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 June 30, 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). o
      Yes x No





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





At
      August
      8, 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**  **(Unaudited)**





**June
                30, 2006**
            
            **December
                31, 2005**(Dollars
                in thousands, except per share data)**ASSETS**Cash
                and due from banks
            
            $
            720
            
            $
            710Federal
                funds sold
            
            
            1,063
            
            
            632Cash
                and cash equivalents
            
            
            1,783
            
            
            1,342Investment
                securities - available for sale
            
            
            8,297
            
            
            8,153Investment
                securities - held to maturity
            
            
            4,000
            
            
            3,998Mortgage
                backed securities - held to maturity
            
            
            3,809
            
            
            4,525Loans
                receivable - net of allowance for loan losses of2006
                $512; 2005 $474
            
            
            146,653
            
            
            144,609Federal
                Home Loan Bank of Atlanta stock at cost
            
            
            2,053
            
            
            1,955Premises
                and equipment, at cost, less accumulated depreciation
            
            
            5,371
            
            
            5,612Accrued
                interest receivable
            
            
            569
            
            
            487Other
                assets
            
            
            422
            
            
            386Total
                assets
            
            $
            172,957
            
            $
            171,067**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**LiabilitiesDeposits
            
            $
            109,968
            
            $
            109,623Checks
                outstanding in excess of bank balance
            
            
            310
            
            
            1,919Borrowings
            
            
            38,000
            
            
            36,000Advance
                payments by borrowers for taxes and insurance
            
            
            1,774
            
            
            372Other
                liabilities
            
            
            358
            
            
            348Total
                liabilities
            
            
            150,410
            
            
            148,262Commitments
                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 atJune
                30, 2006 and December 31, 2005
            
            
            30
            
            
            30Additional
                paid-in capital
            
            
            12,793
            
            
            12,730Retained
                earnings (substantially restricted)
            
            
            11,467
            
            
            11,375Unearned
                Employee Stock Ownership Plan shares
            
            
            (1,079
            )
            
            (1,108
            )Treasury
                Stock at cost,2006,
                53,561 shares and 2005, 10,000 shares
            
            
            (518
            )
            
            (96
            )Accumulated
                other comprehensive loss
            
            
            (146
            )
            
            (126
            )**Total
                stockholders’ equity**
            
            
            22,547
            
            
            22,805**Total
                liabilities and stockholders’ equity**
            
            $
            172,957
            
            $
            171,067




See
      notes
      to consolidated financial statements.


2


**SFSB,
      Inc.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS (Unaudited)**





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**(Dollars
                in thousands, except per share data)Interest
                and fees on loans
            
            $
            2,026
            
            $
            1,660
            
            $
            4,000
            
            $
            3,248Interest
                and dividends on investment securities
            
            
            132
            
            
            105
            
            
            255
            
            
            201Interest
                on mortgage backed securities
            
            
            40
            
            
            53
            
            
            83
            
            
            111Other
                interest income
            
            
            58
            
            
            53
            
            
            114
            
            
            145**Total
                interest income**
            
            
            2,256
            
            
            1,871
            
            
            4,452
            
            
            3,705Interest
                on deposits
            
            
            920
            
            
            710
            
            
            1,773
            
            
            1,382Interest
                on short-term borrowings
            
            
            83
            
            
            29
            
            
            158
            
            
            78Interest
                on long-term borrowings
            
            
            293
            
            
            121
            
            
            581
            
            
            237**Total
                interest expense**
            
            
            1,296
            
            
            860
            
            
            2,512
            
            
            1,697**Net
                interest income**
            
            
            960
            
            
            1,011
            
            
            1,940
            
            
            2,008Provision
                for loan losses
            
            
            24
            
            
            12
            
            
            38
            
            
            33**Net
                interest income after provision for loan****losses**
            
            
            936
            
            
            999
            
            
            1,902
            
            
            1,975**Other
                Income**Rental
                income
            
            
            40
            
            
            34
            
            
            79
            
            
            65Other
                income
            
            
            15
            
            
            16
            
            
            34
            
            
            34Gain
                on sale of loans
            
            
            2
            
            
            -
            
            
            7
            
            
            1**Total
                other income**
            
            
            57
            
            
            50
            
            
            120
            
            
            100**Non-Interest
                Expenses**Compensation
                and other related expenses
            
            
            465
            
            
            424
            
            
            923
            
            
            859Occupancy
                expense
            
            
            87
            
            
            98
            
            
            293
            
            
            204Advertising
                expense
            
            
            46
            
            
            52
            
            
            72
            
            
            91Service
                bureau expense
            
            
            37
            
            
            37
            
            
            78
            
            
            78Furniture,
                fixtures and equipment
            
            
            55
            
            
            58
            
            
            111
            
            
            113Telephone,
                postage and delivery
            
            
            20
            
            
            21
            
            
            44
            
            
            42Other
                expenses
            
            
            189
            
            
            190
            
            
            343
            
            
            381**Total
                non-interest expenses**
            
            
            899
            
            
            880
            
            
            1,864
            
            
            1,768**Income
                before income tax provision**
            
            
            94
            
            
            169
            
            
            158
            
            
            307Income
                tax provision
            
            
            38
            
            
            67
            
            
            66
            
            
            117Net
                income
            
            $
            56
            
            $
            102
            
            $
            92
            
            $
            190**Basic
                Earnings per Share**
            
            **$**
            **0.02**
            
            **$**
            **0.04**
            
            **$**
            **0.03**
            
            **$**
            **0.07****Diluted
                Earnings per Share**
            
            **$**
            **0.02**
            
            **$**
            **0.04**
            
            **$**
            **0.03**
            
            **$**
            **0.07**




See
      notes
      to consolidated financial statements.





3





**SFSB,
      Inc.**


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





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**(Dollars
                in thousands)Net
                income
            
            $
            56
            
            $
            102
            
            $
            92
            
            $
            190Net
                unrealized loss on securitiesavailable
                for sale during the period(net
                of taxes of $(6), $(13), $(13)and
                $(22))
            
            
            (10
            )
            
            (20
            )
            
            (20
            )
            
            (35
            )Total
                Comprehensive Income
            
            $
            46
            
            $
            82
            
            $
            72
            
            $
            155





See
      notes
      to consolidated financial statements.





4


**SFSB,
      Inc.**


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




**Six
                Months Ended**********
            
            **June
                30,**********
            
            **2006**
            
            **2005**(Dollars
                in thousands)**Cash
                Flows From Operating Activities**Net
                income
            
            $
            92
            
            $
            190Adjustments
                to Reconcile Net Income to Net CashProvided
                by (Used in) Operating Activities:Non-cash
                compensation under stock-based compensation plansand
                Employee Stock Ownership Plan
            
            
            92
            
            
            27Net
                amortization of premiums and discounts
            
            
            7
            
            
            12Amortization
                of deferred loan fees
            
            
            (32
            )
            
            (39
            )Provision
                for loan losses
            
            
            38
            
            
            33Gain
                on sale of loans
            
            
            (7
            )
            
            (1
            )Loans
                originated for sale
            
            
            (717
            )
            
            (155
            )Proceeds
                from loans sold
            
            
            724
            
            
            156Provision
                for depreciation
            
            
            264
            
            
            89Decrease
                in accrued interest receivableand
                other assets
            
            
            (104
            )
            
            (63
            )Increase
                in accrued interest payable
            
            
            3
            
            
            14Increase
                (decrease) in other liabilities
            
            
            8
            
            
            (287
            )**Net
                Cash Provided by (Used in) Operating Activities**
            
            
            368
            
            
            (24
            )**Cash
                Flows from Investing Activities**Purchase
                of available for sale securities
            
            
            (179
            )
            
            (125
            )Principal
                collected on mortgage backed securities
            
            
            708
            
            
            1,142Net
                increase in loans
            
            
            (2,050
            )
            
            (8,731
            )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
            
            
            (23
            )
            
            (29
            )**Net
                Cash Used in Investing Activities**
            
            
            (1,642
            )
            
            (7,600
            )**Cash
                Flows from Financing Activities**Net
                increase (decrease) in deposits
            
            
            344
            
            
            (786
            )(Decrease)
                increase in checks outstanding in excess of bank balance
            
            
            (1,609
            )
            
            1,040Proceeds
                from borrowings
            
            
            13,500
            
            
            -Repayment
                of borrowings
            
            
            (11,500
            )
            
            (5,000
            )Increase
                in advance payments by borrowers for taxes and insurance
            
            
            1,402
            
            
            1,284Purchase
                of treasury stock
            
            
            (422
            )
            
            -**Net
                Cash Provided by (Used in) Financing Activities**
            
            
            1,715
            
            
            (3,462
            )Increase
                (Decrease) in cash and cash equivalents
            
            
            441
            
            
            (11,086
            )Cash
                and cash equivalents at beginning of year
            
            
            1,342
            
            
            15,596**Cash
                and cash equivalents at end of period**
            
            $
            1,783
            
            $
            4,510**Supplemental
                Disclosures of Cash Flows Information:****Cash
                paid during the year for:**Income
                taxes
            
            $
            165
            
            $
            235Interest
                expense
            
            $
            2,509
            
            $
            1,684





See
      notes
      to consolidated financial statements.





5





**SLAVIE
      FEDERAL SAVINGS BANK**


**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 June 30, 2006, approximately 89.07%
      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 six months ended June 30, 2006 are not necessarily indicative
      of the results that may be expected for the full year.





6





**Note
      4 - Earnings Per Share**





Basic
      earnings per share is computed by dividing net income by the weighted average
      number of common shares outstanding for the appropriate period. Unearned
      Employee Stock Ownership Plan (“ESOP”) shares are not included in outstanding
      shares. Diluted earnings per share is computed by dividing net income by the
      weighted average shares outstanding as adjusted for the dilutive effect of
      stock
      options and unvested stock awards based on the “treasury stock” method.
      Information related to the calculation of earnings per share is summarized
      for
      the three and six months ended June 30, 2006 and 2005 as follows:





**Three
                Months
                Ended**********
            ****
            **Six
                Months
                Ended**********
            ********
            ****
            **June
                30,
                2006**********
            ****
            **June
                30,
                2006**********
            ********
            ****
            **Basic**
            ****
            **Diluted**
            ****
            **Basic**
            ****
            **Diluted**(Dollars
                in thousands, except for per share data)Net
                income
            
            $
            56
            
            $
            56
            
            $
            92
            
            $
            92Weighted
                average shares outstanding
            
            
            2,813
            
            
            2,813
            
            
            2,824
            
            
            2,824Diluted
                SecuritiesStock
                Options
            
            
            -
            
            
            6
            
            
            -
            
            
            5Unvested
                Stock Awards
            
            
            -
            
            
            3
            
            
            -
            
            
            3Adjusted
                Weighted average shares
            
            
            2,813
            
            
            2,822
            
            
            2,824
            
            
            2,832Per
                Share Amount
            
            $
            0.02
            
            $
            0.02
            
            $
            0.03
            
            $
            0.03




**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30, 2005**
            
            **June
                30, 2005****Basic**
            
            **Diluted**
            
            **Basic**
            
            **Diluted**(Dollars
                in thousands, except for per share data)Net
                income
            
            $
            102
            
            $
            102
            
            $
            190
            
            $
            190Weighted
                average shares outstanding
            
            
            2,861
            
            
            2,861
            
            
            2,861
            
            
            2,861Diluted
                SecuritiesStock
                Options
            
            
            -
            
            
            -
            
            
            -
            
            
            -Unvested
                Stock Awards
            
            
            -
            
            
            -
            
            
            -
            
            
            -Adjusted
                Weighted average shares
            
            
            2,861
            
            
            2,861
            
            
            2,861
            
            
            2,861Per
                Share Amount
            
            $
            0.04
            
            $
            0.04
            
            $
            0.07
            
            $
            0.07





7





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





During
      the six-month period ending June 30, 2006, the Company purchased 43, 561shares
      of treasury stock for $422,000 or $9.68 per share. The acquisition of treasury
      stock is recorded under the treasury stock method. At June 30, 2006, the Bank
      met each of the three minimum regulatory capital requirements. The following
      table summarizes the Bank’s regulatory capital position at June 30, 2006.


**To
                  Be Well****Capitalized
                  Under****For
                  Capital**
              
              **Prompt
                  Corrective****Actual**
              
              **Adequacy
                  Purposes**
              
              **Action
                  Provision****Amount**
              
              **%**
              
              **Amount**
              
              **%**
              
              **Amount**
              
              **%**(Dollars
                  in thousands)**June
                  30, 2006****(Unaudited)**Tangible
                  (1)
              
              $
              16,837
              
              
              9.69
              %
              $
              2,605
              
              
              1.50
              %
              
              N/A
              
              
              N/ATier
                  I capital (2)
              
              
              16,837
              
              
              17.24
              %
              
              N/A
              
              
              N/A
              
              $
              5,861
              
              
              6.00
              %Core
                  (leverage) (1)
              
              
              16,837
              
              
              9.69
              %
              
              6,948
              
              
              4.00
              %
              
              8,684
              
              
              5.00
              %Risk-weighted
                  (2)
              
              
              17,349
              
              
              17.76
              %
              
              7,815
              
              
              8.00
              %
              
              9,768
              
              
              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
      $64,000 for the three and six months ended June 30, 2006. The total income
      tax
      benefit recognized was $9,000 and $18,000  for
      the
      three and six months ended June 30, 2006. No share based compensation plans
      were
      in effect for the three and six months ended June 30, 2005.





At
      June
      30, 2006, there is  $524,000  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  4.1
      years.





During
      the three and six months ended June 30, 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 and six months ended June 30,
      2006.
      At June 30, 2006, there were no vested stock options and no vested 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.





8


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.





In
      July
      2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty
      in
      Income Taxes." The interpretation clarifies the accounting for uncertainty
      in
      income taxes recognized in a company's financial statements in accordance with
      Statement of Financial Accounting Standards No. 109, "Accounting for Income
      Taxes." Specifically, the pronouncement prescribes a recognition threshold
      and a
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return. The interpretation
      also provides guidance on the related derecognition, classification, interest
      and penalties, accounting for interim periods, disclosure and transition of
      uncertain tax positions. The interpretation is effective for fiscal years
      beginning after December 15, 2006. The Company is evaluating the impact of
      this
      new pronouncement on its consolidated 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 $56,000 for the three months ended June 30, 2006 as compared
        to
        $102,000 for the same period in 2005 primarily due to an increase in interest
        paid on deposits and borrowings in a rising interest rate environment, 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, non-cash compensation expenses, compensation
        and
        related expenses associated with the addition of a branch operations and
        business development officer, and the legal costs associated with the pursuit
        of
        projects in connection with the Company’s strategic planning initiatives. 
Interest income increased $385,000, or 20.58%, and non-interest income increased
        $7,000, or 14.00%.  These improvements were offset by a $436,000, or
        50.70%, increase in interest expenses and a $19,000, or 2.16%, increase in
        non-interest expenses.
 
 Earnings
        declined to $92,000 for the six months ended June 30, 2006 as compared to
        $190,000 for the same period in 2005.  Interest income increased $747,000,
        or 20.16%, and non-interest income increased $20,000, or 20.00%.  These
        improvements were offset by an $815,000, or 48.03%, increase in interest
        expenses and a $96,000, or 5.43%, increase in non-interest
        expenses.





Assets
      increased during the first six months of 2006 primarily because we increased
      our
      loan portfolio by $2,044,000, or 1.41%, to $146,653,000 at June 30, 2006 from
      $144,609,000 at December 31, 2005. The increase is also a result of increased
      cash and cash equivalents of $441,000, or 32.86%, to $1,783,000 at June 30,
      2006
      from $1,342,000 at December 31, 2005. These increases were offset by a decrease
      in mortgage backed securities held to maturity of $716,000, or 15.82%, to
      $3,809,000 at June 30, 2006 from $4,525,000 at December 31, 2005.





9


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 lenders 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 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 had until May 14, 2006 to resolve the road access issues,
      which included resolution of storm water management matters for the property
      as
      well. The national homebuilder was unable to resolve these issues by the May
      14,
      2006 deadline. On May 22, 2006, the participating lenders sent the borrower
      and
      the guarantors a notice of default requiring payment in full of their
      indebtedness by June 1, 2006. The letter Agreement between the national
      homebuilder and the borrower, which originally expired on May 14, 2006, was
      extended to July 5, 2006. To date, an extension agreement with a new expiration
      date has not been executed. The participating lenders have not extended their
      forbearance agreement, which also expired on May 14, 2006. They have not yet
      taken further action on their default letter, though they have not waived their
      rights by not doing so. Progress continues on the remaining road issues. Subject
      to the resolution of road access issues, closing is anticipated to occur by
      the
      end of September 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.





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- and six-month periods ended June 30,
      2006
      include the following:





·
            Total
                assets at June 30, 2006 increased by 1.10% to $172,957,000 as compared
                to
                $171,067,000 as of December 31, 2005.





·
            Net
                loans outstanding increased by 1.41% from $144,609,000 as of December
                31,
                2005 to $146,653,000 as of June 30,
                2006.





·
            Nonperforming
                loans at June 30, 2006 totaled $1,331,000. We believe an appropriate
                allowance for loan losses continues to be
                maintained.





·
            Deposits
                at June 30, 2006 were $109,968,000, an increase of $345,000 or 0.31%
                from
                $109,623,000 at December 31, 2005.





·
            SFSB,
                Inc. realized net income of $56,000 and $92,000 for the three-month
                and
                six-month periods ended June 30, 2006. This compares to net income
                of
                $102,000 and $190,000 for the three-month and six-month periods ended
                June
                30, 2005.





10


·
            Net
                interest income, our main source of income, was $960,000 and $1,940,000
                during the three-month and six-month periods ended June 30, 2006
                compared
                to $1,011,000 and $2,008,000 for the same period in 2005. This represents
                a decrease of 5.04% and 3.39% for the three months and six months
                ended
                June 30, 2006 as compared to the same period in 2005.  ·
            Interest
                expenses increased by $436,000 and $815,000, or 50.70% and 48.03%,
                for the
                three-month and six-month periods ended June 30, 2006, as compared
                to the
                three- and six-month periods ended June 30, 2005, as a result of
                an
                increase in interest paid on deposits and borrowings in a rising
                interest
                rate environment.





·
            We
                had no loan charge-offs during the six-month periods ending June
                30, 2006
                or June 30, 2005.





·
            Non-interest
                income increased by $7,000 and $20,000, or 14% and 20%, for the
                three-month and six-month periods ended June 30, 2006, as compared
                to the
                three-month and six-month periods ended June 30, 2005.





·
            Non-interest
                expenses increased by $19,000 and $96,000, or 2.16% and 5.43%, for
                the
                three-month and six-month periods ended June 30, 2006, as compared
                to the
                three- and six-month periods ended June 30,
                2005.





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 and Six Months Ended June 30, 2006 and 2005 -Provision for Loan Losses
      and
      Analysis of Allowance for Loan Losses.”





11


**Results
      of Operations for the Three and Six Months Ended June 30, 2006 and
      2005**





*General* .
      Net
      income decreased $46,000 to $56,000 for the three months ended June 30, 2006
      compared to $102,000 for the same period in the prior year. The decrease was
      due
      primarily to a $436,000 increase in interest expense and a $19,000 increase
      in
      non-interest expenses, offset by a $385,000 increase in interest income.





Net
      income decreased $98,000, to $92,000 for the six months ended June 30, 2006
      compared to $190,000 for the same period in the prior year. The decrease was
      due
      primarily to an $815,000 increase in interest expense and a $96,000 increase
      in
      non-interest expenses, offset by a $747,000 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.





12





**Three
                Months Ended**
              **June
                30, 2006**
            
            **Three********Months
                Ended**
              **June
                30, 2005****Average**
              **Outstanding**
              **Balance**
            
            **Interest**
              **Earned/**
              **Paid**
            
            **Yield/**
              **Rate**
            
            **Average**
              **Outstanding**
              **Balance**
            
            **Interest**
              **Earned/**
              **Paid**
            
            **Yield/**
              **Rate**Dollars
                in Thousands
            
            Dollars
                in ThousandsInterest-earning
                assets:Loans
                receivable(1)
            
            $
            146,513
            
            $
            2,026
            
            
            5.53
            %
            $
            123,319
            
            $
            1,660
            
            
            5.38
            %Mortgage-backed
                securities
            
            
            3,932
            
            
            40
            
            
            4.07
            
            
            6,031
            
            
            53
            
            
            3.52Investment
                securities (available
                for sale)
            
            
            8,272
            
            
            93
            
            
            4.50
            
            
            8,039
            
            
            67
            
            
            3.33Investment
                securities (held to
                maturity)
            
            
            4,000
            
            
            39
            
            
            3.90
            
            
            3,997
            
            
            38
            
            
            3.80Other
                interest-earning
                assets
            
            
            3,846
            
            
            58
            
            
            6.03
            
            
            5,675
            
            
            53
            
            
            3.74Total
                interest-earning assets
            
            
            166,563
            
            
            2,256
            
            
            5.42
            %
            
            147,061
            
            
            1,871
            
            
            5.09
            %Non-interest
                earning assets
            
            
            7,039
            
            
            
            
            
            
            
            
            7,288Total
                assets
            
            $
            173,602
            
            
            
            
            
            
            
            $
            154,349Interest-bearing
                liabilities:Savings
                deposits
            
            $
            25,804
            
            
            83
            
            
            1.29
            %
            $
            34,500
            
            
            114
            
            
            1.32
            %Demand
                and NOW
                accounts
            
            
            2,678
            
            
            4
            
            
            0.60
            
            
            2,256
            
            
            3
            
            
            0.53Certificates
                of
                deposit
            
            
            81,070
            
            
            833
            
            
            4.11
            
            
            69,815
            
            
            593
            
            
            3.40Escrows
            
            
            19
            
            
            -
            
            
            -
            
            
            26
            
            
            -
            
            
            -Borrowings
            
            
            38,000
            
            
            376
            
            
            3.96
            
            
            21,500
            
            
            150
            
            
            2.79Total
                interest-bearing liabilities
            
            
            147,571
            
            
            1,296
            
            
            3.51
            %
            
            128,097
            
            
            860
            
            
            2.69
            %Non-interest
                bearing liabilities
            
            
            3,500
            
            
            
            
            
            
            
            
            3,507Total
                liabilities
            
            
            151,071
            
            
            
            
            
            
            
            
            131,604Total
                equity(2)
            
            
            22,531
            
            
            
            
            
            
            
            
            22,745Total
                liabilities and equity
            
            $
            173,602
            
            
            
            
            
            
            
            $
            154,349Net
                interest income
            
            
            
            
            $
            960
            
            
            
            
            
            
            
            $
            1,011Interest
                rate spread(3)
            
            
            
            
            
            
            
            
            1.91
            %
            
            
            
            
            
            
            
            2.40
            %Net
                interest-earning assets
            
            $
            18,992
            
            
            
            
            
            
            
            $
            18,964Net
                interest margin(4)
            
            
            
            
            
            
            
            
            2.31
            %
            
            
            
            
            
            
            
            2.75
            %Ratio
                of interest earning assets to interest bearing liabilities
            
            
            
            
            
            1.12x
            
            
            
            
            
            
            
            
            1.15x





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


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


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


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


13





**Six
                Months Ended**
              **June
                30, 2006**
            
            **Six
                Months Ended**
              **June
                30, 2005****Average**
              **Outstanding**
              **Balance**
            
            **Interest**
              **Earned/**
              **Paid**
            
            **Yield/**
              **Rate**
            
            **Average**
              **Outstanding**
              **Balance**
            
            **Interest**
              **Earned/**
              **Paid**
            
            **Yield/**
              **Rate**Dollars
                in Thousands
            
            Dollars
                in ThousandsInterest-earning
                assets:Loans
                receivable(1)
            
            $
            145,488
            
            $
            4,000
            
            
            5.50
            %
            $
            120,935
            
            $
            3,248
            
            
            5.37
            %Mortgage-backed
                securities
            
            
            4,109
            
            
            83
            
            
            4.04
            
            
            6,327
            
            
            111
            
            
            3.51Investment
                securities (available
                for sale)
            
            
            8,235
            
            
            179
            
            
            4.35
            
            
            8,021
            
            
            125
            
            
            3.12Investment
                securities (held to
                maturity)
            
            
            3,999
            
            
            76
            
            
            3.80
            
            
            3,996
            
            
            76
            
            
            3.80Other
                interest-earning
                assets
            
            
            4,396
            
            
            114
            
            
            5.19
            
            
            9,356
            
            
            145
            
            
            3.10Total
                interest-earning assets
            
            
            166,227
            
            
            4,452
            
            
            5.36
            %
            
            148,635
            
            
            3,705
            
            
            4.99
            %Non-interest
                earning assets
            
            
            7,062
            
            
            
            
            
            
            
            
            7,223Total
                assets
            
            $
            173,289
            
            
            
            
            
            
            
            $
            155,858Interest-bearing
                liabilities:Savings
                deposits
            
            $
            26,810
            
            
            174
            
            
            1.30
            %
            $
            36,057
            
            
            229
            
            
            1.27
            %Demand
                and NOW
                accounts
            
            
            2,738
            
            
            8
            
            
            0.58
            
            
            2,285
            
            
            7
            
            
            0.61Certificates
                of
                deposit
            
            
            80,025
            
            
            1,591
            
            
            3.98
            
            
            68,718
            
            
            1,146
            
            
            3.34Escrows
            
            
            15
            
            
            -
            
            
            -
            
            
            19
            
            
            -
            
            
            -Borrowings
            
            
            38,000
            
            
            739
            
            
            3.89
            
            
            23,167
            
            
            315
            
            
            2.72Total
                interest-bearing liabilities
            
            
            147,588
            
            $
            2,512
            
            
            3.40
            %
            
            130,246
            
            $
            1,697
            
            
            2.61
            %Non-interest
                bearing liabilities
            
            
            3,121
            
            
            
            
            
            
            
            
            2,894Total
                liabilities
            
            
            150,709
            
            
            
            
            
            
            
            
            133,140Total
                equity(2)
            
            
            22,580
            
            
            
            
            
            
            
            
            22,718Total
                liabilities and equity
            
            $
            173,289
            
            
            
            
            
            
            
            $
            155,858Net
                interest income
            
            
            
            
            $
            1,940
            
            
            
            
            
            
            
            $
            2,008Interest
                rate spread(3)
            
            
            
            
            
            
            
            
            1.96
            %
            
            
            
            
            
            
            
            2.38
            %Net
                interest-earning assets
            
            $
            18,639
            
            
            
            
            
            
            
            $
            18,389Net
                interest margin(4)
            
            
            
            
            
            
            
            
            2.33
            %
            
            
            
            
            
            
            
            2.70
            %Ratio
                of interest earning assets to interest bearing liabilities
            
            
            
            
            
            1.12
            
            
            
            
            
            
            
            
            1.14x




(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* .


Three
        months ended June 30, 2006 compared to three months ended June 30,
        2005 .
 
 Net
        interest income decreased $51,000, or 5.04%, to $960,000 for the three months
        ended June 30, 2006 from $1,011,000 for the three months ended June 30,
        2005.  The decrease was due to a $19,474,000, or 15.20%, increase in
        average interest bearing liabilities to $147,571,000 from $128,097,000,
        partially offset by an increase of $19,502,000, or 13.26%, in average interest
        earning assets to $166,563,000 from $147,061,000.  The growth of net
        interest income was impacted by an increase in interest paid on deposits
        and
        borrowings due to a rising interest rate environment and a decision to place
        a
        non-performing commercial land acquisition and development participation
        loan on
        non-accrual status and, therefore, not accruing $29,000 in interest on the
        loan.  The decrease was primarily the result of an 82 basis point increase
        in the cost of average interest bearing liabilities, from 2.69% to 3.51%,
        while
        the yield on average interest earning assets only increased 33 basis points
        from
        5.09% to 5.42%.


14





Our
      interest rate spread decreased to 1.91% for the quarter ended June 30, 2006
      from
      2.40% for the quarter ended June 30, 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 2.31% from 2.75%, 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 June 30, 2006 and
      1.15 times for the same period in 2005.





Six
      months ended June 30, 2006 compared to six months ended June 30,
      2005 .





Net
      interest income decreased $68,000, or 3.39%, to $1,940,000 for the six months
      ended June 30, 2006 from $2,008,000 for the six months ended June 30, 2005.





The
      decrease was due to a $17,342,000, or 13.31%, increase in average interest
      bearing liabilities to $147,588,000 from $130,246,000, offset by an increase
      of
      $17,592,000, or 11.84%, in average interest earning assets to $166,227,000
      from
      $148,635,000. The decrease was primarily the result of a 79 basis point
      increase in the cost of average interest bearing liabilities, from 2.61% to
      3.40%, while the yield on average interest earning assets only increased 37
      basis points from 4.99% to 5.36%.





Our
      interest rate spread decreased to 1.96% from 2.38%, reflecting the more rapid
      increase in the cost of our average interest bearing liabilities as compared
      to
      the increase in the yield of our average interest earning assets. Our net
      interest margin decreased to 2.33% from 2.70%, 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 six months
      ended June 30, 2006 from 1.14 times for 2005.





*Interest
      Income* .





Three
      months ended June 30, 2006 compared to three months ended June 30,
      2005 .





Interest
      income increased by $385,000, or 20.58%, to $2,256,000 for the three months
      ended June 30, 2006, from $1,871,000 for the three months ended June 30, 2005.
      The increase in interest income resulted primarily from increases of $366,000,
      or 22.05%, in interest and fee income from loans, $27,000, or 25.71%, in
      interest income from investment securities and $5,000, or 9.43%, in interest
      income from other interest earning assets (primarily consisting of interest
      earned on federal funds sold and Federal Home Loan Bank stock), partially offset
      by a decrease of $13,000, or 24.53%, in interest income from mortgage backed
      securities.





The
      increase in interest income reflects a $19,502,000, or 13.26%, increase in
      the
      average balance of interest-earning assets to $166,563,000 during the quarter
      ended June 30, 2006 from $147,061,000 during the quarter ended June 30, 2005,
      and a 33 basis point increase in the yield on average interest-earning assets
      to
      5.42% for the three months ended June 30, 2006 from 5.09% for the three months
      ended June 30, 2005, reflecting an increase in market interest rates.





The
      increase in interest income and fees on loans was due to a $23,194,000 or 18.81%
      increase in average net loans receivable, from $123,319,000 during the quarter
      ended June 30, 2005 to $146,513,000 during the quarter ended June 30, 2006,
      and
      a 15 basis point increase in the average yield on net loans
      receivable.





15





Six
      months ended June 30, 2006 compared to six months ended June 30,
      2005 .





Interest
      income increased by $747,000, or 20.16%, to $4,452,000 for the six months ended
      June 30, 2006, from $3,705,000 for the six months ended June 30, 2005. The
      increase in interest income resulted primarily from an increase of $752,000,
      or
      23.15%, in interest and fee income from loans and $54,000, or 26.87%, in
      interest income from investment securities, partially offset by decreases of
      $28,000, or 25.23%, in interest income from mortgage backed securities and
      $31,000, or 21.38%, in interest income from other interest earning assets
      (primarily consisting of interest earned on federal funds sold and Federal
      Home
      Loan Bank stock).





The
      increase in interest income reflects a $17,592,000, or 11.84%, increase in
      the
      average balance of interest-earning assets to $166,227,000 from $148,635,000,
      and a 37 basis point increase in the yield on average interest-earning assets
      to
      5.36% for the six months ended June 30, 2006 from 4.99% for the six months
      ended
      June 30, 2005, reflecting an increase in market interest rates.





The
      increase in interest income and fees on loans was due to a $24,553,000, or
      20.30% increase in average net loans receivable, from $120,935,000 to
      $145,488,000, and a 13 basis point increase in average yield on net loans
      receivable.





The
      decrease in interest income from other interest earning assets (primarily
      federal funds sold) was due to a $4,960,000, or 53.01% decrease in average
      other
      interest earning assets, from $9,356,000 during the quarter ended June 30,
      2005
      to $4,396,000 during the quarter ended June 30, 2006, and a 209 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* .





Three
      months ended June 30, 2006 compared to three months ended June 30,
      2005 .





Interest
      expense, which consists of interest paid on deposits and borrowings, increased
      by $436,000, or 50.70%, to $1,296,000 for the three months ended June 30, 2006
      from $860,000 for the three months ended June 30, 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
      $109,552,000 during the quarter ended June 30, 2006 from $106,571,000 during
      the
      quarter ended June 30, 2005, and the average cost of deposits increased by
      69
      basis points as a result of increased market interest rates. The average balance
      of borrowings increased to $38,000,000 during the quarter ended June 30, 2006
      from $21,500,000 in the same quarter of 2005 and the average cost of borrowings
      increased by 117 basis points as a result of longer term borrowing at higher
      interest rates.





Six
      months ended June 30, 2006 compared to six months ended June 30,
      2005 .





Interest
      expense increased by $815,000, or 48.03%, to $2,512,000 for the six months
      ended
      June 30, 2006 from $1,697,000 for the six months ended June 30, 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 $109,573,000 from $107,060,000 and the average cost of
      deposits increased by 59 basis points as a result of increased market interest
      rates. The average balance of borrowings increased to $38,000,000 during the
      quarter ended June 30, 2006 from $23,167,000 in the same period of 2005 and
      the
      average cost of borrowings increased by 117 basis points as a result of longer
      term borrowings at higher interest rates.





16





*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 $24,000 and
      $12,000 for the three months ended June 30, 2006 and June 30, 2005, and a
      provision of $38,000 and $33,000 for the six months ended June 30, 2006 and
      June
      30, 2005, respectively. We had no charge-offs during the three- or six-month
      periods ended June 30, 2006 and June 30, 2005. We used the same
      methodology  and
      generally similar assumptions in assessing the allowance for these periods.





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.




17


*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.





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 $512,000  or
      0.35%
      of gross loans outstanding of $147,439,000 at June 30, 2006, compared to an
      allowance for loan losses of $446,000, or 0.35% of gross loans outstanding
      of
      $127,660,000 at June 30, 2005.





The
      following table summarizes the activity in the provision for loan losses for
      the
      three and six months ended June 30, 2006 and 2005.





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**(Dollars
                in Thousands)Balance
                at beginning of period
            
            $
            488
            
            $
            433
            
            $
            474
            
            $
            413Charge-offs
            
            
            -
            
            
            -
            
            
            -
            
            
            -Recoveries
            
            
            0
            
            
            1
            
            
            0
            
            
            1Net
                charge-offs
            
            
            0
            
            
            1
            
            
            0
            
            
            1Provision
                for loan losses
            
            
            24
            
            
            12
            
            
            38
            
            
            32Ending
                balance
            
            $
            512
            
            $
            446
            
            $
            512
            
            $
            446Ratio
                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
            
            
            0.35
            %
            
            0.35
            %
            
            0.35
            %
            
            0.35
            %Allowance
                for loan losses as a percent of total non-performing loans
            
            
            38.47
            %
            
            33.43
            %
            
            38.47
            %
            
            33.43
            %





18





*Other
      Income* .





Three
      months ended June 30, 2006 compared to three months ended June 30,
      2005 .





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 $7,000, or 14.00%, to $57,000 for the three months ended June 30,
      2006, as compared to $50,000 for the three months ended June 30, 2005. The
      primary reason for the increase in non-interest income is a $6,000, or 17.65%,
      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 June 30, 2006, we leased 89.07% of the total leaseable space
      in our headquarters building. We are actively seeking tenants for the remaining
      space.





Six
      months ended June 30, 2006 compared to six months ended June 30,
      2005 .





Non-interest
      income increased $20,000, or 20.00%, to $120,000 for the six months ended June
      30, 2006, as compared to $100,000 for the six months ended June 30, 2005. The
      primary reason for the increase in non-interest income is a $14,000, or 21.54%,
      increase in rental income from our headquarters building to $79,000 for the
      six
      months ended June 30, 2006 compared to $65,000 for the six months ended June
      30,
      2005 and a $6,000, or 600.00%, increase in gain on sale of loans to $7,000
      for
      the six months ended June 30, 2006 compared to $1,000 for the six months ended
      June 30, 2005.





*Non-interest
      Expense* .





Three
      months ended June 30, 2006 compared to three months ended June 30,
      2005 .





Non-interest
      expense was $899,000 for the three months ended June 30, 2006 as compared to
      $880,000 for the three months ended June 30, 2005, an increase of $19,000,
      or
      2.16%. The increase was due  primarily
      to a $41,000, or 9.67%, increase in compensation and related expenses. ** The
      increase in compensation and related expenses reflects, among other items,
      the
      hiring of a branch operations and business development officer in October 2005
      and stock-based expenses, including the Employee Stock Ownership Plan and our
      stock based compensation plans. We had no stock based compensation plans through
      the second quarter of 2005.





Six
      months ended June 30, 2006 compared to six months ended June 30,
      2005 .





Non-interest
      expense was $1,864,000 for the six months ended June 30, 2006, as compared
      to
      $1,768,000 for the six months ended June 30, 2005, an increase of
      $96,000  or
      5.43%.
      The increase was due  primarily
      to increases of $89,000, or 43.63%, in occupancy expenses and $64,000, or 7.45%,
      in compensation and related expenses, partially offset by decreases of $38,000,
      or 9.97%, in other expenses and $19,000, or 20.88%, 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 increased for the same
      reasons that they increased during the three months ended June 30, 2006 as
      compared to the three months ended June 30, 2005.





19





*Income
      Tax Expense* .





Three
      months ended June 30, 2006 compared to three months ended June 30,
      2005 .





The
      provision for income taxes decreased to $38,000 for the three months ended
      June
      30, 2006 from $67,000 for the three months ended June 30, 2005, representing
      a
      $29,000, or 43.28%, decrease. The decrease in the provision for income taxes
      was
      primarily due to our lower level of income before taxes. The effective tax
      rate
      was 40.43% and 39.65% for June 30, 2006 and June 30, 2005, respectively. The
      increase in effective tax rate was due to non-deductible stock-based
      compensation awarded during 2006.





Six
      months ended June 30, 2006 compared to six months ended June 30,
      2005 .





The
      provision for income taxes decreased to $66,000 for the six months ended June
      30, 2006 from $117,000 for the six months ended June 30, 2005, representing
      a
      $51,000, or 43.59%, decrease. The decrease in the provision for income taxes
      was
      primarily due to our lower level of income before taxes. The effective tax
      rate
      was 41.77% and 38.11% for June 30, 2006 and June 30, 2005, respectively. The
      increase in effective tax rate was due to non-deductible stock-based
      compensation awarded during 2006.





**Analysis
      of Financial Condition**





*Assets.*





General .





Our
      total
      assets increased by $1,890,000 or 1.10%, to $172,957,000 at June 30, 2006,
      from
      $171,067,000 at December 31, 2005. The increase in total assets resulted
      primarily from a $2,044,000, or 1.41% increase in net loans receivable, from
      $144,609,000  at
      December 31, 2005  to
      $146,653,000 at June 30, 2006 and a $441,000,  or
      32.86%, increase in cash and cash equivalents, from $1,342,000 at December
      31,
      2005 to $1,783,000 at June 30, 2006. These increases were offset slightly by
      a
      $716,000,  or
      15.82%
      decrease in mortgage backed securities held to maturity, from $4,525,000 at
      December 31, 2005 to $3,809,000 at June 30, 2006.





Investment
      Securities .





The
      investment portfolio at June 30, 2006 amounted to $16,106,000, a decrease of
      $570,000, or 3.42%,  from
      $16,676,000 at December 31, 2005. Investment securities - available for sale,
      increased $144,000, or 1.77%, to $8,297,000 at June 30, 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 $716,000, or 15.82%,
      to
      $3,809,000 at June 30, 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 $239,000 at June 30, 2006 (reflected as accumulated other comprehensive
      loss
      of $146,000 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 $2,044,000, or 1.41%, to $146,653,000 at June 30,
      2006 from $144,609,000 at December 31, 2005. The commercial loan portfolio
      increased $1,757,000, or 19.03%, to $10,991,000 at June 30, 2006 from $9,234,000
      at December 31, 2005. One-to-four family residential loans decreased $5,502,000,
      or 4.08% to $129,303,000 at June 30, 2006 from $134,805,000 at December 31,
      2005. Our loan customers are generally located in Baltimore City, Baltimore
      County and Harford County, Maryland.





20


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:





**June
                30,**
            
            **December
                31,****2006**
            
            **2005**
            
            **2005**(Dollars
                in thousands)Nonaccrual
                loans
            
            $
            1,331,000
            
            $
            254,000
            
            $
            1,245,000Unrecorded
                interest on nonaccrual loans
            
            $
            159,000
            
            $
            11,000
            
            $
            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 lenders 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 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 had until May 14, 2006
      to resolve the road access issues, which included resolution of storm water
      management matters for the property as well. The national homebuilder was unable
      to resolve these issues by the May 14, 2006 deadline. On May 22, 2006, the
      participating lenders sent the borrower and the guarantors a notice of default
      requiring payment in full of their indebtedness by June 1, 2006. The letter
      Agreement between the national homebuilder and the borrower, which originally
      expired on May 14, 2006, was extended to July 5, 2006. To date, an extension
      agreement with a new expiration date has not been executed. The participating
      lenders have not extended their forbearance agreement, which also expired on
      May
      14, 2006. They have not yet taken further action on their default letter, though
      they have not waived their rights by not doing so. Progress continues on the
      remaining road issues. Subject to the resolution of road access issues, closing
      is anticipated to occur by the end of September 2006. The Letter Agreement
      references payment in full of principal, accrued interest and all costs of
      collection for this participation loan.




21


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 $251,000 consisted of
      one-to-four residential mortgage loans at June 30, 2006.





Non-accrual
      loans totaled 0.91% and 0.20% of net loans receivable at June 30, 2006 and
      June
      30, 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 June 30, 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 June
      30, 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 June 30, 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 $2,148,000, or 1.45%, to $150,410,000 at June 30,
      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 $1,402,000,
      or
      376.88% increase in advance payments by borrowers for taxes and insurance,
      and a
      $345,000, or 0.31% increase in deposits. These increases were offset by a
      $1,609,000, or 83.85%, decrease in checks outstanding in excess of bank balance.
      Advance payments by borrowers for taxes and insurance increased because the
      July
      2006 semi-annual property taxes had not been paid as of  June 30,
      2006 (they are paid in July 2006). The balance in checks outstanding in excess
      of bank balance at the end of a period is dependent on the number and amounts
      of
      checks issued on the account at our correspondent’s bank and when such checks
      are presented for payment. Any excess funds are automatically transferred into
      an interest-earning federal funds account. Therefore, changes in checks
      outstanding in excess of bank balance as reflected on the balance sheet,
      generally, do not reflect any underlying changes in the Company’s financial
      condition. The other liabilities consist primarily of accrued federal and state
      income taxes and accrued interest on Federal Home Loan Bank
      borrowings.





22





Deposits





Deposits
      increased $345,000, or 0.31%, to $109,968,000 at June 30, 2006 from $109,623,000
      at December 31, 2005. Certificates of deposits increased $4,276,000 to
      $81,176,000 at June 30, 2006 from $76,900,000 at December 31, 2005, and demand
      and NOW accounts increased by $720,000 to $4,087,000 at June 30, 2006 from
      $3,367,000 at December 31, 2005. Savings and money market deposits decreased
      $4,651,000 to $24,705,000 at June 30, 2006, from $29,356,000 at December 31,
      2005. We believe that, as 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
      June
      30, 2006, we were permitted to borrow up to $51,887,000 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 June 30, 2006 and December 31, 2005, respectively, and
      we
      averaged  $38,000,000
      and $26,500,000 of Federal Home Loan Bank advances during the six months ended
      June 30, 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 half of 2006. We have relied on borrowing to a
      significant extent since the third quarter of 2003 to  fund
      loan
      growth.





**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 June 30, 2006, cash and cash equivalents totaled $1,783,000.
      Securities classified as available-for-sale, which can provide additional
      sources of liquidity, totaled $8,297,000 at June 30, 2006. However, because
      all
      of these securities were in an unrealized loss position at June 30, 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 June 30, 2006.  Also,
      at
      June 30, 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
      $13,887,000.





At
      June
      30, 2006, we had outstanding commitments to originate loans of $1,949,000
      (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 $5,432,000 at June 30, 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.





23


Certificates
        of deposit accounts scheduled to mature within one year totaled $40,429,000
        or
        36.76% of total deposits at June 30, 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 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
        June 30, 2006.  We believe, however, that, 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 June 30, 2006 consisted of  $6,500,000  in
      short
      term fixed rate advances with a daily rate of 5.31%, a $5,000,000 of long term
      advance with a fixed rate of $2.83% and $26,500,000 of long term convertible
      rate advances with fixed rates ranging from 3.63% to 4.90%. If not repaid or
      converted to a different product, the convertible rate advances will convert
      from a fixed to a floating rate after periods ranging from one to five years.





Our
      primary investing activity is the origination of loans, primarily one- to
      four-family residential mortgage loans and commercial loans, and the purchase
      of
      securities. Our primary financing activity consists of activity in deposit
      accounts and Federal Home Loan Bank of Atlanta advances. Asset growth has
      outpaced deposit growth over the past 18-21 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 $258,000, or 1.13%, to $22,547,000 at June 30,
      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 $92,000 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.





24





**Financial
                Instruments Whose****Contract
                Amount Represents**
            
            **Contract
                Amount At****Credit
                Risk**
            
            **June
                30, 2006**
            
            **December
                31, 2005**(Dollars
                in thousands)Lines
                of credit - commercial
            
            $
            492
            
            $
            1,018Lines
                of credit - home equity
            
            
            5,432
            
            
            5,073Lines
                of credit - overdraft checking
            
            
            110
            
            
            95Mortgage
                loan commitments
            
            
            1,949
            
            
            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.





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 5.38%
      to 6.88% and 5.00% to 6.00% at June 30, 2006 and December 31, 2005,
      respectively. Loan commitments expire 60 days from the date of the
      commitment.





For
      the
      six months ended June 30, 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.





25


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.





**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 June 30, 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 June 30, 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.





26


**PART
      II - OTHER INFORMATION**





Item
      1.Legal
      Proceedings.





None.





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





None.





Item
      3.Defaults
      Upon Senior Securities.





Not
      applicable.





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




(a)  SFSB,
      Inc. held its annual meeting of stockholders on May 18, 2006.





(b)  At
      the
      annual meeting, J. Benson Brown and James D. Wise were elected to serve a
      three-year term expiring upon the date of SFSB, Inc.’s 2009 Annual Meeting. The
      term of office of the following directors continued after the meeting: Philip
      E.
      Logan, Thomas J. Dreschler, Robert M. Stahl IV, and Charles E. Wagner, Jr.





(c)  1.
      The
      following individuals were nominees for the Board of Directors for a term to
      expire at the 2009 annual meeting of stockholders. The number of votes for
      or
      withheld for each nominee is as follows:





For
            Withheld
            TotalJ.
                Benson Brown
            2,802,511
            59,300
            2,861,811James
                E. Wise
            2,800,211
            61,600
            2,861,811




2. The ratification of the appointment of Beard Miller Company LLP as
      independent public accountants to audit the financial statements of SFSB, Inc.
      for 2006:




For
            Against
            Abstain
            Broker
                Non-Votes
            Total2,852,591
            9,100
            120
            0
            2,861,811




Item
      5.  Other
      Information.





Not
      applicable.





Item
      6.Exhibits.





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





27


**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:
                  August 9,2006
            By:
            /s/
                Philip E. LoganPhilip
                E. Logan, President(Principal
                Executive Officer)


Date:
                August 9,
                2006
            By:
            /s/
                Sophie T. WittelsbergerSophie
                Torin Wittelsberger, Chief Financial Officer(Principal
                Accounting and Financial Officer)




28