**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 September 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
      November 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)**


**September
                30,**
              **2006**
            
            **December
                31,**
              **2005**(Dollars
                in thousands, except per share data)**ASSETS**Cash
                and due from banks
            
            $
            933
            
            $
            710Federal
                funds sold
            
            
            456
            
            
            632Cash
                and cash equivalents
            
            
            1,389
            
            
            1,342Investment
                securities - available for sale
            
            
            8,435
            
            
            8,153Investment
                securities - held to maturity
            
            
            4,000
            
            
            3,998Mortgage
                backed securities - held to maturity
            
            
            3,479
            
            
            4,525Loans
                receivable - net of allowance for loan losses of 2006 $814; 2005
                $474
            
            
            150,583
            
            
            144,609Federal
                Home Loan Bank of Atlanta stock at cost
            
            
            2,233
            
            
            1,955Premises
                and equipment, at cost, less accumulated depreciation
            
            
            5,327
            
            
            5,612Accrued
                interest receivable
            
            
            483
            
            
            487Other
                assets
            
            
            580
            
            
            386Total
                assets
            
            $
            176,509
            
            $
            171,067**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**LiabilitiesDeposits
            
            $
            109,711
            
            $
            109,623Checks
                outstanding in excess of bank balance
            
            
            1,074
            
            
            1,919Borrowings
            
            
            42,000
            
            
            36,000Advance
                payments by borrowers for taxes and insurance
            
            
            857
            
            
            372Other
                liabilities
            
            
            360
            
            
            348Total
                liabilities
            
            
            154,002
            
            
            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 at September 30, 2006 and December 31,
                2005
            
            
            30
            
            
            30Additional
                paid-in capital
            
            
            12,758
            
            
            12,730Retained
                earnings (substantially restricted)
            
            
            11,325
            
            
            11,375Unearned
                Employee Stock Ownership Plan shares
            
            
            (1,064
            )
            
            (1,108
            )Treasury
                Stock at cost, 2006, 43,066 shares and 2005, 10,000 shares
            
            
            (417
            )
            
            (96
            )Accumulated
                other comprehensive loss
            
            
            (125
            )
            
            (126
            )**Total
                stockholders’ equity**
            
            
            22,507
            
            
            22,805**Total
                liabilities and stockholders’ equity**
            
            $
            176,509
            
            $
            171,067




See
      notes
      to consolidated financial statements.


-2-




**SFSB,
      Inc.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS (Unaudited)**


**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30**,**2006**
            
            **2005**
            
            **2006**
            
            **2005**(Dollars
                in thousands, except per share data)Interest
                and fees on loans
            
            $
            2,080
            
            $
            1,711
            
            $
            6,080
            
            $
            4,959Interest
                and dividends on investment securities
            
            
            140
            
            
            112
            
            
            395
            
            
            313Interest
                on mortgage backed securities
            
            
            39
            
            
            48
            
            
            122
            
            
            159Other
                interest income
            
            
            45
            
            
            30
            
            
            159
            
            
            175**Total
                interest income**
            
            
            2,304
            
            
            1,901
            
            
            6,756
            
            
            5,606Interest
                on deposits
            
            
            998
            
            
            783
            
            
            2,771
            
            
            2,165Interest
                on short-term borrowings
            
            
            119
            
            
            18
            
            
            277
            
            
            96Interest
                on long-term borrowings
            
            
            299
            
            
            170
            
            
            880
            
            
            408**Total
                interest expense**
            
            
            1,416
            
            
            971
            
            
            3,928
            
            
            2,669**Net
                interest income**
            
            
            888
            
            
            930
            
            
            2,828
            
            
            2,937Provision
                for loan losses
            
            
            302
            
            
            12
            
            
            340
            
            
            44**Net
                interest income after provision for loan losses**
            
            
            586
            
            
            918
            
            
            2,488
            
            
            2,893**Other
                Income**Rental
                income
            
            
            35
            
            
            35
            
            
            114
            
            
            100Other
                income
            
            
            19
            
            
            37
            
            
            53
            
            
            71Gain
                on sale of loans
            
            
            —
            
            
            —
            
            
            8
            
            
            1**Total
                other income**
            
            
            54
            
            
            72
            
            
            175
            
            
            172**Non-Interest
                Expenses**Compensation
                and other related expenses
            
            
            461
            
            
            445
            
            
            1,385
            
            
            1,304Occupancy
                expense
            
            
            94
            
            
            115
            
            
            386
            
            
            320Advertising
                expense
            
            
            46
            
            
            53
            
            
            119
            
            
            145Service
                bureau expense
            
            
            42
            
            
            38
            
            
            120
            
            
            115Furniture,
                fixtures and equipment
            
            
            50
            
            
            59
            
            
            161
            
            
            172Telephone,
                postage and delivery
            
            
            20
            
            
            24
            
            
            64
            
            
            65Other
                expenses
            
            
            155
            
            
            220
            
            
            498
            
            
            601**Total
                non-interest expenses**
            
            
            868
            
            
            954
            
            
            2,733
            
            
            2,722**Income
                (Loss) before income tax provision**
            
            
            (228
            )
            
            36
            
            
            (70
            )
            
            343Income
                tax provision (benefit)
            
            
            (86
            )
            
            15
            
            
            (20
            )
            
            132Net
                income (loss)
            
            $
            (142
            )
            $
            21
            
            $
            (50
            )
            $
            211**Basic
                Earnings (Loss) per Share**
            
            **$**
            **(0.05**
            **)**
            **$**
            **0.01**
            
            **$**
            **(0.02**
            **)**
            **$**
            **0.07****Diluted
                Earnings (Loss) per Share**
            
            **$**
            **(0.05**
            **)**
            **$**
            **0.01**
            
            **$**
            **(0.02**
            **)**
            **$**
            **0.07**




See
      notes
      to consolidated financial statements.


-3-




**SFSB,
      Inc.**


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


**Three****Months
                Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**(Dollars
                in thousands)Net
                income (loss)
            
            $
            (142
            )
            $
            21
            
            $
            (50
            )
            $
            211Net
                unrealized (loss) gain on securities available for sale during the
                period
                (net of taxes of $13, $(13), $0 and $(35))
            
            
            21
            
            
            (20
            )
            
            1
            
            
            (55
            )Total
                Comprehensive Income (Loss)
            
            $
            (121
            )
            $
            1
            
            $
            (49
            )
            $
            156




See
      notes
      to consolidated financial statements.


-4-




**SFSB,
      Inc.**


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


**Nine
                Months Ended****September
                30,****2006**
            
            **2005**(Dollars
                in thousands)**Cash
                Flows From Operating Activities**Net
                income (loss)
            
            $
            (50
            )
            $
            211Adjustments
                to Reconcile Net Income (Loss) to Net Cash Provided by Operating
                Activities:Non-cash
                compensation under stock-based compensation plans and Employee Stock
                Ownership Plan
            
            
            173
            
            
            47Net
                amortization of premiums and discounts
            
            
            11
            
            
            22Amortization
                of deferred loan fees
            
            
            (45
            )
            
            (54
            )Provision
                for loan losses
            
            
            340
            
            
            44Gain
                on sale of loans
            
            
            (8
            )
            
            (1
            )Loans
                originated for sale
            
            
            (1,510
            )
            
            (155
            )Proceeds
                from loans sold
            
            
            1,518
            
            
            156Provision
                for depreciation
            
            
            340
            
            
            242Increase
                in accrued interest receivable and other assets
            
            
            (190
            )
            
            (120
            )Increase
                in accrued interest payable
            
            
            10
            
            
            22Increase
                (decrease) in other liabilities
            
            
            9
            
            
            (292
            )**Net
                Cash Provided by Operating Activities**
            
            
            598
            
            
            122**Cash
                Flows from Investing Activities**Purchase
                of available for sale securities
            
            
            (281
            )
            
            (199
            )Net
                increase in loans
            
            
            (6,269
            )
            
            (19,304
            )Principal
                collected on mortgage backed securities
            
            
            1,033
            
            
            1,924Purchase
                of Federal Home Loan Bank of Atlanta stock
            
            
            (278
            )
            
            (465
            )Redemption
                of Federal Home Loan Bank of Atlanta stock
            
            
            —
            
            
            225Purchases
                of premises and equipment
            
            
            (55
            )
            
            (131
            )**Net
                Cash Used in Investing Activities**
            
            
            (5,850
            )
            
            (17,950
            )**Cash
                Flows from Financing Activities**Net
                increase in deposits
            
            
            81
            
            
            131(Decrease)
                increase in checks outstanding in excess of bank balance
            
            
            (845
            )
            
            2,195Proceeds
                from borrowings
            
            
            17,500
            
            
            8,500Repayment
                of borrowings
            
            
            (11,500
            )
            
            (5,000
            )Increase
                in advance payments by borrowers for taxes and insurance
            
            
            485
            
            
            331Purchase
                of treasury stock
            
            
            (422
            )
            
            —**Net
                Cash Provided by Financing Activities**
            
            
            5,299
            
            
            6,157Increase
                (Decrease) in cash and cash equivalents
            
            
            47
            
            
            (11,671
            )Cash
                and cash equivalents at beginning of year
            
            
            1,342
            
            
            15,597**Cash
                and cash equivalents at end of period**
            
            $
            1,389
            
            $
            3,926**Supplemental
                Disclosures of Cash Flows Information**:**Cash
                paid during the year for:**Income
                taxes
            
            $
            230
            
            $
            289Interest
                expense
            
            $
            3,918
            
            $
            2,646




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 September 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 nine months ended September 30, 2006 are not necessarily
      indicative of the results that may be expected for the full year.  -6-


**Note
      4 - Earnings (Loss) Per Share**





Basic
      earnings (loss) per share is computed by dividing net income (loss) 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 (loss) per share is computed by dividing
      net income (loss) 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 nine months ended September 30, 2006
      and
      2005 as follows:




**Three****Months
                Ended**
            
            **Nine
                Months Ended****September
                30, 2006**
            
            **September
                30, 2006****Basic**
            
            **Diluted**
            
            **Basic**
            
            **Diluted**(Dollars
                in thousands, except for per share data)Net
                loss
            
            $
            (142
            )
            $
            (142
            )
            $
            (50
            )
            $
            (50
            )Weighted
                average shares outstanding
            
            
            2,815
            
            
            2,815
            
            
            2,819
            
            
            2,819Diluted
                SecuritiesStock
                Options
            
            
            —
            
            
            —
            
            
            —
            
            
            3Unvested
                Stock Awards
            
            
            —
            
            
            —
            
            
            —
            
            
            2Adjusted
                Weighted average shares
            
            
            2,815
            
            
            2,815
            
            
            2,819
            
            
            2,824Per
                Share Amount
            
            $
            (0.05
            )
            $
            (0.05
            )
            $
            (0.02
            )
            $
            (0.02
            )








**Three****Months
                Ended**
            
            **Nine
                Months Ended****September
                30, 2005**
            
            **September
                30, 2005****Basic**
            
            **Diluted**
            
            **Basic**
            
            **Diluted**(Dollars
                in thousands, except for per share data)Net
                income
            
            $
            21
            
            $
            21
            
            $
            211
            
            $
            211Weighted
                average shares outstanding
            
            
            2,863
            
            
            2,863
            
            
            2,861
            
            
            2,861Diluted
                SecuritiesStock
                Options
            
            
            —
            
            
            —
            
            
            —
            
            
            —Unvested
                Stock Awards
            
            
            —
            
            
            —
            
            
            —
            
            
            —Adjusted
                Weighted average shares
            
            
            2,863
            
            
            2,863
            
            
            2,861
            
            
            2,861Per
                Share Amount
            
            $
            0.01
            
            $
            0.01
            
            $
            0.07
            
            $
            0.07




-7-




**Note
      5 - Regulatory Capital Requirements**





During
      the nine-month period ending September 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 September
      30,
      2006, the Bank met each of the three minimum regulatory capital requirements.
      The following table summarizes the Bank’s regulatory capital position at
      September 30, 2006.


**To
                Be Well****Capitalized
                Under****For
                Capital**
            
            **Prompt
                Corrective****Actual**
            
            **Adequacy
                Purposes**
            
            **Action
                Provision****Amount**
            ****
            **%**
            ****
            **Amount**
            ****
            **%**
            ****
            **Amount**
            ****
            **%**(Dollars
                in thousands)**September
                30, 2006****(Unaudited)**Tangible
                (1)
            
            $
            16,670
            
            
            9.41
            %
            $
            2,658
            
            
            1.50
            %
            
            N/A
            
            
            N/ATier
                I capital (2)
            
            
            16,670
            
            
            16.57
            %
            
            N/A
            
            
            N/A
            
            $
            6,036
            
            
            6.00
            %Core
                (leverage) (1)
            
            
            16,670
            
            
            9.41
            %
            
            7,089
            
            
            4.00
            %
            
            8,861
            
            
            5.00
            %Risk-weighted
                (2)
            
            
            17,484
            
            
            17.38
            %
            
            8,049
            
            
            8.00
            %
            
            10,061
            
            
            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  $81,000  and
      $173,000 for the three and nine months ended September 30, 2006. The total
      income tax benefit recognized was $9,000 and $28,000  for
      the
      three and nine months ended September 30, 2006. The compensation costs charged
      against income was $21,000 for the three and nine months ended September 30,
      2005.




At
      September 30, 2006, there is  $456,000  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 3.6 years.




During
      the three and nine months ended September 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 nine months ended
      September 30, 2006. At September 30, 2006, there were 26,244 vested stock
      options and 10,495 vested restricted stock shares under the Company’s
      stock-based compensation plans.




**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  -8-


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.





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 de-recognition, 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.





In
      September 2006, the FASB issued FASB Statement No. 157, *Fair
      Value Measurements* ,
      which
      defines fair value, establishes a framework for measuring fair value under
      GAAP,
      and expands disclosures about fair value measurements. FASB Statement
      No. 157 applies to other accounting pronouncements that require or permit
      fair value measurements. The new guidance is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and for interim
      periods within those fiscal years. We are currently evaluating the potential
      impact, if any, of the adoption of FASB Statement No. 157 on our
      consolidated financial position, results of operations and cash
      flows.





On
      September 13, 2006, the Securities and Exchange Commission (“SEC”) issued
      Staff Accounting Bulleting No. 108 (“SAB 108”). SAB 108 provides
      interpretive guidance on how the effects of the carryover or reversal of prior
      year misstatements should be considered in quantifying a potential current
      year
      misstatement. Prior to SAB 108, companies might evaluate the materiality of
      financial-statement misstatements using either the income statement or balance
      sheet approach, with the income statement approach focusing on new misstatements
      added in the current year, and the balance sheet approach focusing on the
      cumulative amount of misstatement present in a company’s balance sheet.
      Misstatements that would be material under one approach could be viewed as
      immaterial under another approach, and not be corrected. SAB 108 now requires
      that companies view financial statement misstatements as material if they are
      material according to either the income statement or balance sheet approach.
      The
      Company has analyzed SAB 108 and determined that upon adoption it will have
      no
      impact on the reported results of operations or financial
      conditions.


-9-




**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 a net loss of $50,000 for the nine months ended September 30, 2006
      as compared to net income of $211,000 for the same period in 2005. This decrease
      was primarily due to our increasing the provision for loan loss reserves by
      100%
      of the loan balances of two commercial non-real estate loans due to a default
      on
      those loans, in accordance with regulatory requirements. The decrease also
      resulted from the acceleration of depreciation on the leasehold improvements
      of
      the Edgewood branch in connection with closing the branch and the impact of
      our
      placement of a non-performing commercial land acquisition and development
      participation loan on non-accrual status. Interest income increased $1,150,000,
      or 20.51%, and non-interest income increased $3,000, or 1.74%. These
      improvements were offset by a $1,259,000, or 47.17%, increase in interest
      expenses and a $11,000, or 0.40%, increase in non-interest expenses.





Assets
      increased during the first nine months of 2006 primarily because we increased
      our loan portfolio by $5,974,000, or 4.13%, to $150,583,000 at September 30,
      2006 from $144,609,000 at December 31, 2005. The increase is also a result
      of an
      increase in investment securities available for sale of $282,000, or 3.46%,
      to
      $8,435,000 at September 30, 2006 from $8,153,000 at December 31, 2005 and an
      increase in Federal Home Loan Bank stock of $278,000, or 14.22%, to $2,233,000
      at September 30, 2006 from $1,955,000 at December 31, 2005. These increases
      were
      offset by a decrease in mortgage backed securities held to maturity of
      $1,046,000, or 23.12%, to $3,479,000 at September 30, 2006 from $4,525,000
      at
      December 31, 2005.




As
      discussed in detail in the Asset Quality section of this report, we hold a
      19%
      participation (approximately $1,080,000 unpaid principal balance) in an
      acquisition and development loan.  This loan became delinquent in late 2004
      and was placed on non-accrual status in late 2005.  A national homebuilder
      had contracted to purchase the property and pay off the subject loan upon the
      borrower developing it to the “record plat” stage.  This was to occur in
      late 2005.  To date, the borrower has been unable to do so.  In
      November 2005, the national homebuilder released the borrower from their
      contract, and the participating lenders entered into a forbearance agreement
      with the borrower so that the borrower could attempt to sell the property. 
In February 2006, the national homebuilder agreed to purchase the property
“as
      is” subject to a feasibility study, which uncovered road access and storm water
      management issues.  As of the date of this report, the borrower has been
      unable to resolve these issues with the controlling municipality preventing
      the
      sale of the property to the national homebuilder.  In May 2006, upon the
      expiration of the forbearance agreement, the participating banks sent a notice
      of default to the borrower. In addition, the collateral property has been
      docketed for foreclosure. The principal of the borrower filed for personal
      (Chapter 11) bankruptcy in late September 2006, and a meeting of creditors
      was
      held on November 8, 2006. Later that same day, the entity that owns the
      collateral property filed for Chapter 11 bankruptcy, which caused the
      cancellation of the foreclosure auction that had been scheduled for November
      9,
      2006.  As of the date of this filing, the loan continues to be on
      non-accrual status.  We believe the above mentioned issues regarding the
      property will eventually be resolved, that our collateral position
      is adequate and that we will recover all principal on this loan, although there
      can be no assurance that this will be the case.




-10-





As
      discussed further in the Provision for Loan Losses and Analysis of Allowance
      for
      Loan Losses section of this report, we have two commercial non-real estate
      loans
      that are in non-financial default as of the end of the third quarter. One of
      these commercial loans is a business line of credit to a company that ceased
      operations as of July 31, 2006; the other is an unsecured term loan to the
      principal of the same company. The company filed for Chapter 7 bankruptcy on
      September 26, 2006. In anticipation of a minimal recovery of principal on these
      loans, we have increased our allowance for loan losses by $273,000, or 100%
      of
      the balance of the loans.





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.





As
      a
      gesture of our commitment to our customers and neighbors, the Bank is currently
      celebrating Customer Appreciation Days at each of its two branch locations,
      promoting its newest products. To remain competitive and offer even more choices
      to our customers, in the third quarter of 2006, we developed a money market
      account with what we believe is an attractive tri-tiered interest rate level
      option, a business checking account with an earnings credit feature to
      counterbalance the typical service fees charged, and a premium rate personal
      checking account, requiring higher balances but paying a very competitive
      interest rate without the standard service fees. We also began offering a
      service that automatically pulls funds from a customer’s savings account to
      cover checking account overdrafts to compliment our Check Assurance Overdraft
      Protection Line of Credit product. We continue to offer a seven month
      certificate of deposit with what we believe is an attractive interest rate.





In
      addition to the variety of products we offer and the new ones mentioned above,
      our product development and review committee expects to implement a health
      savings account for health care expenses, a Coverdale individual retirement
      account for educational needs and a business sweep checking account for
      accountholders who maintain high balances and are looking for an alternative
      way
      to increase earnings on their excess available funds. We expect to develop
      and
      offer these services during the fourth quarter of 2006 or in early 2007.





We
      continue to implement strategies formed during a strategic planning meeting
      of
      the Board of Directors and the Company’s officers held in the second quarter of
      2006. In our continued efforts to boost the yield of our interest earning assets
      during a period of net interest margin compression, management has decided
      to
      sell a larger percentage of the Company’s residential loan originations to
      facilitate our goal of increasing and diversifying the mix of commercial loans
      to residential loans in our portfolio. This strategy, if successful, should
      enable us to increase our fee income on loans sold. We are also looking to
      hire
      an experienced commercial loan originator to further our goal of increasing
      the
      average outstanding balance of our commercial loan portfolio. In addition,
      we
      have intensified our marketing strategy by offering incentives to attract new
      checking accounts in an effort to attain our goal of decreasing the yield on
      our
      interest bearing liabilities. Our directors, officers, management and staff
      remain committed in a unified effort to improve the Bank’s
      profitability.


-11-





Key
      measurements and events for the three- and nine-month periods ended September
      30, 2006 include the following:




·
            Total
                assets at September 30, 2006 increased by 3.18% to $176,509,000 as
                compared to $171,067,000 as of December 31, 2005.





·
            Net
                loans outstanding increased by 4.13% from $144,609,000 as of December
                31,
                2005 to $150,583,000 as of September 30,
                2006.





·
            Nonperforming
                loans at September 30, 2006 totaled $1,137,000. We believe that we
                maintain an appropriate allowance for loan
                losses.





·
            Deposits
                at September 30, 2006 were $109,711,000, an increase of $88,000 or
                0.08%
                from $109,623,000 at December 31, 2005.





·
            SFSB,
                Inc. realized net losses of $142,000 and $50,000 for the three-month
                and
                nine-month periods ended September 30, 2006. This compares to net
                income
                of $21,000 and $211,000 for the three-month and nine-month periods
                ended
                September 30, 2005.





·
            Net
                interest income, our main source of income, was $888,000 and $2,828,000
                during the three-month and nine-month periods ended September 30,
                2006
                compared to $930,000 and $2,937,000 for the same period in 2005.
                This
                represents a decrease of 4.52% and 3.71% for the three months and
                nine
                months ended September 30, 2006 as compared to the same period in
                2005.





·
            We
                had no loan charge-offs during the nine-month period ending September
                30,
                2006. We had an automobile loan charge-off of $2,000 during the nine-month
                period ending September 30, 2005.





·
            Non-interest
                income decreased by $18,000, or 25.00%, for the three-month period
                ended
                September 30, 2006, as compared to the three-month period ended September
                30, 2005. Non-interest income increased by $3,000, or 1.74%, for
                the
                nine-month period ended September 30, 2006, as compared to the nine-month
                period ended September 30, 2005. The decrease between the three-month
                periods is the result of receiving an additional $18,000 in connection
                with the sale of our ground rents, which occurred in June 2004. The
                additional proceeds, received in the third quarter of 2005, are due
                to a
                purchase price adjustment on the
                sale.





·
            Non-interest
                expenses decreased by $86,000, or 9.01%, for the three-month period
                ended
                September 30, 2006, as compared to the three-month period ended September
                30, 2005. Non-interest expenses increased by $11,000, or 0.40%, for
                the
                nine-month period ended September 30, 2006, as compared to the nine-month
                period ended September 30, 2005. The decrease between the three-month
                periods is the result of no longer carrying the occupancy expenses
                associated with the Edgewood branch and lower legal fees associated
                with
                operating as a public company compared to our first year as a public
                company in 2005.




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


-12-




**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 Nine Months Ended September 30, 2006 and 2005 -Provision for Loan
      Losses and Analysis of Allowance for Loan Losses.”





**Results
      of Operations for the Three and Nine Months Ended September 30, 2006 and
      2005**





*General* .
      Net
      income decreased $163,000 to a net loss of $142,000 for the three months ended
      September 30, 2006 compared to net income of $21,000 for the same period in
      the
      prior year. The decrease was due primarily to a $445,000 increase in interest
      expense and a $290,000 increase in provision for loan losses, offset by a
      $403,000 increase in interest income and an $86,000 decrease in non-interest
      expenses.





Net
      income decreased $261,000, to a net loss of $50,000 for the nine months ended
      September 30, 2006 compared to net income of $211,000 for the same period in
      the
      prior year. The decrease was due primarily to a $1,259,000 increase in interest
      expense and a $296,000 increase in provision for loan losses, offset by a
      $1,150,000 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.


-13-


**Three
                Months Ended**
              **September
                30, 2006**
            
            **Three********Months
                Ended**
              **September
                30, 2005****Average**
              **Outstanding**
              **Balance**
            
            **Interest**
              **Earned/**
              **Paid**
            
            **Yield/**
              **Rate**
            
            **Average**
              **Outstanding**
              **Balance**
            
            **Interest**
              **Earned/**
              **Paid**
            
            **Yield/**
              **Rate**(Dollars
                in thousands)
            
            (Dollars
                in thousands)Interest-earning
                assets:Loans
                receivable(1)
            
            $
            149,409
            
            $
            2,080
            
            
            5.57
            %
            $
            132,238
            
            $
            1,711
            
            
            5.18
            %Mortgage-backed
                securities
            
            
            3,584
            
            
            39
            
            
            4.35
            
            
            5,313
            
            
            48
            
            
            3.61Investment
                securities(available for sale)
            
            
            8,389
            
            
            103
            
            
            4.91
            
            
            8,070
            
            
            74
            
            
            3.67Investment
                securities(held to maturity)
            
            
            4,000
            
            
            37
            
            
            3.70
            
            
            3,998
            
            
            38
            
            
            3.80Other
                interest-earning assets
            
            
            2,580
            
            
            45
            
            
            6.98
            
            
            2,827
            
            
            30
            
            
            4.24Total
                interest-earning assets
            
            
            167,962
            
            
            2,304
            
            
            5.49
            %
            
            152,446
            
            
            1,901
            
            
            4.99
            %Non-interest
                earning assets
            
            
            7,069
            
            
            
            
            
            
            
            
            7,290Total
                assets
            
            $
            175,031
            
            
            
            
            
            
            
            $
            159,736Interest-bearing
                liabilities:Savings
                deposits
            
            $
            20,314
            
            $
            63
            
            
            1.24
            %
            $
            32,481
            
            $
            108
            
            
            1.33
            %Demand
                and NOW accounts
            
            
            4,849
            
            
            16
            
            
            1.32
            
            
            2,274
            
            
            3
            
            
            0.53Certificates
                of deposit
            
            
            82,892
            
            
            919
            
            
            4.43
            
            
            74,323
            
            
            672
            
            
            3.62Escrows
            
            
            7
            
            
            —
            
            
            —
            
            
            11
            
            
            —
            
            
            —Borrowings
            
            
            40,666
            
            
            418
            
            
            4.11
            
            
            24,833
            
            
            188
            
            
            3.03Total
                interest-bearing liabilities
            
            
            148,728
            
            
            1,416
            
            
            3.81
            %
            
            133,922
            
            
            971
            
            
            2.90
            %Non-interest
                bearing liabilities
            
            
            3,729
            
            
            
            
            
            
            
            
            2,986Total
                liabilities
            
            
            152,457
            
            
            
            
            
            
            
            
            136,908Total
                equity(2)
            
            
            22,574
            
            
            
            
            
            
            
            
            22,828Total
                liabilities and equity
            
            $
            175,031
            
            
            
            
            
            
            
            $
            159,736Net
                interest income
            
            
            
            
            $
            888
            
            
            
            
            
            
            
            $
            930Interest
                rate spread(3)
            
            
            
            
            
            
            
            
            1.68
            %
            
            
            
            
            
            
            
            2.09
            %Net
                interest-earning assets
            
            $
            19,234
            
            
            
            
            
            
            
            $
            18,524Net
                interest margin(4)
            
            
            
            
            
            
            
            
            2.11
            %
            
            
            
            
            
            
            
            2.44
            %Ratio
                of interest earning assets to interest bearing liabilities
            
            
            
            
            
            1.12x
            
            
            
            
            
            
            
            
            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.


-14-




**Nine
                Months Ended**
              **September
                30, 2006**
            
            **Nine
                Months Ended**
              **September
                30, 2005****Average**
              **Outstanding**
              **Balance**
            
            **Interest**
              **Earned/**
              **Paid**
            
            **Yield/**
              **Rate**
            
            **Average**
              **Outstanding**
              **Balance**
            
            **Interest**
              **Earned/**
              **Paid**
            
            **Yield/**
              **Rate**(Dollars
                in thousands)
            
            (Dollars
                in thousands)Interest-earning
                assets:Loans
                receivable(1)
            
            $
            146,795
            
            $
            6,080
            
            
            5.52
            %
            $
            124,702
            
            $
            4,959
            
            
            5.30
            %Mortgage-backed
                securities
            
            
            3,934
            
            
            122
            
            
            4.13
            
            
            5,989
            
            
            159
            
            
            3.54Investment
                securities(available for sale)
            
            
            8,286
            
            
            281
            
            
            4.52
            
            
            8,037
            
            
            199
            
            
            3.30Investment
                securities(held to maturity)
            
            
            4,000
            
            
            114
            
            
            3.80
            
            
            3,997
            
            
            114
            
            
            3.80Other
                interest-earning assets
            
            
            3,790
            
            
            159
            
            
            5.59
            
            
            7,180
            
            
            175
            
            
            3.25Total
                interest-earning assets
            
            
            166,805
            
            
            6,756
            
            
            5.40
            %
            
            149,905
            
            
            5,606
            
            
            4.99
            %Non-interest
                earning assets
            
            
            7,065
            
            
            
            
            
            
            
            
            7,246Total
                assets
            
            $
            173,870
            
            
            
            
            
            
            
            $
            157,151Interest-bearing
                liabilities:Savings
                deposits
            
            $
            24,645
            
            $
            236
            
            
            1.28
            %
            $
            34,865
            
            $
            337
            
            
            1.29
            %Demand
                and NOW accounts
            
            
            3,441
            
            
            24
            
            
            0.93
            
            
            2,282
            
            
            10
            
            
            0.57Certificates
                of deposit
            
            
            80,981
            
            
            2,511
            
            
            4.13
            
            
            70,586
            
            
            1,818
            
            
            3.43Escrows
            
            
            12
            
            
            —
            
            
            —
            
            
            16
            
            
            —
            
            
            —Borrowings
            
            
            38,889
            
            
            1,157
            
            
            3.97
            
            
            23,722
            
            
            504
            
            
            2.83Total
                interest-bearing liabilities
            
            
            147,968
            
            $
            3,928
            
            
            3.54
            %
            
            131,471
            
            
            2,669
            
            
            2.71
            %Non-interest
                bearing liabilities
            
            
            3,324
            
            
            
            
            
            
            
            
            2,925Total
                liabilities
            
            
            151,292
            
            
            
            
            
            
            
            
            134,396Total
                equity(2)
            
            
            22,578
            
            
            
            
            
            
            
            
            22,755Total
                liabilities and equity
            
            $
            173,870
            
            
            
            
            
            
            
            $
            157,151Net
                interest income
            
            
            
            
            $
            2,828
            
            
            
            
            
            
            
            $
            2,937Interest
                rate spread(3)
            
            
            
            
            
            
            
            
            1.86
            %
            
            
            
            
            
            
            
            2.28
            %Net
                interest-earning assets
            
            $
            18,837
            
            
            
            
            
            
            
            $
            18,434Net
                interest margin(4)
            
            
            
            
            
            
            
            
            2.26
            %
            
            
            
            
            
            
            
            2.61
            %Ratio
                of interest earning assets to interest bearing liabilities
            
            
            
            
            
            1.12x
            
            
            
            
            
            
            
            
            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 September 30, 2006 compared to three months ended September 30,
      2005 .





Net
      interest income decreased $42,000, or 4.52%, to $888,000 for the three months
      ended September 30, 2006 from $930,000 for the three months ended September
      30,
      2005. The decrease was due primarily to a $14,806,000, or 11.06%, increase
      in
      average interest bearing liabilities from $133,922,000 to $148,728,000,
      partially offset by an increase of $15,516,000, or 10.18%, in average interest
      earning assets to $167,962,000 from $152,446,000. The decrease was also a result
      of a 91 basis point increase in the cost of average interest bearing
      liabilities, from 2.90% to 3.81%, while the yield on average interest earning
      assets increased 50 basis points from 4.99% to 5.49%.  -15-


Our
      interest rate spread decreased to 1.68% for the quarter ended September 30,
      2006
      from 2.09% for the quarter ended September 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 2.11% from 2.44%, 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
      September 30, 2006 and 1.14 times for the same period in 2005.





Nine
      months ended September 30, 2006 compared to nine months ended September 30,
      2005 .





Net
      interest income decreased $109,000, or 3.71%, to $2,828,000 for the nine months
      ended September 30, 2006 from $2,937,000 for the nine months ended September
      30,
      2005.





The
      decrease was due primarily to a $16,497,000, or 12.55%, increase in average
      interest bearing liabilities to $147,968,000 from $131,471,000, offset by an
      increase of $16,900,000, or 11.27%, in average interest earning assets from
      $149,905,000 to $166,805,000. The decrease was also a result of an 83 basis
      point increase in the cost of average interest bearing liabilities, from 2.71%
      to 3.54%, while the yield on average interest earning assets increased 41 basis
      points from 4.99% to 5.40%.





Our
      interest rate spread decreased to 1.86% from 2.28%, 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 2.26% from 2.61%, 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 nine months
      ended September 30, 2006 from 1.14 times for 2005.





*Interest
      Income* .





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





Interest
      income increased by $403,000, or 21.20%, to $2,304,000 for the three months
      ended September 30, 2006, from $1,901,000 for the three months ended September
      30, 2005. The increase in interest income resulted primarily from increases
      of
      $369,000, or 21.57%, in interest and fee income from loans, $28,000, or 25.00%,
      in interest income from investment securities and $15,000, or 50.00%, 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 $9,000, or 18.75%, in interest income from
      mortgage backed securities.





The
      increase in interest income reflects a $15,516,000, or 10.18%, increase in
      the
      average balance of interest-earning assets to $167,962,000 during the quarter
      ended September 30, 2006 from $152,446,000 during the quarter ended September
      30, 2005, and a 50 basis point increase in the yield on average interest-earning
      assets to 5.49% for the three months ended September 30, 2006 from 4.99% for
      the
      three months ended September 30, 2005, reflecting an increase in market interest
      rates.





The
      increase in interest income and fees on loans was due to a $17,171,000 or 12.98%
      increase in average net loans receivable, from $132,238,000 during the quarter
      ended September 30, 2005 to $149,409,000 during the quarter ended September
      30,
      2006, and a 39 basis point increase in the average yield on net loans
      receivable.  -16-


Nine
      months ended September 30, 2006 compared to nine months ended September 30,
      2005 .





Interest
      income increased by $1,150,000, or 20.51%, to $6,756,000 for the nine months
      ended September 30, 2006, from $5,606,000 for the nine months ended September
      30, 2005. The increase in interest income resulted primarily from an increase
      of
      $1,121,000, or 22.61%, in interest and fee income from loans and $82,000, or
      26.20%, in interest income from investment securities, partially offset by
      decreases of $37,000, or 23.27%, in interest income from mortgage backed
      securities and $16,000, or 9.14%, 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 $16,900,000, or 11.27%, increase in
      the
      average balance of interest-earning assets to $166,805,000 from $149,905,000,
      and a 41 basis point increase in the yield on average interest-earning assets
      to
      5.40% for the nine months ended September 30, 2006 from 4.99% for the nine
      months ended September 30, 2005, reflecting an increase in market interest
      rates.





The
      increase in interest income and fees on loans was due to a $22,093,000, or
      17.72% increase in average net loans receivable, from $124,702,000 to
      $146,795,000, and a 22 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 $3,390,000, or 47.21% decrease in average
      other
      interest earning assets, from $7,180,000 during the nine months ended September
      30, 2005 to $3,790,000 during the nine months ended September 30, 2006,
      partially offset by a 234 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 September 30, 2006 compared to three months ended September 30,
      2005 .





Interest
      expense, which consists of interest paid on deposits and borrowings, increased
      by $445,000, or 45.83%, to $1,416,000 for the three months ended September
      30,
      2006 from $971,000 for the three months ended September 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 borrowings
      increased to $40,666,000 during the quarter ended September 30, 2006 from
      $24,833,000 in the same quarter of 2005 and the average cost of borrowings
      increased by 108 basis points as a result of borrowing at higher interest rates,
      partially offset by a decrease in average balance of deposits to $108,055,000
      during the quarter ended September 30, 2006 from $109,078,000 during the quarter
      ended September 30, 2005. The increase was also a result of an 82 basis point
      increase in the average cost of deposits due to a rising interest rate market.





Nine
      months ended September 30, 2006 compared to nine months ended September 30,
      2005 .





Interest
      expense increased by $1,259,000, or 47.17%, to $3,928,000 for the nine months
      ended September 30, 2006 from $2,669,000 for the nine months ended September
      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 $109,067,000 from $107,733,000 and the average cost of
      deposits increased by 71 basis points as a result of increased market interest
      rates. The average balance of borrowings increased to $38,889,000 during the
      nine ended September 30, 2006 from $23,722,000 in the same period of 2005 and
      the average cost of borrowings increased by 114 basis points as a result of
      borrowings at higher interest rates.  -17-




*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, and as discussed further below, management
      made
      a provision of $302,000 and $12,000 for the three months ended September 30,
      2006 and September 30, 2005, and a provision of $340,000 and $44,000 for the
      nine months ended September 30, 2006 and September 30, 2005, respectively.
      There
      were no loan charge-offs during the three and nine-month periods ended September
      30, 2006. Although, as discussed below under “General Valuation Allowance on the
      Remainder of the Loan Portfolio,” we placed 100% of the loan balances of two
      commercial non-real estate loans into the allowance for loan loss reserve,
      these
      loans were not charged-off during the period ended September 30, 2006 because
      the final disposition of this matter is still pending a resolution of the
      bankruptcy proceedings and both loans have been paid as agreed as of September
      30, 2006. We had an automobile loan charge-off of $2,000 during the three and
      nine-month periods ended September 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.




-18-




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





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





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 $814,000 or 0.54% of gross loans outstanding
      of $151,575,000 at September 30, 2006, an increase of $354,000, or 76.96%,
      as
      compared to an allowance for loan losses of $460,000 or 0.33% of gross loans
      outstanding of $138,918,000 at September 30, 2005. The increase to the loan
      loss
      reserve is due to the increase of our loans receivable balance and the addition
      of $273,000, or 100% of the loan balances of two commercial non-real estate
      loans that are in default. As of September 30, 2006, pursuant to regulatory
      requirements, we made the additional provision of $273,000 to the allowance
      for
      loan losses because we believe there is a substantial likelihood that we will
      collect only a minimal amount of the outstanding principal balance on these
      loans. In mid-July 2006, a corporate commercial loan borrower informed the
      Bank
      that it was contemplating ceasing business operations, which it did as of July
      31, 2006. The principal of this company also borrowed additional funds from
      the
      Bank directly. Both of these loans were cross-guaranteed, cross-defaulted and
      cross-collateralized. Once the company ceased operations, the borrower and
      guarantor were in non-financial default on these loans, even though the loans
      were current as of that date and as of September 30, 2006. On September 11,
      2006, the Bank gave written notice to the borrower and the guarantor that they
      had defaulted on their loan agreements. Subsequently, the company filed for
      Chapter 7 bankruptcy on September 26, 2006. Final disposition of this matter
      is
      still pending as of the date of this report.


-19-




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





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**(Dollars
                in Thousands)Balance
                at beginning of period
            
            $
            512
            
            $
            447
            
            $
            474
            
            $
            413Charge-offs
            
            
            0
            
            
            (2
            )
            
            0
            
            
            (2
            )Recoveries
            
            
            0
            
            
            3
            
            
            0
            
            
            5Net
                Recoveries
            
            
            0
            
            
            1
            
            
            0
            
            
            3Provision
                for loan losses
            
            
            302
            
            
            12
            
            
            340
            
            
            44Ending
                balance
            
            $
            814
            
            $
            460
            
            $
            814
            
            $
            460Ratio
                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
            
            
            0.54
            %
            
            0.33
            %
            
            0.54
            %
            
            0.33
            %Allowance
                for loan losses as a percent of total non-performing loans
            
            
            71.59
            %
            
            32.63
            %
            
            71.59
            %
            
            32.63
            %




*Other
      Income* .





Three
      months ended September 30, 2006 compared to three months ended September 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
      decreased $18,000, or 25.00%, to $54,000 for the three months ended September
      30, 2006, as compared to $72,000 for the three months ended September 30, 2005.
      The reason for the decrease in non-interest income is an $18,000, or 48.65%,
      decrease in other income, which is the result of our receiving an additional
      $18,000 in the third quarter of 2005 in connection with the sale of our ground
      rents in June 2004. The additional proceeds received in the 2005 period are
      due
      to a purchase price adjustment on the sale. Rental income from our headquarters
      building remained the same. While we have experienced the loss of several small
      tenants, rental income has remained constant due to increases in rental rates
      provided for in the applicable lease agreements of the remaining tenants. As
      of
      September 30, 2006, we leased 89.07% of the total leaseable space in our
      headquarters building. We are actively seeking tenants for the remaining
      space.





Nine
      months ended September 30, 2006 compared to nine months ended September 30,
      2005 .





Non-interest
      income increased $3,000, or 1.74%, to $175,000 for the nine months ended
      September 30, 2006, as compared to $172,000 for the nine months ended September
      30, 2005. The reason for the increase in non-interest income is a $14,000,
      or
      14.00%, increase in rental income from our headquarters building to $114,000
      for
      the nine months ended September 30, 2006 compared to $100,000 for the nine
      months ended September 30, 2005 and a $7,000 increase in gain on sale of loans
      to $8,000 for the nine months ended September 30, 2006 compared to $1,000 for
      the nine months ended September 30, 2005, offset by an $18,000 decrease in
      other
      income due to the additional $18,000 received during the 2005 period in
      connection with the adjustment to the purchase price of the sale of our ground
      rents in 2004, as discussed above.


-20-




*Non-interest
      Expense* .





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





Non-interest
      expense was $868,000 for the three months ended September 30, 2006 as compared
      to $954,000 for the three months ended September 30, 2005, a decrease of
      $86,000, or 9.01%. The decrease was due  primarily
      to a $65,000, or 29.55%, decrease in other expenses. The decrease in other
      expenses reflects, among other items, a reduction in legal costs associated
      with
      our first year as a public company in 2005. A decrease in occupancy expenses
      of
      a $21,000, or 18.26%, also attributed to the decrease in non-interest expense
      and is the result of no longer carrying the costs associated with the operation
      of the Edgewood branch, which we closed on February 24, 2006.





Nine
      months ended September 30, 2006 compared to nine months ended September 30,
      2005 .





Non-interest
      expense was $2,733,000 for the nine months ended September 30, 2006, as compared
      to $2,722,000 for the nine months ended September 30, 2005, an increase of
      $11,000  or
      0.40%.
      The increase was due  primarily
      to increases of $81,000, or 6.21%, in compensation and related expenses and
      $66,000, or 20.63%, in occupancy expenses, partially offset by decreases of
      $103,000, or 17.14%, in other expenses and $26,000, or 17.93%, in advertising
      expenses. The increase in compensation and related expenses reflects, among
      other items, the hiring of a business development officer in October 2005.
      The
      increase in occupancy expenses is due to the acceleration of depreciation on
      the
      leasehold improvements of our Edgewood branch.





*Income
      Tax Expense* .





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





The
      benefit for income taxes was $86,000 for the three months ended September 30,
      2006 from a provision for income tax of $15,000 for the three months ended
      September 30, 2005, representing a $101,000, or 673.33%, decrease. The benefit
      for income taxes was due to our loss before taxes. The effective tax rate was
      37.72%  and
      41.67% for September 30, 2006 and September 30, 2005, respectively.





Nine
      months ended September 30, 2006 compared to nine months ended September 30,
      2005 .





The
      benefit for income taxes was $50,000 for the nine months ended September 30,
      2006 from a provision for income tax of $211,000 for the nine months ended
      September 30, 2005, representing a $261,000, or 123.70%, decrease. The benefit
      for income taxes was due to our loss before taxes. The effective tax rate was
      28.57% and 38.48% for September 30, 2006 and September 30, 2005,
      respectively.


-21-




**Analysis
      of Financial Condition**





*Assets.*





General .





Our
      total
      assets increased by $5,442,000 or 3.18%, to $176,509,000 at September 30, 2006,
      from $171,067,000 at December 31, 2005. The increase in total assets resulted
      primarily from a $5,974,000, or 4.13% increase in net loans receivable, from
      $144,609,000  at
      December 31, 2005  to
      $150,583,000 at September 30, 2006, a $282,000,  or
      3.46%,
      increase in investment securities available for sale, from $8,153,000 at
      December 31, 2005 to $8,435,000 at September 30, 2006 and an increase in Federal
      Home Loan Bank stock of $278,000, or 14.22%, to $2,233,000 at September 30,
      2006
      from $1,955,000 at December 31, 2005. These increases were offset by a
      $1,046,000,  or
      23.12%
      decrease in mortgage backed securities held to maturity, from $4,525,000 at
      December 31, 2005 to $3,479,000 at September 30, 2006.





Investment
      Securities .





The
      investment portfolio at September 30, 2006 amounted to $15,914,000, a decrease
      of $762,000, or 4.57%,  from
      $16,676,000 at December 31, 2005. Investment securities - available for sale,
      increased $282,000, or 3.46%, to $8,435,000 at September 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
      $1,046,000, or 23.12%, to $3,479,000 at September 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 $204,000 at September 30, 2006 (reflected as accumulated other comprehensive
      loss of $125,000 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 $5,974,000, or 4.13%, to $150,583,000 at September
      30, 2006 from $144,609,000 at December 31, 2005. The commercial loan portfolio
      increased $1,808,000, or 19.58%, to $11,042,000 at September 30, 2006 from
      $9,234,000 at December 31, 2005. One-to-four family residential loans decreased
      $515,000, or 0.38% to $134,290,000 at September 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.





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.


-22-




Loans
      classified as non accrual and the associated unrecorded interest is as
      follows:





**September
                30,**
            
            **December
                31,****2006**
            
            **2005**
            
            **2005**(Dollars
                in thousands)Non
                accrual loans
            
            $
            1,137,000
            
            $
            1,246,000
            
            $
            1,245,000Unrecorded
                interest on non accrual loans
            
            $
            89,000
            
            $
            56,000
            
            $
            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.





Progress
      on resolving the road access and storm water management issue slowed in mid-late
      August 2006 due to a revision of the criteria for their resolution by the
      controlling municipality.  These new criteria have thus far been
      unacceptable to the national home builder.  In addition, the preliminary
      site plan for the property is due to expire on November 21, 2006, and the
      special zoning exception granted for the age restricted portion (165
      condominiums) of the project has already expired.  The controlling
      municipality has denied an extension for the preliminary site plan, and is
      unlikely to renew the special zoning exception.





With
      negotiations between the national homebuilder and the borrower stalled, and
      considering the site plan and zoning issues, participating lenders instructed
      their counsel to docket the collateral property for foreclosure.  This was
      done on September 13, 2006. In addition, the principal of the borrower filed
      for
      personal (Chapter 11) bankruptcy on September 26, 2006 and a meeting of
      creditors was held on November 8, 2006. Later that same day, the entity that
      owns the collateral property filed for Chapter 11 bankruptcy,
      which caused the cancellation of the foreclosure auction that had been scheduled
      for November 9, 2006.




-23-




As
      of the
      date of this filing, this participation loan continues to be on non accrual
      status.  Due to the developments during the last quarter, there is reason
      to question the viability of the project as conceived by the borrower.  We
      believe our collateral position is adequate and that we will recover all
      principal on this loan, although there can be no assurance that this will be
      the
      case.  Resolution of this matter will extend into 2007.





Of
      the
      non-accrual loans, $1,080,000 consisted of the commercial land acquisition
      and
      development participation loan discussed above and $57,000 consisted of a
      one-to-four residential mortgage loan at September 30, 2006.





Non-accrual
      loans totaled 0.76%  and
      0.91%
      of net loans receivable at September 30, 2006 and September 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 September 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
      September 30, 2006, in addition to the non-accrual acquisition and development
      loan described above, we have classified two commercial non-real estate loans
      as
      impaired. In mid-July 2006, a corporate commercial loan borrower informed the
      Bank that it was contemplating ceasing business operations, which it did as
      of
      July 31, 2006. The principal of this company also borrowed additional funds
      from
      the Bank directly. Both of these loans were cross-guaranteed, cross-defaulted
      and cross-collateralized. Once the company ceased operations, the borrower
      and
      guarantor were in non-financial default on these loans, even though the loans
      were current as of that date and as of September 30, 2006. On September 11,
      2006, the Bank gave written notice to the borrower and the guarantor that they
      had defaulted on their loan agreements. Subsequently, the company filed for
      Chapter 7 bankruptcy on September 26, 2006. Final disposition of this matter
      is
      still pending as of the date of this report.





As
      of
      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 September 30, 2006 about which
      management has serious doubts concerning the ability of the borrowers to comply
      with the present loan repayment terms.


-24-




*Liabilities.*





General .





Total
      liabilities increased by $5,740,000, or 3.87%, to $154,002,000 at September
      30,
      2006, from $148,262,000 at December 31, 2005. The increase in total liabilities
      resulted from a $6,000,000, or 16.67% increase in borrowings, from $36,000,000
      at December 31, 2005 to $42,000,000 at September 30, 2006, a $485,000, or
      130.38% increase in advance payments by borrowers for taxes and insurance,
      from
      $372,000 at December 31, 2005 to $857,000 at September 30, 2006, and an $88,000,
      or 0.08% increase in deposits, from $109,623,000 at December 31, 2005 to
      $109,711,000 at September 30, 2006. These increases were offset by an $845,000,
      or 44.03%, decrease in checks outstanding in excess of bank balance, from
      $1,919,000 at December 31, 2005 to $1,074,000 at September 30, 2006. Advance
      payments by borrowers for taxes and insurance increased because of the growth
      to
      the loan portfolio. 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





Deposits .





Deposits
      increased $88,000, or 0.08%, to $109,711,000 at September 30, 2006 from
      $109,623,000 at December 31, 2005. Certificates  of
      deposits increased $6,643,000, or 8.64%, to $83,543,000 at September 30, 2006
      from $76,900,000 at December 31, 2005, and demand and NOW accounts increased
      by
      $3,707,000, or 110.10%, to $7,074,000 at September 30, 2006 from $3,367,000
      at
      December 31, 2005. Savings and money market deposits decreased $10,257,000,
      or
      34.94%, to $19,099,000 at September 30, 2006, from $29,356,000 at December
      31,
      2005. We believe that, in the current interest rate environment, 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
      September 30, 2006, we were permitted to borrow up to $52,953,000 from the
      Federal Home Loan Bank of Atlanta. We had $42,000,000 and $36,000,000 of Federal
      Home Loan Bank advances as of September 30, 2006 and December 31, 2005,
      respectively, and we averaged  $38,889,000
      and $26,500,000 of Federal Home Loan Bank advances during the nine months ended
      September 30, 2006 and the year ended December 31, 2005, respectively. The
      increase in borrowings reflects a new $6,000,000 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 nine months of 2006. We have relied on borrowing to
      a
      significant extent since the third quarter of 2003 to  fund
      loan
      growth.


-25-




**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 September 30, 2006, cash and cash equivalents totaled $1,389,000.
      Securities classified as available-for-sale, which can provide additional
      sources of liquidity, totaled $8,435,000 at September 30, 2006. However, because
      all of these securities were in an unrealized loss position at September 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 September 30, 2006.  Also,
      at
      September 30, 2006, we had advances outstanding of $42,000,000 from the Federal
      Home Loan Bank of Atlanta. On that date, we had the ability to borrow an
      additional $10,953,000.





At
      September 30, 2006, we had outstanding commitments to originate loans of
      $2,022,000 (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 $5,404,000 at September 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.





Certificate
      of deposit accounts scheduled to mature within one year totaled $46,683,000
      or  42.55%
      of
      total deposits at September 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
      September 30, 2006. We believe, however, based on past experience, that a
      significant portion of our certificates of deposit will remain with us. We
      also
      believe we have the ability to attract and retain deposits by adjusting the
      interest rates we offer.





Our
      borrowings are with the Federal Home Loan Bank of Atlanta and are secured by
      Federal Home Loan Bank of Atlanta stock that we own and a blanket lien on
      mortgages. Borrowings at September 30, 2006 consisted of  $10,500,000  in
      short
      term fixed rate advances with a fixed rates ranging from 5.30% to 5.36%, a
      $5,000,000 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 the initial borrowing periods
      ranging from one to five years.


-26-




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 21-24 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 $298,000, or 1.31%, to $22,507,000 at September
      30, 2006 from $22,805,000 at December 31, 2005 as a result of the purchase
      of
      $422,000 in additional Treasury stock and a net loss of $50,000. The net loss
      is
      primarily due to the acceleration of depreciation on the leasehold improvements
      in connection with the closing of the Edgewood branch and the increase in the
      provision for loan losses due to the expected default of two commercial non-real
      estate loans. We are considered “well capitalized” under the risk-based capital
      guidelines applicable to us.





***Off-balance
      Sheet Arrangements***





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





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





**Financial
                Instruments Whose****Contract
                Amount Represents**
            
            **Contract
                Amount At****Credit
                Risk**
            
            **September
                30, 2006**
            
            **December
                31, 2005**(Dollars
                in thousands)Lines
                of credit - commercial
            
            $
            500
            
            $
            1,018Lines
                of credit - home equity
            
            
            5,404
            
            
            5,073Lines
                of credit - overdraft checking
            
            
            111
            
            
            95Mortgage
                loan commitments
            
            
            2,022
            
            
            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.


-27-




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
      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 5.63%
      to 9.00% and 5.00% to 6.00% at September 30, 2006 and December 31, 2005,
      respectively. Loan commitments expire 60 days from the date of the
      commitment.





For
      the
      nine months ended September 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.





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.


-28-




**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 September 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 September 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.


-29-




**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.




None.





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(a) Certification of Chief Executive Officer and Chief Financial
                Officer




-30-




**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:
                November 9, 2006
            
            By:
            /s/
                Philip E. LoganPhilip
                E. Logan, President(Principal
                Executive Officer)Date:
                November 9, 2006
            
            By:
            /s/
                Sophie T. WittelsbergerSophie
                Torin Wittelsberger, Chief Financial Officer(Principal
                Accounting and Financial Officer)




-31-