United
States


Securities
and Exchange Commission


Washington,
D.C. 20549





Form
10-K





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


For
      the fiscal year ended December 31,
2008


ORo
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE
      ACT OF 1934For
      the transition period from
________to_________





Commission
File Number 000-51037





SFSB,
INC.


(Exact
name of registrant as specified in its charter)





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





1614
Churchville Road, Bel Air, Maryland   21015


(Address
of principal executive offices)      (Zip
Code)





(443)
265-5570


(Registrant’s
telephone number, including area code)





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


None





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


Common
Stock: par value $0.01 per share





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


Act.  Yes
 ̈      No
x





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


Yes  ̈      No
x





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


Yes x      No
 ̈





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





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







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





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


Yes   
 ̈No  x





The
aggregate market value of the common equity held by non-affiliates was
$7,178,208 as of June 30, 2008, based on a sales price of $6.90 per share of
Common Stock, which is the sales price at which shares of Common Stock were last
sold in over the counter trading on June 24, 2008 (the last date on which the
Common Stock had traded on June 30, 2008).





The
number of shares outstanding of the registrant’s Common Stock was 2,707,652 as
of March 25, 2009.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the Annual Report to Stockholders for the Fiscal Year Ended December 31,
2008, which is filed as an exhibit to this Annual Report on Form 10-K, are
incorporated by reference into Part II of this Annual Report on Form
10-K.





Portions
of the Proxy Statement for the 2009 Annual Meeting of Stockholders of SFSB,
Inc., to be filed with the Securities and Exchange Commission no later than 120
days after the close of the fiscal year, are incorporated by reference into Part
III of this Annual Report on Form 10-K.








PART
I





Item
1.  Business





BUSINESS
OF SFSB, INC.





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





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





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





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





BUSINESS
OF SLAVIE FEDERAL SAVINGS BANK





General





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





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





New products and
services.  In 2008, we expanded our financial services
operations, created in mid-year 2007, by hiring an investment planner, who sells
a variety of non-insured investment products, and an administrative assistant to
join our certified financial planner.  It has enabled us to provide
comprehensive investing guidance and financial planning expertise to our
customers and focus on their financial well being potential.  During
2008, we implemented remote deposit for commercial accountholders and check
imaging services for our checking accountholders.  We expanded our
Automated Teller Machine network to include access to more than 52,500 ATMs
throughout the United States. We have begun to offer a thirteen month
relationship certificate of deposit and a premium rate checking account with
what we believe are attractive interest rates.  In addition, we
implemented a Slavie credit card, foreign currency services and coin counting
services.  We have informed our customers of the launching of these
new products and services through the distribution of a quarterly newsletter,
entitled Today’s Slavie.


1


Application to Participate in
TARP.  We have applied to participate in the U.S. Treasury
Department’s Capital Purchase Program under the Troubled Asset Relief Program
(“TARP”) signed into law on October 3, 2008.  If we are approved to
and elect to participate in TARP, we will issue shares of preferred stock to
Treasury as well as a warrant to purchase our common stock.  The
general terms for participating in the program are as follows: pay 5% dividends
on the preferred stock for the first five years and 9% dividends thereafter;
cannot increase common stock dividends for three years while Treasury is an
investor without its permission; Treasury receives warrants entitling it to buy
a participating company’s common stock equal to 15% of Treasury’s total initial
investment in the participant; if the participating company fails to pay
dividends due on the preferred stock for six quarters (these need not be
consecutive), Treasury has the right to appoint two directors to the company’s
board of directors; the participating company cannot repurchase its own shares
of stock without Treasury’s permission; required compliance with certain
executive compensation restrictions, including a prohibition on severance
payments to certain executive officers and employees, restrictions on the amount
of executive compensation and the amount that is tax deductible, limits on
incentive compensation, and the participating company’s executives must agree to
certain of the compensation restrictions; and other detailed terms and
conditions.





Market
Area





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





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





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





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





Competition





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


2


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





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





Lending
Activities





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





Our net
loan portfolio totaled $157,309,000 at December 31, 2008, representing 87.94% of
total assets.  One- to four-family residential real estate mortgage
loans represented $110,061,000, or 67.05%, of our total loan portfolio at
December 31, 2008.  Other loans secured by real estate include
commercial real estate loans, construction loans secured by single family
properties and acquisition and development loans, which amounted to $19,408,000,
$10,050,000 and $5,111,000, or 11.82%, 6.12% and 3.11% of the total loan
portfolio at December 31, 2008.





Commercial
non-mortgage loans amounted to $3,501,000, or 2.13% of our total loan portfolio
at December 31, 2008.  The remainder of our portfolio was comprised of
consumer loans, consisting primarily of home equity loans and lines of credit
and other loans such as deposit account loans, home improvement loans,
automobile loans and overdraft protection loans.  At December 31,
2008, home equity and other consumer loans totaled $15,586,000 and $447,000,
respectively, or 9.50% and 0.27% of the total loan portfolio.





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





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





A savings bank generally may not make
loans to one borrower and related entities in an amount which exceeds 15% of its
unimpaired capital and surplus, and an additional amount equal to 10% of
unimpaired capital and surplus if the loan is secured by readily marketable
collateral (generally financial instruments, but not real estate).  At
December 31, 2008, our regulatory limit on loans-to-one borrower was $2,417,000
and our five largest loans or groups of loans-to-one borrower, including related
entities, aggregated $2,397,000, $2,206,000, $1,661,000, $1,547,000 and
$1,536,000.  Each loan or groups of loans was performing in accordance
with its terms at December 31, 2008, with the exception of one which was 30 days
past due.


3


Economic Conditions and
Concentrations.  During 2008, the financial industry
encountered significant volatility and stress as economic conditions worsened,
unemployment increased and the effects of the “housing crisis” became more
widespread.  While we did not have direct exposure to the subprime
lending issues, the slowing economy, declines in housing construction and the
related impact on contractors and other small and medium sized businesses, has
had an adverse impact on our business, primarily increased levels of
non-performing assets.  While management believes that we have taken
adequate reserves for the problem assets in our loan portfolio at December 31,
2008, there can be no assurance that we will not be required to take additional
charge-offs or make additional provisions for nonperforming loans or that
currently performing loans will continue to perform.  Further, we have
been increasing, and intend to continue to increase, our commercial real estate
loan volume as a percentage of our loan portfolio, including an increase of
47.47% during 2008.  Given the current depressed and uncertain
economic conditions, as well as the riskier nature of commercial real estate
loans, we determined it would be prudent to consider what steps may be
appropriate in this regard.  As a result, we conducted an analysis of
our commercial real estate loan portfolio concentrations and management has set
specific limits on certain riskier commercial real estate loan types, including
those requiring the sale of the collateral property to pay down the loan and
those loans relying on rental income from the property to repay the
loan.





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


At December 31,2008
                
                
                2007Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent(Dollars in Thousands)Real
      Estate Loans:One-
      to four-family
                
                $
                110,061
                
                
                
                67.05
                %
                
                $
                112,198
                
                
                
                74.55
                %Commercial
      mortgage
                
                
                19,408
                
                
                
                11.82
                
                
                
                12,273
                
                
                
                8.15Construction
                
                
                10,050
                
                
                
                6.12
                
                
                
                2,205
                
                
                
                1.47Acquisition
      and development
                
                
                5,111
                
                
                
                3.11
                
                
                
                3,135
                
                
                
                2.08Total
      real estate loans
                
                
                144,630
                
                
                
                88.10
                
                
                
                129,811
                
                
                
                86.25Commercial
      non-real estate
                
                
                3,501
                
                
                
                2.13
                
                
                
                3,593
                
                
                
                2.39Consumer
      Loans:Home
      equity
                
                
                15,586
                
                
                
                9.50
                
                
                
                16,670
                
                
                
                11.08Other
                
                
                447
                
                
                
                0.27
                
                
                
                427
                
                
                
                0.28Total
      consumer loans
                
                
                16,033
                
                
                
                9.77
                
                
                
                17,097
                
                
                
                11.36Total
      loans receivable, gross
                
                
                164,164
                
                
                
                100.0
                %
                
                
                150,501
                
                
                
                100.0
                %Less:Loans
      in process
                
                
                (5,277
                )
                
                
                
                
                
                
                (1,538
                )Allowance
      for loan losses
                
                
                (1,149
                )
                
                
                
                
                
                
                (972
                )Deferred
      loan fees
                
                
                (429
                )
                
                
                
                
                
                
                (247
                )Total
      loans receivable, net
                
                $
                157,309
                
                
                
                
                
                
                $
                147,744


4





Maturity of Loan
Portfolio.  The following tables present certain information at
December 31, 2008 regarding the dollar amount of certain loans maturing in our
portfolio based on their contractual terms to maturity or scheduled
amortization, but does not include the effect of possible prepayments or due on
sale clause payments.





One Year
                  or less
              
              
              More than 1
                  to 5 years
              
              
              More than
                  5 years
              
              
              Totals(Dollars
      in Thousands)Real
      Estate Loans:One-
      to four-family
              
              $
              901
              
              
              $
              4,728
              
              
              $
              104,432
              
              
              $
              110,061Commercial
      mortgage
              
              
              11,377
              
              
              
              6,355
              
              
              
              1,676
              
              
              
              19,408Construction
              
              
              6,405
              
              
              
              3,645
              
              
              
              -
              
              
              
              10,050Acquisition
      and development
              
              
              1,860
              
              
              
              3,251
              
              
              
              -
              
              
              
              5,111Total
      real estate loans
              
              
              20,543
              
              
              
              17,979
              
              
              
              106,108
              
              
              
              144,630Commercial
      non-real estate
              
              
              1,287
              
              
              
              1,582
              
              
              
              632
              
              
              
              3,501Consumer
      Loans:Home
      equity
              
              
              27
              
              
              
              850
              
              
              
              14,709
              
              
              
              15,586Other
              
              
              183
              
              
              
              264
              
              
              
              -
              
              
              
              447Total
      consumer loans
              
              
              210
              
              
              
              1,114
              
              
              
              14,709
              
              
              
              16,033Total
      loans receivable, gross
              
              $
              22,040
              
              
              $
              20,675
              
              
              $
              121,449
              
              
              $
              164,164





One- to
                  four-
                  family
              
              
              Commercial
                  Mortgage
              
              
              Construction
              
              
              Acquisition
                  and
                  Development
              
              
              Commercial
                  Non R/E
              
              
              Home
                  Equity
              
              
              Other
                  Consumer
                  Loans
              
              
              Totals(Dollars in
      Thousands)Total
      due after one yearwith fixed interest rates
              
              $
              109,129
              
              
              $
              8,031
              
              
              $
              -
              
              
              $
              319
              
              
              $
              2,214
              
              
              $
              10,053
              
              
              $
              264
              
              
              $
              130,010Total
      due after one yearwith adjustable interest rates
              
              $
              31
              
              
              $
              -
              
              
              $
              3,645
              
              
              $
              2,932
              
              
              $
              -
              
              
              $
              5,506
              
              
              $
              -
              
              
              $
              12,114





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





One- to Four-Family Residential
Loans.  Our primary lending activity consists of the
origination of one- to four-family residential mortgage loans that are primarily
secured by properties located in the greater Baltimore metropolitan
area.  At December 31, 2008, $110,061,000, or 67.05% of our total loan
portfolio, consisted of one- to-four family residential
loans.  Generally, one- to four-family residential mortgage loans are
originated in amounts up to 80% of the lesser of the appraised value or purchase
price of the property, with private mortgage insurance required on loans with a
loan-to-value ratio in excess of 80%.  Fixed-rate loans are originated
for terms of 10, 15, 20 and 30 years.  At December 31, 2008,
$110,030,000, or 99.97% of our one- to four-family residential mortgage loans
were fixed-rate loans.  Also, at December 31, 2008, our largest loan
secured by one- to four-family real estate had a principal balance of $947,000
and was secured by a single-family residence.  This loan was
performing in accordance with its terms at December 31, 2008.




We also
offer adjustable-rate mortgage loans with a one year adjustment period based on
changes in a designated United States Treasury index.  However, in the
recent interest rate environment, there has been very limited demand for these
loans.  We did not originate any adjustable rate one- to four-family
residential loans during the year ended December 31, 2008.  Our
adjustable rate mortgage loans provide for maximum rate adjustments of 200 basis
points per adjustment, with a lifetime maximum adjustment of 600 basis points
per term.  Our adjustable rate mortgage loans amortize over terms of
up to 30 years.  At December 31, 2008, only $31,000 or 0.03% of our
one- to four-family residential mortgage loans had adjustable rates of
interest.


5


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




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





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





Commercial Real Estate
Loans.  At December 31, 2008, $19,408,000, or 11.82% of our
total loan portfolio, consisted of commercial real estate
loans.  Commercialreal estate loans are
secured by office buildings, mixed use properties and other commercial
properties.  We generally originate commercial real estate loans with
maximum terms of up to 30 years with a call feature. The maximum loan-to-value
ratio of commercial real estate loans is 75%. At December 31, 2008, we had 99
commercial real estate loans with an average outstanding balance of
$187,000.  At December 31, 2008, our largest loan secured by
commercial real estate had an outstanding balance of $2,078,000.  At
December 31, 2008, this loan was performing in accordance with its
terms.





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





Multi-Family
Loans.  We offer fixed-rate and adjustable rate multi-family
real estate loans with amortization schedules of up to 30 years.  We
generally lend up to 80% of the property’s appraised value.  Appraised
values are typically determined by independent appraisers.  In
deciding to originate a multi-family loan, we review the creditworthiness of the
borrower, the expected cash flows from the property securing the loan, the cash
flow requirements of the borrower, the value of the property and the quality of
the management involved with the property.  We generally obtain the
personal guarantee of the principals when originating multi-family real estate
loans.  At December 31, 2008, we had three multi-family real
estate loans with an average outstanding balance of $308,000 in our loan
portfolio.  At December 31, 2008, our largest multi-family loan
secured by real estate had an outstanding balance of $541,000.  At
December 31, 2008, this loan was performing in accordance with its
terms.





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


6


Construction Loans and
Acquisition and Development Loans.  We originate loans to
finance the construction of residential dwellings and loans to acquire and
develop land on which to construct residential dwellings.  At December
31, 2008, $10,050,000, or 6.12% of our total loan portfolio, consisted of a
commercial acquisition and development loan and eight residential construction
loans, and $5,111,000, or 3.11% of our total loan portfolio, consisted of
acquisition and development loans.  Of this amount, $464,000
constituted our interest in a loan participation.





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





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





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





While
some financial institutions have experienced increased defaults on acquisition,
development and construction loans as a result of recent declines in the housing
market and the attendant inability of the borrowers to sell the property after
project completion or sell the property at an amount that will allow repayment
of the loan, we have not experienced such an increase in defaults on these types
of loans.  However, there can be no guarantee that defaults will not
increase in this portfolio if declines in economic conditions and the housing
market continue in our market areas.





Commercial Business
Loans.  To diversify our loan portfolio, we have grown our
commercial business loan portfolio.  We have focused our commercial
business lending activities on small to mid-size businesses in our market area
and the loans were made for working capital or equipment
financing.  Typically, these loans are secured by equipment, machinery
and other corporate assets and have terms from three to five years with either
fixed rates or variable rates of interest.  Commercial business loans
generally have higher interest rates and shorter terms than one- to four-family
residential mortgage loans, but they also may involve higher average balances,
increased difficulty of loan monitoring and a higher risk of default since their
repayment generally depends on the successful operation of the borrower’s
business.  We attempt to minimize these risks by limiting these loans
to viable businesses and by obtaining personal guarantees from the borrowers
whenever possible.  At December 31, 2008, commercial business loans
totaled $3,501,000, or 2.13% of the total loan portfolio.


7


Consumer Loans.  We
are authorized to originate loans for a wide variety of personal and consumer
purposes.  Consumer loans consist primarily of home equity loans and
lines of credit, deposit account loans, home improvement loans, automobile loans
and overdraft protection loans.  At December 31, 2008, consumer loans
totaled $16,033,000 or 9.77% of the total loan portfolio.





Home equity loans and lines of credit
are secured by a real estate mortgage with a security interest in the borrower’s
primary residence.  These are fixed rate or variable rate loans
indexed to the prime rate with terms of up to 20 years.  At December
31, 2008, home equity loans totaled $15,586,000 or 9.50% of the total loan
portfolio.  At December 31, 2008, $10,080,000, or 64.67% of our home
equity loans were fixed-rate loans and $5,506,000 or 35.33% of our home equity
loans had adjustable rates of interest.





As indicated, we also offer deposit
account loans for personal purposes, home improvement loans, automobile loans
and overdraft protection loans.  At December 31, 2008, $262,000 or
0.16% of our total loan portfolio consisted of deposit account loans, $57,000 or
0.03% of our total loan portfolio consisted of home improvement loans, $79,000
or 0.05% of our total loan portfolio consisted of automobile loans and $49,000
or 0.03% of our total loan portfolio consisted of overdraft protection
loans.





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





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





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




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




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





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





Residential
mortgage loans are typically underwritten to secondary market (Fannie Mae and
Freddie Mac) standards to facilitate the ability to sell loans and thereby limit
interest rate risk and meet loan portfolio objectives.  Historically,
we have generally retained all originated loans in our portfolio.  Our
growth strategy contemplates that we only retain for our portfolio those loans
meeting our interest rate risk and balance sheet composition targets and sell
the remaining loans in the secondary market on a servicing released
basis.  Our goal continues to be to increase the number of fixed rate
loans that we sell on the secondary market.  Over time, we may
evaluate selling loans on a servicing retained basis.  During 2008, we
sold five residential mortgage loans with a total principal balance of
$843,000.  Our residential mortgage loan volume in 2008 was lower than
we had anticipated due to the absence of a residential loan officer during the
first half of 2008 and the rapid decline in residential home values, making it
difficult for borrowers to attain acceptable loan-to-value ratios.  We
hired an experienced residential loan officer in the first quarter of 2009 in
anticipation of a refinance surge due to the current lower interest rates on
this type of loan and we expect to sell a higher volume of loans during
2009.


8


Loan Approval Procedures and
Authority.  The loan approval process is intended to assess the
borrower’s ability to repay the loan, the viability of the loan, and the
adequacy of the value of the property that will secure the loan.  To
assess the borrower’s ability to repay, among other things, we review the
employment and credit history and information on the historical and projected
income and expenses of borrowers.  We have established a loan
committee consisting of the president/chief executive officer, senior
vice-president/chief lending officer, vice-president of lending and the
assistant vice-president/loan administration.  Currently, any two
members of this committee have the authority to approve loans up to $313,000;
loan applications over $313,000 are submitted to the executive loan committee
consisting of either the president/chief executive officer or the executive
vice-president/chief lending officer and one non-management member of the board
of directors for approval.  In addition, the board of directors
ratifies all loans approved by the loan and executive loan
committees.  With continued economic volatility, we have tightened our
already stringent underwriting standards by reducing our maximum loan-to-value
requirements.  All loan applications that we have the intention of
selling are processed through Mortgage Department Services, a company in which
we have a minor interest.  We have outsourced the loan processing,
loan underwriting and other standards to the Mortgage Department Services (MDS)
as a cost savings measure.  Using MDS to process our residential
mortgage loans has allowed us to eliminate a full time position from our
residential mortgage processing department and transfer an employee to a
higher-volume area of the lending department.  We pay a flat fee to
MDS for each loan settled and we receive a fee per loan in return for delivery
of said loan to the secondary market.  MDS also processes loans which
we choose to keep in our portfolio for a reduced per loan fee
rate.  We ensure that the stringent underwriting standards we are
accustomed to are adhered to by MDS by having an independent third party vendor
conduct periodic quality control reviews on the loans processed by MDS on our
behalf.  We process all home equity loans at our main
office.




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


9


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




Years Ended December 31,2008
                    
                    
                    2007(Dollars in Thousands)Balance
      outstanding at beginning of period
                    
                    $
                    147,744
                    
                    
                    $
                    147,118Originations
      by Type:Real
      Estate:One-
      to
      four-family
                    
                    
                    22,435
                    
                    
                    
                    23,569Commercial-real
      estate
                    
                    
                    15,609
                    
                    
                    
                    4,585Commercial-non
      real
      estate
                    
                    
                    250
                    
                    
                    
                    -Construction(1)
                    
                    
                    -
                    
                    
                    
                    -Consumer
      loans:Home
      equity
                    
                    
                    2,003
                    
                    
                    
                    3,296Other
                    
                    
                    311
                    
                    
                    
                    31Total
      loans
      originated
                    
                    
                    40,608
                    
                    
                    
                    31,481Total
      loans
      purchased
                    
                    
                    2,641
                    
                    
                    
                    2,212Less:Total
      loans or participations
      sold
                    
                    
                    1,990
                    
                    
                    
                    7,602Principal
      repayments
                    
                    
                    31,732
                    
                    
                    
                    24,227Transfers
      to foreclosed real
      estate
                    
                    
                    -
                    
                    
                    
                    1,083Other(2)
                    
                    
                    (38
                    )
                    
                    
                    155Total
      deductions
                    
                    
                    33,684
                    
                    
                    
                    33,067Balance
      outstanding at end of
      period
                    
                    $
                    157,309
                    
                    
                    $
                    147,744





(1)
            Includes
      acquisition and development loans.


(2)
            Includes
      deferred loan fees and allowance for loan loss
  reserves.





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





In accordance with Statement of
Financial Accounting Standards No. 91, which pertains to the accounting for
non-refundable fees and costs associated with originating or acquiring loans,
our loan origination fees and certain related direct loan origination costs are
offset, and the resulting net amount is deferred and amortized as interest
income over the contractual life of the related loans as an adjustment to the
yield of such loans.  At December 31, 2008 and 2007, we had $429,000
and $247,000 in net deferred loan fees, respectively.





Asset
Quality




General.  One of
our key operating objectives continues to be to maintain a high level of asset
quality.  Through a variety of strategies, which include aggressive
marketing of foreclosed properties and repossessed assets and borrower workout
arrangements, we have been proactive in addressing problems with non-performing
assets.  These strategies, as well as our past emphasis on originating
relatively low risk one- to four-family residential mortgage loans, quality
underwriting, maintenance of sound credit standards for new loan originations,
even in these unfavorable real estate market conditions, have supported
maintenance of low delinquency ratios.  Our balance of non-performing
assets equaled $2,615,000 or 1.66% of total loans at December 31, 2008 and
consisted of 13 non-accruing loans, of which 11 are secured by one- to
four-family properties totaling $1,180,000, two are commercial real estate loans
totaling $239,000 and one is a commercial non-real estate loan totaling
$100,000, and $1,096,000 in foreclosed real estate.


10


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




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





Real
estate and other assets that we acquire as a result of foreclosure or by
deed-in-lieu of foreclosure or repossession on collateral-dependent loans are
classified as real estate owned or other repossessed assets until
sold.  Such assets are recorded at foreclosure or other repossession
and updated quarterly at estimated fair value less estimated selling
costs.  Any portion of the outstanding loan balance in excess of fair
value is charged off against the allowance for loan losses.  If, upon
ultimate disposition of the property, net sales proceeds exceed the net carrying
value of the property, a gain on sale of real estate or other assets is
recorded.  At December 31, 2008 and 2007, we had foreclosed real
estate of $1,096,000 and $1,083,000, respectively, pursuant to the foreclosure
of the property securing a commercial land acquisition and development
participation loan.





Under
current accounting guidelines, a loan is defined as impaired when, based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due under the contractual terms of the loan
agreement.  We consider one- to four-family mortgage loans and
consumer installment loans to be homogeneous and, therefore, do not separately
evaluate them for impairment.  All other loans are evaluated for
impairment on an individual basis.  As of December 31, 2008, we had
classified three non-accrual loans as impaired totaling $339,000 because, for
reasons discussed below, we believe that we may not collect all outstanding
balances due on these loans.





As of
December 31, 2008 and December 31, 2007, we classified a $100,000 commercial
non-real estate loan as impaired.  The corporate commercial loan
borrower filed Chapter 7 corporate bankruptcy in the third quarter of 2006 and
the principal of the borrower filed Chapter 7 personal bankruptcy in the second
quarter of 2007.  We restructured the remaining debt to facilitate
repayment of the loan in the third quarter of 2007 and the borrower has been
making payments in accordance with the terms of the restructured loan
agreement.  We also classified the two commercial real estate loans
totaling $239,000 as impaired as of December 31, 2008.  In the first
quarter of 2008, the borrowers of these loans filed Chapter 13 personal
bankruptcy, which was denied and dismissed in the third quarter of
2008.  They filed Chapter 13 personal bankruptcy again near the end of
the third quarter of 2008, which was converted to a Chapter 7 personal
bankruptcy on October 3, 2008.  On November 19, 2008, our attorney
filed an Order of Relief from Stay and he is currently in the process of sending
a Notice of Intent to Foreclose with respect to the properties securing these
loans.


11


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




At December 31,2008
                
                
                2007(Dollars in Thousands)Non-accruing
      real estate loans:One-
      to four-family
                
                $
                1,180
                
                
                $
                368Commercial
      real estate
                
                
                239
                
                
                
                -Commercial
      non-real estate
                
                
                100
                
                
                
                100Construction(1)
                
                
                -
                
                
                
                -Non-accruing
      consumer loans:Home
      equity
                
                
                -
                
                
                
                -Other
                
                
                -
                
                
                
                -Total
      non-accruing loans
                
                $
                1,519
                
                
                $
                468Accruing
      loans delinquent 90 days or more
                
                
                -
                
                
                
                -Total
      non-performing loans
                
                
                1,519
                
                
                
                468Real
      estate owned
                
                
                1,096
                
                
                
                1,083Total
      non-performing assets
                
                $
                2,615
                
                
                $
                1,551Total
      as a percentage of total assets
                
                
                1.46
                %
                
                
                0.90
                %Total
      as a percentage of total loans
                
                
                1.66
                %
                
                
                1.05
                %







(1)           Includes
acquisition and development loans.





For the years ended December 31, 2008
and December 31, 2007, gross interest income which would have been recorded had
our non-accruing loans been current in accordance with their original terms
amounted to $137,000 and $37,000 respectively.  Interest income
recognized on such loans for the years ended December 31, 2008 and December 31,
2007 was $80,000 and $24,000, respectively.




Of the
non-accrual loans, at December 31, 2008, $339,000 consisted of the three
impaired loans discussed above and $1,180,000 consisted of one-to-four
residential mortgage loans.  Non-accrual loans totaled 0.97% and 0.32%
of net loans receivable at December 31, 2008 and December 31, 2007,
respectively.





Our real
estate owned includes a 19% participation (approximately $1,096,000 in unpaid
principal balance) in a foreclosed real estate participation loan resulting from
the foreclosure of an acquisition and development loan..





As we
previously reported, the property securing this loan was sold at auction to the
lead participating bank in the second quarter of 2007, at which time we
reclassified the participation as foreclosed real estate.  As we
previously disclosed, the foreclosed property had previously been under a sale
contract that was subject to a feasibility study that expired on June 15,
2008.  The property is currently under a new purchase agreement
contract.  The purchase agreement is subject to a feasibility study
which allows the buyer to perform due diligence with regards to environmental
approvals and permits and a zoning change that would allow strictly commercial
zoning.  Once the zoning change is approved by the city’s council
government, the buyer expects to settle on the subject property.  The
zoning change approval is expected by June 2009, which is expected to coincide
with the results of the environmental due diligence mentioned
above.  We still believe that we will recover the carrying amount of
the real estate pursuant to the sale of the property, although there can be no
assurance that this will be the case.





Other
than as disclosed in the table and paragraphs above, there are no other loans at
December 31, 2008 about which management has serious doubts concerning the
ability of the borrowers to comply with the present loan repayment
terms.




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


12


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




On the basis of management’s review of
our assets, at December 31, 2008, we had classified $2,515,000 of our assets as
substandard (which consisted of 11 non-accruing loans secured by one- to
four-family residential properties, two commercial real estate loans and
foreclosed real estate).  At December 31, 2008, we had classified
$100,000, or 100% of one loan as “loss” (which consisted of a commercial
non-real estate loan).  At December 31, 2008, none of our assets were
classified as special mention or doubtful.  The loan portfolio is
reviewed on a monthly basis to determine whether any loans require
classification in accordance with applicable regulations.  All
classified assets are included in non-performing assets for all periods
presented.




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





At December 31,2008
                
                
                2007(Dollars in Thousands)Special
      mention assets
                
                $
                -
                
                
                $
                -Substandard
      assets
                
                
                2,515
                
                
                
                1,451Doubtful
      assets
                
                
                -
                
                
                
                -Loss
      assets
                
                
                100
                
                
                
                100Total
      classified assets
                
                $
                2,615
                
                
                $
                1,551


13





Delinquencies.  The
following table sets forth information concerning delinquent loans at December
31, 2008 and December 31, 2007, in dollar amounts and as a percentage of our
total loan portfolio.





At December 31, 2008
              
              
              At December 31, 200730-59 Days
              
              
              60-89 Days
              
              
              30-59 Days
              
              
              60-89 DaysPrincipal
                  Balance of
                  Loans
              
              
              % of
                  Total
                  Loans
              
              
              Principal
                  Balance of
                  Loans
              
              
              % of
                  Total
                  Loans
              
              
              Principal
                  Balance of
                  Loans
              
              
              % of
                  Total
                  Loans
              
              
              Principal
                  Balance of
                  Loans
              
              
              % of
                  Total
                  Loans(Dollars in Thousands)Real
      estate loans:One-
      to four-family
              
              $
              672
              
              
              
              0.41
              %
              
              $
              718
              
              
              
              0.44
              %
              
              $
              749
              
              
              
              0.50
              %
              
              $
              361
              
              
              
              0.24
              %Commercial
      real estate
              
              
              319
              
              
              
              0.19
              
              
              
              49
              
              
              
              0.03
              
              
              
              90
              
              
              
              0.06
              
              
              
              138
              
              
              
              0.09Construction(1)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Commercial
      non-real estate:
              
              
              1,321
              
              
              
              0.81
              
              
              
              -
              
              
              
              -
              
              
              
              69
              
              
              
              0.05
              
              
              
              -
              
              
              
              -Consumer
      loans:Home
      equity
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              71
              
              
              
              0.05
              
              
              
              -
              
              
              
              -Other
              
              
              16
              
              
              
              0.01
              
              
              
              7
              
              
              
              -
              
              
              
              49
              
              
              
              0.03
              
              
              
              4
              
              
              
              -Total
      delinquent loans
              
              $
              2,328
              
              
              
              1.42
              %
              
              $
              774
              
              
              
              0.47
              %
              
              $
              1,028
              
              
              
              0.69
              %
              
              $
              503
              
              
              
              0.33
              %




(1)          Includes
acquisition and development loans.





Allowance
for Loan Losses





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




Our
methodology for assessing the adequacy of the allowance for loan losses consists
of three key elements: (1) specific allowances for identified problem loans,
including primarily collateral-dependent loans; (2) a general valuation
allowance on certain identified problem loans that do not meet the definition of
impaired; and (3) a general valuation allowance on the remainder of the loan
portfolio.




Specific Allowance on Identified
Problem Loans. The loan portfolio is segregated first between loans that
are on our “watch list” and loans that are not.  Our watch list
includes:




·
            loans
      90 or more days delinquent;





·
            loans
      with anticipated losses;





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





·
            nonaccrual
      loans;





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





·
            troubled
      debt restructurings and other non-performing
  loans.





Two of
our officers review each loan on the watch list and establish an individual
allowance allocation on certain impaired loans based on such factors as: (1) the
strength of the customer’s personal or business cash flow; (2) the availability
of other sources of repayment; (3) the amount due or past due; (4) the type and
value of collateral; (5) the strength of our collateral position; (6) the
estimated cost to sell the collateral; and (7) the borrower’s effort to cure the
delinquency.


14


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





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




General Valuation Allowance on the
Remainder of the Loan Portfolio.  We establish another general
allowance for loans that are not on the watch list to recognize the inherent
losses associated with lending activities, but which, unlike specific allowances
and the general valuation on certain identified problem loans, has not been
allocated to particular problem assets.  This general valuation
allowance is determined by segregating the loans by loan category and assigning
allowance percentages based on our historical loss experience and delinquency
trends.  The allowance may be adjusted for significant factors that,
in management’s judgment, affect the collectibility of the portfolio as of the
evaluation date.  These significant factors may include changes in
lending policies and procedures, changes in existing general economic and
business conditions affecting our primary lending areas, credit quality trends,
collateral value, loan volumes and concentrations, seasoning of the loan
portfolio, specific industry conditions within portfolio segments, recent loss
experience in a particular segment of the portfolio, duration of the current
business cycle and bank regulatory examination results. The applied loss factors
are reevaluated annually to ensure their relevance in the current
environment.





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


15





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




Years Ended
                      December 31,2008
                    
                    
                    2007(Dollars
      in Thousands)Balance
      at beginning of period
                    
                    $
                    972
                    
                    
                    $
                    850Charge-offs(1)
                    
                    
                    3
                    
                    
                    
                    122Recoveries
                    
                    
                    -
                    
                    
                    
                    -Net
      charge-offs
                    
                    
                    3
                    
                    
                    
                    122Provision
      for loan losses
                    
                    
                    180
                    
                    
                    
                    244Ending
      balance
                    
                    $
                    1,149
                    
                    
                    $
                    972Ratio
      of net charge-offs during the period to average loans outstanding, net,
      during the period
                    
                    
                    -
                    
                    
                    
                    0.08
                    %Ratio
      of allowance for loan losses to total loans outstanding
                    
                    
                    0.73
                    %
                    
                    
                    0.66
                    %Allowance
      for loan losses as a percent of total non-performing loans
                    
                    
                    75.64
                    %
                    
                    
                    207.69
                    %







(1)
Charge offs consisted of four overdraft protection lines of credit of $3,000 in
2008 and the principal loss of a commercial non-real estate loan of $120,000 and
four overdraft protection lines of credit of $2,000 in 2007.





The
following table sets forth information concerning the allocation of the
allowance for loan losses by loan category at the dates
indicated.  The allocation of the allowance to each category is not
necessarily indicative of future loss in any particular category and does not
restrict the use of the allowance to absorb losses in other
categories.  During 2008, based on the factors described above, we
reallocated the allowance among our loan categories to reflect our current
beliefs regarding the collectibility of loans in our portfolio.





At December 31,2008
                  
                  
                  2007Amount of
                      Loan Loss
                      Allowance
                  
                  
                  Loan
                      amounts
                      by
                      Category
                  
                  
                  Percent of
                      Loans in
                      Each
                      Category to
                      Total Loans
                  
                  
                  Amount of
                      Loan Loss
                      Allowance
                  
                  
                  Loan
                      amounts
                      by
                      Category
                  
                  
                  Percent
                      of Loans
                      in Each
                      Category
                      to Total
                      Loans(Dollars
      in Thousands)One-
      to four-family
                  
                  $
                  330
                  
                  
                  $
                  110,061
                  
                  
                  
                  67.05
                  %
                  
                  $
                  246
                  
                  
                  $
                  112,198
                  
                  
                  
                  74.55
                  %Commercial
      real estate
                  
                  
                  426
                  
                  
                  
                  19,408
                  
                  
                  
                  11.82
                  
                  
                  
                  172
                  
                  
                  
                  12,273
                  
                  
                  
                  8.15Commercial
      non R/E
                  
                  
                  170
                  
                  
                  
                  3,501
                  
                  
                  
                  2.13
                  
                  
                  
                  338
                  
                  
                  
                  3,593
                  
                  
                  
                  2.39Construction
                  
                  
                  139
                  
                  
                  
                  10,050
                  
                  
                  
                  6.12
                  
                  
                  
                  102
                  
                  
                  
                  2,205
                  
                  
                  
                  1.47Acquisition
      and development
                  
                  
                  20
                  
                  
                  
                  5,111
                  
                  
                  
                  3.11
                  
                  
                  
                  35
                  
                  
                  
                  3,135
                  
                  
                  
                  2.08Home
      equity
                  
                  
                  61
                  
                  
                  
                  15,586
                  
                  
                  
                  9.50
                  
                  
                  
                  77
                  
                  
                  
                  16,670
                  
                  
                  
                  11.08Other
      consumer
                  
                  
                  3
                  
                  
                  
                  447
                  
                  
                  
                  0.27
                  
                  
                  
                  2
                  
                  
                  
                  427
                  
                  
                  
                  0.28Total
                  
                  $
                  1,149
                  
                  
                  $
                  164,164
                  
                  
                  
                  100.00
                  %
                  
                  $
                  972
                  
                  
                  $
                  150,501
                  
                  
                  
                  100.00
                  %


16





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





At December 31,2008
                
                
                2007Amount of
                    Allowance
                
                
                Percent of
                    Allowance
                
                
                Amount of
                    Allowance
                
                
                Percent of
                    Allowance(Dollars
      in Thousands)Specific
      allowance
                
                $
                100
                
                
                
                8.70
                %
                
                $
                100
                
                
                
                10.29
                %General
      (identified problem loans)
                
                
                -
                
                
                
                -
                
                
                
                55
                
                
                
                5.66General
      (all other loans)
                
                
                1,049
                
                
                
                91.30
                
                
                
                817
                
                
                
                84.05Total
                
                $
                1,149
                
                
                
                100.00
                %
                
                $
                972
                
                
                
                100.00
                %





Investments





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





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





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





At
December 31, 2008, our investment portfolio consisted of $7,040,000 in mutual
fund securities (which invest in adjustable rate mortgages) classified as
available for sale, $1,899,000 in Federal Home Loan Bank of Atlanta stock and
$2,234,000 in other interest earning assets, consisting of federal funds
sold.  We also invest in mortgage-backed securities, all of which are
guaranteed by the United States Government or agencies thereof, and all of which
are classified as held to maturity.  At December 31, 2008, our
mortgage-backed securities totaled $1,552,000, consisting of $1,089,000 in
fixed-rate mortgage-backed securities guaranteed by the Federal National
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac), and $463,000 in adjustable rate mortgage-backed securities
guaranteed by the Government National Mortgage Association (Ginnie
Mae).  Management does not believe that the recent turmoil in the U.S.
housing market will have an adverse affect on its securities as these are high
quality investments with short to medium term maturities.


17


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





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





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





Mortgage-backed securities generally
yield less than the loans which underlie such securities because of their
payment guarantees or credit enhancements which offer nominal credit
risk.  In addition, mortgage-backed securities are more liquid than
individual mortgage loans and may be used to collateralize borrowings or other
obligations of Slavie Federal Savings Bank.  In general, we had
purchased mortgage-backed securities as a means to deploy excess liquidity at
more favorable yields than other investment alternatives; we now purchase other
investments for this same purpose.





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





At December 31,2008
                  
                  
                  2007Amortized
                      Cost
                  
                  
                  Fair
                      Value
                  
                  
                  Amortized
                      Cost
                  
                  
                  Fair
                      Value(Dollars
      in Thousands)Securities
      available for sale:ARM
      mutual fund
                  
                  $
                  7,040
                  
                  
                  $
                  7,040
                  
                  
                  $
                  9,200
                  
                  
                  $
                  8,942Total
      available for sale
                  
                  $
                  7,040
                  
                  
                  $
                  7,040
                  
                  
                  $
                  9,200
                  
                  
                  $
                  8,942Securities
      held to maturity:United
      States government agency securities
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  3,000
                  
                  
                  $
                  2,987Mortgage-backed
      securities:Ginnie
      Mae
                  
                  
                  463
                  
                  
                  
                  455
                  
                  
                  
                  720
                  
                  
                  
                  720Fannie
      Mae
                  
                  
                  71
                  
                  
                  
                  71
                  
                  
                  
                  172
                  
                  
                  
                  174Freddie
      Mac
                  
                  
                  1,018
                  
                  
                  
                  999
                  
                  
                  
                  1,355
                  
                  
                  
                  1,327Total
      mortgage-backed securities
                  
                  
                  1,552
                  
                  
                  
                  1,525
                  
                  
                  
                  2,247
                  
                  
                  
                  2,221Total
      held to maturity
                  
                  $
                  1,552
                  
                  
                  $
                  1,525
                  
                  
                  $
                  5,247
                  
                  
                  $
                  5,208


18


We
purchased Shay Asset Management Fund (AMF) Ultra Short Mortgage Fund, consisting
primarily of short-term adjustable rate mortgage securities, to control our
interest rate risk and to generate interest income. We purchased the mutual
funds incrementally between 2001 and 2003. As of December 31, 2008, the mutual
fund has a fair value of $7,040,000. Management has identified the Shay AMF
Ultra Short Mortgage Fund as an impaired asset, meaning that the fair value is
below the cost of the investment and these securities available for sale are
carried at fair value. At the end of the third quarter of 2008, management
identified the Shay AMF Ultra Short Mortgage Fund as being
other-than-temporarily impaired and we realized an impairment loss of $1,678,000
on these securities. We realized an additional impairment loss of $799,000 in
the fourth quarter of 2008, for a total impairment loss of $2,477,000 for 2008.
The write-down is a result of declines in pricing levels differing from those
existing at the time of the purchase of the fund due to the deterioration of the
underlying collateral portfolio. The mutual funds have no stated maturity
date.


19


The
following table sets forth the maturities and weighted average yields of
securities at December 31, 2008.  Adjustable rate mortgage-backed
securities are included in the period in which interest rates are next scheduled
to adjust.




Less than 1 Year
              
              
              1 to 5 Years
              
              
              5 to 10 Years
              
              
              Over 10 Years
              
              
              Total SecuritiesCarrying
                  Value
              
              
              Weighted
                  Average
                  Yield
              
              
              Carrying
                  Value
              
              
              Weighted
                  Average
                  Yield
              
              
              Carrying
                  Value
              
              
              Weighted
                  Average
                  Yield
              
              
              Carrying
                  Value
              
              
              Weighted
                  Average
                  Yield
              
              
              Carrying
                  Value
              
              
              Weighted
                  Average
                  Yield(Dollars in Thousands)Securities
      available for sale:ARM
      mutual fund(1)
              
              $
              7,040
              
              
              
              4.73
              %
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              $
              7,040
              
              
              
              4.73
              %Total
      available for sale
              
              
              7,040
              
              
              
              4.73
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              7,040
              
              
              
              4.73United
      States government agency securities
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Mortgage-backed
      securities:Ginnie
      Mae
              
              
              463
              
              
              
              5.12
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              463
              
              
              
              5.12Fannie
      Mae
              
              
              71
              
              
              
              5.50
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              71
              
              
              
              5.50Freddie
      Mac
              
              
              337
              
              
              
              4.50
              
              
              
              681
              
              
              
              4.50
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,018
              
              
              
              4.50Total
      mortgage-backed securities
              
              
              871
              
              
              
              4.91
              
              
              
              681
              
              
              
              4.50
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,552
              
              
              
              4.73Total
      held to maturity
              
              
              871
              
              
              
              4.91
              
              
              
              681
              
              
              
              4.50
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,552
              
              
              
              4.73Total
              
              $
              7,911
              
              
              
              4.75
              %
              
              $
              681
              
              
              
              4.50
              %
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              $
              8,592
              
              
              
              4.73
              %








(1)
Mutual funds have no stated maturity, however they are included in maturities
less than one year.


20


Sources
of Funds





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





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





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





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





To
provide additional convenience to our customers, we are affiliated with an ATM
network and offer online banking with bill paying capabilities as a convenience
to our personal banking customers, as well as our commercial
customers.  Affiliating with an Automated Teller Machine network
allows our customers to have access to over 52,500 ATM machines without
charge.  Currently, we have three ATM machines, two drive-up machines
at each of our offices and a cash dispensing machine located inside our
corporate headquarters building.





The flow
of deposits is influenced significantly by general economic conditions, changes
in money market and other prevailing interest rates and levels of
competition.  We believe the variety of deposit accounts we offer
allows us to be competitive in obtaining funds and responding to changes in
consumer demand.  Based on experience, management believes our
deposits to be relatively stable.  However, the ability to attract and
maintain certificates of deposit, and the rates paid on these deposits, has been
and will continue to be significantly affected by market
conditions.  At December 31, 2008, $97,245,000, or 78.93% of our
deposit accounts were certificates of deposit, of which $61,909,000 have
maturities of one year or less.




21




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





At December 31,2008
                      
                      
                      2007Weighted
                          Average
                          Rate
                      
                      
                      Amount
                      
                      
                      Weighted
                        Average
                        Rate
                      
                      
                      Amount(Dollars in Thousands)NOW
      & Money Market Demand
                      
                      
                      1.43
                      %
                      
                      $
                      16,856
                      
                      
                      
                      1.90
                      %
                      
                      $
                      15,390Savings
      deposits
                      
                      
                      0.90
                      
                      
                      
                      7,194
                      
                      
                      
                      1.26
                      
                      
                      
                      7,718Certificates
      of deposit
                      
                      
                      4.15
                      
                      
                      
                      97,245
                      
                      
                      
                      4.95
                      
                      
                      
                      89,675Accrued
      interest payable
                      
                      
                      -
                      
                      
                      
                      13
                      
                      
                      
                      -
                      
                      
                      
                      14Non-interest
      bearing deposits
                      
                      
                      -
                      
                      
                      
                      1,895
                      
                      
                      
                      -
                      
                      
                      
                      1,301Total
                      
                      
                      3.50
                      %
                      
                      $
                      123,203
                      
                      
                      
                      4.23
                      %
                      
                      $
                      114,098





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




Years Ended December 31,2008
                              
                              
                              2007(Dollars in Thousands)Beginning
      of period
                              
                              $
                              114,098
                              
                              
                              $
                              111,823Net
      deposits (withdrawals)
                              
                              
                              4,592
                              
                              
                              
                              (2,390
                              )Interest
      credited on deposit accounts
                              
                              
                              4,513
                              
                              
                              
                              4,665Total
      increase in deposit accounts
                              
                              
                              9,105
                              
                              
                              
                              2,275Ending
      balance
                              
                              $
                              123,203
                              
                              
                              $
                              114,098Percent
      increase (decrease)
                              
                              
                              7.98
                              %
                              
                              
                              2.03
                              %




Large
Certificates of Deposits.The following table indicates the
amount of certificates of deposit as of December 31, 2008, by time remaining
until maturity.




Three months
                  or less
              
              
              Over three
                  months to six
                  months
              
              
              Over six
                  months to
                  twelve months
              
              
              Over
                  twelve
                  months
              
              
              Total(Dollars in Thousands)Certificates
      of deposit:Less
      than $100,000
              
              $
              14,311
              
              
              $
              10,047
              
              
              $
              17,787
              
              
              $
              19,973
              
              
              $
              62,118$100,000
      or more
              
              
              4,751
              
              
              
              3,602
              
              
              
              11,411
              
              
              
              15,363
              
              
              
              35,127Total
              
              $
              19,062
              
              
              $
              13,649
              
              
              $
              29,198
              
              
              $
              35,336
              
              
              $
              97,245





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


22


At December 31, 2008, Slavie Federal
Savings Bank was permitted to borrow up to $53,665,000 from the Federal Home
Loan Bank of Atlanta.  We had $35,300,000 and $34,000,000 of Federal
Home Loan Bank advances as of December 31, 2008 and December 31, 2007,
respectively, and we averaged $32,158,000 and $33,917,000 of Federal Home Loan
Bank advances during the years ended December 31, 2008 and December 31, 2007,
respectively.  During 2008, the increase in borrowings reflects
$39,300,000 in short term borrowing as well as $36,500,000 in short term
borrowing repayments.  There was $1,500,000 in long term borrowing
repayments.  Total borrowings increased by $1,300,000 from the prior
year.





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





Years Ended December 31,2008
                
                
                2007(Dollars
      in Thousands)FHLB
      Advances:Maximum
      month-end
      balance
                
                $
                35,300
                
                
                $
                34,000Balance
      at end of
      period
                
                
                35,300
                
                
                
                34,000Average
      balance
                
                
                32,158
                
                
                
                33,917Weighted
      average interest rate at end of period
                
                
                2.96
                %
                
                
                3.47
                %Weighted
      average interest rate during period
                
                
                3.65
                %
                
                
                4.18
                %





Personnel





As of
December 31, 2008, we had 28 full-time employees and 11 part-time
employees.  Our employees are not represented by any collective
bargaining group.  Management believes that we have good relations
with our employees.





Subsidiary
Activities





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





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


23





SUPERVISION
AND REGULATION





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





General





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





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





Federal
Banking Regulation





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





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





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


24





At
December 31, 2008, Slavie Federal Savings Bank’s capital exceeded all applicable
requirements.





Loans-to-One
Borrower.  A federal savings bank generally may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
unimpaired capital and surplus.  An additional amount may be loaned,
equal to 10% of unimpaired capital and surplus, if the loan is secured by
readily marketable collateral, which generally does not include real
estate.  As of December 31, 2008, Slavie Federal Savings Bank was in
compliance with the loans-to-one borrower limitations.





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





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





A savings
bank that fails the qualified thrift lender test must either convert to a bank
charter or operate under specified restrictions.  At December 31,
2008, Slavie Federal Savings Bank maintained approximately 83.28% of its
portfolio assets in qualified thrift investments.





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





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





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





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





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





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





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





·
            the
      bank would be undercapitalized following the
  distribution;





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


25


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





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





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





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





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





In
addition, under Regulation W:





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


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


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





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





Slavie
Federal Savings Bank’s authority to extend credit to its directors, executive
officers and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the FRA and Regulation O of the Federal Reserve Board.  Among other
things, these provisions require that extensions of credit to insiders be made
on terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable
features.  However, there is an exception for loans made pursuant to a
benefit or compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other
employees.  These provisions also require that such extensions of
credit not exceed certain limitations on the amount of credit extended to such
persons, individually and in the aggregate, which limits are based, in part, on
the amount of Slavie Federal Savings Bank’s capital.  In addition,
extensions of credit in excess of certain limits must be approved by Slavie
Federal Savings Bank’s board of directors (with any “interested” director not
participating in the voting).


26


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





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





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





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





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





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





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





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





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


27


At
December 31, 2008, Slavie Federal Savings Bank met the criteria for being
considered “well-capitalized.”





Insurance of Deposit
Accounts.  Deposit accounts in Slavie Federal Savings Bank are
insured by the FDIC, generally up to a maximum of $250,000 per separately
insured depositor accounts through December 31, 2009.  Slavie Federal
Savings Bank’s deposits therefore are subject to FDIC deposit insurance
assessments.





The FDIC
assesses insurance premiums based on risk, which allows it to tie each financial
institution’s deposit insurance premiums to the risk it poses to the deposit
insurance fund.  Under the risk-based assessment system, the FDIC
evaluates the risk of each financial institution based on its supervisory
rating, its financial ratios, and its long-term debt issuer
rating.  The rates for nearly all of the financial institution
industry vary between five and seven cents for every $100 of domestic
deposits.  In 2008, the assessments paid by the Bank were offset by
the allocation of $47,000 in credits from the FDIC for prior premiums paid by
the Bank.  At December 31, 2008, there was no balance remaining to be
allocated against future assessments.




In 2006,
the FDIC merged the Bank Insurance Fund (“BIF”) and the Savings Association
Insurance Fund (“SAIF”) into a single fund called the Deposit Insurance Fund
(“DIF”) in accordance with the Federal Deposit Insurance Reform Act of 2005 (the
“Act”).  As a result of a merger, the BIF and the SAIF were
abolished.  The merger of the BIF and the SAIF into the DIF does not
affect the authority of the Financing Corporation (“FICO”) to impose and
collect, with the approval of the FDIC, assessments for anticipated payments,
issuance cost and custodial fees on bonds issued by the FICO in the 1980s to
recapitalize the Federal Savings and Loan Insurance Corporation.  The
bonds issued by the FICO are due to mature in 2017 through 2019.  For
the quarter ended December 31, 2008, the annualized FICO assessment was equal to
1.04 basis points for each $100 in domestic deposits maintained at an
institution.




The Act
established a range of 1.15% to 1.50% within which the FDIC Board of Directors
may set the Designated Reserve Ratio (“DRR”). Recent failures have resulted in a
decline in the DRR to below 1.15%. Under the Act, the FDIC is required to
establish and implement a restoration plan to restore the DRR to 1.15% within
five years of the establishment of the plan. The FDIC adopted a final rule
effective January 1, 2009, raising current rates uniformly by seven
cents per $100 of domestic deposits for the first quarter of 2009
only.  Proposed rates beginning April 1, 2009, range from a
minimum initial assessment rate of ten to 45 cents for every $100 of domestic
deposits.  We anticipate the FDIC will increase our deposit insurance
assessment in the second quarter of 2009 to 16 cents for every $100 of domestic
deposits.




In
addition to the increase in deposit insurance premiums, on February 27, 2009,
the FDIC announced that it plans to impose a 20 basis point special emergency
assessment, payable September 30, 2009, and it has the authority to implement an
additional 10 basis point premium in any quarter.  Senate Banking
Chairman, Christopher Dodd, subsequently introduced legislation in the Senate
that would permanently raise the FDIC’s line of credit from Treasury to $100
billion and temporarily increase the borrowing authority to $500 billion until
December 31, 2020.  The FDIC pledged to cut the 20 basis point
emergency special assessment if Congress approves legislation expanding the
agency’s line of credit.




The FDIC
may terminate the deposit insurance of any insured depository institution,
including Slavie Federal Savings Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC.


28




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





Federal Home Loan Bank
System.  Slavie Federal Savings Bank is a member of the Federal
Home Loan Bank System, which consists of 12 regional Federal Home Loan
Banks.  The Federal Home Loan Bank System provides a central credit
facility primarily for member institutions.  As a member of the
Federal Home Loan Bank of Atlanta, Slavie Federal Savings Bank is required to
acquire and hold shares of capital stock in the Federal Home Loan Bank in an
amount at least equal to 1% of the aggregate principal amount of its unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 1/20 of its borrowings from the Federal Home Loan Bank, whichever is
greater.  As of December 31, 2008, Slavie Federal Savings Bank was in
compliance with this requirement.  In the first quarter of 2009, The
Federal Home Loan Bank adjusted the membership stock requirement
calculation.  The new calculation method uses .18% of our total assets
with the addition of 4.50% of any outstanding advances.  The Bank was
required to recalculate its membership stock requirement in the first quarter of
2009 based on the new calculation and we have determined that we will need to
purchase an additional $12,600 in capital stock.





On March
25, 2009, the Federal Home Loan Bank’s Board of Directors announced that they
will not pay a dividend on its membership stock for the fourth quarter of
2008.  An annualized dividend rate of 3.54% was paid in
2008.  We have not accrued interest for a stock dividend in the first
quarter of 2009 in anticipation that the Federal Home Loan will not pay a stock
dividend in this period primarily doe to the continued volatility in the
financial markets.





Federal
Reserve System





The
Federal Reserve Board regulations require savings banks to maintain
non-interest-earning reserves against their transaction accounts, such as
negotiable order of withdrawal and regular checking accounts.  At
December 31, 2008, Slavie Federal Savings Bank was in compliance with these
reserve requirements.





Privacy
Requirements of the GLBA




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





The
USA Patriot Act





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





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


29





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





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





Check 21




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




·
            allowing
      check truncation without making it
mandatory;


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


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


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


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





Consumer
Credit Reporting





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





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


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


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




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





Other
Regulations




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


30




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




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




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




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




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




Our
deposit operations are subject to the following:




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




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




Proposed
Legislation and Regulatory Actions




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




Effect
of Governmental Monetary Policies




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




Holding
Company Regulation





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


31





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





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





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





Waivers of Dividends by Slavie
Bancorp, MHC.  Office of Thrift Supervision regulations require
Slavie Bancorp, MHC to notify the Office of Thrift Supervision of any proposed
waiver of its receipt of dividends from SFSB, Inc.  The Office of
Thrift Supervision reviews dividend waiver notices on a case-by-case basis, and,
in general, does not object to any such waiver if: (1) the mutual holding
company’s board of directors determines that such waiver is consistent with such
directors’ fiduciary duties to the mutual holding company’s members;
(2) for as long as the savings bank subsidiary is controlled by the mutual
holding company, the dollar amount of dividends waived by the mutual holding
company is considered as a restriction on the retained earnings of the savings
bank, which restriction, if material, is disclosed in the public financial
statements of the savings bank as a note to the financial statements;
(3) the amount of any dividend waived by the mutual holding company is
available for declaration as a dividend solely to the mutual holding company,
and, in accordance with SFAS 5, where the savings bank determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; and (4) the amount of
any waived dividend is considered as having been paid by the savings bank in
evaluating any proposed dividend under Office of Thrift Supervision capital
distribution regulations.  We anticipate that Slavie Bancorp, MHC will
waive dividends paid by SFSB, Inc.  SFSB, Inc. did
not  declare any dividends in 2008 or 2007.


32





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


33





FORWARD
LOOKING STATEMENTS





Some of
the matters discussed in this annual report and in the annual report to
stockholders incorporated herein by reference, including under the captions
“Business of SFSB, Inc.,” “Business of Slavie Federal Savings Bank,” “Risk
Factors,” “Management’s Discussion And Analysis Of Financial Condition And
Results Of Operations” and elsewhere include forward-looking
statements.  These forward-looking statements include statements
regarding the development and introduction of new products and services, the
allowance for loan losses, repayment of impaired loans, improvement in the value
of the Shay AMF Ultra Short Mortgage Fund, retention of maturing certificates of
deposit, liquidity management and the establishment of a liquidity plan in a
distressed financial environment, funding of unused lines of credit, the impact
on us of weakening economic conditions, potential increases in foreclosure
rates, our holding of mortgage-backed securities, impact of recent housing
market turmoil on our investment portfolio, sources of revenues or income,
deposit retention and growth, capture of deposits from bank consolidation
run-off, underwriting standards, cross-selling opportunities, interest rate
sensitivity, loan mix and growth, growth strategy, expected recovery of the
carrying amount of real estate in connection with foreclosed property, future
additional branches, potential payment of dividends and Slavie Bancorp MHC’s
waiver of its receipt of dividends, market risk and management of market risk,
the expectation of increasing the volume of loans sold to the secondary market
and financial and other goals.  Forward-looking statements often use
words such as “believe,” “expect,” “plan,” “may,” “will,” “should,” “project,”
“contemplate,” “anticipate,” “forecast,” “intend,” or other words of similar
meaning.  You can also identify them by the fact that they do not
relate strictly to historical or current facts.  When you read a
forward-looking statement, you should keep in mind the risk factors described
below and any other information contained in and incorporated into this annual
report which identifies a risk or uncertainty.  SFSB, Inc.’s actual
results and the actual outcome of SFSB, Inc.’s expectations and strategies could
be different from that described in this annual report or the information
incorporated into this annual report because of these risks and uncertainties
and you should not put undue reliance on any forward-looking
statements.  All forward-looking statements speak only as of the date
of this filing, and SFSB, Inc. undertakes no obligation to make any revisions to
the forward-looking statements to reflect events or circumstances after the date
of this filing or to reflect the occurrence of unanticipated
events.





Item
1A.  Risk Factors





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





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





Our
financial results may be adversely affected by changes in prevailing economic
conditions, including decreases in real estate values, changes in interest rates
which may cause a decrease in interest rate spreads, adverse employment
conditions, the monetary and fiscal policies of the federal government and other
significant external events.  Because most of our loan portfolio is
comprised of real estate related loans, continued decreases in real estate
values could adversely affect the value of property used as
collateral.  Although we have been required to write-down a portion of
our investment portfolio in this regard, our business has not been impacted by
recent adverse economic changes due to our strict underwriting standards;
however, further adverse changes in the economy may have a negative effect on
the ability of our borrowers to make timely repayments of their loans, which
would increase the level of nonperforming loans and charge-offs, reduce loan
demand and deposit growth, and otherwise, have an adverse impact on our
earnings.





Additionally,
if economic conditions in our market areas deteriorate, or there is significant
volatility or weakness in the economy or any significant sector of our market
area’s economy, our ability to develop our business relationships may be
diminished and loan demand may be reduced.  Although lending trends
were positive in 2008 increasing 12% from 2007 to 2008 for banks headquartered
in Maryland overall, and we were able to increase our lending during the past
year as well, there can be no assurance that this trend will continue or will
not reverse if economic conditions continue to deteriorate.


34





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





Currently,
our primary market area is limited to Baltimore City, Baltimore County and
Harford County, Maryland.  If these areas or the Baltimore
metropolitan area generally suffers an economic downturn, our business and
financial condition may be severely affected.  Overall, during 2008,
the business environment negatively impacted many businesses and households in
the United States and worldwide.  Although the economic decline has
not impacted our target markets as severely as [some] other areas of the United
States, it has caused an increase in unemployment and business failures and a
decline in property values.  As a result, if our market area continues
to suffer an economic downturn, it may more severely affect our business and
financial condition than it affects larger bank competitors.  Our
larger competitors serve a more geographically diverse market area, parts of
which may not be affected by the same economic conditions that exist in our
primary market area.  Further, unexpected changes in the national and
local economy may adversely affect our ability to attract deposits and to make
loans.  Such risks are beyond our control and may have a material
adverse effect on our financial condition and results of operations and, in
turn, the value of our securities.





If U.S. Credit Markets and Economic
Conditions Continue to Deteriorate, Our Liquidity Could be Adversely
Affected.





Our
liquidity may be adversely affected by the current environment of economic
uncertainty reducing business activity as a result of, among other factors,
disruptions in the financial system in the recent past.  Dramatic
declines in the housing market during the past year, with falling real estate
prices and increased foreclosures and rising unemployment resulting in increased
loan defaults, have resulted in significant asset value write-downs by financial
institutions, including government-sponsored entities and investment
banks.  These investment write-downs have caused financial
institutions to seek additional capital.  Should we experience a
substantial deterioration in our financial condition or should disruptions in
the financial markets restrict our funding, it would negatively impact our
liquidity.





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





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





We
cannot predict the impact of recently enacted legislation, in particular the
Emergency Economic Stabilization Act of 2008 and its implementing regulations,
and actions by the FDIC, cannot be predicted at this time.





On
October 3, 2008, President Bush signed into law the Emergency Economic
Stabilization Act of 2008 (“EESA”).  The legislation was the result of
a proposal by Treasury Secretary Henry Paulson to the U.S. Congress in response
to the financial crises affecting the banking system and financial
markets.  EESA increases the amount of deposits insured by the FDIC to
$250,000.  On October 14, 2008, the FDIC announced a new program — the
Temporary Liquidity Guarantee Program that provides unlimited deposit insurance
on funds in noninterest-bearing transaction deposit accounts not otherwise
covered by the existing deposit insurance limit of $250,000.  All
eligible institutions were covered under the program until December 5, 2008
without incurring any costs, and institutions that desire to opt out of this
coverage were required to do so prior to such date.  After the initial
period, participating institutions will be assessed a 10 basis point surcharge
on the additional insured deposits.  We elected not to participate in
the Temporary Liquidity Guarantee Program.  Additionally, the behavior
of depositors in regard to the level of FDIC insurance could cause our existing
customers to reduce the amount of deposits held at the Bank, and could cause new
customers to open deposit accounts at the Bank. The level and composition of the
Bank’s deposit portfolio directly impacts the Bank’s funding cost and net
interest margin.


35





EESA also
created the TARP program.  TARP gave Treasury authority to deploy up
to $700 billion into the financial system with an objective of improving
liquidity in capital markets.  As discussed above, we have applied to
participate in TARP.  As discussed above, if we participate the terms
of this preferred stock program could reduce investment returns to our current
stockholders by restricting dividends to common stockholders, preventing us from
repurchasing outstanding shares of common stock, diluting existing stockholders’
interests, and restricting capital management practices.  Further, we
cannot ensure that additional restrictions will not be imposed on participating
companies at a later date or that any such restrictions would not have a
material adverse affect on our operations, revenues, income and financial
condition.





Rising
Interest Rates May Hurt Our Profits and Assets Value.





Interest
rates are still at historically low levels.  As a result of low
interest rates, we have experienced strong demand for fixed rate loans, and as
of December 31, 2008, $133,692,000, or 84.99%, of our loans had fixed
rates.  If interest rates rise, our net interest income and the value
of our assets likely would be reduced because the interest paid on
interest-bearing liabilities, such as deposits and borrowings, would increase
more quickly than interest received on interest-earning assets, such as loans
and investments.  Our interest rate spread (the difference between the
average yield earned on our interest-earning assets and the average rate paid on
our interest-bearing liabilities) was 2.10% for the year ended December 31, 2008
compared to 1.51% for the year ended December 31, 2007.  Our net
interest margin (net interest income as a percentage of average interest-earning
assets) was 2.47% for the year ended December 31, 2008 compared to 1.99% for the
year ended December 31, 2007.  If interest rates rise, our interest
rate spread and net interest margin could be compressed, which would have a
negative effect on our profitability.





Changes
in interest rates also affect the value of our interest-earning
assets.  According to Office of Thrift Supervision calculations, as of
December 31, 2008, if interest rates increase by 1%, the net value of our assets
(our net portfolio value) will decrease by 1%.  If interest rates
increase by 2%, the net value of our assets (our net portfolio value) will
decrease by 12%.  For further discussion of how changes in interest
rates could impact us, see “Management’s Discussion and Analysis of Results of
Operations and Financial Condition – Management of Market Risk” in our Annual
Report to Stockholders.





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





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





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





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


36





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





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





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





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





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





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





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





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





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





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


37





Item
1B.  Unresolved Staff Comments





Not
applicable.


38





Item
2.  Properties





We
conduct our business through our main office and one branch
office.  The net book value of our premises, land and equipment was
$4,979,000 at December 31, 2008.  The following table provides certain
information with respect to our offices as of December 31, 2008:




Location
                                        
                                        Leased
                                          or Owned
                                        
                                        Year Acquired or
                                          Leased
                                        
                                        Net Book Value of Property
                                          andLeasehold Improvements
                                        
                                        
                                        Deposits at
                                          December 31,
                                          2008(Dollars
      in Thousands)Main
      Office
                                        
                                        Owned
                                        
                                        2001
                                        
                                        $
                                        4,716
                                        
                                        
                                        $
                                        31,1621614
      Churchville RoadBel
      Air, MD 21015Branch
      Office
                                        
                                        Owned
                                        
                                        1976
                                        
                                        $
                                        263
                                        
                                        
                                        $
                                        92,0413700
      East Northern PkwyBaltimore,
      MD  21206








Item
3.  Legal Proceedings





From time
to time we may be involved in litigation relating to claims arising out of the
ordinary course of our business.  At December 31, 2008, we were not
involved in any legal proceedings the outcome of which, in management’s opinion,
would be material to our financial condition or results of
operations.





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





No matter was submitted during the
fourth quarter of the year ended December 31, 2008 to a vote of security holders
of SFSB, Inc.


39


PART
II





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





Common
Stock





As of March 25, 2009, the number of
holders of record of SFSB, Inc.’s common stock was approximately
135.  SFSB, Inc.’s common stock is traded on the Over the Counter
Bulletin Board (“OTCBB”) under the symbol “SFBI.OB.”





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




2008
                    Bid Price Range
                  
                  
                  2007
                    Bid Price RangeQuarter
                  
                  High
                  
                  
                  Low
                  
                  
                  High
                  
                  
                  Low1st
                  
                  $
                  8.25
                  
                  
                  $
                  6.50
                  
                  
                  $
                  9.80
                  
                  
                  $
                  9.152nd
                  
                  
                  7.00
                  
                  
                  
                  6.90
                  
                  
                  
                  9.80
                  
                  
                  
                  8.753rd
                  
                  
                  7.00
                  
                  
                  
                  6.25
                  
                  
                  
                  9.25
                  
                  
                  
                  7.504th
                  
                  
                  6.45
                  
                  
                  
                  5.80
                  
                  
                  
                  8.65
                  
                  
                  
                  8.10





Dividends





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





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





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





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


40





Stock
Repurchases





On
November 18, 2005, SFSB, Inc.’s board of directors adopted a stock repurchase
program to acquire up to 53,561 shares, or approximately 4% of its outstanding
common stock held by persons other than Slavie Bancorp, MHC.  SFSB,
Inc’s board of directors approved additional repurchases of up to an additional
66,951 shares on May 1, 2006, 62,334 shares on August 6, 2007, 59,052 shares on
February 19, 2008, 59,022 on July 21, 2008 and 53,552 on December 15, 2008, in
each case constituting approximately 5% of its outstanding common stock held by
persons other than Slavie Bancorp, MHC at such time.  Stock purchases
are made from time to time in the open market at the discretion of the
management.  Any share repurchases under the repurchase program are
dependent upon market conditions and other applicable legal requirements and
must be undertaken within a 12-month period of the board’s
authorization.  As of December 31, 2008, SFSB, Inc. had repurchased
300,920 shares on the open market at an average cost of $8.22 per share to fund
a stock-based compensation plan.  In accordance with the terms of the
stock repurchase program, SFSB, Inc. is currently authorized to purchase an
additional 18,555 shares before December 15, 2009.





The table
below summarizes our repurchases of equity securities during the fourth quarter
of 2008.





ISSUER
PURCHASES OF EQUITY SECURITIES





Period
                
                Total
                    Number of
                    Shares
                    Purchased
                
                
                Average Price
                    Paid per
                    Share
                
                
                Total Number of
                    Shares Purchased
                    as Part of Publicly
                    Announced Plans
                    or Programs
                
                
                Maximum Number
                    of Shares That May
                    Yet Be Purchased
                    Under the Plan or
                    ProgramsOctober
      1-31, 2008
                
                
                0
                
                
                
                n/a
                
                
                
                0
                
                
                
                46,441November
      1-30, 2008
                
                
                33,000
                
                
                $
                6.50
                
                
                
                33,000
                
                
                
                13,441December
      1-31, 2008
                
                
                13,440
                
                
                $
                6.50
                
                
                
                13,440
                
                
                
                53,553Total
      Fourth Quarter
                
                
                46,440
                
                
                $
                6.50
                
                
                
                46,440
                
                
                
                53,553





Item
6.  Selected Financial Data





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





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





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





Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk





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





Item
8.  Financial Statements and Supplementary Data





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


41





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





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





Item
9A.  Controls and Procedures





As of the
end of the period covered by this annual report on Form 10-K, SFSB, Inc.’s Chief
Executive Officer and Chief Financial Officer evaluated the effectiveness of
SFSB, Inc.’s disclosure controls and procedures.  Based upon that
evaluation, SFSB, Inc.’s Chief Executive Officer and Chief Financial Officer
concluded that SFSB, Inc.’s disclosure controls and procedures are effective as
of December 31, 2008.  Disclosure controls and procedures are controls
and other procedures that are designed to ensure that information required to be
disclosed by SFSB, Inc. in the reports that it files or submits under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms.





In addition, there were no changes in
SFSB, Inc.’s internal control over financial reporting (as defined in Rule
13a-15 or Rule 15d-15 under the Securities Act of 1934, as amended) during the
quarter ended December 31, 2008, that have materially affected, or are
reasonably likely to materially affect, SFSB, Inc.’s internal control over
financial reporting.





Management’s
Report On Internal Control Over Financial Reporting





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




Management
has conducted an assessment of the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008, utilizing the
framework established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.  Based on this assessment, management has
determined that the Company’s internal control over financial reporting as of
December 31, 2008 is effective.




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





Item
9B.  Other Information





None





PART
III.





Item
10.  Directors, Executive Officers and Corporate
Governance





Code
of Ethics





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


42





The remaining information required by
this Item 10 is incorporated by reference from the information appearing
under the captions “Election of Directors,” “Board Meetings and Committees,”
“Executive Compensation – Information Regarding Executive Officers Who are Not
Directors and Key Employees” and “Section 16(a) Beneficial Ownership Reporting
Compliance” in the Proxy Statement for the 2009 Annual Meeting of Stockholders
of SFSB, Inc.





Item
11.  Executive Compensation





The information required by this
Item 11 is incorporated by reference from the information appearing under
the captions “Executive Compensation” and “Director Compensation” in the Proxy
Statement for the 2009 Annual Meeting of Stockholders of SFSB, Inc.





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





The information required by this
Item 12 is incorporated by reference from the information appearing under
the captions “Security Ownership of Management and Certain Security Holders” in
the Proxy Statement for the 2009 Annual Meeting of Stockholders of SFSB,
Inc.





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





The information required by this
Item 13 is incorporated by reference from the information appearing under
the captions “Election of Directors” and “Certain Relationships and Related
Transactions” in the Proxy Statement for the 2009 Annual Meeting of Stockholders
of SFSB, Inc.





Item
14.  Principal Accounting Fees and Services





Audit
and Non-Audit Fees




The
following table presents fees for professional audit services rendered by Beard
Miller Company LLP for the audit of SFSB, Inc.’s annual consolidated financial
statements for the years ended December 31, 2008 and December 31, 2007, and fees
billed for other services rendered by Beard Miller Company LLP during those
periods.





Years
      Ended December 31,2008
                
                
                2007Audit
      Fees(1)
                
                $
                66,500
                
                
                $
                53,904Audit
      Related Fees(2)
                
                
                2,245
                
                
                
                400Tax
      Fees(3)
                
                
                6,750
                
                
                
                9,946All
      Other Fees
                
                
                -
                
                
                
                -Total
                
                $
                75,495
                
                
                $
                64,250





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





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





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


43





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




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


44





Item
15.  Exhibits, Financial Statement Schedules





(a)(1)  Financial
Statements.





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





A.
            Consolidated
      Statements of Financial Condition


B.
            Consolidated
      Statements of Operations


C.
            Consolidated
      Statements of Stockholders’ Equity


D.
            Consolidated
      Statements of Cash Flows





(a)(1)
 Schedules.





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





(a)(3)      
Exhibits.





Exhibit No.
              
              Description
      of Exhibits2*
              
              Slavie
      Federal Savings Bank Second Amended and Restated Plan of Reorganization
      from a Mutual Savings Bank to a Mutual Holding Company and Stock Issuance
      Plan3.1*
              
              Federal
      Stock Charter of SFSB, Inc.3.2+
              
              Amended
      and Restated Bylaws of SFSB, Inc.4*
              
              Form
      of Common Stock certificate of SFSB, Inc.4.1@
              
              Advances
      and Security Agreement between Slavie Federal Savings Bank and the Federal
      Home Loan Bank of Atlanta10.1*
              
              Form
      of Employee Stock Ownership Plan, as amended10.2**
              
              Loan
      Documents relating to Employee Stock Ownership Plan10.3
              
              Terms
      of Employment Arrangement between Slavie Federal Savings Bank and Philip
      E. Logan10.4
              
              Terms
      of Employment Arrangement between Slavie Federal Savings Bank and Charles
      E. Wagner, Jr.10.5
              
              Terms
      of Employment Arrangement between Slavie Federal Savings Bank and Sophie
      Torin Wittelsberger10.8#
              
              Terms
      of Retirement Benefit Paid to Former President Roger
    Schueler10.9##
              
              Form
      of 2005 Stock Option Plan10.10##
              
              Form
      of 2005 Recognition and Retention Plan10.11##
              
              Form
      of Employee Stock Option Agreement10.12##
              
              Form
      of Director Stock Option Agreement




45





10.13##
              
              SFSB,
      Inc. and Slavie Federal Savings Bank Director Compensation
      Policy10.14###
              
              Form
      of Restricted Stock Agreement13
              
              Annual
      Report to Stockholders21@
              
              Subsidiaries
      of Registrant23.1
              
              Consent
      of Beard Miller Company LLP31.1
              
              Rule
      13a-14(a) Certification of Chief Executive Officer31.2
              
              Rule
      13a-14(a) Certification of Chief Financial Officer32
              
              Section
      1350 Certification of Chief Executive Officer and Chief Financial
      Officer





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





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





The
exhibit which is denominated with one plus sign (+) was previously filed by
SFSB, Inc. as a part of, and is hereby incorporated by reference from, SFSB,
Inc.’s Current Report on Form 8-K filed on August 6, 2008.





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





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





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





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





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


46





SIGNATURES




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




SFSB,
      INC.Date :
      March 26, 2009By:
              /s/ Philip E. LoganPhilip
      E. LoganPresident,
      Chairman & CEO





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





Name
                
                Position
                
                Date/s/ Philip E. Logan
                
                President,
      CEO, Chairman and
                
                March
      26, 2009Philip
      E. Logan
                
                Principal
      Executive Officer;DirectorVice
      President and Chief
                
                March
      26, 2009/s/ Sophie T. Wittelsberger
                
                Financial
      Officer, PrincipalSophie
      T. Wittelsberger
                
                Financial
      Officer and PrincipalAccounting
      Officer/s/ J. Benson Brown
                
                Director
                
                March
      25, 2009J.
      Benson Brown/s/ Thomas J. Drechsler
                
                Director
                
                March
      26, 2009Thomas
      J. Drechsler/s/ Robert M. Stahl, IV
                
                Director
                
                March
      26, 2009Robert
      M. Stahl, IV/s/ James D. Wise
                
                Director
                
                March
      25, 2009James
      D. Wise/s/ Charles E. Wagner, Jr.
                
                Executive Vice
      President and
                
                March
      26, 2009Charles
      E. Wagner, Jr.
                
                Secretary;
      Director




47





EXHIBIT
INDEX





2*
                
                Slavie
      Federal Savings Bank Second Amended and Restated Plan of Reorganization
      from a Mutual Savings Bank to a Mutual Holding Company and Stock Issuance
      Plan3.1*
                
                Federal
      Stock Charter of SFSB, Inc.3.2+
                
                Amended
      and Restated Bylaws of SFSB, Inc.4*
                
                Form
      of Common Stock certificate of SFSB, Inc.4.1@
                
                Advances
      and Security Agreement between Slavie Federal Savings Bank and the Federal
      Home Loan Bank of Atlanta10.1*
                
                Form
      of Employee Stock Ownership Plan, as amended10.2**
                
                Loan
      Documents relating to Employee Stock Ownership Plan10.3
                
                Terms
      of Employment Arrangement between Slavie Federal Savings Bank and Philip
      E. Logan10.4
                
                Terms
      of Employment Arrangement between Slavie Federal Savings Bank and Charles
      E. Wagner, Jr.10.5
                
                Terms
      of Employment Arrangement between Slavie Federal Savings Bank and Sophie
      Torin Wittelsberger10.8#
                
                Terms
      of Retirement Benefit Paid to Former President Roger
    Schueler10.9##
                
                Form
      of 2005 Stock Option Plan10.10##
                
                Form
      of 2005 Recognition and Retention Plan10.11##
                
                Form
      of Employee Stock Option Agreement10.12##
                
                Form
      of Director Stock Option Agreement10.13##
                
                SFSB,
      Inc. and Slavie Federal Savings Bank Director Compensation
      Policy10.14###
                
                Form
      of Restricted Stock Agreement13
                
                Annual
      Report to Stockholders21@
                
                Subsidiaries
      of Registrant23.1
                
                Consent
      of Beard Miller Company LLP31.1
                
                Rule
      13a-14(a) Certification of Chief Executive Officer31.2
                
                Rule
      13a-14(a) Certification of Chief Financial Officer32
                
                Section
      1350 Certification of Chief Executive Officer and Chief Financial
      Officer





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








The
exhibit which is denominated with one plus sign (+) was previously filed by
SFSB, Inc. as a part of, and is hereby incorporated by reference from, SFSB,
Inc.’s Current Report on Form 8-K filed on August 6, 2008.





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





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





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





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





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





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