 31,
                2007.





·
            Nonperforming
                loans and foreclosed real estate totaled $1,551,000 at December 31,
                2007.
                We believe an appropriate allowance for loan losses continues to
                be
                maintained.





·
            Deposits
                at December 31, 2007 were $114,098,000, an increase of $2,275,000
                or 2.03%
                from $111,823,000 at December 31, 2006.





·
            We
                realized net income of $103,000 for the year ended December 31, 2007,
                compared to net income of $18,000 for the year ended December 31,
                2006.





·
            Net
                interest income, our main source of income, was $3,277,000 during
                the year
                ended December 31, 2007 compared to $3,624,000 for the year ended
                December
                31, 2006. This represents a 9.58% decrease for the year ended December
                31,
                2007 as compared to the same period in
                2006.





4





·
            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
                year
                ended December 31, 2007. We had one overdraft protection loan charge-off,
                which was less than $1,000 during the same period in 2006.





·
            Non-interest
                income increased by $157,000, or 56.68%, for the year ended December
                31,
                2007, as compared to the year ended December 31, 2006, from $277,000
                to
                $434,000.





·
            Non-interest
                expense decreased by $196,000 or 5.63% for the year ended December
                31,
                2007, as compared to the year ended December 31, 2006, from $3,482,000
                to
                $3,286,000.





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, has
      improved over the past few years. One of our continued strategies going forward
      is to build our sources of non-interest income. See “Business Strategy.”
Non-interest expense currently consists primarily of compensation and related
      expenses, occupancy expense, deposit insurance premiums, advertising expense,
      data processing expense, furniture, fixture and equipment expenses, telephone,
      postage and delivery expenses and other general and administrative
      expenses. ****





In
      an
      effort to control 2007 non-interest expenses, we successfully replaced our
      branch full-time staffing position openings with part-time employees.  This
      was not only a cost saving measure, but allowed for more scheduling flexibility
      during peak business hours, which provides better customer service. We continue
      to benefit from a three-year agreement, signed in 2006, which fixed our electric
      supply rate pricing.





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





5





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





We
      have
      developed a methodology for evaluating the adequacy of the allowance for loan
      losses that distinguishes between **** specific
      allowances for identified problem loans (“watch list” loans), a general
      valuation allowance on certain identified problem loans 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.





Management
      has significant discretion in making the judgments inherent in the determination
      of the provision and allowance for loan losses, including in connection with
      the
      valuation of collateral and the financial condition of the borrower. The
      establishment of allowance factors is a continuing exercise and allowance
      factors may change over time, resulting in an increase or decrease in the amount
      of the provision or allowance based upon the same volume and classification
      of
      loans. **** Changes
      in allowance factors or in management’s interpretation of those factors will
      have a direct impact on the amount of the provision, and a corresponding effect
      on income and assets. Also, errors in management’s perception and assessment of
      the allowance factors could result in the allowance not being adequate to cover
      losses in the portfolio, and may result in additional provisions or charge-offs,
      which would adversely affect income and capital. For additional information
      regarding the allowance for loan losses, see “Results of Operations for the
      Years Ended December 31, 2007 and 2006 - Provision for Loan Losses and Analysis
      of Allowance for Loan Losses.”





As
      disclosed in Note 5 to the Consolidated Financial Statements, there are certain
      securities in an unrealized loss position that management believes at this
      time
      are 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 then until recovery, a write down through the
      statement of operations would be necessary. As declines in the fair value of
      available-for-sale and held-to-maturity securities below their cost that are
      deemed to be other-than-temporary in nature are reflected in earnings as
      realized losses. In estimating other-than-temporary impairment losses,
      management gives consideration to (1) the length of time and the extent to
      which
      the fair value has been less than cost, (2) the financial condition and
      near-term prospects of the issuer, and (3) the intent and ability of the Bank
      to
      retain its securities with the issuer for a period of time sufficient to allow
      for an anticipated recovery in fair value. Management also considers the
      assessment of whether or not investment impairment is other than temporary
      to be
      a critical accounting estimate.





6





On
      January 1, 2005, the Company adopted SFAS 123R using the modified-prospective
      transition method as more fully described in Note 1 of the Consolidated
      Financial Statement. The compensation expense recognized in 2007 pertaining
      to
      the stock-based compensation plans was $119,000 and the related tax benefit
      was
      $33,000. As of December 31, 2007, there was $309,000 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 2.4 years. The value of stock options and, therefore, the
      resulting expense realized is heavily dependent upon estimates and assumptions
      we make as elaborated upon in Note 12 of the consolidated financial statements.





**Business
      Strategy**





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





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





·
            Leveraging
                excess equity to improve earnings;





·
            Increasing
                loan diversification with an emphasis on commercial lending;





·
            Increasing
                residential loan originations to sell on the secondary
                market;





·
            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 other borrowings to finance a greater amount of
      interest earning assets. Our borrowings decreased $5,000,000 during 2007 and
      increased $3,000,000 during 2006.





*Increasing
      loan diversification, particularly with respect to commercial business and
      commercial real estate loans* .
      We
      believe that increasing loan diversification has increased our competitive
      profile and improved earnings through higher yields. 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 three years. During 2007, our commercial mortgage loans increased
      from $5,752,000 to $12,273,000, or 8.15% of our loan portfolio and our
      commercial business loans increased from $2,800,000 to $3,593,000, or 2.39%
      of
      our loan portfolio. We have also expanded our consumer lending activities by
      cross-selling to a larger base of transaction accounts.





*Increasing
      residential loan originations* .
      During
      2007, we continued to originate residential mortgage loans within our market
      area. As of December 31, 2007 and December 31, 2006, $112,198,000 and
      $117,755,000, respectively, or 74.55% and 79.48%, 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, 2007 and December 31, 2006, we originated
      $23,569,000 and $14,400,000, 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 loans that we sell in the secondary market. Over time,
      we
      may evaluate selling loans on a servicing retained basis. To date, our secondary
      market activities continue to improve. During 2007, we sold forty-four
      residential mortgage loans with a total principal balance of $7,142,000.
      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.





7





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
      are affiliated with an ATM network, allowing our customers to use the ATM
      machines of a larger financial institution, with a network of numerous local
      branches, without charge. Also, we continue to offer free ServiceFirst Internet
      Banking, Simplicity Bill Pay to our retail customers, and 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.





*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 $79,000 during 2007 compared to 2006.





*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, 2007, our nonperforming loans (loans that were 90
      days or more past due) were 0.32% of our


total
      loan portfolio and 0.27% 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
      mid-year 2007, we created an alternative means for our customers to reach their
      financial well being potential by offering them investing guidance and financial
      planning expertise through a financial services operation, with the addition
      of
      a certified financial planner, who sells non-insured investment products. In
      2007, we also developed a health savings account to assist customers in making
      medical expenses more affordable and began offering Coverdell Education Savings
      Accounts to assist our customers with planning for educational expenses. In
      addition, we offer a merchant bank card service through a third party vendor,
      offering the convenience of debit and credit card transaction processing to
      our
      commercial checking account customers. We have informed our customers of the
      launching of these new products and services through the distribution of a
      quarterly newsletter, entitled Today’s Slavie.





**Comparison
      of Financial Condition at December 31, 2007 and 2006**





*Assets* .
      Our
      total assets decreased by $1,981,000, or 1.14%, to $172,244,000 at December
      31,
      2007, from $174,225,000 at December 31, 2006. The decrease in total assets
      resulted primarily from a $1,574,000, or 55.21% decrease in cash and cash
      equivalents, from $2,851,000 at December 31, 2006 to $1,277,000 at December
      31,
      2007, a $1,000,000, or 25.00%, decrease in investment securities held to
      maturity, from $4,000,000 at December 31, 2006 to $3,000,000 at December 31,
      2007, a $953,000, or 29.78%, decrease in mortgage backed securities held to
      maturity, from $3,200,000 at December 31, 2006 to $2,247,000 at December 31,
      2007, and a $254,000, or 12.11%, decrease in Federal Home Loan Bank stock,
      to
      $1,844,000 at December 31, 2007 from $2,098,000 at December 31, 2006. These
      decreases were partially offset by a $626,000, or 0.43%, increase in net loans
      receivable, from $147,118,000 at December 31, 2006 to $147,744,000 at December
      31, 2007 and a $416,000, or 4.88% increase in investment securities available
      for sale, from $8,526,000 at December 31, 2006 to $8,942,000 at December 31,
      2007.





8





Approximately
      70.84% of the $626,000 increase in net loans receivable was the result of
      additional one-to-four family residential loan originations, consistent with
      our
      intended growth strategy in this area. Cash and cash equivalents decreased
      primarily due to our use of cash to pay off borrowings. In general, the decrease
      in mortgage-backed securities resulted from scheduled repayments and payoffs
      and
      our use of the received funds to originate loans. As we are not continuing
      to
      purchase mortgage-backed securities, we expect continued decreases in this
      asset
      both in amount and as a percentage of our assets.





*Liabilities* .
      Total
      liabilities decreased by $1,385,000, or 0.91%, to $150,475,000 at December
      31,
      2007, from $151,860,000 at December 31, 2006. The decrease in total liabilities
      resulted from a $5,000,000, or 12.82% decrease in borrowings, from $39,000,000
      at December 31, 2006 to $34,000,000 at December 31, 2007, offset by increases
      of
      $2,275,000, or 2.03%, in deposits, from $111,823,000 at December 31, 2006 to
      $114,098,000 at December 31, 2007, a $693,000, or 180.47% increase in checks
      outstanding in excess of bank balance, from $384,000 at December 31, 2006 to
      $1,077,000 at December 31, 2007 and a $658,000, or 217.16% increase in other
      liabilities, from $303,000 at December 31, 2006 to $961,000 at December 31,
      2007. The decrease in borrowings was consistent with our de-leveraging strategy
      in the current interest rate environment. The other liabilities consist
      primarily of escrow reserves for our renovation loans, accounts payable for
      treasury stock purchased on December 31, 2007, but not settled until early
      January 2008, accrued federal and state income taxes and accrued interest on
      Federal Loan Home Bank borrowings.





*Stockholders’
      Equity* .
      Total
      equity decreased by $596,000, or 2.66% to $21,769,000 at December 31, 2007,
      compared to $22,365,000 at December 31, 2006 as a result of the purchase of
      $914,000 in additional Treasury stock. The decrease in equity also reflects
      a
      $23,000 increase in accumulated other comprehensive loss (resulting from
      unrealized losses on investments available for sale, net of tax), offset by
      net
      income of $103,000 and stock based compensation of $171,000. We are considered
      “well capitalized” under the risk-based capital guidelines applicable to us.





9





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





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


**At December 31,**
                
                **Years Ended December 31,****2007**
                
                **2007**
                
                **2006**
                
                **2005****Outstanding**
                  **Balance**
                
                **Yield/**
                  **Rate**
                
                **Average**
                  **Outstanding**
                  **Balance**
                
                **Interest**
                  **Earned/**
                  **Paid**
                
                **Yield/**
                  **Rate**
                
                **Average**
                  **Outstanding**
                  **Balance**
                
                **Interest**
                  **Earned/**
                  **Paid**
                
                **Yield/**
                  **Rate**
                
                **Average**
                  **Outstanding**
                  **Balance**
                
                **Interest**
                  **Earned/**
                  **Paid**
                
                **Yield/**
                  **Rate**(Dollars
                    in Thousands)Interest-earning
                    assets:Loans
                    receivable(1)
                
                $
                147,744
                
                
                5.71
                %
                $
                145,659
                
                $
                8,435
                
                
                5.79
                %
                $
                147,238
                
                $
                8,165
                
                
                5.55
                %
                $
                129,169
                
                $
                6,875
                
                
                5.32
                %Mortgage-backed
                    securities
                
                
                2,247
                
                
                5.25
                
                
                2,683
                
                
                118
                
                
                4.40
                
                
                3,773
                
                
                157
                
                
                4.16
                
                
                5,662
                
                
                204
                
                
                3.60Investment
                    securities (available for sale)
                
                
                8,942
                
                
                5.05
                
                
                8,751
                
                
                452
                
                
                5.17
                
                
                8,339
                
                
                390
                
                
                4.68
                
                
                8,059
                
                
                279
                
                
                3.46Investment
                    securities (held to maturity)
                
                
                3,000
                
                
                4.60
                
                
                3,583
                
                
                138
                
                
                3.85
                
                
                4,000
                
                
                151
                
                
                3.78
                
                
                3,997
                
                
                153
                
                
                3.83Other
                    interest-earning assets
                
                
                2,612
                
                
                10.38
                
                
                4,383
                
                
                271
                
                
                6.18
                
                
                3,931
                
                
                228
                
                
                5.80
                
                
                6,062
                
                
                209
                
                
                3.45Total
                    interest-earning assets
                
                
                164,545
                
                
                5.72
                
                
                %165,059
                
                
                9,414
                
                
                5.70
                %
                
                167,281
                
                
                9,091
                
                
                5.43
                %
                
                152,949
                
                
                7,720
                
                
                5.05
                %Non-interest
                    earning assets
                
                
                7,699
                
                
                
                
                
                7,406
                
                
                
                
                
                
                
                
                7,074
                
                
                
                
                
                
                
                
                7,232Total
                    assets
                
                $
                172,244
                
                
                
                
                $
                172,465
                
                
                
                
                
                
                
                $
                174,355
                
                
                
                
                
                
                
                $
                160,181Interest-bearing
                    liabilities:Savings
                    deposits
                
                $
                14,586
                
                
                1.18
                %
                $
                16,113
                
                
                172
                
                
                1.07
                %
                $
                23,132
                
                
                288
                
                
                1.25
                %
                $
                33,595
                
                
                436
                
                
                1.30
                %Demand
                    and NOW accounts
                
                
                8,536
                
                
                2.32
                
                
                7,552
                
                
                198
                
                
                2.62
                
                
                4,055
                
                
                68
                
                
                1.68
                
                
                2,339
                
                
                15
                
                
                0.56Certificates
                    of deposit
                
                
                89,675
                
                
                4.78
                
                
                88,964
                
                
                4,290
                
                
                4.82
                
                
                82,037
                
                
                3,497
                
                
                4.26
                
                
                72,124
                
                
                2,537
                
                
                3.52Escrows
                
                
                -
                
                
                -
                
                
                5
                
                
                -
                
                
                -
                
                
                11
                
                
                -
                
                
                -
                
                
                15
                
                
                -
                
                
                -Borrowings
                
                
                34,000
                
                
                4.34
                
                
                33,917
                
                
                1,477
                
                
                4.35
                
                
                39,250
                
                
                1,614
                
                
                4.11
                
                
                26,250
                
                
                807
                
                
                3.07Total
                    interest-bearing liabilities
                
                
                146,797
                
                
                4.18
                %
                
                146,551
                
                
                6,137
                
                
                4.19
                %
                
                148,485
                
                
                5,467
                
                
                3.68
                %
                
                134,323
                
                
                3,795
                
                
                2.83
                %Non-interest-bearing
                    liabilities
                
                
                3,678
                
                
                
                
                
                3,691
                
                
                
                
                
                
                
                
                3,330
                
                
                
                
                
                
                
                
                3,077Total
                    liabilities
                
                
                150,475
                
                
                
                
                
                150,242
                
                
                
                
                
                
                
                
                151,815
                
                
                
                
                
                
                
                
                137,400Total
                    equity(2)
                
                
                21,769
                
                
                
                
                
                22,223
                
                
                
                
                
                
                
                
                22,540
                
                
                
                
                
                
                
                
                22,781Total
                    liabilities and equity
                
                $
                172,244
                
                
                
                
                $
                172,465
                
                
                
                
                
                
                
                $
                174,355
                
                
                
                
                
                
                
                $
                160,181Net
                    interest income
                
                
                
                
                
                
                
                
                
                
                $
                3,277
                
                
                
                
                
                
                
                $
                3,624
                
                
                
                
                
                
                
                $
                3,925Interest
                        rate spread(3)
                
                
                
                
                
                1.54
                %
                
                
                
                
                
                
                
                1.51
                %
                
                
                
                
                
                
                
                1.75
                %
                
                
                
                
                
                
                
                2.22
                %Net
                    interest-earning assets
                
                $
                17,748
                
                
                
                
                $
                18,508
                
                
                
                
                
                
                
                $
                18,796
                
                
                
                
                
                
                
                $
                18,626Net
                    interest margin(4)
                
                
                
                
                
                1.99
                %
                
                
                
                
                
                
                
                1.99
                %
                
                
                
                
                
                
                
                2.17
                %
                
                
                
                
                
                
                
                2.57
                %Ratio
                    of interest earning assets to interest bearing
                    liabilities
                
                
                
                
                
                
                
                
                
                
                
                1.13
                x
                
                
                
                
                
                
                
                1.13
                x
                
                
                
                
                
                
                
                1.14
                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.




10





**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,****2007
                vs. 2006**
            
            **2006
                vs. 2005****Increase/(Decrease)**
              **Due
                to**
            
            
            
            **Increase/(Decrease)**
              **Due
                to****Volume**
            
            **Rate**
            
            **Total**
              **Increase**
              **(Decrease)**
            
            **Volume**
            
            **Rate**
            
            **Total**
              **Increase**
              **(Decrease)**(Dollars
                in Thousands)Interest
                income:Loans
                receivable
            
            $
            (87
            )
            $
            357
            
            $
            270
            
            $
            985
            
            $
            305
            
            $
            1,290Mortgage-backed
                securities
            
            
            (48
            )
            
            9
            
            
            (39
            )
            
            (75
            )
            
            28
            
            
            (47
            )Investment
                securities (available for sale)
            
            
            20
            
            
            42
            
            
            62
            
            
            10
            
            
            101
            
            
            111Investment
                securities (held to maturity)
            
            
            (16
            )
            
            3
            
            
            (13
            )
            
            0
            
            
            (2
            )
            
            (2
            )Other
                interest-earnings assets
            
            
            27
            
            
            16
            
            
            43
            
            
            (91
            )
            
            110
            
            
            19Total
                interest income
            
            
            (104
            )
            
            427
            
            
            323
            
            
            829
            
            
            542
            
            
            1,371Interest
                expense:Savings
                deposits
            
            
            (79
            )
            
            (37
            )
            
            (116
            )
            
            (132
            )
            
            (16
            )
            
            (148
            )Demand
                and NOW deposits
            
            
            79
            
            
            51
            
            
            130
            
            
            15
            
            
            38
            
            
            53Certificates
                of deposits
            
            
            310
            
            
            483
            
            
            793
            
            
            379
            
            
            581
            
            
            960Escrow.
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0Borrowings
            
            
            (227
            )
            
            90
            
            
            (137
            )
            
            479
            
            
            328
            
            
            807Total
                interest expense
            
            
            83
            
            
            587
            
            
            670
            
            
            741
            
            
            931
            
            
            1,672Net
                interest income
            
            $
            (187
            )
            $
            (160
            )
            $
            (347
            )
            $
            88
            
            $
            (389
            )
            $
            (301
            )





Comparison
      of Operating Results for the Years Ended December 31, 2007 and 2006





*Net
      Income* .
      Net
      income increased by $85,000, or 472.22%, to $103,000 for the year ended December
      31, 2007, from $18,000 for the year ended December 31, 2006. The increase was
      due primarily to a $323,000 increase in interest income, a $132,000 decrease
      in
      provision for loan losses, a $157,000 increase in non-interest income and a
      $196,000 decrease in non-interest expenses, offset by a $670,000 increase in
      interest expense.





*Net
      Interest Income* .
      Net
      interest income decreased $347,000, or 9.58%, to $3,277,000 for the year ended
      December 31, 2007, from $3,624,000 for the year ended December 31, 2006. The
      decrease was primarily a result of a 51 basis point increase in the cost of
      average interest bearing liabilities, from 3.68% to 4.19%, while the yield
      on
      average interest earning assets only increased 27 basis points from 5.43% to
      5.70% and the balance in average interest earning assets decreased by
      $2,222,000, or 1.33%, to $165,059,000 from $167,281,000. The decrease was
      partially offset by a $1,934,000, or 1.30%, decrease in average interest bearing
      liabilities to $146,551,000 from $148,485,000.





Our
      interest rate spread decreased to 1.51% during the year ended December 31,
      2007
      from 1.75% during the year ended December 31, 2006, reflecting the more rapid
      increase in the cost of our average interest bearing liabilities as compared
      to
      the increase in the yield of our average interest earning assets. Our net
      interest margin decreased to 1.99% from 2.17% because the growth in the yield
      on
      average interest earning assets was not enough to offset the increase in the
      cost of interest bearing liabilities.





11





The
      ratio
      of interest earning assets to interest bearing liabilities remained unchanged
      at
      1.13 times for the years ended December 31, 2007 and December 31,
      2006.





*Interest
      Income* .
      Interest income increased by $323,000, or 3.55%, to $9,414,000 for the year
      ended December 31, 2007, from $9,091,000 for the year ended December 31, 2006.
      The increase in interest income resulted primarily from an increase of $270,000,
      or 3.31%, in interest and fee income from loans, $49,000, or 9.06%, in interest
      income from investment securities and $43,000, or 18.86%, in interest income
      from other interest earning assets (primarily consisting of interest earned
      on
      federal funds sold and Federal Home Loan Bank stock), partially offset by a
      decrease of $39,000, or 24.84% in interest income from mortgage-backed
      securities.





The
      increase in interest income reflected a 27 basis point increase in the yield
      on
      average interest earning assets to 5.70% for the year ended December 31, 2007
      from 5.43% for the year ended December 31, 2006, reflecting an increase in
      market interest rates.




The
      increase in interest income and fees on loans was due to a 24 basis point
      increase in the average yield on net loans receivable. The increase in interest
      income from investment securities was primarily reflective of a 49 basis point
      increase in the average yield and a $412,000 or 4.94% increase in the average
      balance of available for sale investment securities.





The
      increase in interest income from other interest earning assets (federal funds
      sold and Federal Home Loan Bank stock) was due to a $452,000, or 11.50% increase
      in the average balance of other interest earning assets, from $3,931,000 for
      the
      year ending December 31, 2006 to $4,383,000 for the year ending December 31,
      2007, and a 38 basis point increase in the average yield on these assets (as
      a
      result of increases in short term market interest rates).





The
      decrease in interest income from mortgage-backed securities was primarily the
      result of a $1,090,000, or 28.89% decline in average mortgage-backed securities,
      partially offset by a 24 basis point increase in the yield on these
      securities.





*Interest
      Expense* .
      Interest expense, which consists of interest paid on deposits and borrowings,
      increased by $670,000, or 12.26% to $6,137,000 for the year ended December
      31,
      2007, from $5,467,000 for the year ended December 31, 2006. The increase in
      interest expense resulted from an increase in the average balance of deposits
      and the average cost of interest bearing liabilities, while the balance of
      average interest bearing liabilities decreased slightly. The average balance
      of
      deposits increased to $112,629,000 from $109,224,000 and the average cost of
      deposits increased by 72 basis points as a result of a rising interest rate
      market. The average cost of borrowings increased by 24 basis points as a result
      of borrowings at higher interest rates, while the average balance of borrowings
      decreased to $33,917,000 from $39,250,000 as a result of paying down the
      borrowings.





*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 $244,000 and
      $376,000 for the years ended December 31, 2007 and December 31, 2006,
      respectively. There was one commercial loan charge-off of $120,000 that had
      been
      specifically reserved for in 2006 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, 2007 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.
      We had an  overdraft
      protection line of credit loan charge-off of less than $1,000 during the year
      ended December 31, 2006. We used the same methodology and generally similar
      assumptions in assessing the allowance for both periods.





12





The
      provision for 2007 reflects a $100,000 allowance allocated to an impaired
      non-real estate commercial loan discussed below, the increase of $6,521,000
      in
      commercial mortgage loans and $793,000 in commercial non-mortgage loans during
      the year ended December 31, 2007. Non-performing
      loans decreased to $468,000 at December 31, 2007 from $1,486,000 at December
      31,
      2006, or 68.51% for the period. Non-performing loans were 0.32% and 1.01% of
      total loans at December 31, 2007 and 2006.





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





The
      allowance for loan losses totaled $972,000, or 0.65%, of gross loans outstanding
      of $150,501,000 at December 31, 2007, compared to an allowance for loan losses
      of $850,000, or 0.57% of gross loans outstanding of $148,160,000 at December
      31,
      2006. The increase to the loan loss reserve is due to the increase of our loans
      receivable balance and the addition of $100,000, or 100% of the loan balance
      of
      a commercial non-real estate loan that is classified as impaired. As of 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 this loan. 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 paying as agreed.





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





*Other
      Income* .
      Historically, our non-interest income had been relatively modest and one of
      our
      strategic initiatives is to increase our non-interest income. Non-interest
      income increased $157,000 or 56.68%, to $434,000 for the year ended December
      31,
      2007, as compared to $277,000 for the year ended December 31, 2006. The primary
      reason for the increase in non-interest income is a $66,000, or 165.00%,
      increase in gain on sale of loans to $106,000 for the year ended December 31,
      2007 as compared to $40,000 for the year ended December 31, 2006. Rental income
      from our headquarters building increased $12,000, or 7.95%, to $163,000 for
      the
      year ended December 31, 2007 as compared to $151,000 for the year ended December
      31, 2006. The increase in rental income is a result of our headquarters building
      being 100% leased to non-affiliated tenants at the end of 2007 as compared
      to
      88% at the end of 2006. The increase is also the result of an increase in
      leasing rates to certain non-affiliated tenants during the past year.




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 $79,000, or 91.86%, to $165,000 for the
      year ended December 31, 2007, as compared to $86,000 for the year ended December
      31, 2006. The increase is primarily due to $23,000 earned from commissions
      of
      non-insured investment products sales through our new financial services
      operation and $41,000 in loan processing fees.





*Non-interest
      Expense* .
      Non-interest expense was $3,286,000 for the year ended December 31, 2007 as
      compared to $3,482,000 for the year ended December 31, 2006, a decrease of
      $196,000, or 5.63%. The decrease was due primarily to decreases of $101,000,
      or
      21.44%, in occupancy expenses, $75,000, or 36.76%, in furniture, fixtures and
      equipment expenses and $39,000, 6.05%, in other expenses, partially offset
      by an
      increase of $20,000, or 11.63%, in advertising expenses.





13





The
      decrease in occupancy expenses is the result of no longer carrying the costs
      associated with the operation of the Edgewood branch, which we closed in 2006.
      The decrease in furniture, fixtures and equipment expenses is due to the full
      depreciation of items purchased in 2001 to establish our new offices in Harford
      County. The decease in other expenses is the result of a concerted effort to
      reduce costs in such areas of operation as office supplies, insurance premiums
      and loan expenses and a decision to replace full-time branch staff openings
      with
      part-time employees.





*Income
      Tax Expense* .
      The
      provision for income taxes increased to $78,000 for the year ended December
      31,
      2007 from $25,000 for the year ended December 31, 2006, representing an increase
      of $53,000, or 212.00%. The increase in the provision for income taxes was
      due
      to a higher level of income before taxes. The effective tax rate was 43.09%
      and
      58.14% for 2007 and 2006, respectively.





**Management
      of Market Risk**





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





*Net
      Portfolio Value and Interest Rate Risk* .
      In past
      years, many savings institutions have measured interest rate sensitivity by
      computing the “gap” between the assets and liabilities which are expected to
      mature or reprice within certain time periods, based on assumptions regarding
      loan prepayment and deposit decay rates formerly provided by the Office of
      Thrift Supervision. However, the Office of Thrift Supervision now requires
      the
      computation of amounts by which the net present value of an institution’s cash
      flow from assets, liabilities and off -balance sheet items (the institution’s
      net portfolio value or “NPV”) would change in the event of a range of assumed
      changes in market interest rates. The Office of Thrift Supervision provides
      all
      institutions that file a Consolidated Maturity/Rate Schedule as a part of their
      quarterly Thrift Financial Report with an interest rate sensitivity report
      of
      net portfolio value. The Office of Thrift Supervision simulation model uses
      a
      discounted cash flow analysis and an option-based pricing approach to measuring
      the interest rate sensitivity of net portfolio value. Historically, the Office
      of Thrift Supervision model estimated the economic value of each type of asset,
      liability and off-balance sheet contract under the assumption that the United
      States Treasury yield curve increases or decreases instantaneously on any given
      day by 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 200 basis points. A basis point equals one-hundredth of one
      percent, and 100 basis points equals one percent. An increase in interest rates
      from 3% to 4% would mean, for example, a 100 basis point increase in the “Change
      in Interest Rates” column below. The Office of Thrift Supervision provides us
      the results of the interest rate sensitivity model, which is based on
      information we provide to the Office of Thrift Supervision to estimate the
      sensitivity of our net portfolio value.





14





The
      table
      below sets forth, as of December 31, 2007, the estimated changes in our net
      portfolio value that would result from the designated instantaneous changes
      in
      the United States Treasury yield curve.





**Net
                Portfolio Value**
            
            **Net
                Portfolio Value as a % of Present Value of Assets****Change
                in Interest Rates**
              **(basis
                points)**
            
            **Estimated**
              **NPV**
            
            **Amount
                of Change**
            
            **Percent**
              **Of**
              **Change**
            
            **NPV**
              **Ratio**
            
            **Change
                in Basis**
              **Points**(Dollars
                in Thousands)+300
            
            $
            8,096
            
            $
            (7,992
            )
            
            (50
            )%
            
            5.00
            %
            
            (422)
                basis points+200
            
            
            11,212
            
            
            (4,875
            )
            
            (30
            )
            
            6.74
            
            
            (248)
                basis points+100
            
            
            13,985
            
            
            (2,103
            )
            
            (13
            )
            
            8.19
            
            
            (102)
                basis points+50
            
            
            15,135
            
            
            (952
            )
            
            (6
            )
            
            8.77
            
            
            (45)
                basis points0
            
            
            16,088
            
            
            -
            
            
            -
            
            
            9.22
            
            
            -
                basis points-50
            
            
            16,680
            
            
            592
            
            
            4
            
            
            9.47
            
            
            25
                basis points-100
            
            
            17,050
            
            
            962
            
            
            6
            
            
            9.60
            
            
            38
                basis points-200
            
            
            16,533
            
            
            445
            
            
            3
            
            
            9.20
            
            
            (2)
                basis points





The
      table
      above indicates that at December 31, 2007, in the event of a 100 basis point
      increase in interest rates, we would experience a 13% decrease in net portfolio
      value. In the event of a 200 basis point increase in interest rates, we would
      experience a 30% decrease in net portfolio value.





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





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




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




·
            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.





15





**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, 2007, cash and cash equivalents totaled $1,277,000.
      Securities classified as available-for-sale, which can provide additional
      sources of liquidity, totaled $8,942,000 at December 31, 2007. However, because
      all of these securities were in an unrealized loss position at December 31,
      2007,  and
      because management has the intent and ability to hold these securities until
      recovery or maturity, management does not consider these securities as a source
      of liquidity at December 31, 2007. Also, at December 31, 2007, we had advances
      outstanding of $34,000,000 from the Federal Home Loan Bank of Atlanta. On that
      date, we had the ability to borrow an additional $17,673,000.





At
      December 31, 2007, we had outstanding commitments to originate loans of
      $1,541,000 (excluding the undisbursed portions of loans). These commitments
      do
      not necessarily represent future cash requirements since certain of these
      instruments may expire without being funded. We also extend lines of credit
      to
      customers, primarily home equity lines of credit. The borrower is able to draw
      on these lines as needed, thus the funding is generally unpredictable. Unused
      home equity lines of credit amounted to $4,964,000 at December 31, 2007 and
      unused commercial lines of credit amounted to $887,000 at December 31, 2007.
      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 $57,335,000,
      or
      63.94%, of total certificates of deposit at December 31, 2007. 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 in which some
      of the longer termed accounts have lower rates than the shorter termed accounts.
      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, 2008. 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.





16





The
      following table presents certain of our contractual obligations as of December
      31, 2007.




**Total**
                  
                  **Less
                      than**
                    **One
                      Year**
                  
                  **One
                      to**
                    **Three Years**
                  
                  **Three
                      to**
                    **Five
                      Years**
                  
                  **More
                      than**
                    **Five
                      Years****Contractual
                      Obligations**
                  
                  (Dollars
                      in thousands)Long
                      and short-term debt obligations
                  
                  $
                  34,000
                  
                  $
                  9,000
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  25,000Certificate
                      of deposit maturities
                  
                  
                  89,675
                  
                  
                  57,335
                  
                  
                  21,097
                  
                  
                  11,243
                  
                  
                  -Total
                  
                  $
                  123,675
                  
                  $
                  66,335
                  
                  $
                  21,097
                  
                  $
                  11,243
                  
                  $
                  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, 2007 consisted of $7,500,000 short term
      fixed rate FHLB advances bearing interest at rates ranging from 4.40% to 4.52%
      and $26,500,000 long term convertible rate FHLB advances with fixed interest
      rates ranging from 3.63% to 4.90%. 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.
      Borrowings at December 31, 2006 consisted of $12,500,000 short term fixed rate
      FHLB advances bearing interest at rates ranging from 5.28% to 5.36% and
      $26,500,000 long term fixed rate FHLB advances with interest rates ranging
      from
      3.63% to 4.90%.





The
      following table represents information regarding short term FHLB borrowings
      during the years ended December 31, 2007 and 2006.




**December 31,**
            
            **December 31,****2007**
            
            **2006**(Dollars
                in thousands)Total
                outstanding at period-end
            
            $
            7,500
            
            $
            12,500Average
                interest rate at period-end
            
            
            4.56
            %
            
            5.33
            %Average
                balance during the period
            
            $
            7,792
            
            $
            12,667Average
                interest rate during the period
            
            
            5.17
            %
            
            4.49
            %Maximum
                balance during the period
            
            $
            11,500
            
            $
            9,500





Our
      primary investing activity is the origination of loans, primarily one- to
      four-family residential mortgage loans, commercial loans, and the purchase
      of
      securities. Our primary financing activity consists of activity in deposit
      accounts and Federal Home Loan Bank of Atlanta advances. Deposit growth outpaced
      asset growth over the past five to nine months 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.





17





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


**Year
                  Ended December 31,****2007**
              
              **2006**(Dollars
                  in Thousands)Investing
                  Activities:One-
                  to four-family loan originations
              
              $
              23,868
              
              $
              14,400Other
                  loan originations
              
              
              9,825
              
              
              12,222Financing
                  Activities:Increase
                  in deposits
              
              
              2,275
              
              
              2,200(Decrease)
                  Increase in FHLB advances
              
              
              (5,000
              )
              
              3,000





The
      foregoing was consistent with our expectations and the pricing policies we
      implemented. Deposit products other than savings deposits and non-interest
      bearing demand deposits increased during 2007. Specifically, certificates of
      deposit increased by $3,679,000, NOW and money market demand deposits increased
      by $22,000 while savings deposits decreased by $1,374,000.





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, 2007, we
      exceeded all of our regulatory capital requirements. We are considered “well
      capitalized” under regulatory guidelines. See note 14 of the notes to the
      consolidated financial statements.




**Off-Balance
      Sheet Arrangements**




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





**Financial
                Instruments Whose****Contract
                Amount Represents**
            
            **Contract
                Amount At****Credit
                Risk**
            
            **December 31, 2007**
            
            **December 31, 2006**Lines
                of credit - commercial
            
            $
            887
            
            $
            1,210Lines
                of credit - home equity
            
            
            4,964
            
            
            5,335Lines
                of credit - overdraft checking
            
            
            129
            
            
            118Mortgage
                loan commitments
            
            
            1,541
            
            
            830





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





18





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





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





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





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





Our
      outstanding commitments to make mortgages are at fixed rates ranging from 6.250%
      to 8.250% and 5.625% to 7.125% at December 31, 2007 and December 31, 2006,
      respectively. Loan commitments expire 60 days from the date of the
      commitment.





For
      the
      years ended December 31, 2007 and December 31, 2006, 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.”





**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. These forward-looking statements include statements regarding
      the
      development and introduction of new services, revenues and profitability,
      deposit growth, liquidity, allowance for loan losses, underwriting standards,
      interest rate sensitivity, loan mix, growth strategy, funding of unused lines
      of
      credit, expected recovery of the carrying amount of real estate in connection
      with foreclosed property, market risk and financial and other goals.








19




These
      forward-looking statements are based on our beliefs, assumptions and on
      information available to us as of the date of this Annual Report, and involve
      risks and uncertainties. These risks and uncertainties include, in addition
      to
      those identified in our Annual Report on Form 10-K for the year ended December
      31, 2007, among others: the effect of rising interest rates on our profits
      and
      asset values; risks related to our intended increased focus on commercial real
      estate and commercial business loans; adverse economic conditions in our market
      area; our dependence on key personnel; competitive factors within our market
      area; the effect of developments in technology on our business; adverse changes
      in the overall national economy as well as adverse economic conditions in our
      specific market area; adequacy of the allowance for loan losses; expenses as
      a
      result of our stock benefit plans; 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.





20




**SFSB,
          INC. AND SUBSIDIARIES**
 **TABLE
          OF CONTENTS**
 
 **Page
                    No.****Consolidated
                    Financial Statements**Report
                    of Independent Registered Public Accounting Firm
                1Consolidated
                    Statements of Financial Condition
                2Consolidated
                    Statements of Operations
                3Consolidated
                    Statements of Stockholders’ Equity
                4Consolidated
                    Statements of Cash Flows
                5Notes
                    to Consolidated Financial Statements
                6
                    -
                    29
  21
 
 22


**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 as of December 31, 2007 and 2006, 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
        its subsidiaries as of December 31, 2007 and 2006, and the results of their
        operations and their cash flows for the years then ended, in conformity with
        accounting principles generally accepted in the United States of
        America.
  /s/
        Beard
        Miller Company LLP
 
 Beard
        Miller Company LLP
 Baltimore,
        Maryland
 March
        25,
        2008
  23




**SFSB,
        INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF FINANCIAL CONDITION**
 
 **December
                  31,****2007**
              
              **2006**(Dollars in thousands, except per share data)**ASSETS**Cash
                  and due from banks
              
              **$**
              **612**
              
              $
              881Federal
                  funds sold
              
              
              **665**
              
              
              1,970Cash
                  and cash equivalents
              
              
              **1,277**
              
              
              2,851Investment
                  securities - available for sale
              
              
              **8,942**
              
              
              8,526Investment
                  securities - held to maturity
              
              
              **3,000**
              
              
              4,000Mortgage
                  backed securities - held to maturity
              
              
              **2,247**
              
              
              3,200Loans
                  receivable - net of allowance for loan losses of 2007 $972; 2006
                  $850
              
              
              **147,744**
              
              
              147,118Foreclosed
                  real estate
              
              
              **1,083**
              
              
              -Federal
                  Home Loan Bank of Atlanta stock, at cost
              
              
              **1,844**
              
              
              2,098Premises
                  and equipment, net
              
              
              **5,107**
              
              
              5,265Accrued
                  interest receivable
              
              
              **564**
              
              
              560Other
                  assets
              
              
              **436**
              
              
              607**Total
                  assets**
              
              **$**
              **172,244**
              
              $
              174,225**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY****Liabilities**Deposits
              
              **$**
              **114,098**
              
              $
              111,823Checks
                  outstanding in excess of bank balance
              
              
              **1,077**
              
              
              384Borrowings
              
              
              **34,000**
              
              
              39,000Advance
                  payments by borrowers for taxes and insurance
              
              
              **339**
              
              
              350Other
                  liabilities
              
              
              **961**
              
              
              303**Total
                  liabilities**
              
              
              **150,475**
              
              
              151,860**Stockholders’
                  Equity**Preferred
                  stock, no par value, 1,000,000 shares authorized, none issued and
                  outstanding
              
              
              **-**
              
              
              -Common
                  stock, par value $.01, 9,000,000 shares authorized, 2,975,625 shares
                  issued at December 31, 2007 and 2006 and 2,817,644 and 2,907,759
                  shares
                  outstanding at December 31, 2007 and 2006, respectively
              
              
              **30**
              
              
              30Additional
                  paid-in capital
              
              
              **12,828**
              
              
              12,788Retained
                  earnings (substantially restricted)
              
              
              **11,496**
              
              
              11,393Unearned
                  Employee Stock Ownership Plan shares
              
              
              **(992**
              **)**
              
              (1,050
              )Treasury
                      stock at cost, 2007, 157,981 shares and 2006, 67,866
                      shares
              
              
              **(1,434**
              **)**
              
              (660
              )Accumulated
                  other comprehensive loss
              
              
              **(159**
              **)**
              
              (136
              )**Total
                  stockholders’ equity**
              
              
              **21,769**
              
              
              22,365**Total
                  liabilities and stockholders’ equity**
              
              **$**
              **172,244**
              
              $
              174,225
 
 See
        notes
        to consolidated financial statements.
  24
  **SFSB,
        INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 
 **Years
                  Ended December 31,****2007**
              
              **2006**(Dollars in thousands, except for per share data)Interest
                  and fees on loans
              
              **$**
              **8,435**
              
              $
              8,165Interest
                  and dividends on investment securities
              
              
              **590**
              
              
              541Interest
                  on mortgage backed securities
              
              
              **118**
              
              
              157Other
                  interest income
              
              
              **271**
              
              
              228**Total
                  interest income**
              
              
              **9,414**
              
              
              9,091Interest
                  on deposits
              
              
              **4,660**
              
              
              3,853Interest
                  on short-term borrowings
              
              
              **411**
              
              
              466Interest
                  on long-term borrowings
              
              
              **1,066**
              
              
              1,148**Total
                  interest expense**
              
              
              **6,137**
              
              
              5,467**Net
                  interest income**
              
              
              **3,277**
              
              
              3,624Provision
                  for loan losses
              
              
              **244**
              
              
              376**Net
                  interest income after provision for loan losses**
              
              
              **3,033**
              
              
              3,248**Other
                  Income**Rental
                  income
              
              
              **163**
              
              
              151Other
                  income
              
              
              **165**
              
              
              86Gain
                  on sale of loans
              
              
              **106**
              
              
              40**Total
                  other income**
              
              
              **434**
              
              
              277**Non-Interest
                  Expenses**Compensation
                  and other related expenses
              
              
              **1,740**
              
              
              1,746Occupancy
                  expense
              
              
              **370**
              
              
              471Advertising
                  expense
              
              
              **192**
              
              
              172Service
                  bureau expense
              
              
              **166**
              
              
              162Furniture,
                  fixtures and equipment
              
              
              **129**
              
              
              204Telephone,
                  postage and delivery
              
              
              **83**
              
              
              82Other
                  expenses
              
              
              **606**
              
              
              645**Total
                  non-interest expenses**
              
              
              **3,286**
              
              
              3,482**Income
                  before income tax provision**
              
              
              **181**
              
              
              43Income
                  tax provision
              
              
              **78**
              
              
              25**Net
                  income**
              
              **$**
              **103**
              
              $
              18**Basic
                  Earnings per Share**
              
              **$**
              **0.04**
              
              $
              0.01**Diluted
                  Earnings Per Share**
              
              **$**
              **0.04**
              
              $
              0.01
 
 See
        notes
        to consolidated financial statements.
  25
  **SFSB,
        INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS’ EQUITY**
 **YEARS
        ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006**
 
 ****
              **Stock**
              ****
              **Common
                  Capital**
              ****
              **Paid-In
                  Earnings**
              ****
              **Retained
                  Plan Shares**
              ****
              **Additional
                  Ownership Stock**
              ****
              **Unearned
                  Employee Stock Treasury (Loss)**
              ****
              **Accumulated
                  Other Comprehensive Total**(Dollars
                  in thousands)**BALANCE
                  - JANUARY 1, 2006**
              
              $
              30
              
              $
              12,730
              
              $
              11,375
              
              $
              (1,108
              )
              $
              (96
              )
              $
              (126
              )
              $
              22,805Comprehensive
                  income:Net
                  income
              
              
              -
              
              
              -
              
              
              18
              
              
              -
              
              
              -
              
              
              -
              
              
              18Net
                  unrealized loss on securities available for sale, net of taxes
                  of
                  $6
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (10
              )
              
              (10
              )Total
                  Comprehensive Income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              8Compensation
                  under stock based benefit plans
              
              
              -
              
              
              58
              
              
              -
              
              
              58
              
              
              101
              
              
              -
              
              
              217Purchase
                  of treasury stock (68,361 shares)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (665
              )
              
              -
              
              
              (665
              )**BALANCE
                  - DECEMBER 31, 2006**
              
              
              30
              
              
              12,788
              
              
              11,393
              
              
              (1,050
              )
              
              (660
              )
              
              **(136**
              **)**
              
              22,365Comprehensive
                  income:Net
                  income
              
              
              **-**
              ****
              ****
              **-**
              ****
              ****
              **103**
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **103**
              ****Net
                  unrealized loss on securities available for sale, net of taxes
                  of
                  $17
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **(23**
              **)**
              ****
              **(23**
              **)**Total
                  Comprehensive Income
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **80**
              ********
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****Stock
                  options exercised
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **67**
              ****
              ****
              **-**
              ****
              ****
              **67**
              ****Compensation
                  under stock based benefit plans
              ****
              ****
              **-**
              ****
              ****
              **40**
              ****
              ****
              **-**
              ****
              ****
              **58**
              ****
              ****
              **73**
              ****
              ****
              **-**
              ****
              ****
              **171**
              ****Purchase
                  of treasury stock (104,986 shares)
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **-**
              ****
              ****
              **(914**
              **)**
              ****
              **-**
              ****
              ****
              **(914**
              **)******
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ******BALANCE
                  - DECEMBER 31, 2007**
              ****
              **$**
              **30**
              ****
              **$**
              **12,828**
              ****
              **$**
              **11,496**
              ****
              **$**
              **(992**
              **)**
              **$**
              **(1,434**
              **)**
              **$**
              **(159**
              **)**
              **$**
              **21,769**
 See
        notes
        to consolidated financial statements.
  26
  **SFSB,
        INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 
 **Years
                  Ended December 31,**
              ********
              ****
              **2007**
              ****
              **2006**(Dollars
                  in thousands)**Cash
                  Flows From Operating Activities**Net
                  income
              
              **$**
              **103**
              
              $
              18Adjustments
                  to Reconcile Net Income to Net Cash Provided by Operating
                  Activities:Non-cash
                  compensation under stock based compensation plans and Employee
                  Stock
                  Ownership Plan
              
              
              **171**
              
              
              217Net
                  amortization of premiums and discounts of investment
                  securities
              
              
              **14**
              
              
              15Amortization
                  of deferred loan fees
              
              
              **(89**
              **)**
              
              (54
              )Provision
                  for loan losses
              
              
              **244**
              
              
              376Gain
                  on sale of loans
              
              
              **(106**
              **)**
              
              (40
              )Loans
                  originated for sale
              
              
              **(7,142**
              **)**
              
              (3,739
              )Proceeds
                  from loans sold
              
              
              **7,248**
              
              
              3,779Provision
                  for depreciation
              
              
              **233**
              
              
              410Decrease
                  (increase) in accrued interest receivable and other assets
              
              
              **181**
              
              
              (287
              )(Decrease)
                  increase in accrued interest payable
              
              
              **(7**
              **)**
              
              11Increase
                  (decrease) in other liabilities
              
              
              **665**
              
              
              (57
              )**Net
                  Cash Provided by Operating Activities**
              
              
              **1,515**
              
              
              649**Cash
                  Flows from Investing Activities**Purchase
                  of available for sale securities
              
              
              **(452**
              **)**
              
              (390
              )Proceeds
                  from redemption of held to maturity securities
              
              
              **1,000**
              
              
              -Net
                  decrease (increase) in loans
              
              
              **347**
              
              
              (2,831
              )Purchase
                  of loans
              
              
              **(2,212**
              **)**
              
              -Principal
                  collected on mortgage backed securities
              
              
              **939**
              
              
              1,309Purchase
                  of Federal Home Loan Bank of Atlanta stock
              
              
              **(23**
              **)**
              
              (278
              )Redemption
                  of Federal Home Loan Bank of Atlanta Stock
              
              
              **277**
              
              
              135Purchases
                  of premises and equipment
              
              
              **(75**
              **)**
              
              (63
              )**Net
                  Cash Used in Investing Activities**
              
              
              **(199**
              **)**
              
              (2,118
              )**Cash
                  Flows from Financing Activities**Net
                  increase in deposits
              
              
              **2,275**
              
              
              2,200Increase
                  (decrease) in checks outstanding in excess of bank balance
              
              
              **693**
              
              
              (1,535
              )Proceeds
                  from long term borrowings
              
              
              **10,000**
              
              
              6,500Repayment
                  of long term borrowings
              
              
              **(10,000**
              **)**
              
              (11,500
              )Net
                  change of short term borrowings
              
              
              **(5,000**
              **)**
              
              8,000Decrease
                  in advance payments by borrowers for taxes and insurance
              
              
              **(11**
              **)**
              
              (22
              )Stock
                  options exercised
              
              
              **67**
              
              
              -Purchase
                  of treasury stock
              
              
              **(914**
              **)**
              
              (665
              )**Net
                  Cash (Used in) Provided by Financing Activities**
              
              
              **(2,890**
              **)**
              
              2,978(Decrease)
                  increase in cash and cash equivalents
              
              
              **(1,574**
              **)**
              
              1,509Cash
                  and cash equivalents at beginning of year
              
              
              **2,851**
              
              
              1,342**Cash
                  and cash equivalents at end of year**
              
              **$**
              **1,277**
              
              $
              2,851**Supplemental
                  Disclosures of Cash Flows Information:****Cash
                  paid during the year for:**Income
                  taxes
              
              **$**
              **-**
              
              $
              295Interest
                  expense
              
              **$**
              **6,144**
              
              $
              5,446Transfer
                  of loan to foreclosed real estate
              
              **$**
              **1,083**
              
              $
              -
  See
        notes
        to consolidated financial statements.
  27
  **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        1 - Summary of Significant Accounting Policies**
 
 **Principles
        of Consolidation**
 
 The
        consolidated financial statements include the accounts of SFSB, Inc. (“the
        Company”), its wholly-owned subsidiaries, Slavie Federal Savings Bank (“the
        Bank”) and the Bank’s wholly-owned subsidiary, Slavie Holdings, LLC
        (“Holdings”). The accompanying consolidated financial statements include the
        accounts and transactions of these companies on a consolidated basis since
        inception. All intercompany accounts and transactions have been eliminated
        in
        the consolidated financial statements.
 
 Slavie
        Bancorp, MHC, a mutual holding company whose activity is not included in
        the
        accompanying consolidated financial statements, owns 58.08% of the outstanding
        common stock of the Company as of December 31, 2007.
 
 **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 and the evaluation of other than temporary
        impairment of investment securities.
 
 **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. Realized gains and losses on
        sales,
        determined using the specific identification method, are included in
        earnings.
  28
 
 **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        1 - Summary of Significant Accounting Policies -
        (continued)**
 
 Investments
        and mortgage-backed securities held to maturity are carried at amortized
        cost
        since management has the ability and intention to hold them to maturity.
        Amortization of related premiums and discounts are computed using the level
        yield method over the terms of the securities.
 
 The
        Company evaluates securities for other-than-temporary impairment on a quarterly
        basis. Consideration is given to (1) the length of time and the extent to
        which
        the fair value has been less than the cost, (2) the financial condition and
        near-term prospects of the issuer, and (3) the intent and ability of the
        Company
        to retain its investment in the issuer for a period of time sufficient to
        allow
        for an anticipated recovery in fair value. In evaluating an issuer’s financial
        condition, management considers whether the securities are issued by the
        federal
        government or its agencies, whether downgrades by bond rating agencies have
        occurred and industry analysts’ reports.
 
 **Loans
        Receivable**
 
 Loans
        receivable that management has the intent and ability to hold until maturity
        or
        payoff are stated at their outstanding unpaid principal balances, net of
        an
        allowance for loan losses and any deferred fees 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**
 
 An
        allowance for loan losses is provided through charges to income in an amount
        that management believes necessary for known and inherent losses in the loan
        portfolio that are both probable and estimable, based on evaluations of the
        collectibility of loans and prior loan loss experience. The evaluations take
        into consideration such factors as changes in the nature and volume of the
        loan
        portfolio, overall portfolio quality, review of specific problem loans, and
        current economic conditions that may affect the borrowers' ability to pay.
        Determining the amount of the allowance for loan losses requires the use
        of
        estimates and assumptions, which is permitted under accounting principles
        generally accepted in the United States of America. Actual results could
        differ
        significantly from those estimates. While management uses available information
        to estimate losses on loans, future additions to the allowances may be necessary
        based on changes in economic conditions, particularly in the State of Maryland.
        In addition, various regulatory agencies, as an integral part of their
        examination process, periodically review the Bank’s allowances for losses on
        loans. Such agencies may require the Bank to recognize additions to the
        allowances based on their judgments about information available to them at
        the
        time of their examination. Statement of Financial Accounting Standards (“SFAS”)
        No. 114, as amended by SFAS No. 118 addresses the accounting by creditors
        for
        impairment of certain loans. It is generally applicable for all loans except
        large groups of smaller balance homogeneous loans that are evaluated
        collectively for impairment, including residential mortgage loans and consumer
        installment loans. It also applies to all loans that are restructured in
        a
        troubled debt restructuring involving a modification of terms. SFAS No. 114
        requires that the impaired loans be measured on the present value of expected
        future cash flows discounted at the loan’s effective interest rate, or at the
        loan’s observable market price or the fair value of the collateral if the loan
        is collateral dependent. A loan is considered impaired when, based on current
        information and events, it is probable that a creditor will be unable to
        collect
        all amounts due according to the contractual terms of the loan agreement.
        Loans
        are reviewed for impairment on a monthly basis. The Company’s methodology for
        assessing the adequacy of the allowance for loan losses consists of three
        key
        elements: (i) specific allowances for identified problem loans, including
        certain impaired or collateral-dependent loans; (ii) a general valuation
        allowance on certain identified problem loans; and (iii) a general valuation
        allowance on the remainder of the loan portfolio.
  29
  **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        1 - Summary of Significant Accounting Policies -
        (continued)**
 
 *Specific
        Allowance on Identified Problem Loans.* The
        loan
        portfolio is segregated first between loans that are on the “watch list” and
        loans that are not. Each loan on the watch list is reviewed and an individual
        reserve allocation is established on certain loans based on such factors
        as: (i)
        the strength of the customer’s personal or business cash flow; (ii) the
        availability of other sources of repayment; (iii) the amount due or past
        due;
        (iv) the type and value of collateral; (v) the strength of the collateral
        position; (vi) the estimated cost to sell the collateral; and (vii) the
        borrower’s effort to cure the delinquency. If necessary, an allowance for
        certain impaired loans is established for the amounts by which the discounted
        cash flows (or collateral value or observable market price) are lower than
        the
        carrying value of the loan.
 
 *General
        Valuation Allowance on Certain Identified Problem Loans.* A
        general allowance is established for watch list loans that do not meet the
        definition of impaired. These loans are segregated by loan category and
        allowance percentages are assigned to each category based on inherent losses
        associated with each type of lending and consideration that these loans,
        in the
        aggregate, represent an above-average credit risk and that more of these
        loans
        will prove to be uncollectible compared to loans in the general
        portfolio.
 
 *General
        Valuation Allowance on the Remainder of the Loan Portfolio.* A
        general allowance is established for loans that are not on the watch list
        to
        recognize the inherent losses associated with lending activities, but which,
        unlike specific allowances, has not been allocated to particular problem
        assets.
        This general valuation allowance is determined by segregating the loans by
        loan
        category and assigning allowance percentages based on the historical loss
        experience and delinquency trends. The allowance may be adjusted for significant
        factors that, in management’s judgment, affect the collectibility of the
        portfolio as of the evaluation date. These significant factors may include
        changes in lending policies and procedures, changes in existing general economic
        and business conditions affecting primary lending areas, credit quality trends,
        collateral value, loan volumes and concentrations, seasoning of the loan
        portfolio, specific industry conditions within portfolio segments, recent
        loss
        experience in a particular segment of the portfolio, duration of the current
        business cycle and bank regulatory examination results. The applied loss
        factors
        are reevaluated regularly to ensure their relevance in the current
        environment.
 
 **Premises
        and Equipment**
 
 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.
  30
  **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        1 - Summary of Significant Accounting Policies -
        (continued)**
 
 **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.
 
 Effective
        January 1, 2007, the Company adopted the provision 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 year ended December 31, 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 year ended December
        31,
        2007. The tax years subject to examination by the taxing authorities are
        the
        years ended December 31, 2006, 2005, 2004 and 2003.
 
 **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.
 
 **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.
  31
  **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        1 - Summary of Significant Accounting Policies -
        (continued)**
 
 **Off-Balance
        Sheet Financial Instruments**
 
 In
        the
        ordinary course of business, the Bank has entered into off-balance sheet
        financial instruments consisting of commitments to extend credit. Such financial
        instruments are recorded in the balance sheet when they are funded.
 
 **Comprehensive
        Income**
 
 Accounting
        principles generally require that recognized revenue, expenses, gains and
        losses
        be included in net income. Although certain changes in assets and liabilities,
        such as unrealized gains and losses on securities available for sale, are
        reported as a separate component of the equity section of the balance sheet,
        such items, along with net income, are components of comprehensive
        income.
 
 **Earnings
        Per Share**
 
 Basic
        earnings per share is computed by dividing net income by the weighted average
        number of common shares outstanding for the appropriate period. Unearned
        Employee Stock Ownership Plan (“ESOP”) shares are not included in outstanding
        shares. Diluted earnings per share is computed by dividing net income by
        the
        weighted average shares outstanding as adjusted for the dilutive effect of
        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. Information related to the calculation of earnings per
        share is summarized for the years ended December 31, 2007 and 2006, as
        follows:
  (In
                  thousands, except per share data)
              
              **Year
                  ended****December
                  31, 2007**Basic
              
              
              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
  32
  **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        1 - Summary of Significant Accounting Policies -
        (continued)**
  (In
                  thousands, except per share data)
              
              **Year
                  Ended****December
                  31, 2006**Basic
              
              DilutedNet
                  income
              
              $
              18
              
              $
              18Weighted
                  average common shares outstanding
              
              
              2,815
              
              
              2,815Diluted
                  securities:Stock
                  options
              
              
              **-**
              
              
              5Unvested
                  Stock Awards
              
              
              **-**
              
              
              **1**Adjusted
                  weighted average shares
              
              
              2,815
              
              
              2,821Per
                  share amount
              
              $
              0.01
              
              $
              0.01
  **Share
        Based Compensation**
  Effective
        January 1, 2005, the Company adopted SFAS 123R using the
        modified-prospective transition method. SFAS 123R requires all share-based
        payments to employees, including grants of employee stock options, to be
        recognized as compensation expense in the statement of income at fair value.
        In
        addition to recognizing expense for options granted or modified subsequent
        to
        the adoption date, under the modified-prospective transition method, the
        Company
        will recognize expense over the remaining required service period for any
        stock
        options granted prior to January 1, 2005 for the portion of those grants
        for which the requisite service has not yet been rendered. Prior to the adoption
        of SFAS 123R, the Company did not recognize expense for stock options as
        it
        followed APB Opinion No. 25 and the exercise price of the options was not
        less
        than the share price at the date of grant.
 
 **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.
  33
  **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        1 - Summary of Significant Accounting Policies -
        (continued)**
 
 **Recent
        Accounting Pronouncements**
 
 In
        February 2007, the Financial Accounting Standards Board issued SFAS No. 159,
        “The Fair Value Option for Financial Assets and Financial Liabilities-Including
        an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose
        to measure many financial instruments and certain other items at fair value.
        Unrealized gains and losses on items for which the fair value option has
        been
        elected will be recognized in earnings at each subsequent reporting date.
        Effective January 1, 2008, the Company adopted SFAS No. 159 and has determined
        that it is immaterial to the consolidated financial statements.
  In
        September 2006, the Financial Accounting Standards Board issued FASB Statement
        No. 157, “Fair Value Measurements,” which defines fair value, establishes a
        framework for measuring fair value under Generally Accepted Accounting
        Principles, and expands disclosures about fair value measurements. FASB
        Statement No. 157 applies to other accounting pronouncements that require
        or
        permit fair value measurements. The new guidance is effective for financial
        statements issued for fiscal years beginning after November 15, 2007, and
        for
        interim periods within those fiscal years. Effective January 1, 2008, the
        Company adopted FASB Statement No. 157 and has determined that it is immaterial
        to the consolidated financial statements.
  FASB
        statement No. 141 (R) “Business Combinations” was issued in December of 2007.
        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 noncontrolling interest
        in the
        acquiree. 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.
  Staff
        Accounting Bulletin No. 110 (SAB 110) amends and replaces Question 6 of Section
        D.2 of Topic 14, *“* Share-Based
        Payment,” of the Staff Accounting Bulletin series. Question 6 of Section D.2 of
        Topic 14 expresses the views of the staff regarding the use of the “simplified”
method in developing an estimate of expected term of “plain vanilla” share
        options and allows usage of the “simplified” method for share option grants
        prior to December 31, 2007. SAB 110 allows public companies which do not
        have
        historically sufficient experience to provide a reasonable estimate to continue
        use of the “simplified” method for estimating the expected term of “plain
        vanilla” share option grants after December 31, 2007. Effective January 1, 2008,
        the Company adopted SAB 110 and expects it will not have an impact on its
        consolidated financial statements.
  In
        June
        2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue
        No.
        06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment
        Awards” (“EITF 06-11”). EITF 06-11 states that an entity should recognize a
        realized tax benefit associated with dividends on nonvested equity shares,
        nonvested equity share units and outstanding equity share options charged
        to
        retained earnings as an increase in additional paid in capital. The amount
        recognized in additional paid in capital should be included in the pool of
        excess tax benefits available to absorb potential future tax deficiencies
        on
        share-based payment awards. EITF 06-11 should be applied prospectively to
        income
        tax benefits of dividends on equity-classified share-based payment awards
        that
        are declared in fiscal years beginning after December 15, 2007. The Company
        expects that EITF 06-11 will not have an impact on its consolidated financial
        statements.
  34
  **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        2 - Investment Securities - Available for Sale**
 
 The
        amortized cost and fair value of available for sale investment securities
        are as
        follows:
 
 **Gross**
              
              **Gross****Amortized**
              
              **Unrealized**
              
              **Unrealized**
              
              **Fair****Cost**
              
              **Gains**
              
              **Losses**
              
              **Value****(Dollars
                  in thousands)****December
                  31, 2007:**Adjustable
                  Rate Mortgage Portfolio Mutual Funds
              
              **$**
              **9,200**
              ****
              **$**
              **-**
              ****
              **$**
              **258**
              ****
              **$**
              **8,942****December
                  31, 2006:**Adjustable
                  Rate Mortgage Portfolio Mutual Funds
              
              $
              8,747
              
              $
              -
              
              $
              221
              
              $
              8,526
 
 No
        gains
        or losses were realized for the years ended December 31, 2007 and 2006. The
        mutual funds have no stated maturity date.
 
 **Note
        3 - Investment Securities - Held to Maturity**
 
 The
        amortized cost and fair value of held to maturity investment securities are
        as
        follows:
  **Gross**
              
              **Gross****Amortized**
              
              **Unrealized**
              
              **Unrealized**
              
              **Fair****Cost**
              
              **Gains**
              
              **Losses**
              
              **Value**(Dollars
                  in thousands)**December
                  31, 2007:**FNMA
                  Note
              
              **$**
              **1,000**
              ****
              **$**
              **-**
              ****
              **$**
              **8**
              ****
              **$**
              **992**
              ****FHLB
                  Notes
              ****
              ****
              **2,000**
              ****
              ****
              **-**
              ****
              ****
              **5**
              ****
              ****
              **1,995**
              ****Total
              ****
              **$**
              **3,000**
              ****
              **$**
              **-**
              ****
              **$**
              **13**
              ****
              **$**
              **2,987****December
                  31, 2006:**FNMA
                  Note
              
              $
              1,000
              
              $
              -
              
              $
              31
              
              $
              969FHLB
                  Notes
              
              
              2,000
              
              
              -
              
              
              46
              
              
              1,954FFCB
                  Note
              
              
              1,000
              
              
              -
              
              
              13
              
              
              987Total
              
              $
              4,000
              
              $
              -
              
              $
              90
              
              $
              3,910
  35
  **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        3 - Investment Securities - Held to Maturity - (continued)**
 
 The
        scheduled maturities of held to maturity investment securities at December
        31,
        2007 are shown below:
  **Amortized**
              ****
              **Fair**
              ********
              ****
              **Cost**
              ****
              **Value**(Dollars
                  in thousands)Due
                  within one year
              
              **$**
              **2,000**
              ****
              **$**
              **1,995**Due
                  after one year through five years
              
              
              **-**
              ****
              ****
              **-**Due
                  after ten years
              
              
              **1,000**
              ****
              ****
              **992**Total
              
              **$**
              **3,000**
              ****
              **$**
              **2,987**
 
 **Note
        4 - Mortgage Backed Securities - Held to Maturity**
 
 The
        amortized cost and fair value of mortgage backed securities - held to maturity
        are as follows:
  ****
              ****
              ****
              ****
              ****
              ****
              **Gross**
              ****
              **Gross**
              ********
              ****
              **Amortized**
              ****
              **Unrealized**
              ****
              **Unrealized**
              ****
              **Fair**
              ********
              ****
              **Cost**
              ****
              **Gains**
              ****
              **Losses**
              ****
              **Value****(Dollars
                  in thousands)****December
                  31, 2007**FHLMC
              
              **$**
              **1,355**
              ****
              **$**
              **-**
              ****
              **$**
              **28**
              ****
              **$**
              **1,327**
              ****GNMA
              ****
              ****
              **720**
              ****
              ****
              **3**
              ****
              ****
              **3**
              ****
              ****
              **720**
              ****FNMA
              ****
              ****
              **172**
              ****
              ****
              **2**
              ****
              ****
              **-**
              ****
              ****
              **174**
              ********
              ****
              **$**
              **2,247**
              ****
              **$**
              **5**
              ****
              **$**
              **31**
              ****
              **$**
              **2,221****December
                  31, 2006**FHLMC
              
              $
              1,731
              
              $
              -
              
              $
              61
              
              $
              1,670GNMA
              
              
              1,246
              
              
              1
              
              
              6
              
              
              1,241FNMA
              
              
              223
              
              
              -
              
              
              -
              
              
              223$
              3,200
              
              $
              1
              
              $
              67
              
              $
              3,134
 
 **Note
        5 - Gross Unrealized Losses of Investment Securities**
 
 Below
        are
        schedules of securities with unrealized losses as of December 31, 2007 and
        2006.
        The Company’s unrealized losses are the result, in part, 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. At December 31,
        2007,
        the Company’s adjustable rate mortgage portfolio mutual funds have unrealized
        loss depreciation of 2.80% from the Company’s cost basis. The mutual funds hold
        primarily the highest quality credit rating adjustable rate mortgages. The
        value
        of these funds fluctuate in relation to the general level and direction of
        interest rates. Management believes that the unrealized losses, which have
        existed over the last few years, are attributable to the current rate
        environment combined with uncertainties in the U.S. housing market brought
        about, in part, by the subprime lending situation. Management believes these
        disruptions are only temporary in nature and expects the asset values of
        the
        funds to improve once liquidity is restored to the market and mortgage pricing
        spreads begin to narrow and return to a more stable market. As management
        has
        the intent and ability to hold these securities for the foreseeable future
        until
        anticipated recovery, the declines are not deemed to be other than temporary.
  36
  **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        5 - Gross Unrealized Losses of Investment Securities -
        (continued)**
 
 The
        following table shows the Company’s gross unrealized losses and fair value of
        investments at December 31, 2007 and 2006:
  **Continuous
                    Unrealized Losses****For
                    Less than**
                
                **For
                    More Than****12
                    Months**
                
                **12
                    Months**
                
                
                
                **Total****Fair**
                
                **Unrealized**
                
                **Fair**
                
                **Unrealized**
                
                **Fair**
                
                **Unrealized****Value**
                
                **Losses**
                
                **Value**
                
                **Losses**
                
                **Value**
                
                **Losses**(Dollars
                    in thousands)**December
                    31, 2007****Available
                    for Sale Securities**Adjustable
                    Rate Mortgage Portfolio Mutual Funds
                
                **$**
                **-**
                
                **$**
                **-**
                
                **$**
                **8,942**
                
                **$**
                **258**
                
                **$**
                **8,942**
                
                **$**
                **258****Held
                    to Maturity Securities**FNMA
                    Note - 1 security
                
                
                **-**
                
                
                **-**
                
                
                **992**
                
                
                **8**
                
                
                **992**
                
                
                **8**FHLB
                    Note - 2 securities
                
                
                **-**
                
                
                **-**
                
                
                **1,995**
                
                
                **5**
                
                
                **1,995**
                
                
                **5****Mortgage
                    Backed Securities**FHLMC
                    - 2 securities
                
                
                **-**
                
                
                **-**
                
                
                **1,327**
                
                
                **28**
                
                
                **1,327**
                
                
                **28**GNMA
                    - 1 security
                
                
                **-**
                
                
                **-**
                
                
                **384**
                
                
                **3**
                
                
                **384**
                
                
                **3****Total
                    temporarily impaired securities**
                
                **$**
                **-**
                
                **$**
                **-**
                
                **$**
                **13,640**
                
                **$**
                **302**
                
                **$**
                **13,640**
                
                **$**
                **302**
  37
 
 **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        5 - Gross Unrealized Losses of Investment Securities -
        (continued)**
  **Continuous
                    Unrealized Losses****For
                    Less than**
                
                **For
                    More Than****12
                    Months**
                
                **12
                    Months**
                
                
                
                **Total****Fair**
                
                **Unrealized**
                
                **Fair**
                
                **Unrealized**
                
                **Fair**
                
                **Unrealized****Value**
                
                **Losses**
                
                **Value**
                
                **Losses**
                
                **Value**
                
                **Losses****(Dollars
                    in thousands)****December
                    31, 2006****Available
                    for Sale Securities**Adjustable
                    Rate Mortgage Portfolio Mutual Funds
                
                **$**
                **-**
                
                **$**
                **-**
                
                **$**
                **8,526**
                
                **$**
                **221**
                
                **$**
                **8,526**
                
                **$**
                **221****Held
                    to Maturity Securities**FNMA
                    Note - 1 security
                
                
                **-**
                
                
                **-**
                
                
                **969**
                
                
                **31**
                
                
                **969**
                
                
                **31**FHLB
                    Notes - 2 securities
                
                
                **-**
                
                
                **-**
                
                
                **1,954**
                
                
                **46**
                
                
                **1,954**
                
                
                **46**FFCB
                    Note - 1 security
                
                
                **-**
                
                
                **-**
                
                
                **987**
                
                
                **13**
                
                
                **987**
                
                
                **13****Mortgage
                    Backed Securities**FHLMC
                    - 3 securities
                
                
                **-**
                
                
                **-**
                
                
                **1,659**
                
                
                **61**
                
                
                **1,659**
                
                
                **61**GNMA
                    - 2 securities
                
                
                **-**
                
                
                **-**
                
                
                **1,128**
                
                
                **6**
                
                
                **1,128**
                
                
                **6**Total
                    temporarily impaired securities
                
                **$**
                **-**
                
                **$**
                **-**
                
                **$**
                **15,223**
                
                **$**
                **378**
                
                **$**
                **15,223**
                
                **$**
                **378**
 
 
 **Note
        6 - Loans Receivable**
 
 Loans
        receivable consist of the following:
 
 **December
                  31,****2007**
              
              **2006**(Dollars
                  in thousands)Mortgage
                  loans 1- 4 family residential
              
              **$**
              **112,198**
              
              $
              117,755Construction
                  loans
              
              
              **2,205**
              
              
              300Commercial
                  mortgage loans
              
              
              **12,273**
              
              
              5,752Commercial
                  non-mortgage loans
              
              
              **3,593**
              
              
              2,800Home
                  equity loans
              
              
              **16,670**
              
              
              16,857Land
                  loans
              
              
              **3,135**
              
              
              4,160Home
                  improvement loans
              
              
              **95**
              
              
              116Consumer
                  loans
              
              
              **332**
              
              
              420Total
                  Gross Loans Receivable
              
              
              **150,501**
              
              
              148,160Allowance
                  for loan losses
              
              
              **(972**
              **)**
              
              (850
              )Deferred
                  loan fees
              
              
              **(247**
              **)**
              
              (132
              )Loans
                  in process
              
              
              **(1,538**
              **)**
              
              (60
              )Total
                  Loans Receivable - Net
              
              **$**
              **147,744**
              
              $
              147,118
  38
  **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        6 - Loans Receivable - (continued)**
 
 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
              
              **$**
              **1,242**Loans
                  made
              
              
              **638**New
                  Personnel with existing loans prior to 2007
              
              
              **350**Principal
                  repayments
              
              
              **(363**
              **)**Ending
                  balance
              
              **$**
              **1,867**
 
 Activity
        in the Bank's allowance for loan losses for the periods indicated is as
        follows:
  **Years
                  Ended****December
                  31,****2007**
              
              **2006**(Dollars
                  in thousands)Balance
                  at beginning of period
              
              **$**
              **850**
              
              $
              474Provision
                  for loan losses
              
              
              **244**
              
              
              376Charge-offs
              
              
              **(122**
              **)**
              
              -Recoveries
              
              
              **-**
              
              
              -Balance
                  at end of period
              
              **$**
              **972**
              
              $
              850
  The following
        tables show a summary of information pertaining to impaired and non-accrual
        loans:
 **December
                    31****,****2007**
                
                **2006**(Dollars
                    in thousands)Impaired
                    loans without a valuation allowance
                
                **$**
                -
                
                $
                **-**Impaired
                    loans with a valuation allowance
                
                
                **100**
                
                
                1,343Total
                    impaired loans
                
                **$**
                **100**
                
                $
                1,343Valuation
                    allowance related to impaired loans
                
                **$**
                **100**
                
                $
                423Total
                    non-accrual loans
                
                **$**
                **468**
                
                $
                1,486Total
                    loans past-due ninety days or more and still accruing
                
                **$**
                -
                
                $
                **-**
  39
  **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        6 - Loans Receivable - (continued)**
 
 **Years
                  Ended December 31,****2007**
              
              **200****6**(Dollars
                  in thousands)Average
                  investment in impaired loans
              
              **$**
              **1****34**
              
              $
              1,326Interest
                  income recognized on impaired loans, on a cash basis
              
              **$**
              **1**
              
              $
              29
 
 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 At****Credit
                  Risk**
              
              **December 31, 2007**
              
              **December 31, 2006**(Dollars
                  in thousands)Lines
                  of credit - commercial
              
              **$**
              **887**
              
              $
              1,210Lines
                  of credit - home equity
              
              
              **4,964**
              
              
              5,335Lines
                  of credit - overdraft checking
              
              
              **129**
              
              
              118Mortgage
                  loan commitments
              
              
              **1,541**
              
              
              830
 
 Commercial
        lines of credit are generally secured by a blanket lien on assets of the
        borrower. Revolving Lines of Credit (RLOC) are typically used for short term
        working capital needs and are based most heavily on the accounts receivable
        and
        inventory components of the borrower’s balance sheet. RLOC have terms of one
        year, are subject to annual reaffirmation and carry variable rates of interest.
        The Bank generally receives a one percent fee, based on the commitment
        amount.
 
 Equipment
        lines of credit are secured by equipment being purchased and sometimes by
        a
        blanket lien on assets of the borrower as well. Each advance is repaid over
        a
        three to five years term and carries a variable or prevailing fixed rate
        of
        interest. The Bank will generally advance up to 80% of the cost of the new
        or
        used equipment. These credit facilities are revolving in nature and the
        commitment is subject to annual reaffirmation.
 
 For
        both
        types of credit facilities listed above, the Bank evaluates each customer’s
        credit worthiness on a case-by-case basis.
 
 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.
  40
  **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        6 - Loans Receivable - (continued)**
 
 The
        Bank
        evaluates each customer’s credit worthiness on a case-by-case
        basis.
 
 Overdraft
        lines of credit on checking accounts are unsecured. Linked to any Slavie
        Federal
        personal checking account, the line will automatically make a deposit to
        the
        customer’s checking account if the balance falls below the amount needed to pay
        an item presented for payment.
 
 The
        credit risk involved in these financial instruments is essentially the same
        as
        that involved in extending loan facilities to customers.
 
 The
        Bank's outstanding commitments to make mortgages are at fixed rates ranging
        from
        6.250% to 8.250% and 5.625% to 7.125% at December 31, 2007 and December 31,
        2006
        respectively.
 
 **Note
        7 - Investment in Federal Home Loan Bank of Atlanta Stock**
 
 The
        Bank
        is required to maintain an investment in the stock of the Federal Home Loan
        Bank
        of Atlanta ("FHLB"). On December 17, 2004, the FHLB adopted a new capital
        plan
        under which member institutions are required to maintain capital stock based
        upon two components. The first component is a stock requirement equal to
        0.20%
        of the member’s total assets as of the preceding year end. The second component
        is a stock requirement equal to 4.50% of the member’s outstanding advances.
        Purchases and sales of stock are made directly with the FHLB at par value.
        This
        restricted stock is carried at cost.
 
 **Note
        8 - Premises and Equipment**
 
 Premises
        and equipment are summarized by major classification as follows:
 
 **December
                  31,**
              
              **Useful
                  Life****2007**
              
              **2006**
              
              **in
                  Years**(Dollars
                  In thousands)Land
              
              **$**
              **1,128**
              
              $
              1,128
              
              
              -Office
                  building
              
              
              **4,695**
              
              
              4,639
              
              
              40Furniture,
                  fixtures and equipment
              
              
              **1,221**
              
              
              1,211
              
              
              3-10**7,044**
              
              
              6,978Accumulated
                  depreciation
              
              
              **1,937**
              
              
              1,713**$**
              **5,107**
              
              $
              5,265
 
 The
        provision for depreciation charged to operations for the years ended December
        31, 2007 and 2006 amounted to $233,000 and $410,000, respectively.
 
 Holdings
        has negotiated and rented office space to non-bank tenants in the Churchville
        Road property under various noncancellable operating leases. Credit is extended
        based on an evaluation of the lessee’s financial condition and, generally,
        collateral is not required. These leases included no commitments to provide
        for
        various tenant-finishing costs at December 31, 2007.
 
 The
        cost
        and accumulated depreciation of the property, which is included in premises
        and
        equipment of the Company, was $5,472,000 and $801,000, respectively, at December
        31, 2007.
  41
 
 **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        8 - Premises and Equipment - (continued)**
 
 Future
        minimum rentals to be received from non-Company tenants under noncancellable
        operating leases in effect at December 31, 2007, and in the aggregate, are
        as
        follows:
  (Dollars in thousands)2008
              
              **$**
              **158**2009
              
              
              **65**2010
              
              
              **51**2011
              
              
              **49**2012
              
              
              **43**Thereafter
              
              
              **77****$**
              **443**
 Rentals
        received in 2007 and 2006 were $163,000 and $151,000 respectively and are
        recorded in other income.
 
 **Note
        9 - Deposits**
  The
        Bank
        has the following deposits:
 
 **December
                  31,****2007**
              
              **2006**(Dollars
                  in thousands)Non-interest
                  bearing demand deposits
              
              **$**
              **1,301**
              
              $
              1,356NOW
                  and money market demand deposits
              
              
              **15,390**
              
              
              15,368Savings
                  deposits
              
              
              **7,718**
              
              
              9,092Certificates
                  of deposit
              
              
              **89,675**
              
              
              85,996**114,084**
              
              
              111,812Accrued
                  interest on deposits
              
              
              **14**
              
              
              11**$**
              **114,098**
              
              $
              111,823
 
 The
        aggregate amount of certificates of deposit accounts with a minimum denomination
        of $100,000 was $29,714,000 and $26,547,000 as of December 31, 2007 and 2006,
        respectively.
 
 Scheduled
        maturities of certificates of deposit are as follows:
 
 **December
                  31,****2007**(Dollars in thousands)**Maturing Within**One
                  year
              
              **$**
              **57,335**Two
                  years
              
              
              **11,800**Three
                  years
              
              
              **9,297**Four
                  years
              
              
              **5,805**Five
                  years
              
              
              **5,438**Total
              
              **$**
              **89,675**
  42
 
 **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        9 - Deposits - (continued)**
 
 **Years
                  Ended December 31,****2007**
              
              **2006**(In
                  thousands)**Interest
                  Expense on Deposits**NOW
                  and money market demand deposits
              
              **$**
              **257**
              
              $
              149Savings
                  deposits
              
              
              **113**
              
              
              207Certificates
                  of deposit
              
              
              **4,290**
              
              
              3,497**$**
              **4,660**
              
              $
              3,853
 
 **Note
        10 - Borrowings**
 
 The
        Bank
        has a line of credit from the Federal Home Loan Bank of Atlanta (“FHLB”). The
        line is secured by the FHLB stock and a blanket lien on mortgages. There
        is no
        set limit. Each borrowing is evaluated on a case-by-case basis by the lender.
        The Bank also has a $1 million unsecured line of credit with its correspondent
        bank, M & T Bank, however no advances have been made on this line.
 
 At
        December 31, 2007 and 2006, outstanding borrowings with the FHLB were $34
        million and $39 million respectively. Borrowings at December 31, 2007 consisted
        of $6 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 is also $1.5 million short term daily rate FHLB
        advance bearing an interest rate of 4.40% as of December 31, 2007.  Borrowings
        at December 31, 2006 consisted of $12.5 million short term fixed rate FHLB
        advances bearing interest rates ranging from 5.28% to 5.36% and $26.5 million
        long term fixed rate FHLB advances with interest rates ranging from 3.63%
        to
        4.90%.
 The
        maturities of advances outstanding as of December 31, 2007 are as
        follows:
 
 **Due
                  Within**
              
              (Dollars in thousands)One
                  year
              
              **$**
              **9,000**Beyond
                  five years
              
              
              **25,000****$**
              **34,000**
 
 **Note
        11 - 401(k) Plan and Deferred Compensation Agreement**
 
 The
        Bank
        has a 401(k) plan. Employees could contribute up to $15,000 in 2007, 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 $10,000 and $12,000, respectively, for the years
        ended December 31, 2007 and 2006.
  The
        Bank
        also entered into a deferred compensation agreement with one of its former
        officers. The liability under this agreement was accrued by charges to operating
        expense during prior periods. The liability balances were $34,000 and $44,000
        at
        December 31, 2007 and 2006.
  43
  **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        12 - Stock Grants and Stock Option Plans**
 
 On
        January 1, 2005, the Company adopted SFAS 123R using the modified-prospective
        transition method as more fully described in Note 1. The compensation expense
        recognized pertaining to the stock-based compensation plans was $119,000
        and
        $161,000 for the years ended December 31, 2007 and 2006. The related tax
        benefit
        was $33,000 and $49,000 for the years ended December 31, 2007 and 2006.
 
 As
        of
        December 31, 2007, there was $309,000 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
        2.4 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. 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.
 
 Information
        regarding the Company's stock option plan as of and for the year ended
        December 31, 2007 is as follows:
 
 **Shares**
                
                **Weighted**
                  **Average**
                  **Price**
                
                **Weighted**
                  **Average**
                  **Remaining**
                  **Life**
                
                **Aggregate**
                  **Intrinsic**
                  **Value**Options
                    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 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.
  44
 
 **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        12 - Stock Grants and Stock Option Plans - (continued)**
 
 Information
        regarding the Company's Award Plan as of and for the year ended
        December 31, 2007 is as follows:
 
 **Shares**
              
              **Weighted**
                **Average**
                **Grant
                  Date**
                **Fair
                  Value**Nonvested
                  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
        13 - Common Stock**
 
 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. During the year ended December
        31,
        2006, the Company repurchased 68,361 shares of its stock at an average price
        of
        $9.73 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 it
        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, 2007 and 2006 was $52,000 and $56,000, respectively. The ESOP
        holds
        the common stock in a trust for allocation among participating employees,
        in
        trust or allocated to the participants’ accounts; and an annual contribution
        from the Bank to the ESOP; and earnings thereon. There were 99,136 and 104,968
        of unearned ESOP shares at December 31, 2007 and 2006, respectively. The
        fair
        value of unearned ESOP shares at December 31, 2007 is estimated to be
        $818,000.
 
 All
        employees of the Bank who attain the age of 21 and complete one year of service
        with the Bank will be eligible to participate in the ESOP. Each participant’s
        vested interest under the ESOP is determined according to the following
        schedule: 0% for less than 5 years of service with the Company and 100% for
        more
        than 5 years of service. For vesting purposes, a year of service means any
        plan
        year in which an employee completes at least 1,000 hours of service (whether
        before or after the ESOP’s January 1, 2004 effective date). Vesting accelerates
        to 100% upon a participant’s attainment of normal retirement age 65, death or
        disability.
  45
 
 **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        14 - Regulatory Requirements**
 
 The
        Bank
        is required to maintain cash reserve balances in vault cash or with the Federal
        Reserve Bank. The total of these reserve balances at December 31, 2007 was
        approximately $150,000.
 
 The
        Bank
        is subject to various regulatory capital requirements administered by the
        federal banking agencies. Failure to meet minimum capital requirements can
        initiate certain mandatory and possibly additional discretionary actions
        by
        regulators that, if undertaken, could have a direct material effect on the
        Bank's financial statements. Under capital adequacy guidelines and the
        regulatory framework for prompt corrective action, the Bank must meet specific
        capital guidelines that involve quantitative measures of the Bank's assets,
        liabilities, and certain off-balance-sheet items as calculated under regulatory
        accounting principles. The Bank's capital amounts and classification are
        also
        subject to qualitative judgments by the regulators about components, risk
        weightings, and other factors. Quantitative measures established by regulation
        to ensure capital adequacy require the Bank to maintain minimum amounts and
        ratios (set forth in the table below) of total and Tier I capital (as defined
        in
        the regulations) to risk-weighted assets (as defined), and of Tier I capital
        (as
        defined) to average assets (as defined). Management believes, as of December
        31,
        2007, that the Bank meets all capital adequacy requirements to which it is
        subject.
 
 As
        of
        December 31, 2007, 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, 2007 and 2006.
 
 **Minimum****To
                  Be Well****Minimum**
              
              **Capitalized
                  Under****For
                  Capital**
              
              **Prompt
                  Corrective****Actual**
              
              **Adequacy
                  Purposes**
              
              **Action
                  Provisions****Amount**
              
              **%**
              
              **Amount**
              
              **%**
              
              **Amount**
              
              **%****December
                  31, 2007**
              
              (Dollars
                  in thousands)Tangible
                  (1)
              
              **$**
              **16,948**
              ****
              ****
              **9.81**
              **%**
              **$**
              **2,591**
              ****
              ****
              **1.50**
              **%**
              ****
              **N/A**
              ****
              ****
              **N/A**Tier
                  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**
              **%****December
                  31, 2006**Tangible
                  (1)
              
              $
              16,775
              
              
              9.62
              %
              $
              2,617
              
              
              1.50
              %
              
              N/A
              
              
              N/ATier
                  I risk-based (2)
              
              
              16,775
              
              
              16.93
              %
              
              N/A
              
              
              N/A
              
              $
              5,944
              
              
              6.00
              %Core
                  (leverage) (1)
              
              
              16,775
              
              
              9.62
              %
              
              6,978
              
              
              4.00
              %
              
              8,723
              
              
              5.00
              %Total
                  risk-based (2)
              
              
              17,625
              
              
              17.79
              %
              
              7,926
              
              
              8.00
              %
              
              9,907
              
              
              10.00
              %
  (1)
        To
        adjusted total assets.
 (2)
        To
        risk-weighted assets.
  46
  **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        14 - 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,****2007**
              
              **2006**(Dollars
                  in thousands)Total
                  equity
              
              **$**
              **21,769**
              
              $
              22,365Adjustment
                  for accumulated other comprehensive loss
              
              
              **159**
              
              
              136Adjustment
                  for intangible assets
              
              
              **(6**
              **)**
              
              (17
              )Adjustment
                  for parent company equity
              
              
              **(4,974**
              **)**
              
              (5,709
              )Tangible,
                  Tier 1 and Core capital
              
              
              **16,948**
              
              
              16,775Allowance
                  for loan losses
              
              
              **972**
              
              
              850Total
                  risk-based capital
              
              **$**
              **17,920**
              
              $
              17,625
 
 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, 2007 and 2006 include $1,580,000, for which
        no
        provision for federal income tax has been provided. The unrecorded deferred
        income tax liability on the above amount was approximately
        $610,000.
 
 **Note
        15 - Income Taxes**
 
 The
        income tax provision consists of the following for the years ended December
        31,
        2007 and 2006.
  **December
                  31,****2007**
              
              **2006**(Dollars
                  in thousands)**Current**Federal
              
              $
              (18
              )
              $
              173State
              
              
              (8
              )
              
              30(26
              )
              
              203**Deferred**Federal
              
              
              89
              
              
              (146
              )State
              
              
              15
              
              
              (32
              )104
              
              
              (178
              )$
              78
              
              $
              25
  47
  **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        15 - Income Taxes - (continued)**
 
 The
        amounts computed by applying the statutory federal income tax rate to the
        income
        before taxes is less than the taxes provided for the following
        reasons:
  **Years
                  Ended December 31,****2007**
              
              **2006**(Dollars in thousands)**Percent**
              
              **Percent****of Pretax**
              
              **of
                  Pretax****Amount**
              
              **Income**
              
              **Amount**
              
              **Income****Federal
                  tax at statutory rate****Increases
                  (Decreases) in Taxes**
              
              **$**
              **61**
              
              
              **34.00**
              **%**
              $
              15
              
              
              34.00
              %State
                  tax, net of federal income tax benefit
              
              **$**
              **5**
              
              
              **2.76**
              
              
              (2
              )
              
              (3.91
              )Other
              
              
              **12**
              
              
              **6.33**
              
              
              12
              
              
              28.05**$**
              **78**
              
              
              **43.09**
              **%**
              $
              25
              
              
              58.14
              %
 
 The
        tax
        effects of temporary differences that give rise to significant portions of
        the
        deferred tax assets and deferred tax liabilities at December 31, 2007 and
        2006
        are presented below:
  **December
                  31,****2007**
              
              **2006**(Dollars in thousands)**Deferred
                  Tax Assets:**Allowance
                  for loan losses
              
              **$**
              **383**
              
              $
              328Deferred
                  compensation
              
              
              **13**
              
              
              17Reserve
                  - uncollected interest
              
              
              **1**
              
              
              1Market
                  value adjustment on available for sale securities
              
              
              **102**
              
              
              85Stock-based
                  compensation
              
              
              **31**
              
              
              46**Total
                  gross deferred tax assets**
              
              
              **530**
              
              
              477**Deferred
                  Tax Liabilities:**Federal
                  Home Loan Bank of Atlanta stockdividends
              
              
              **(102**
              **)**
              
              (100
              )Depreciation
              
              
              **(191**
              **)**
              
              _(52
              )**Total
                  gross deferred tax liabilities**
              
              
              **(293**
              **)**
              
              (152
              )**Net
                  deferred tax assets**
              
              **$**
              **237**
              
              $
              325
 
 **Note
        16 - Disclosures about Fair Value of Financial Instruments**
 
 The
        estimated fair values of the Company's financial instruments are summarized
        below. The fair values of a significant portion of these financial instruments
        are estimates derived using present value techniques prescribed by the FASB
        and
        may not be indicative of the net realizable or liquidation values. Also,
        the
        calculation of estimated fair values is based on market conditions at a specific
        point in time and may not reflect current or future fair
        values.
  48
  **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        16 - Disclosures about Fair Value of Financial Instruments -
        (continued)**
 
 The
        carrying amount is a reasonable estimate of fair value for cash equivalents,
        accrued interest receivable and accrued interest payable due to the short-term
        nature of these financial instruments. Fair value is based upon market prices
        quoted by dealers for investment securities and mortgage backed securities.
        The
        carrying amount of Federal Home Loan Bank of Atlanta stock is a reasonable
        estimate of fair value. Loans receivable were discounted using the current
        rates
        at which similar loans would be made to borrowers with similar credit ratings
        and for the same remaining maturities. These rates were used for each aggregated
        category of loans as reported on the Office of Thrift Supervision Quarterly
        Report. The fair value of demand deposits, savings accounts and money market
        deposits is the amount payable on demand at the reporting date. The fair
        value
        of fixed-maturity certificates of deposit is estimated using the rates currently
        offered on deposits of similar remaining maturities. The fair value of
        borrowings is estimated using discounted cash flow analyses, based on rates
        currently available to the Bank for borrowings with similar terms and remaining
        maturities.
 
 The
        fair
        value of commitments to extend credit is estimated using the fees currently
        charged to enter into similar agreements, taking into account market interest
        rates, the remaining terms and present credit worthiness of the
        counterparties.
 
 The
        estimated fair values of the Company's financial instruments are as
        follows:
 
 **December
                  31,****2007**
              
              **2006****Carrying**
              
              **Fair**
              
              **Carrying**
              
              **Fair****Value**
              
              **Value**
              
              **Value**
              
              **Value**(Dollars
                  in thousands)**Financial
                  Assets**Cash
                  and equivalents
              
              **$**
              **1,277**
              
              **$**
              **1,277**
              
              $
              2,851
              
              $
              2,851Investment
                  securities available for sale
              
              
              **8,942**
              
              
              **8,942**
              
              
              8,526
              
              
              8,526Investment
                  securities held to maturity
              
              
              **3,000**
              
              
              **2,987**
              
              
              4,000
              
              
              3,910Mortgage
                  backed securitiesheld
                  to maturity
              
              
              **2,247**
              
              
              **2,221**
              
              
              3,200
              
              
              3,134Federal
                  Home Loan Bank stock
              
              
              **1,844**
              
              
              **1,844**
              
              
              2,098
              
              
              2,098Loans
                  receivable - net
              
              
              **147,744**
              
              
              **144,763**
              
              
              147,118
              
              
              141,590Accrued
                  interest receivable
              
              
              **564**
              
              
              **564**
              
              
              560
              
              
              560**Financial
                  Liabilities**Deposits
              
              **$**
              **114,098**
              
              **$**
              **114,446**
              
              $
              111,823
              
              $
              112,091Borrowings
              
              
              **34,000**
              
              
              **35,251**
              
              
              39,000
              
              
              38,653Accrued
                  interest payable
              
              
              **95**
              
              
              **95**
              
              
              102
              
              
              102**Financial
                  Instruments - Off-Balance Sheet**Loan
                  commitments
              
              **$**
              **-**
              
              **$**
              **-**
              
              $
              -
              
              $
              -Lines
                  of credit
              
              
              **-**
              
              
              **-**
              
              
              -
              
              
              -
  49
 
 **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        17 - 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, 2007
        and
        2006, Slavie Federal Savings Bank paid Mr. Brown $700 and $3,000, 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, 2007 and 2006, Slavie Federal Savings Bank paid law firms that
        Mr.
        Drechsler was associated with $33,000 and $12,000, 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, 2007 and 2006, borrowers paid Sage Title Group,
        LLC
        (formerly Universal Title, LLC) $31,000 and $73,000, respectively, for those
        services.
 
 
 **Note
        18 - Condensed Financial Information (Parent Company Only)**
 
 **December
                  31,****2007**
              
              **2006**(Dollars
                  in thousands)**Statements
                  of Financial Condition****ASSETS**Cash
                  and cash equivalents
              
              **$**
              **4,207**
              
              $
              4,684Note
                  receivable - ESOP
              
              
              **991**
              
              
              1,050Investment
                  in subsidiary
              
              
              **16,795**
              
              
              16,656**Total
                  assets**
              
              **$**
              **21,993**
              
              $
              22,390**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY****Liabilities
                  Other liabilities**
              
              **$**
              **224**
              
              $
              25**Total
                  liabilities**
              
              
              **224**
              
              
              25**Total
                  stockholders’ equity**
              
              
              **21,769**
              
              
              22,365**Total
                  liabilities and stockholders’ equity**
              
              **$**
              **21,993**
              
              $
              22,390
  50
 
 **SFSB,
        INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Note
        18 - Condensed Financial Information (Parent Company Only) -
        (continued)**
 
 **December
                  31,****2007**
              
              **2006**(Dollars
                  in thousands)**Statements
                  of Income**Total
                  Revenue
              
              **$**
              **84**
              
              $
              89Non-interest
                  Expense
              
              
              **16**
              
              
              38**Income
                  before equity in undistributed net income (loss) of subsidiary
                  and income
                  taxes**
              
              
              **68**
              
              
              51**Undistributed
                  net income (loss) of subsidiary**
              
              
              **61**
              
              
              (13
              )**Income
                  before income tax provision**
              
              
              **129**
              
              
              38Income
                  tax provision
              
              
              **26**
              
              
              20**Net
                  income**
              
              **$**
              **103**
              
              $
              18
 
 **Years
                  Ended December 31,****2007**
              
              **2006**(Dollars
                  in thousands)**Statements
                  of Cash Flows****Operating
                  activities**Net
                  income
              
              **$**
              **103**
              
              $
              18Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Non-cash
                  compensation under stock based compensation plans And Employee
                  Stock
                  Ownership Plan
              
              
              **73**
              
              
              101Equity
                  in undistributed net (income) loss of subsidiary
              
              
              **(61**
              **)**
              
              13Decrease
                  in note receivable - ESOP
              
              
              **58**
              
              
              58Decrease
                  (increase) in other assets
              
              
              **-**
              
              
              6Increase
                  in other liabilities
              
              
              **197**
              
              
              17**Net
                  Cash Provided by Operating Activities**
              
              
              **370**
              
              
              213**Financing
                  activities**Exercise
                  of options
              
              
              **67**
              
              
              -Purchase
                  of treasury stock
              
              
              **(914**
              **)**
              
              (665
              )**Net
                  Cash Used in Financing Activities**
              
              
              **(847**
              **)**
              
              (665
              )Decrease
                  in cash and cash equivalents
              
              
              **(477**
              **)**
              
              (452
              )Cash
                  and cash equivalents at beginning of year
              
              
              **4,684**
              
              
              5,136**Cash
                  and cash equivalents at end of year**
              
              **$**
              **4,207**
              
              $
              4,684
  51




**DIRECTORS
      AND OFFICERS**





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





**Officers
      of SFSB, Inc.**





**Philip
                E. Logan**
              President
                and Chief Executive Officer
            
            **Sophie
                T. Wittelsberger**
              Vice
                President and Chief Financial Officer**Charles
                E. Wagner, Jr.**
              Executive
                Vice President, Chief Lending Officer andSecretary





**Officers
      of Slavie Federal Savings Bank**





**Philip
                E. Logan**
              President
                and Chief Executive Officer
            
            **Gary
                E. Barnoff**
              Vice
                President - Branch Operations and Compliance Officer**Charles
                E. Wagner, Jr.**
              Executive
                Vice President, Chief Lending Officer and Secretary
            
            **Sophie
                T. Wittelsberger**
              Vice
                President, Chief Financial Officer and CRA Officer**Michael
                Tagg**
              Vice
                President - Commercial Loan Officer
            
            **James
                T. Nichols**
              Vice
                President - Commercial Loan Officer**Lauren
                Rebbel**
              Vice
                President - Slavie Financial Services
            
            **Patricia
                Zimmerman**
              Assistant
                Vice President - Overlea Branch Manager**Andrea
                Niedzwicki**
              Assistant
                Vice President - Loan Administration





52





**INVESTOR
      AND CORPORATE INFORMATION**





**Annual
      Meeting**





The
      annual meeting of stockholders will be held at 4:00 p.m. on May 15, 2008 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 31, 2008, the number of holders of
      record of SFSB, Inc.’s common stock was approximately 140.





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





High
            
            LowDecember
                31, 2004
            
            $
            11.00
            
            $
            10.75March
                31, 2005
            
            
            10.95
            
            
            9.00June
                30, 2005
            
            
            9.35
            
            
            8.40September
                30, 2005
            
            
            9.40
            
            
            8.95December
                31, 2005
            
            
            9.90
            
            
            9.10March
                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
            
            
            8.25





SFSB,
      Inc. has not paid any cash dividends.





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




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





**Annual
      Reports**





A
      copy of
      the SFSB, Inc. Annual Report on Form 10-KSB without exhibits for the year ended
      December 31, 2007 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.





53





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




54