UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-QSB





(Mark
                One)x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934
              For
                the quarterly period ended March 31, 2006o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934 FOR THE TRANSITION PERIOD FROM ______TO ___________








Commission
      file number: 000-51037





**SFSB,
      INC.**


(Exact
      name of small business issuer 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





(443)
      265-5570


Issuer’s
      telephone number





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





Yes
            x
            
            No
            o





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





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date:





As
      of May
      12, 2006, there were 2,975,625 shares of the issuer’s Common Stock, par value
      $0.01 per share, outstanding.





Transitional
      Small Business Disclosure Format (Check One):  Yes
o No
x








PART
      I -
      FINANCIAL INFORMATION


**Item
      1. Financial Statements.**


**SFSB,
      Inc.**


**CONSOLIDATED
      STATEMENTS OF FINANCIAL CONDITION**





**March
                31, 2006**
            
            **December
                31, 2005**(Unaudited)(In
                thousands, except per share data)**ASSETS**Cash
                and due from banks
            
            $
            722
            
            $
            710Federal
                funds sold
            
            
            3,209
            
            
            632Cash
                and cash equivalents
            
            
            3,931
            
            
            1,342Investment
                securities - available for sale
            
            
            8,221
            
            
            8,153Investment
                securities - held to maturity
            
            
            3,999
            
            
            3,998Mortgage
                backed securities - held to maturity
            
            
            4,184
            
            
            4,525Loans
                receivable - net of allowance for loan losses of2006
                $488; 2005 $474
            
            
            145,323
            
            
            144,609Federal
                Home Loan Bank of Atlanta stock, at cost
            
            
            2,053
            
            
            1,955Premises
                and equipment, at cost, less accumulated depreciation
            
            
            5,445
            
            
            5,612Accrued
                interest receivable
            
            
            490
            
            
            487Other
                assets
            
            
            364
            
            
            386**Total
                assets**
            
            $
            174,010
            
            $
            171,067**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Liabilities**Deposits
            
            $
            111,208
            
            $
            109,623Checks
                outstanding in excess of bank balance
            
            
            987
            
            
            1,919Borrowings
            
            
            38,000
            
            
            36,000Advance
                payments by borrowers for taxes and insurance
            
            
            1,075
            
            
            372Other
                liabilities
            
            
            285
            
            
            348**Total
                liabilities**
            
            
            151,555
            
            
            148,262**Commitments
                and Contingencies****Stockholders’
                Equity**Preferred
                stock, no par value, 1,000,000 shares authorized,none
                issued and outstanding
            
            
            —
            
            
            —Common
                stock, par value $.01, 9,000,000 shares authorized,2,975,625
                shares issued and outstanding atMarch
                31, 2006 and December 31, 2005
            
            
            30
            
            
            30Additional
                paid-in capital
            
            
            12,761
            
            
            12,730****Retained
                earnings (substantially restricted)
            
            
            11,411
            
            
            11,375Unearned
                Employee Stock Ownership Plan shares
            
            
            (1,093
            )
            
            (1,108
            )Treasury
                Stock at cost,2006,
                53,561 shares and 2005, 10,000 shares
            
            
            (518
            )
            
            (96
            )Accumulated
                other comprehensive loss
            
            
            (136
            )
            
            (126
            )**Total
                stockholders’ equity**
            
            
            22,455
            
            
            22,805**Total
                liabilities and stockholders’ equity**
            
            $
            174,010
            
            $
            171,067




See
      notes
      to consolidated financial statements.


2




**SFSB,
      Inc.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS (Unaudited)**





**Three
                Months Ended****March
                31,****2006**
            
            **2005******(In
                thousands, except for per share data)Interest
                and fees on loans
            
            $
            1,974
            
            $
            1,588Interest
                and dividends on investment securities
            
            
            123
            
            
            96Interest
                on mortgage backed securities
            
            
            43
            
            
            58Other
                interest income
            
            
            56
            
            
            92**Total
                interest income**
            
            
            2,196
            
            
            1,834Interest
                on deposits
            
            
            853
            
            
            673Interest
                on short-term borrowings
            
            
            75
            
            
            49Interest
                on long-term borrowings
            
            
            288
            
            
            116**Total
                interest expense**
            
            
            1,216
            
            
            838**Net
                interest income**
            
            
            980
            
            
            996Provision
                for loan losses
            
            
            14
            
            
            19**Net
                interest income after provision for loan****losses**
            
            
            966
            
            
            977**Other
                Income**Rental
                income
            
            
            39
            
            
            31Other
                income
            
            
            19
            
            
            18Gain
                on sale of loans
            
            
            5
            
            
            1**Total
                other income**
            
            
            63
            
            
            50**Non-Interest
                Expenses**Compensation
                and other related expenses
            
            
            458
            
            
            435Occupancy
                expense
            
            
            206
            
            
            107Advertising
                expense
            
            
            26
            
            
            39Service
                bureau expense
            
            
            41
            
            
            41Furniture,
                fixtures and equipment
            
            
            56
            
            
            54Telephone,
                postage and delivery
            
            
            24
            
            
            21Other
                expenses
            
            
            154
            
            
            192**Total
                non-interest expenses**
            
            
            965
            
            
            889**Income
                before income tax provision**
            
            
            64
            
            
            138Income
                tax provision
            
            
            28
            
            
            50Net
                income
            
            $
            36
            
            $
            88**Basic
                Earnings per Share**
            
            **$**
            **0.01**
            
            **$**
            **0.03****Diluted
                Earnings Per Share**
            
            **$**
            **0.01**
            
            **$**
            **0.03**




See
      notes
      to consolidated financial statements.




3








**SFSB,
      Inc.**


**CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)**





**Three****Months
                Ended****March
                31,****2006**
            
            **2005**(In
                Thousands)Net
                income
            
            $
            36
            
            $
            88Net
                unrealized (loss) gain on securitiesavailable
                for sale during the period(net
                of taxes of $(7) and $(9))
            
            
            (10
            )
            
            (15
            )Total
                Comprehensive Income
            
            $
            26
            
            $
            73





See
      notes
      to consolidated financial statements.




4





**SFSB,
      Inc.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (Unaudited)**


**Three
                Months Ended****March
                31,****2006**
            
            **2005**(In
                Thousands)**Cash
                Flows From Operating Activities**Net
                income
            
            $
            36
            
            $
            88Adjustments
                to reconcile net income to net cashprovided
                by operating activities:Non-cash
                compensation under stock based benefit plan
            
            
            46
            
            
            —Net
                amortization of premiums and discounts
            
            
            (4
            )
            
            6Amortization
                of deferred loan fees
            
            
            (15
            )
            
            (20
            )Provision
                for loan losses
            
            
            14
            
            
            19Gain
                on sale of loans
            
            
            (5
            )
            
            (1
            )Loans
                originated for sale (452) (155)Proceeds
                from loans sold 457 156Provision
                for depreciation
            
            
            187
            
            
            44Decrease
                in accrued interest receivableand
                other assets
            
            
            19
            
            
            10Increase
                in accrued interest payable
            
            
            1
            
            
            22Decrease
                in other liabilities
            
            
            (57
            )
            
            (326
            )**Net
                Cash Provided (Used in) by Operating Activities**
            
            
            227
            
            
            (157
            )**Cash
                Flows from Investing Activities**Purchase
                of available for sale securities
            
            
            (78
            )
            
            (58
            )Principal
                collected on mortgage backed securities
            
            
            337
            
            
            518Net
                increase in loans
            
            
            (713
            )
            
            (276
            )Purchase
                of Federal Home Loan Bank of Atlanta stock
            
            
            (98
            )
            
            (82
            )Redemption
                of Federal Home Loan Bank of Atlanta stock
            
            
            —
            
            
            225Purchases
                of premises and equipment
            
            
            (20
            )
            
            (15
            )**Net
                Cash (Used in) Provided by Investing Activities**
            
            
            (572
            )
            
            312**Cash
                Flows from Financing Activities**Net
                increase (decrease) in deposits
            
            
            1,585
            
            
            (2,171
            )Decrease
                in checks outstanding in excess of bank balance
            
            
            (932
            )
            
            (239
            )Proceeds
                from borrowings
            
            
            13,500
            
            
            —Repayment
                of borrowings
            
            
            (11,500
            )
            
            (5,000
            )Increase
                in advance payments by borrowers for taxes and insurance
            
            
            703
                627Purchase
                of treasury stock
            
            
            (422
            )
            
            —**Net
                Cash Provided (Used in) by Financing Activities**
            
            
            2,934
            
            
            (6,783
            )Increase
                (decrease) in cash and cash equivalents
            
            
            2,589
            
            
            (6,628
            )Cash
                and cash equivalents at beginning of year
            
            
            1,342
            
            
            15,597**Cash
                and cash equivalents at end of year**
            
            $
            3,931
            
            $
            8,969**Supplemental
                Disclosures of Cash Flows Information**:**Cash
                paid during the period for:**Income
                taxes
            
            $
            35
            
            $
            125Interest
            
            $
            1,215
            
            $
            816





See
      notes
      to consolidated financial statements.




5





**SFSB,
      Inc.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS** **** **(Unaudited)**





**Note
      1 - Principles of Consolidation**





The
      consolidated financial statements include the accounts of SFSB, Inc. (“the
      Company”), its wholly-owned subsidiary, Slavie Federal Savings Bank (“the Bank”)
      and the Bank’s wholly-owned subsidiary, Slavie Holdings, LLC (“Holdings”). The
      accompanying consolidated financial statements include the accounts and
      transactions of these companies on a consolidated basis since inception. All
      intercompany accounts and transactions have been eliminated in the consolidated
      financial statements.




**Note
      2 - Business**





The
      Company's primary business is the ownership and operation of the Bank. The
      Bank’s primary business activity is the acceptance of deposits from the general
      public and the use of the proceeds for investments and loan originations. The
      Bank is subject to competition from other financial institutions. The Bank
      is
      subject to the regulations of certain federal agencies and undergoes periodic
      examinations by those regulatory authorities.





Holdings,
      formed on August 18, 1999 as a Maryland limited liability company, was created
      to acquire and manage certain real property located at 1614 Churchville Road,
      Bel Air, Maryland. This property includes the main office and corporate
      headquarters of the Bank. In addition, the property houses mixed use office
      space which is available for lease. As of March 31, 2006, approximately 100%
      of
      the available space to non-affiliated tenants was leased.





**Note
      3 - Basis of** **Presentation**





The
      accompanying unaudited consolidated financial statements have been prepared
      in
      conformity with accounting principles generally accepted in the United States
      of
      America (GAAP) for interim financial information and with the instructions
      to
      SEC Form 10-QSB. Accordingly, they do not include all the information and
      footnotes required by GAAP for complete financial statements.





The
      foregoing consolidated financial statements are unaudited; but in the opinion
      of
      management include all adjustments (consisting only of normal recurring
      adjustments) necessary for a fair presentation thereof. The balances as of
      December 31, 2005 have been derived from the audited consolidated financial
      statements. These consolidated financial statements should be read in
      conjunction with the consolidated financial statements and notes thereto
      included in the Company’s Annual Report on Form 10-KSB. The results of
      operations for the three months ended March 31, 2006 are not necessarily
      indicative of the results that may be expected for the full year.





**Note
      4 - Earnings Per Share**





Basic
      earnings per share for the three months ended March 31, 2006 and 2005 is
      computed by dividing net income by the weighted average number of common shares
      outstanding of 2,830,839 and 2,859,967 for the respective periods. Unearned
      Employee Stock Ownership Plan (ESOP) shares are not included in outstanding
      shares. Diluted earnings per share for the three months ended March 31, 2006
      and
      2005 is computed on the weighted average number of common shares outstanding
      of
      2,835,601 and 2,859,967, for the respective periods, as adjusted for the
      dilutive effect of stock options and unvested stock awards based on the
“treasury stock” method. The earnings per share, for both basic and diluted, is
      $0.01 as of March 31, 2006 and $0.03 as of March 31, 2005.




6





**Note
      5 - Stockholders’ Equity and Regulatory Capital
      Requirements**





During
      March 31, 2006, the Company purchased 43,561 shares of treasury stock for
      $422,000 or $9.68 per share. The acquisition of treasury stock is recorded
      under
      the cost method.





At
      March
      31, 2006, the Bank met each of the three minimum regulatory capital
      requirements. The following table summarizes the Bank’s regulatory capital
      position at March 31, 2006.





**To
                Be Well****Capitalized
                Under****For
                  Capital**
            
            **Prompt
                Corrective****Actual**
            
            **Adequacy
                  Purposes**
            
            **Action
                Provision****Amount**
            
            **%**
            
            **Amount**
            
            **%**
            
            **Amount**
            
            **%**(Dollars
                in thousands)**March
                31, 2006****(Unaudited)**Tangible
                (1)
            
            $
            16,722
            
            
            9.58
            %
            $
            2,620
            
            
            1.50
            %
            
            N/A
            
            
            N/ATier
                I capital (2)
            
            
            16,722
            
            
            17.43
            %
            
            N/A
            
            
            N/A
            
            $
            5,755
            
            
            6.00
            %Core
                (leverage) (1)
            
            
            16,722
            
            
            9.58
            %
            
            6,986
            
            
            4.00
            %
            
            8,732
            
            
            5.00
            %Risk-weighted
                (2)
            
            
            17,209
            
            
            17.94
            %
            
            7,673
            
            
            8.00
            %
            
            9,591
            
            
            10.00
            %


_____________________


(1)
      To
      adjusted total assets.


(2)
      To
      risk-weighted assets.





**Note
      6 - Stock-Based Compensation**




The
      compensation cost charged against income for stock-based compensation plans
      was
      $32,000 and the total income tax benefit recognized was $9,000 for the three
      months ended March 31, 2006. No share based compensation plans were in effect
      for the three months ended March 31, 2005.




At
      March
      31, 2006, there is $557,000 of total unrecognized compensation cost related
      to
      unvested share-based compensation arrangements granted under the plans. The
      cost
      is expected to be recognized over a weighted average period of 4.4
      years.




During
      the three months ended March 31, 2006, there were no grants of stock options
      or
      restricted stock under the Company’s stock-based compensation plans. No stock
      options were exercised in the three months ended March 31, 2006. At March 31,
      2006, there were no vested stock options or restricted stock
      shares.




**Note
      7 - Recent Accounting Pronouncements**





In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments” (“SFAS No 155”).  SFAS No. 155 amends FASB Statement
      No. 133 and FASB Statement No. 140, and improves the financial reporting of
      certain hybrid financial instruments by requiring more consistent accounting
      that eliminates exemptions and provides a means to simplify the accounting
      for
      these instruments.  Specifically, SFAS No. 155 allows financial instruments
      that have embedded derivatives to be accounted for as a whole (eliminating
      the
      need to bifurcate the derivative from its host) if the holder elects to account
      for the whole instrument on a fair value basis.  SFAS No. 155 is effective
      for all financial instruments acquired or issued after the beginning of an
      entity's first fiscal year that begins after September 15, 2006.  SFSB,
      Inc. is required to adopt the provisions of SFAS No. 155, as applicable,
      beginning in fiscal year 2007.  Management does not believe the adoption of
      SFAS No. 155 will have a material impact on SFSB, Inc.'s financial position
      and
      results of operations.




7





In
      March
      2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
      Financial Assets — An Amendment of FASB Statement No. 140”
(“SFAS 156”). SFAS 156 requires that all separately recognized
      servicing assets and servicing liabilities be initially measured at fair value,
      if practicable. The statement permits, but does not require, the subsequent
      measurement of servicing assets and servicing liabilities at fair value.
      SFAS 156 is effective as of the beginning of an entity’s first fiscal year
      that begins after September 15, 2006, which for SFSB, Inc. will be as of
      the beginning of fiscal 2007. We do not believe that the adoption of
      SFAS 156 will have a significant effect on our financial
      statements.





**Item
      2.**  **Management's
      Discussion and Analysis**





**Introduction**





Some
      of
      the matters discussed below include forward-looking statements within the
      meaning of the federal securities laws. Forward-looking statements often use
      words such as “believe,” “expect,” “plan,” “may,” “will,” “should,” “project,”
“contemplate,” “anticipate,” “forecast,” “intend” or other words of similar
      meaning. You can also identify them by the fact that they do not relate strictly
      to historical or current facts. Our actual results and the actual outcome of
      our
      expectations and strategies could be materially different from those anticipated
      or estimated for the reasons discussed below and the reasons under the heading
      “Information Regarding Forward Looking Statements.”





**Overview**





Earnings
      declined to $36,000 for the three months ended March 31, 2006 as compared to
      $88,000 for the same period in 2005 primarily due to the acceleration of
      depreciation on the leasehold improvements of the Edgewood branch in connection
      with closing the branch, the impact of a decision to place a non-performing
      commercial land acquisition and development participation loan on non-accrual
      status and, therefore, not accruing interest on that loan, and the continued
      costs associated with being a public company. Interest income increased
      $362,000, or 19.74%, and non-interest income increased $13,000, or 26.00%.
      These
      improvements were offset by a $378,000, or 45.11%, increase in interest expenses
      and a $76,000, or 8.55%, increase in non-interest expenses.





Assets
      increased during the first three months of 2006 primarily because we had an
      increase of cash and cash equivalents of $2,589,000, or 192.92%, to $3,931,000
      at March 31, 2006 from $1,342,000 at December 31, 2005. The increase is also
      a
      result of increased loan growth of $714,000, or 0.49%, to $145,323,000 at March
      31, 2006 from $144,609,000 at December 31, 2005. These increases were offset
      by
      a decrease in mortgage backed securities held to maturity of $341,000, or 7.54%,
      to $4,184,000 at March 31, 2006 from $4,525,000 at December 31, 2005.





We
      hold a
      19% participation (approximately $1,080,000 in unpaid principal balance) in
      an
      acquisition and development loan. Although this loan became delinquent in the
      fourth quarter of 2004, we had continued to accrue interest on the loan because
      we believed that collection of all principal and interest on the loan was
      probable. In the third quarter of 2005, we placed the loan on non-accrual
      status. As a result, we discontinued the accrual of interest and we reversed
      previously accrued interest. Previously, we reported that we expected a national
      homebuilder would purchase the property to build residential units as soon
      as
      the borrower developed the property to the “record plat” stage, at which time
      the loan would be paid in full, and that we expected that to occur prior to
      the
      end of 2005. In early November 2005, the national homebuilder agreed to release
      the borrower from its purchase agreement with the national homebuilder. On
      November 18, 2005, the participating banks successfully negotiated a 90-day
      Forbearance Agreement with the borrower for the purpose of allowing the borrower
      to negotiate the sale of the property. On February 7, 2006, the borrower
      executed a Letter Agreement with the national homebuilder to purchase the
      property in “as is” condition. The Letter Agreement was contingent upon
      completion of a feasibility study within 45 days of its execution. The national
      homebuilder has completed its feasibility study and, on March 27, 2006, approved
      the purchase of the property, subject to the approval of road access plans.
      The
      national homebuilder has until May 14, 2006 to resolve the road access issues.
      Subject to the resolution of road access issues, closing is anticipated to
      occur
      by the end of June 2006. The above referenced Forbearance Agreement was extended
      and runs coterminous with the Letter Agreement. Both are due to expire on May
      14, 2006. The Letter Agreement references payment in full of principal, accrued
      interest and all costs of collection for this participation loan. As of the
      date
      of this filing, this participation loan continues to be on non-accrual status.
      We continue to believe the project is viable and that our collateral position
      is
      adequate. Ultimately, we believe we will receive all interest and principal
      on
      this loan, although there can be no assurance that this will be the
      case.




8





Opened
      in
      November 2001, our Edgewood branch had been an active part of the community
      it
      served, but it had been unable to generate the business necessary to keep it
      a
      viable part of our strategic plan. In November 2005, we received regulatory
      approval to close our Edgewood location and we closed the branch on February
      24,
      2006. We incurred $101,000 in expenses in the first quarter of 2006 in
      connection with closing the branch, primarily due to the acceleration of
      depreciation on the leasehold improvements. Long term, we believe the branch
      closing will have a positive effect on earnings as we will cease to incur some
      of the costs associated with branch operations, yet retain in our portfolio
      the
      loans that were originated from the branch. The Edgewood branch personnel have
      remained with us and were reassigned to positions at the Bel Air branch and
      corporate headquarters.





Key
      measurements and events for the three-month period ended March 31, 2006 include
      the following:





·
            Total
                assets at March 31, 2006 increased by 1.72% to $174,010,000 as compared
                to
                $171,067,000 as of December 31, 2005.





·
            Net
                loans outstanding increased by 0.49% from $144,609,000 as of December
                31,
                2005 to $145,323,000 as of March 31,
                2006.





·
            Nonperforming
                loans at March 31, 2006 totaled $1,332,000. We believe an appropriate
                allowance for loan losses continues to be
                maintained.





·
            Deposits
                at March 31, 2006 were $111,208,000, an increase of $1,585,000 or
                1.45%
                from $109,623,000 at December 31, 2005.





·
            SFSB,
                Inc. realized net income of $36,000 for the three-month period ended
                March
                31, 2006. This compares to net income of $88,000 for the three-month
                period ended March 31, 2005.





·
            Net
                interest income, our main source of income, was $980,000 during the
                three-month period ended March 31, 2006 compared to $996,000 for
                the same
                period in 2005. This represents a decrease of 1.61% for the three
                months
                ended March 31, 2006 as compared to the same period in 2005.





·
            We
                had no loan charge-offs during the three month periods ending March
                31,
                2006 or March 31, 2005.





·
            Non-interest
                income increased by $13,000, or 26.00%, for the three-month period
                ended
                March 31, 2006, as compared to the three-month period ended March
                31,
                2005.





·
            Non-interest
                expenses increased by $76,000 or 8.55%, for the three-month period
                ended
                March 31, 2006, as compared to the period ended March 31,
                2005.




9





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





**Critical
      Accounting Policies**





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





Based
      on
      the valuation techniques used and the sensitivity of financial statement amounts
      to the methods, assumptions, and estimates underlying those amounts, management
      has identified the determination of the allowance for loan losses as the
      accounting area that requires the most subjective or complex judgments, and
      as
      such could be most subject to revision as new information becomes available.





Management’s
      judgment is inherent in the determination of the provision and allowance for
      loan losses, including in connection with the valuation of collateral and the
      financial condition of the borrower. The establishment of allowance factors
      is a
      continuing exercise and allowance factors may change over time, resulting in
      an
      increase or decrease in the amount of the provision or allowance based upon
      the
      same volume and classification of loans. ****





Changes
      in allowance factors or in management’s interpretation of those factors will
      have a direct impact on the amount of the provision, and a corresponding effect
      on income and assets. Also, errors in management’s perception and assessment of
      the allowance factors could result in the allowance not being adequate to cover
      losses in the portfolio, and may result in additional provisions or charge-offs,
      which would adversely affect income and capital. For additional information
      regarding the allowance for loan losses, see “Results of Operations for the
      Three Months Ended March 31, 2006 and 2005 - Provision for Loan Losses and
      Analysis of Allowance for Loan Losses.”





In
      December, 2004, the Financial Accounting Standards Board (FASB) issued Statement
      No. 123(R), “Share-Based Payment” (“SFAS 123R”). We adopted this standard in the
      third quarter of 2005 in connection with our initial granting of stock based
      compensation awards. This revised standard addresses the accounting for
      share-based payment transactions in which a company receives employee services
      in exchange for either equity instruments of the company or that are based
      on a
      fair value of the company’s equity instruments or that may be settled by the
      issuance of such equity instruments. Under the new standard, the company is
      required to account for such transactions using a fair-value method and to
      recognize the expense in the consolidated statement of income. We selected
      the
      Black-Scholes Option-Pricing model for calculating the fair value of option
      grants. The impact on operations in future periods is determined by amortizing
      the remaining value of our currently outstanding options, plus the value imputed
      to future option grants using the above described methods. There is no impact
      on
      cash flow. For additional information on stock-based compensation, see Note
      6 to
      the March 31, 2006 financial statements above and the Company’s Annual Report on
      Form 10-KSB for December 31, 2005.




10








**Results
      of Operations for the Three Months Ended March 31, 2006 and
      2005**





*General* .
      Net
      income decreased $52,000, to $36,000 for the three months ended March 31, 2006
      compared to $88,000 for the same period in the prior year. The decrease was
      due
      primarily to a $378,000 increase in interest expense and a $76,000 increase
      in
      non-interest expenses, offset by a $362,000 increase in interest income.





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






11







**Three
                Months Ended**
              **March
                31, 2006**
            
            **Three
                Months Ended**
              **March
                31, 2005****Average**
              **Outstanding**
              **Balance**
            
            **Interest**
              **Earned/**
              **Paid**
            
            **Yield/**
              **Rate**
            
            **Average**
              **Outstanding**
              **Balance**
            
            **Interest**
              **Earned/**
              **Paid**
            
            **Yield/**
              **Rate**(Dollars
                in thousands)Interest-earning
                assets:Loans
                receivable(1)
            
            $
            144,463
            
            $
            1,974
            
            
            5.47
            %
            $
            118,550
            
            $
            1,588
            
            
            5.36
            %Mortgage-backed
                securities
            
            
            4,287
            
            
            43
            
            
            4.01
            
            
            6,623
            
            
            58
            
            
            3.50Investment
                securities (available for sale)
            
            
            8,198
            
            
            85
            
            
            4.15
            
            
            8,002
            
            
            58
            
            
            2.90Investment
                securities (held to maturity)
            
            
            3,999
            
            
            38
            
            
            3.80
            
            
            3,996
            
            
            38
            
            
            3.80Other
                interest-earning assets
            
            
            4,944
            
            
            56
            
            
            4.53
            
            
            13,038
            
            
            92
            
            
            2.82Total
                interest-earning assets
            
            
            165,891
            
            
            2,196
            
            
            5.30
            %
            
            150,209
            
            
            1,834
            
            
            4.88
            %Non-interest
                earning assets
            
            
            7,085
            
            
            
            
            
            
            
            
            7,158Total
                assets
            
            $
            172,976
            
            
            
            
            
            
            
            $
            157,367Interest-bearing
                liabilities:Savings
                deposits
            
            $
            27,817
            
            
            91
            
            
            1.31
            %
            $
            37,614
            
            
            116
            
            
            1.23
            %Demand
                and NOW accounts
            
            
            2,797
            
            
            4
            
            
            0.57
            
            
            2,315
            
            
            5
            
            
            0.86Certificates
                of deposit
            
            
            78,980
            
            
            758
            
            
            3.84
            
            
            67,621
            
            
            552
            
            
            3.27Escrows
            
            
            10
            
            
            —
            
            
            —
            
            
            12
            
            
            —
            
            
            —Borrowings
            
            
            38,000
            
            
            363
            
            
            3.82
            
            
            24,833
            
            
            165
            
            
            2.66Total
                interest-bearing liabilities
            
            
            147,604
            
            
            1,216
            
            
            3.30
            %
            
            132,395
            
            
            838
            
            
            2.53
            %Non-interest
                bearing liabilities
            
            
            2,742
            
            
            
            
            
            
            
            
            2,282Total
                liabilities
            
            
            150,346
            
            
            
            
            
            
            
            
            134,677Total
                equity(2)
            
            
            22,630
            
            
            
            
            
            
            
            
            22,690Total
                liabilities and equity
            
            $
            172,976
            
            
            
            
            
            
            
            $
            157,367Net
                interest income
            
            
            
            
            $
            980
            
            
            
            
            
            
            
            $
            996Interest
                rate spread(3)
            
            
            
            
            
            
            
            
            2.00
            %
            
            
            
            
            
            
            
            2.35
            %Net
                interest-earning assets
            
            $
            18,287
            
            
            
            
            
            
            
            $
            17,814Net
                interest margin(4)
            
            
            
            
            
            
            
            
            2.36
            %
            
            
            
            
            
            
            
            2.65
            %Ratio
                of interest earning assets to interest bearing liabilities
            
            
            
            
            
            1.12x
            
            
            
            
            
            
            
            
            1.13x





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


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


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


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





*Net
      Interest Income* .





Net
      interest income decreased $16,000, or 1.61%, to $980,000 for the three months
      ended March 31, 2006 from $996,000 for the three months ended March 31, 2005.
      The decrease was due primarily to a $15,209,000, or 11.49%, increase in average
      interest bearing liabilities to $147,604,000 from $132,395,000, partially offset
      by an increase of $15,682,000, or 10.44%, in average interest earning assets
      to
      $165,891,000 from $150,209,000. The decrease was also a result of a 77 basis
      point increase in the cost of average interest bearing liabilities, from 2.53%
      to 3.30%, while the yield on average interest earning assets only increased
      42
      basis points from 4.88% to 5.30%.





Our
      interest rate spread decreased to 2.00% for the quarter ended March 31, 2006
      from 2.35% for the quarter ended March 31, 2005, reflecting the more rapid
      increase in the cost of our average interest bearing liabilities as compared
      to
      the increase in the yield of our interest earning assets. Our net interest
      margin decreased to 2.36% from 2.65%, because the growth in average interest
      earning assets was not enough to offset the increase in the cost of interest
      bearing liabilities. The ratio of interest earning assets to interest bearing
      liabilities remained relatively steady at 1.12 times for the three months ended
      March 31, 2006 and 1.13 times for the same period in 2005.




12




*Interest
      Income* .





Interest
      income increased by $362,000, or 19.74%, to $2,196,000 for the three months
      ended March 31, 2006, from $1,834,000 for the three months ended March 31,
      2005.
      The increase in interest income resulted primarily from increases of $386,000,
      or 24.31%, in interest and fee income from loans and $27,000, or 28.13%, in
      interest income from investment securities, partially offset by decreases of
      $15,000, or 25.86%, in interest income from mortgage backed securities and
      $36,000, or 39.13%, in interest from other interest earning assets (primarily
      consisting of interest earned on federal funds sold and Federal Home Loan Bank
      Stock).





The
      increase in interest income reflected a $15,682,000, or 10.44% increase in
      the
      average balance of interest-earning assets to $165,891,000 during the quarter
      ended March 31, 2006 from $150,209,000 during the quarter ended March 31, 2005,
      and a 42 basis point increase in the average yield on interest-earning assets
      to
      5.30% for the three months ended March 31, 2006 from 4.88% for the three months
      ended March 31, 2005, reflecting an increase in market interest rates.





The
      increase in interest income and fees on loans was due to a $25,913,000, or
      21.86% increase in average net loans receivable, from $118,550,000 during the
      quarter ended March 31, 2006 to $144,463,000 during the quarter ended March
      31,
      2005, and an 11 basis point increase in the average yield on loans
      receivable.





The
      decrease in interest income from other interest earning assets (primarily
      federal funds sold) was due to an $8,094,000, or 62.08%, decrease in average
      other interest earning assets, from $13,038,000 during the quarter ended March
      31, 2006 to $4,944,000 during the quarter ended March 31, 2005, offset by a
      171
      basis point increase in the average yield on these assets (as a result of
      increases in short term market interest rates). Other interest earning assets
      decreased primarily as a result of the continued improvements in loan growth
      as
      federal funds were used to fund the loan growth.





*Interest
      Expense* .





Interest
      expense, which consists of interest paid on deposits and borrowings, increased
      by $378,000, or 45.11%, to $1,216,000 for the three months ended March 31,
      2006
      from $838,000 for the three months ended March 31, 2005. The increase in
      interest expense resulted from an increase in the average balance and average
      cost of interest-bearing liabilities. The average balance of deposits increased
      to $109,594,000 during the quarter ended March 31, 2006 from $107,550,000 during
      the quarter ended March 31, 2005, and the average cost of deposits increased
      by
      61 basis points as a result of increased market interest rates. The average
      balance of borrowings increased to $38,000,000 during the quarter ended March
      31, 2006 from $24,833,000 in the same quarter of 2005 and the average cost
      of
      borrowings increased by 116 basis points as a result of longer term borrowings
      at higher interest rates.




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





Based
      on
      our evaluation of these factors, management made a provision of $14,000 and
      $19,000 for the three months ended March 31, 2006 and March 31, 2005,
      respectively. There were no charge-offs during the three-month periods ended
      March 31, 2006 and March 31, 2005. We used the same methodology and generally
      similar assumptions in assessing the allowance for these periods.




13





We
      have
      developed a methodology for assessing the adequacy of the allowance for loan
      losses. Our methodology consists of three key elements: (1) specific allowances
      for identified problem loans, including certain impaired or collateral-dependent
      loans; (2) a general valuation allowance on certain identified problem loans;
      and (3) a general valuation allowance on the remainder of the loan portfolio.




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




·
            loans
                90 or more days delinquent;





·
            loans
                with anticipated losses;





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





·
            nonaccrual
                loans;





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





·
            troubled
                debt restructurings and other non-performing
                loans.





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




We
      also
      review and establish, if necessary, an allowance for certain impaired loans
      for
      the amounts by which the discounted cash flows (or collateral value or
      observable market price) are lower than the carrying value of the loan. Under
      current accounting guidelines, a loan is defined as impaired when, based on
      current information and events, it is probable that a creditor will be unable
      to
      collect all amounts due under the contractual terms of the loan agreement.





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




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




14





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





The
      allowance for loan losses totaled $488,000, or 0.33% of gross loans outstanding
      of $146,305,000 at March 31, 2006, compared to an allowance for loan losses
      of
      $432,000, or 0.36% of gross loans outstanding of $118,891,000 at March 31,
      2005.





The
      following table summarizes the activity in the provision for loan losses for
      the
      three months ended March 31, 2006 and 2005.





**Three
                Months Ended****March
                31,****2006**
            
            **2005**(Dollars
                in thousands)Balance
                at beginning of period
            
            $
            474
            
            $
            413Charge-offs
            
            
            —
            
            
            —Recoveries
            
            
            —
            
            
            —Net
                charge-offs
            
            
            —Provision
                for loan losses
            
            
            14
            
            
            19Ending
                balance
            
            $
            488
            
            $
            432Ratio
                of net charge-offs (recoveries) during the period to average loans
                outstanding, net, during the period
            
            
            —
            
            
            —Ratio
                of allowance of loan losses to total loans outstanding
            
            
            0.33
            %
            
            0.36
            %Allowance
                for loan losses as a percent of total non-performing loans
            
            
            39.23
            %
            
            33.99
            %





*Other
      Income* .





Historically,
      our non-interest income has been relatively modest and one of our strategic
      initiatives is to increase our non-interest income. Non-interest income
      increased $13,000, or 26.00%, to $63,000 for the three months ended March 31,
      2006, as compared to $50,000 for the three months ended March 31, 2005. The
      primary reason for the increase in non-interest income is a $8,000, or 25.81%,
      increase in rental income from our headquarters building. Rental income
      increased due to increases in rental rates provided for in the applicable lease
      agreements. As of March 31, 2006, we leased 100% of the total leaseable space
      in
      our headquarters building. We expect this figure to be slightly lower for the
      second quarter of 2006 as two tenants who had occupied approximately 4.50%
      of
      our headquarters building vacated during April 2006.





*Non-interest
      Expense* .





Non-interest
      expense was $965,000 for the three months ended March 31, 2006 as compared
      to
      $889,000 for the three months ended March 31, 2005, an increase of $76,000,
      or
      8.55%. The increase was due primarily to increases of $99,000, or 92.52%, in
      occupancy expenses and $23,000, or 5.29%, in compensation and related expenses,
      partially offset by decreases of $38,000, or 19.79%, in other expenses and
      $13,000, or 33.33%, in advertising expenses. The increase in occupancy expenses
      is due to the acceleration of depreciation on the leasehold improvements of
      our
      Edgewood branch, which we closed on February 24, 2006. The increase in
      compensation and related expenses reflects, among other items, the hiring of
      a
      business development officer in October 2005 and the stock based expenses,
      including the Employee Stock Ownership Plan and our stock-based compensation
      plans (no costs in the first quarter of 2005).




15





*Income
      Tax Expense* .





The
      provision for income taxes decreased to $28,000 for the three months ended
      March
      31, 2006 from $50,000 for the three months ended March 31, 2005, representing
      a
      $22,000, or 44.00%, decrease. The decrease in the provision for income taxes
      was
      primarily due to our lower level of income before taxes of $64,000 for the
      three
      months ended March 31, 2006, as compared to $138,000 for the three months ended
      March 31, 2005. The effective tax rate was 43.75% and 36.23% for March 31,
      2006
      and March 31, 2005, respectively. The increase in effective tax rate was due
      to
      non-deductible stock based compensation.





**Analysis
      of Financial Condition**





***Assets.***





General .





Our
      total
      assets increased by $2,943,000 or 1.72%, to $174,010,000 at March 31, 2006,
      from
      $171,067,000 at December 31, 2005. The increase in total assets resulted
      primarily from a $2,589,000, or 192.92 % increase in cash and cash equivalents,
      from $1,342,000 at December 31, 2005 to $3,931,000 at March 31, 2006, and a
      $714,000, or 0.49% increase in net loans receivable, from $144,609,000 at
      December 31, 2005 to $145,323,000 at March 31, 2006. These increases were offset
      slightly by a $341,000, or 7.54% decrease in mortgage backed securities-held
      to
      maturity, from $4,525,000 at December 31, 2005 to $4,184,000 at March 31, 2006.





Investment
      Securities .





The
      investment portfolio at March 31, 2006 amounted to $16,404,000, a decrease
      of
      $272,000, or 1.63%, from $16,676,000 at December 31, 2005. Investment securities
      - available for sale, increased $68,000, or 0.83%, to $8,221,000 at March 31,
      2006 from $8,153,000 at December 31, 2005, primarily as a result of dividends
      credited to the account. Mortgage backed securities - held to maturity,
      decreased $341,000, or 7.54%, to $4,184,000 at March 31, 2006 from $4,525,000
      at
      December 31, 2005, as a result of principal repayments.





The
      carrying value of available for sale securities includes a net unrealized loss
      of $222,000 at March 31, 2006 (reflected as accumulated other comprehensive
      loss
      of $136,000 in equity after deferred taxes) as compared to a net unrealized
      loss
      of $205,000 ($126,000 net of taxes) as of December 31, 2005. In general, this
      increase in unrealized loss was a result of **** rising
      interest **** rates.





Loan
      Portfolio .





Loans
      receivable, net, increased $714,000, or 0.49%, to $145,323,000 at March 31,
      2006
      from $144,609,000 at December 31, 2005. The commercial loan portfolio increased
      $807,000, or 8.74%, to $10,041,000 at March 31, 2006 from $9,234,000 at December
      31, 2005. One-to-four family residential loans decreased $114,000, or 0.08%
      to
      $134,691,000 at March 31, 2006 from $134,805,000 at December 31, 2005. Our
      loan
      customers are generally located in Baltimore City, Baltimore County and Harford
      County, Maryland.




16





Asset
      Quality .





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





Loans
      classified as nonaccrual and the associated unrecorded interest is as
      follows:





**March
                31,**
            
            **December
                31,****2006**
            
            **2005**
            
            **2005**(Dollars
                in thousands)Nonaccrual
                loans
            
            $
            1,244,000
            
            $
            194,000
            
            $
            1,245,000Unrecorded
                interest on nonaccrual loans
            
            $
            85,000
            
            $
            21,000
            
            $
            67,000








We
      hold a
      19% participation (approximately $1,080,000 in unpaid principal balance) in
      an
      acquisition and development loan. Although this loan became delinquent in the
      fourth quarter of 2004, we had continued to accrue interest on the loan because
      we believed that collection of all principal and interest on the loan was
      probable. In the third quarter of 2005, we placed the loan on non-accrual
      status. As a result, we discontinued the accrual of interest and we reversed
      previously accrued interest. Previously, we reported that we expected a national
      homebuilder would purchase the property to build residential units as soon
      as
      the borrower developed the property to the “record plat” stage, at which time
      the loan would be paid in full, and that we expected that to occur prior to
      the
      end of 2005.





In
      early
      November 2005, the national homebuilder agreed to release the borrower from
      its
      purchase agreement with the national homebuilder. On November 18, 2005, the
      participating banks successfully negotiated a 90-day Forbearance Agreement
      with
      the borrower for the purpose of allowing the borrower to negotiate the sale
      of
      the property. On February 7, 2006, the borrower executed a Letter Agreement
      with
      the national homebuilder to purchase the property in “as is” condition. The
      Letter Agreement was contingent upon completion of a feasibility study within
      45
      days of its execution. The national homebuilder has completed its feasibility
      study and, on March 27, 2006, approved the purchase of the property, subject
      to
      the approval of road access plans. The national homebuilder has until May 14,
      2006 to resolve the road access issues. Subject to the resolution of road access
      issues, closing is anticipated to occur by the end of June 2006. The above
      referenced Forbearance Agreement was extended and runs coterminous with the
      Letter Agreement. Both are due to expire on May 14, 2006. The Letter Agreement
      references payment in full of principal, accrued interest and all costs of
      collection for this participation loan.





As
      of the
      date of this filing, this participation loan continues to be on non-accrual
      status. We continue to believe the project is viable and that our collateral
      position is adequate. Ultimately, we believe we will receive all interest and
      principal on this loan, although there can be no assurance that this will be
      the
      case.





Of
      the
      non-accrual loans, $1,080,000 consisted of the commercial land acquisition
      and
      development participation loan discussed above and $164,000 consisted of
      one-to-four residential mortgage loans at March 31, 2006.




17





Non-accrual
      loans totaled 0.86% and 0.16% of net loans receivable at March 31, 2006 and
      March 31, 2005, respectively, and 0.86% of net loans receivable at December
      31,
      2005.




Real
      estate and other assets that we acquire as a result of foreclosure or by
      deed-in-lieu of foreclosure or repossession on collateral-dependent loans are
      classified as real estate owned or other repossessed assets until sold. Such
      assets are recorded at foreclosure or other repossession and updated quarterly
      at the lower of cost or estimated fair value less estimated selling costs.
      Any
      portion of the outstanding loan balance in excess of fair value is charged
      off
      against the allowance for loan losses. If, upon ultimate disposition of the
      property, net sales proceeds exceed the net carrying value of the property,
      a
      gain on sale of real estate or other assets is recorded. We did not have any
      real estate owned or other repossessed assets at March 31, 2006 or December
      31,
      2005.





Under
      current accounting guidelines, a loan is defined as impaired when, based on
      current information and events, it is probable that a creditor will be unable
      to
      collect all amounts due under the contractual terms of the loan agreement. 
We consider one- to four-family mortgage loans and consumer installment loans
      to
      be homogeneous and, therefore, do not separately evaluate them for
      impairment.  All other loans are evaluated for impairment on an individual
      basis. We generally classify non-accrual loans as impaired and we are doing
      so
      in this instance, even though management feels that we will be able to collect
      all amounts due under the contractual terms of the loan agreement. As of March
      31, 2006, as well as December 31, 2005, no loan had been identified as impaired
      other than the non-accrual acquisition and development loan described above.





**** Other
      than as disclosed, there are no other loans at March 31, 2006 about which
      management has serious doubts concerning the ability of the borrowers to comply
      with the present loan repayment terms.





***Liabilities.***





General .





Total
      liabilities increased by $3,293,000, or 2.22%, to $151,555,000 at March 31,
      2006, from $148,262,000 at December 31, 2005. The increase in total liabilities
      resulted from a $2,000,000, or 5.56% increase in borrowings, a $1,585,000,
      or
      1.45% increase in deposits, and a $703,000, or 188.98% increase in advance
      payments by borrowers for taxes and insurance. These increases were offset
      slightly by a $932,000, or 48.57% decrease in checks outstanding in excess
      of
      bank balance. Advance payments by borrowers for taxes and insurance increased
      because of the growth to the loan portfolio. The other liabilities consist
      primarily of accrued federal and state income taxes and accrued interest on
      Federal Home Loan Bank borrowings.





Deposits .





Deposits
      increased $1,585,000, or 1.45%, to $111,208,000 at March 31, 2006 from
      $109,623,000 at December 31, 2005. Certificates of deposits increased $3,515,000
      to $80,415,000 at March 31, 2006 from $76,900,000 at December 31, 2005, and
      demand and NOW accounts increased by $216,000 to $3,583,000 at March 31, 2006
      from $3,367,000 at December 31, 2005. Savings and money market deposits
      decreased by $2,146,000 to $27,210,000 at March 31, 2006 from $29,356,000 at
      December 31, 2005. We believe that, as savings deposit rates are beginning
      to
      rise, some customers are moving funds into higher-yielding investments, thus
      accounting for the increase in certificates of deposits and the decline in
      savings and money market deposits.





Borrowings .





At
      March
      31, 2006, we were permitted to borrow up to $52,203,000 from the Federal Home
      Loan Bank of Atlanta. We had $38,000,000 and $36,000,000 of Federal Home Loan
      Bank advances as of March 31, 2006 and December 31, 2005, respectively, and
      we
      averaged $38,000,000 and $26,250,000 of Federal Home Loan Bank advances during
      the three months ended March 31, 2006 and the year ended December 31, 2005,
      respectively. The increase in borrowings reflects a new $2,000,000 Federal
      Home
      Loan Bank advance and $11,500,000 in the rollover of advances, offset by
      maturing advances of $11,500,000 in the first quarter of 2006. We have relied
      on
      borrowing to a significant extent since the third quarter of 2003 to fund loan
      growth.




18





**Liquidity
      Management**





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





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





Our
      most
      liquid assets are cash and cash equivalents. The levels of these assets depend
      on our operating, financing, lending and investing activities during any given
      period. At March 31, 2006, cash and cash equivalents totaled $3,931,000.
      Securities classified as available-for-sale, which can provide additional
      sources of liquidity, totaled $8,221,000 at March 31, 2006. However, because
      all
      of these securities were in an unrealized loss position at March 31, 2006,
      and
      because management has the intent and ability to hold these securities until
      recovery or maturity, management does not consider these securities as a source
      of liquidity at March 31, 2006.  Also,
      at
      March 31, 2006, we had advances outstanding of $38,000,000 from the Federal
      Home
      Loan Bank of Atlanta. On that date, we had the ability to borrow an additional
      $14,203,000.





At
      March
      31, 2006, we had outstanding commitments to originate loans of $1,199,000
      (excluding the undisbursed portions of loans). These commitments do not
      necessarily represent future cash requirements since certain of these
      instruments may expire without being funded. We also extend lines of credit
      to
      customers, primarily home equity lines of credit. The borrower is able to draw
      on these lines as needed, thus the funding is generally unpredictable. Unused
      home equity lines of credit amounted to $5,451,000 at March 31, 2006. Since
      the
      majority of unused lines of credit expire without being funded, it is
      anticipated that our obligation to fund the above commitment amount will be
      substantially less than the amounts reported.





Certificates
      of deposit accounts scheduled to mature within one year totaled $41,376,000
      or
      37.21% of total deposits at March 31, 2006. Management believes that the large
      percentage of deposits in shorter-term certificates of deposit reflects
      customers’ hesitancy to invest their funds in long-term certificates of deposit
      in the current low interest rate environment. If these deposits do not remain
      with us, we will be required to seek other sources of funds, including other
      certificates of deposit and/or additional borrowings. Depending on market
      conditions, we may be required to pay higher rates on such deposits or other
      borrowings than we currently pay on the certificates of deposit due on or before
      March 31, 2006. We believe, however, based on past experience, that a
      significant portion of our certificates of deposit will remain with us. We
      also
      believe we have the ability to attract and retain deposits by adjusting the
      interest rates we offer.





Our
      borrowings are with the Federal Home Loan Bank of Atlanta and are secured by
      Federal Home Loan Bank of Atlanta stock that we own and a blanket lien on
      mortgages. Borrowings at March 31, 2006 consisted of $6,500,000 of long term
      fixed rate advances with rates ranging from 2.83% to 4.90% and $31,500,000
      of
      long term convertible rate advances with fixed rates ranging from 3.63% to
      4.84%. If not repaid or converted to a different product, the convertible rate
      advances will convert from a fixed to a floating rate after periods ranging
      from
      one to five years.




19





Our
      primary investing activity is the origination of loans, primarily one- to
      four-family residential mortgage loans, and the purchase of securities. Our
      primary financing activity consists of activity in deposit accounts and Federal
      Home Loan Bank of Atlanta advances. Asset growth has outpaced deposit growth
      over the past 15-18 months and the increased liquidity needed to fund the asset
      growth has been provided through increased Federal Home Loan Bank borrowings.
      Deposit flows are affected by the overall level of interest rates, the interest
      rates and products offered by us and our local competitors and other factors.
      We
      generally manage the pricing of our deposits to be competitive.





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




***Stockholders’
      Equity***





Total
      stockholders’ equity decreased $350,000, or 1.53%, to $22,455,000 at March 31,
      2006 from $22,805,000 at December 31, 2005 as a result of the purchase of
      $422,000 in additional Treasury stock, partially offset by $36,000 in net
      income. We are considered “well capitalized” under the risk-based capital
      guidelines applicable to us.





***Off-balance
      Sheet Arrangements***





In
      the
      normal course of operations, we engage in a variety of financial transactions
      that, in accordance with generally accepted accounting principles, are not
      recorded in our financial statements. These transactions involve, to varying
      degrees, elements of credit, interest rate, and liquidity risk. Such
      transactions are used primarily to manage customers’ requests for funding and
      take the form of loan commitments and lines of credit.





Our
      exposure to credit loss from non-performance by the other party to the
      above-mentioned financial instruments is represented by the contractual amount
      of those instruments. We use the same credit policies in making commitments
      and
      conditional obligations as we do for on-balance sheet instruments. In general,
      we do not require collateral or other security to support financial instruments
      with off-balance sheet credit risk.





**Financial
                Instruments Whose****Contract
                Amount Represents**
            
            **Contract
                Amount At****Credit
                Risk**
            
            **March
                31, 2006**
            
            **December
                31, 2005**(In
                thousands)Lines
                of credit - commercial
            
            $
            744
            
            $
            1,018Lines
                of credit - home equity
            
            
            5,451
            
            
            5,073Lines
                of credit - overdraft checking
            
            
            114
            
            
            95Mortgage
                loan commitments
            
            
            1,199
            
            
            2,425





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




20





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





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





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





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





Our
      outstanding commitments to make mortgages are at fixed rates ranging from 5.00%
      to 8.125% and 5.00% to 6.00% at March 31, 2006 and December 31, 2005,
      respectively. Loan commitments expire 60 days from the date of the
      commitment.





For
      the
      three months ended March 31, 2006, we engaged in no off-balance sheet
      transactions reasonably likely to have a material effect on our financial
      condition, results of operations or cash flows.





**Information
      Regarding Forward-Looking Statements**





In
      addition to the historical information contained in Part I of this Quarterly
      Report on Form 10-QSB, the discussion in Part I of this Quarterly Report on
      Form
      10-QSB contains certain forward-looking statements within the meaning of Section
      27A of the Securities Exchange Act of 1933, as amended, and Section 21E of
      the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”).
      Forward-looking statements often use words such as “believe,” “expect,” “plan,”
“may,” “will,” “should,” “project,” “contemplate,” “anticipate,” “forecast,”
“intend” or other words of similar meaning. You can also identify them by the
      fact that they do not relate strictly to historical or current facts.





Our
      goals, objectives, expectations and intentions, including statements regarding
      profitability, growth and operating strategy, liquidity, asset quality of our
      loan and investment portfolio, the allowance for loan losses, interest rate
      sensitivity, liquidity management, market risk and financial and other goals
      are
      forward looking. These statements are based on our beliefs, assumptions and
      on
      information available to us as of the date of this filing, and involve risks
      and
      uncertainties. These risks and uncertainties include, among others, those
      discussed in this Quarterly Report on Form 10-QSB; the effect of rising interest
      rates on our profits and asset values; risks related to our intended increased
      focus on commercial real estate and commercial business loans; our limited
      recognition and reputation in our markets; adverse economic conditions in our
      market area; the dependence on key personnel; competitive factors within our
      market area; the effect of developments in technology on our business; adverse
      changes in the overall national economy as well as adverse economic conditions
      in our specific market area; adequacy of the allowance for loan losses; expenses
      as a result of our stock benefit plans; and changes in regulatory requirements
      and/or restrictive banking legislation.





Our
      actual results could differ materially from those discussed herein 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 we
      undertake no obligation to make any revisions to the forward-looking statements
      to reflect events or circumstances after the date of this filing or to reflect
      the occurrence of unanticipated events.




21





**Item
      3.**  **Controls
      and Procedures.**





As
      of the
      end of the period covered by this quarterly report on Form 10-QSB, SFSB, Inc.’s
      Chief Executive Officer and Chief Financial Officer evaluated the effectiveness
      of SFSB, Inc.’s and Slavie Federal Savings Bank’s disclosure controls and
      procedures (as such term is defined in Rule 13a-15(e) or Rule 15d-15(e) under
      the Exchange Act). Based upon that evaluation, SFSB, Inc.’s and Slavie Federal
      Savings Bank’s Chief Executive Officer and Chief Financial Officer concluded
      that SFSB, Inc.’s and Slavie Federal Savings Bank’s disclosure controls and
      procedures are effective as of


March
      31,
      2006. 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 Exchange Act 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 or Slavie Federal Savings Bank’s
      internal control over financial reporting (as defined in Rule 13a-15 or Rule
      15d-15 under the Exchange Act) during the quarter ended March 31, 2006, that
      have materially affected, or are reasonably likely to materially affect, SFSB,
      Inc.’s or Slavie Federal Savings Bank’s internal control over financial
      reporting.





22




**PART
      II - OTHER INFORMATION**





Item
      1.Legal
      Proceedings.




None.





Item
      2.Unregistered
      Sales of Equity Securities and Use of Proceeds.





The
      table
      below summarizes our repurchases of our common stock during the quarter ended
      March 31, 2006.





**SMALL
                BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES****Period**
            **(a)**
              **Total
                Number of Shares Purchased**
            **(b)**
              **Average
                Price Paid per Share**
            **(c)**
              **Total
                Number of Shares Purchased as Part of Publicly Announced
                Program**
            **(d)**
              **Maximum
                Number of Shares that May Yet Be Purchased Under the Program
                (1)(2)**01/01/2006-
                01/31/2006
            0
            0
            0
            43.56102/01/2006-
                02/31/2006
            32,000
            $9.68
            32,000
            11,56103/01/2006-
                03/31/2006
            11,561
            $9.68
            11,561
            0Total
            43,561
            $9.68
            43,561
            0


_____________________


(1)
      As
      announced on November 22, 2005, on November 21, 2005, our board of directors
      adopted a stock repurchase program to acquire up to 4% of our outstanding shares
      of common stock held by
      persons other than Slavie Bancorp, MHC. This repurchase authorization expired
      during the quarter ended March 31, 2006 once we acquired the 4% of the
      outstanding shares of common stock authorized for repurchase.





(2)
      Does
      not include approximately 66,314 shares of common stock available for repurchase
      pursuant to our board of director’s authorization on May 1, 2006 for us to
      repurchase up to an additional 5% of our outstanding common stock held by
      persons other than Slavie Bancorp, MHC. This stock repurchase program was
      announced on May 10, 2006.








Item
      3.Defaults
      Upon Senior Securities.





Not
      applicable.





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





Not
      applicable.





Item
      5.  Other
      Information.





None.




23





Item
      6.  Exhibits.




10.2
            Amendment
                to Employment Agreement between Slavie Federal Savings Bank and Philip
                E.
                Logan - Increase in Annual Salary and Bonus for 2005
                Service




10.3
            Amendment
                to Employment Agreement between Slavie Federal Savings Bank and Charles
                E.
                Wagner, Jr. - Increase in Annual Salary, Bonus for 2005 Service and
                Compensation for Service as
                Secretary





10.4
            Amendment
                to Employment Agreement between Slavie Federal Savings Bank and Sophie
                T.
                Wittelsberger





31.1
            Rule
                13a-14(a) Certification of Chief Executive
                Officer




31.2
            Rule
                13a-14(a) Certification of Chief Financial Officer




32
            Rule
                13a-14(b) Certification of Chief Executive Officer and Chief Financial
                Officer




24


**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.








SFSB,
                Inc.Date:
                May 12, 2006
            
            By:
            /s/
                Philip E. LoganPhilip
                E. Logan, President(Principal
                Executive Officer)Date:
                May 12, 2006
            
            By:
            /s/
                Sophie T. WittelsbergerSophie
                T. Wittelsberger, Chief Financial Officer(Principal
                Accounting and Financial Officer)





25