UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-Q





(Mark
                One)x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934
              For
                the quarterly period ended September 30, 2008o
            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 registrant as specified in its charter)





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





1614
      Churchville Road, Bel Air, Maryland 21015


(Address
      of principal executive offices) (Zip Code)





(443)
      265-5570


(Registrant’s
      telephone number, including area code)





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





Yes
                x 
No
                o




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





Large
      accelerated filer o     Accelerated
      filer o





Non-accelerated
      filer o (Do
      not check if a smaller reporting company)  Smaller
      reporting company þ





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





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





As
      of
      November 10, 2008, there were 2,754,092 shares of the issuer’s Common Stock, par
      value $0.01 per share, outstanding.










**TABLE
      OF CONTENTS**


**Page****Item**
              **Description****PART
                  I**1
              Financial
                  Statements (Unaudited)Consolidated
                  Statements of Financial Condition
              
              3Consolidated
                  Statements of Operations
              
              4Consolidated
                  Statements of Comprehensive Income (Loss)
              
              5Consolidated
                  Statements of Cash Flows
              
              6Notes
                  to Consolidated Financial Statements
              
              7-122
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              123
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              344
              Controls
                  and Procedures
              
              34**PART
                  II**1
              Legal
                  Proceedings
              
              352
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              
              363
              Defaults
                  Upon Senior Securities
              
              364
              Submission
                  of Matters to a Vote of Securities Holders
              
              365
              Other
                  Information
              
              376
              Exhibit
                  Index
              
              37Signatures
              
              38Exhibits
              
              39




2


**PART
        I - FINANCIAL INFORMATION**
 Item
        1. Financial Statements
 **SFSB,
        Inc.**
 **CONSOLIDATED
        STATEMENTS OF FINANCIAL CONDITION**


**September
                  30, 2008**
              
              **December
                  31, 2007**(Dollars
                  in thousands, except share data)**ASSETS**Cash
                  and due from banks
              
              $
              1,299
              
              $
              612Federal
                  funds sold
              
              
              855
              
              
              665Cash
                  and cash equivalents
              
              
              2,154
              
              
              1,277Investment
                  securities - available for sale
              
              
              7,808
              
              
              8,942Investment
                  securities - held to maturity (fair value of 2008 $-; 2007
                  $2,987)
              
              
              —
              
              
              3,000Mortgage
                  backed securities - held to maturity (fair value of 2008 $1,695;
                  2007
                  $2,221)
              
              
              1,702
              
              
              2,247Loans
                  receivable - net of allowance for loan losses of 2008 $1,100; 2007
                  $972
              
              
              155,309
              
              
              147,744Foreclosed
                  Real Estate
              
              
              1,096
              
              
              1,083Federal
                  Home Loan Bank of Atlanta stock, at cost
              
              
              1,706
              
              
              1,844Premises
                  and equipment, net
              
              
              5,023
              
              
              5,107Accrued
                  interest receivable
              
              
              636
              
              
              564Other
                  assets
              
              
              421
              
              
              436**Total
                  assets**
              
              $
              175,855
              
              $
              172,244**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY****Liabilities**Deposits
              
              $
              123,819
              
              $
              114,098Checks
                  outstanding in excess of bank balance
              
              
              247
              
              
              1,077Borrowings
              
              
              30,500
              
              
              34,000Advance
                  payments by borrowers for taxes and insurance
              
              
              662
              
              
              339Other
                  liabilities
              
              
              465
              
              
              961**Total
                  liabilities**
              
              
              155,693
              
              
              150,475**Stockholders’
                  Equity**Preferred
                  stock, no par value, 1,000,000 shares authorized, none issued and
                  outstanding
              
              
              —
              
              
              —Common
                  stock, par value $0.01, 9,000,000 shares authorized, 2,975,625
                  shares
                  issued at September 30, 2008 and December 31, 2007 and 2,754,092
                  and
                  2,817,644 shares outstanding at September 30, 2008 and December
                  31, 2007,
                  respectively
              
              
              30
              
              
              30Additional
                  paid-in capital
              
              
              12,839
              
              
              12,828Retained
                  earnings (substantially restricted)
              
              
              10,106
              
              
              11,496Unearned
                  Employee Stock Ownership Plan shares
              
              
              (948
              )
              
              (992
              )Treasury
                  Stock at cost, September 30, 2008, 221,533 shares and December
                  31, 2007,
                  157,981 shares
              
              
              (1,865
              )
              
              (1,434
              )Accumulated
                  other comprehensive loss
              
              
              —
              
              
              (159
              )**Total
                  stockholders’ equity**
              
              
              20,162
              
              
              21,769**Total
                  liabilities and stockholders’ equity**
              
              $
              175,855
              
              $
              172,244


See
        notes
        to consolidated financial statements.
  3
 **SFSB,
          Inc.**
 **CONSOLIDATED
          STATEMENTS OF OPERATIONS**
  **Three
                    Months Ended**
                
                ******Nine
                    Months Ended****September
                    30,**
                
                **September
                    30**,**2008**
                
                ******2007**
                
                ******2008******
                
                **2007**(Dollars
                    in thousands, except for per share data)Interest
                    and fees on loans
                
                $
                2,338
                
                $
                2,130
                
                $
                6,863
                
                $
                6,228Interest
                    and dividends on investment securities
                
                
                92
                
                
                149
                
                
                329
                
                
                446Interest
                    on mortgage backed securities
                
                
                18
                
                
                29
                
                
                63
                
                
                94Other
                    interest income
                
                
                18
                
                
                59
                
                
                92
                
                
                224**Total
                    interest income**
                
                
                2,466
                
                
                2,367
                
                
                7,347
                
                
                6,992Interest
                    on deposits
                
                
                1,115
                
                
                1,201
                
                
                3,433
                
                
                3,464Interest
                    on short-term borrowings
                
                
                21
                
                
                78
                
                
                121
                
                
                335Interest
                    on long-term borrowings
                
                
                271
                
                
                271
                
                
                807
                
                
                795**Total
                    interest expense**
                
                
                1,407
                
                
                1,550
                
                
                4,361
                
                
                4,594**Net
                    interest income**
                
                
                1,059
                
                
                817
                
                
                2,986
                
                
                2,398Provision
                    for loan losses
                
                
                56
                
                
                26
                
                
                130
                
                
                208**Net
                    interest income after provision for loan****losses**
                
                
                1,003
                
                
                791
                
                
                2,856
                
                
                2,190**Other
                    (Loss) Income**Loss
                    on investments
                
                
                (1,678
                )
                
                —
                
                
                (1,678
                )
                
                —Rental
                    income
                
                
                38
                
                
                41
                
                
                144
                
                
                121Other
                    income
                
                
                79
                
                
                46
                
                
                179
                
                
                99Gain
                    on sale of loans
                
                
                7
                
                
                18
                
                
                14
                
                
                57**Total
                    other (loss) income**
                
                
                (1,554
                )
                
                105
                
                
                (1,341
                )
                
                277**Non-Interest
                    Expenses**Compensation
                    and other related expenses
                
                
                493
                
                
                455
                
                
                1,461
                
                
                1,315Occupancy
                    expense
                
                
                100
                
                
                93
                
                
                292
                
                
                278Advertising
                    expense
                
                
                61
                
                
                39
                
                
                163
                
                
                147Service
                    bureau expense
                
                
                59
                
                
                41
                
                
                148
                
                
                124Furniture,
                    fixtures and equipment
                
                
                37
                
                
                33
                
                
                98
                
                
                98Telephone,
                    postage and delivery
                
                
                23
                
                
                22
                
                
                66
                
                
                60Other
                    expenses
                
                
                175
                
                
                165
                
                
                470
                
                
                460**Total
                    non-interest expenses**
                
                
                948
                
                
                848
                
                
                2,698
                
                
                2,482**(Loss)
                    Income before income tax provision**
                
                
                (1,499
                )
                
                48
                
                
                (1,183
                )
                
                (15
                )Income
                    tax provision
                
                
                75
                
                
                21
                
                
                207
                
                
                6Net
                    (loss) income
                
                $
                (1,574
                )
                $
                27
                
                $
                (1,390
                )
                $
                (21
                )**Basic
                    (Loss) Earnings per Share**
                
                **$**
                **(0.59**
                **)**
                **$**
                **0.01**
                
                **$**
                **(0.51**
                **)**
                **$**
                **(0.01**
                **)****Diluted
                    (Loss) Earnings per Share**
                
                **$**
                **(0.59**
                **)**
                **$**
                **0.01**
                
                **$**
                **(0.51**
                **)**
                **$**
                **(0.01**
                **)**
 See
          notes
          to consolidated financial statements.
  4


**SFSB,
        Inc.**
 **CONSOLIDATED
        STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**


**Three****Months
                  Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2008**
              
              ******2007**
              
              **2008**
              
              **2007******(Dollars
                  in thousands)Net
                  (loss) income
              
              $
              (1,574
              )
              $
              27
              
              $
              (1,390
              )
              $
              (21
              )Net
                  unrealized loss on securities available for sale during the period
                  (net of
                  taxes of $739, $4, $1,012 and $17)
              
              
              (1,109
              )
              
              (5
              )
              
              (1,519
              )
              
              (27
              )Securities
                  impairment loss reclassification into Statement of Operations during
                  the
                  period
              
              $
              1,678
              
              
              —
              
              $
              1,678
              
              
              —Other
                  Comprehensive Income (Loss)
              
              $
              569
              
              $
              (5
              )
              $
              159
              
              $
              (27
              )Total
                  Comprehensive (Loss) Income
              
              $
              (1,005
              )
              $
              22
              
              $
              (1,231
              )
              $
              (48
              )


See
        notes
        to consolidated financial statements.




5


**SFSB,
      Inc.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**




**Nine
                    Months Ended****2008**
                
                **2007**(Dollars
                    in thousands)**Cash
                    Flows From Operating Activities**Net
                    loss
                
                $
                (1,390
                )
                $
                (21
                )Adjustments
                    to Reconcile Net Income (Loss) to Net CashProvided
                    by Operating Activities:Non-cash
                    compensation under stock-based compensation plans and Employee
                    Stock
                    Ownership Plan
                
                
                120
                
                
                129Net
                    amortization of premiums and discounts of investment
                    securities
                
                
                8Amortization
                    of deferred loan fees
                
                
                (154
                )
                
                (53
                )Provision
                    for loan losses
                
                
                130
                
                
                208Impairment
                    write-down of investment securities
                
                
                1,678
                
                
                —Gain
                    on sale of loans
                
                
                (14
                )
                
                (57
                )Loans
                    originated for sale
                
                
                (648
                )
                
                (6,871
                )Proceeds
                    from loans sold
                
                
                662
                
                
                6,928Provision
                    for depreciation
                
                
                169
                
                
                175(Increase)
                    decrease in accrued interest receivable and other assets
                
                
                (57
                )
                
                152(Decrease)
                    increase in other liabilities
                
                
                (496
                )
                
                418**Net
                    Cash Provided by Operating Activities**
                
                
                8
                
                
                1,017**Cash
                    Flows from Investing Activities**Purchase
                    of available for sale securities
                
                
                (286
                )
                
                (339
                )Proceeds
                    from redemption of held to maturity securities
                
                
                3,000
                
                
                1,000Net
                    increase in loans
                
                
                (6,147
                )
                
                (284
                )Purchase
                    of loans
                
                
                (1,507
                )
                
                —Principal
                    collected on mortgage-backed securities
                
                
                538
                
                
                717Purchase
                    of Federal Home Loan Bank of Atlanta stock
                
                
                (23
                )
                
                —Redemption
                    of Federal Home Loan Bank of Atlanta stock
                
                
                161
                
                
                277Purchases
                    of premises and equipment
                
                
                (85
                )
                
                (69
                )**Net
                    Cash (Used in) Provided by Investing Activities**
                
                
                (4,349
                )
                
                1,302**Cash
                    Flows from Financing Activities**Net
                    increase in deposits
                
                
                9,721
                
                
                2,862(Decrease)
                    increase in checks outstanding in excess of bank balance
                
                
                (830
                )
                
                1,055Proceeds
                    from long-term borrowings
                
                
                —
                
                
                10,000Repayment
                    of long-term borrowings
                
                
                —
                
                
                (10,000
                )Net
                    change in short-term borrowings
                
                
                (3,500
                )
                
                (7,500
                )Increase
                    in advance payments by borrowers for taxes and insurance
                
                
                323
                
                
                314Issuance
                    of common stock
                
                
                —
                
                
                67Purchase
                    of treasury stock
                
                
                (496
                )
                
                (427
                )**Net
                    Cash Provided by (Used in) Financing Activities**
                
                
                5,218
                
                
                (3,629
                )Increase
                    (decrease) in cash and cash equivalents
                
                
                877
                
                
                (1,310
                )Cash
                    and cash equivalents at beginning of year
                
                
                1,277
                
                
                2,851**Cash
                    and cash equivalents at end of period**
                
                $
                2,154
                
                $
                1,541**Supplemental
                    Disclosures of Cash Flows Information**:Income
                    taxes paid
                
                $
                512
                
                $
                —Interest
                    expense paid
                
                $
                4,352
                
                $
                4,589Transfer
                    of loan to foreclosed real estate
                
                $
                —
                
                $
                1,083




See
      notes
      to consolidated financial statements.


6




**SFSB,
      Inc.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS** ****





**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.





Slavie
      Bancorp, MHC, a mutual holding company whose activity is not included in the
      accompanying consolidated financial statements, owns 59.42% of the outstanding
      common stock of the Company as of September 30, 2008.





**Note
      2 - Basis of** **Presentation**





The
      accompanying 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-Q. Accordingly, they do not include all the information and footnotes
      required by GAAP for complete financial statements.





The
      foregoing consolidated financial statements in the opinion of management include
      all adjustments (consisting only of normal recurring adjustments) necessary
      for
      a fair presentation thereof. 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-K for the year ended December
      31, 2007. The results of operations for the nine months ended September 30,
      2008
      are not necessarily indicative of the results that may be expected for the
      full
      year.


7


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





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





**Three****Months
                Ended**
            
            **Nine
                Months Ended****September
                30, 2008**
            
            **September
                30, 2008****Basic**
            
            **Diluted**
            
            **Basic**
            
            **Diluted**(In
                thousands, except for per share data)Net
                loss
            
            $
            (1,574
            )
            $
            (1,574
            )
            $
            (1,390
            )
            $
            (1,390
            )Weighted
                average shares outstanding
            
            
            2,669
            
            
            2,669
            
            
            2,700
            
            
            2,700Diluted
                SecuritiesStock
                Options
            
            
            —
            
            
            —
            
            
            —
            
            
            —Unvested
                Stock Awards
            
            
            —
            
            
            —
            
            
            —
            
            
            —Adjusted
                Weighted average shares
            
            
            2,669
            
            
            2,669
            
            
            2,700
            
            
            2,700Per
                Share Amount
            
            $
            (0.59
            )
            $
            (0.59
            )
            $
            (0.51
            )
            $
            (0.51
            )




**Three****Months
                  Ended**
              
              
              **Nine
                  Months Ended****September
                  30, 2007**
              
              
              **September
                  30, 2007****Basic**
              
              
              **Diluted**
              
              
              **Basic**
              
              
              **Diluted**(In
                  thousands, except for per share data)Net
                  Income (loss)
              
              $
              27
              
              $
              27
              
              $
              (21
              )
              $
              (21
              )Weighted
                  average shares outstanding
              
              
              2,704
              
              
              2,704
              
              
              2,722
              
              
              2,722Diluted
                  SecuritiesStock
                  Options
              
              
              —
              
              
              —
              
              
              —
              
              
              —Unvested
                  Stock Awards
              
              
              —
              
              
              —
              
              
              —
              
              
              —Adjusted
                  Weighted average shares
              
              
              2,704
              
              
              2,704
              
              
              2,722
              
              
              2,722Per
                  Share Amount
              
              $
              0.01
              
              $
              0.01
              
              $
              (0.01
              )
              $
              (0.01
              )




8




**Note
      4 - Regulatory Capital Requirements**





At
      September 30, 2008, the Bank met each of the three minimum regulatory capital
      requirements. The following table summarizes the Bank’s regulatory capital
      position at September 30, 2008 and December 31, 2007.




**To
                Be Well****Capitalized
                Under****For
                Capital**
            
            
            **Prompt
                  Corrective****Actual**
            
            
            **Adequacy
                Purposes**
            
            
            **Action
                  Provision****Amount**
            
            
            **%**
            
            
            **Amount**
            
            
            **%**
            
            
            **Amount**
            
            
            **%****September
                30, 2008**
            
            
            
            
            
            
            
            
            (Dollars
                in thousands)Tangible
                (1)
            
            $
            15,590
            
            
            8.84
            %
            $
            2,646
            
            
            1.50
            %
            
            N/A
            
            
            N/ATier
                I capital (2)
            
            
            15,590
            
            
            13.93
            %
            
            N/A
            
            
            N/A
            
            $
            6,716
            
            
            6.00
            %Core
                (leverage) (1)
            
            
            15,590
            
            
            8.84
            %
            
            7,057
            
            
            4.00
            %
            
            8,821
            
            
            5.00
            %Risk-weighted
                (2)
            
            
            16,590
            
            
            14.82
            %
            
            8,955
            
            
            8.00
            %
            
            11,193
            
            
            10.00
            %**December
                31, 2007**Tangible
                (1)
            
            $
            16,948
            
            
            9.81
            %
            $
            2,591
            
            
            1.50
            %
            
            N/A
            
            
            N/ATier
                I capital (2)
            
            
            16,948
            
            
            16.42
            %
            
            N/A
            
            
            N/A
            
            $
            6,194
            
            
            6.00
            %Core
                (leverage) (1)
            
            
            16,948
            
            
            9.81
            %
            
            6,909
            
            
            4.00
            %
            
            8,637
            
            
            5.00
            %Risk-weighted
                (2)
            
            
            17,920
            
            
            17.36
            %
            
            8,259
            
            
            8.00
            %
            
            10,324
            
            
            10.00
            %





(1)
            To
                adjusted total assets.




(2)
            To
                risk-weighted assets.





**Note
      5 - Stock-Based Compensation**




The
      compensation cost charged against income for stock-based compensation plans,
      excluding ESOP, was  $30,000
      and $89,000,  for
      the
      three and nine months ended September 30, 2008. The total income tax benefit
      recognized was $8,000 and $25,000 for the three and nine months ended September
      30, 2008. The compensation cost charged against income for stock-based
      compensation plans, excluding ESOP, was $30,000 and $89,000 for the three and
      nine months ended September 30, 2007. The total income tax benefit recognized
      was $8,000 and $25,000  for
      the
      three and nine months ended September 30, 2007.





**Note
      6 - Fair Values for Financial Instruments**




In
      September 2006, the Financial Accounting Standards Board issued FASB Statement
      No. 157, “Fair Value Measurements,” (SFAS 157) which defines fair value,
      establishes a framework for measuring fair value under Generally Accepted
      Accounting Principles, and expands disclosures about fair value measurements.
      SFAS 157 applies to other accounting pronouncements that require or permit
      fair
      value measurements. The new guidance is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and for interim
      periods within those fiscal years. Effective January 1, 2008, the Company
      adopted SFAS 157. The primary effect of SFAS 157 on the Company was to expand
      the required disclosures pertaining to the methods used to determine fair
      values.




SFAS
      157
      establishes a fair value hierarchy that prioritizes the inputs to valuation
      methods used to measure fair value. The hierarchy gives the highest priority
      to
      unadjusted quoted prices in active markets for identical assets or liabilities
      (Level 1 measurement) and the lowest priority to unobservable inputs (Level
      3
      measurements).




9




The
      three
      levels of the fair value hierarchy under SFAS 157 are as follows:




Level
      1:
      Unadjusted quoted prices in active markets that are accessible at the
      measurement date for identical, unrestricted assets or liabilities.




Level
      2:
      Quoted prices in markets that are not active, or inputs that are observable
      either directly or indirectly, for substantially the full term of the asset
      or
      liability.




Level
      3:
      Prices or valuation techniques that require inputs that are both significant
      to
      the fair value measurement and unobservable (i.e. supported with little or
      no
      market activity).




An
      asset
      or liability’s level within the fair value hierarchy is based on the lowest
      level of input that is significant to the fair value measurement.




For
      assets measured at fair value, the fair value measurements by level within
      the
      fair value hierarchy used at September 30, 2008 are as
      follows:




**September
                  30, 2008**
              
              
              **(Level
                  1) Quoted Prices in Active Markets for Identical
                  Assets**
              
              
              **(Level
                  2) Significant Other Observable Inputs**
              
              
              **(Level
                  3) Significant Other Unobservable Inputs**(Dollars
                  in thousands)Securities
                  available for sale
              
              $
              7,808
              
              $
              7,808
              
              $
              —
              
              $
              —Impaired
                  loans
              
              
              239
              
              
              —
              
              
              —
              
              
              239Foreclosed
                  Real Estate
              
              
              1,096
              
              
              —
              
              
              —
              
              
              1,096Total
              
              $
              9,143
              
              $
              7,808
              
              $
              —
              
              $
              1,335




The
      following valuation techniques were used to measure the fair value of assets
      in
      the table above on a recurring basis as of September 30, 2008.





*Available
      for sale securities* - The
      fair value on available for sale securities was based on available market
      pricing for the securities.





*Impaired
      Loans* - Loans
      included in the above table are those that are accounted for under SFAS 114, *Accounting
      by Creditors for Impairment of a Loan,* in which
      the Company has measured impairment generally based on the fair value of the
      loan’s collateral. This asset is included as Level 3 fair value, based upon the
      lowest level of input that is significant to the fair value measurements. The
      fair value consists of the loan balance reduced by any specific impairment
      reserve. Activity in impaired loans for the quarter and the nine months ended
      September 30, 2008 consisted solely of two new loans totaling $239,000 moving
      into impaired status.





*Foreclosed
      Real Estate* - Fair
      value of foreclosed real estate was based on an independent third party
      appraisal of the property. This value was determined based on the sale price
      of
      similar development properties in the proximate vicinity. There has been no
      significant activity during the first nine months of 2008 in foreclosed real
      estate.


10




**Note
      7 - Income Tax Provision**





The
      provision for income taxes was $75,000 for the three months ended September
      30,
      2008 and $207,000 for the nine months ended September 30, 2008. We calculated
      a
      provision for income taxes even though we show a loss before income taxes of
      $1,499,000 for the three months ended September 30, 2008 and $1,183,000 for
      the
      nine months ended September 30, 2008 because the loss on our investments of
      $1,678,000 is treated as a capital loss and resulted in a deferred tax asset
      with a valuation allowance in the tax provision computation. We
      would
      only be able to recognize a tax benefit for the quarter and for the nine months
      ended September 30, 2008, if we were to create a specific plan to generate
      capital gains to offset the capital losses. A decision was made to record a
      full
      valuation allowance on the tax benefit attributable to this investment
      loss.





**Note
      8 - Recent Accounting Pronouncements**





In
      June
      2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1, “Determining
      Whether Instruments Granted in Share-Based Payment Transactions Are
      Participating Securities.” This FSP clarifies that all outstanding unvested
      share-based payment awards that contain rights to non-forfeitable dividends
      participate in undistributed earnings with common shareholders. Awards of this
      nature are considered participating securities and the two-class method of
      computing basic and diluted earnings per share must be applied. This FSP is
      effective for fiscal years beginning after December 15, 2008. The Company is
      currently evaluating the potential impact the new pronouncement will have on
      its
      consolidated financial statements.





In
      December 2007, the FASB issued FASB statement No. 141 (R) “Business
      Combinations”. This Statement establishes principles and requirements for how
      the acquirer of a business recognizes and measures in its financial statements
      the identifiable assets acquired, the liabilities assumed, and any
      non-controlling interest in the acquired. The Statement also provides guidance
      for recognizing and measuring the goodwill acquired in the business combination
      and determines what information to disclose to enable users of the financial
      statements to evaluate the nature and financial effects of the business
      combination. The guidance will become effective as of the beginning of a
      company’s fiscal year beginning after December 15, 2008. This new pronouncement
      will impact the Company’s accounting for business combinations completed
      beginning January 1, 2009.





In
      October 2008, the FASB issued FSP SFAS No. 157-3, *“* Determining
      the Fair Value of a Financial Asset When The Market for That Asset Is Not
      Active” (FSP 157-3), to clarify the application of the provisions of
      SFAS 157 in an inactive market and how an entity would determine fair value
      in an inactive market. FSP 157-3 is effective immediately and applies to
      our September 30, 2008 financial statements. The application of the
      provisions of FSP 157-3 did not materially affect our results of operations
      or financial condition as of and for the periods ended September 30,
      2008.





In
      September 2008, the FASB issued FSP 133-1 and FIN 45-4, “Disclosures about
      Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
      133 and FASB Interpretation No. 45; and Clarification of the Effective Date
      of
      FASB Statement No. 161” (FSP 133-1 and FIN 45-4). FSP 133-1 and FIN 45-4 amends
      and enhances disclosure requirements for sellers of credit derivatives and
      financial guarantees. It also clarifies that the disclosure requirements of
      SFAS
      No. 161 are effective for quarterly periods beginning after November 15, 2008,
      and fiscal years that include those periods. FSP 133-1 and FIN 45-4 is effective
      for reporting periods (annual or interim) ending after November 15, 2008. The
      implementation of this standard will not have a material impact on our
      consolidated financial position and results of operations.


11





In
      September 2008, the FASB ratified EITF Issue No. 08-5, “Issuer’s Accounting for
      Liabilities Measured at Fair Value With a Third-Party Credit Enhancement” (EITF
      08-5). EITF 08-5 provides guidance for measuring liabilities issued with an
      attached third-party credit enhancement (such as a guarantee). It clarifies
      that
      the issuer of a liability with a third-party credit enhancement should not
      include the effect of the credit enhancement in the fair value measurement
      of
      the liability. EITF 08-5 is effective for the first reporting period beginning
      after December 15, 2008. The Company is currently assessing the impact of EITF
      08-5 on its consolidated financial position and results of
      operations.





**Item
      2.**  **Management's
      Discussion and Analysis of Financial Condition and Results of Operations**





**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**





We
      incurred a net loss of $1,390,000 for the nine months ended September 30, 2008
      as compared to a net loss of $21,000 for the same period in 2007. This decline
      was primarily due to a non-cash charge to earnings of $1,678,000 as a result
      of
      an other-than-temporary impairment in the value of the AMF Ultra Short Mortgage
      Fund held in our investment portfolio. The loss in the value of the AMF Fund
      was
      previously reported as unrealized losses on the consolidated statements of
      financial condition. This impairment is the primary reason for a decrease of
      $1,618,000, or 584.12%, during the nine-month period compared to the same period
      in 2007. The decline in earnings is also the result of an increase in
      non-interest expenses of $216,000, or 8.70%, primarily due to an increase in
      compensation expenses related to the hiring of two experienced commercial loan
      originators and a certified financial planner. These declines were partially
      offset by improvements in net interest income. Interest income increased
      $355,000, or 5.08%, primarily as a result of an increase in higher yielding
      commercial real estate loan originations, while interest expenses decreased
      $233,000, or 5.07%, primarily because the interest rates we pay on deposit
      accounts have dropped as a result of decreases in the prime rate instituted
      by
      the Federal Reserve Board in response to the unfavorable economy.





Assets
      increased 2.10% during the first nine months of 2008 primarily because of a
      5.12% increase in our loan portfolio and a 68.68% increase in cash and cash
      equivalents, partially offset by decreases in investment  securities
      held to maturity of 100.00% (to $0 at September 30, 2008), investment securities
      available for sale of 12.68% and mortgage backed securities held to maturity
      of
      24.25% compared to December 31, 2007.




12





As
      further discussed in the Asset Quality section of this report, we hold a 19%
      participation (approximately $1,096,000 in unpaid principal balance) in an
      acquisition and development loan.  This loan was transferred to foreclosed
      real estate. The foreclosed property had been contracted for sale subject to
      a
      feasibility study, however, the feasibility study period expired on June 15,
      2008. The buyer requested an extension to the original contract subject to
      a
      feasibility study period to expire on April 30, 2009, but it was not accepted.
      The lead lender is negotiating a new contract of sale with a potential buyer
      who
      has offered to purchase the property at the previously contracted price. We
      still believe that we will recover the carrying amount of the real estate,
      although there can be no assurance that this will be the case. Additionally,
      a
      $100,000 business line of credit loan, restructured in the third quarter of
      2007, is classified as impaired, because we believe that there is a substantial
      likelihood that we will not collect the total amount of the outstanding
      principal balance on this loan. A specific reserve of $100,000, or 100%, of
      the
      remaining loan balance continues to remain in our allowance for loan losses
      with
      respect to this loan. Furthermore, two commercial real estate loans totaling
      $239,000 are also classified as impaired as we believe that it may become
      difficult to collect the outstanding principal balances on these loans.





To
      remain
      competitive and offer even more choices to our customers, we implemented a
      Slavie credit card, merchant bank card services through a third party vendor,
      and foreign currency services for our customers traveling abroad. We also
      expanded our Automated Teller Machine network to include access to more than
      52,500 ATMs throughout the United States and coin counting services in each
      of
      our lobbies. We also offer a comprehensive and full service approach to managing
      finances and investing in the future. The creation of Slavie Financial Services
      and the addition of a certified financial planner in mid-2007 enabled us to
      bring investment guidance and financial planning expertise to our customers,
      while expanding our ability to provide personalized services that focus on
      the
      successful financial well being of our customers.





We
      expect
      that during the fourth quarter of 2008, our product development and review
      committee will implement remote deposit for commercial
      accountholders  and
      check
      imaging services for our checking accountholders to provide an even wider
      variety of products and services to our customers. In addition, we hired an
      investment advisor who will join Slavie Financial Services in the fourth quarter
      of 2008.





We
      continue to implement strategies formed during strategic planning meetings
      of
      the Board of Directors and the Company’s officers during 2006, and we are
      complementing them with new strategies resulting from a planning meeting held
      in
      the third quarter of 2008, which are currently being finalized. In our continued
      efforts to boost the yield of our interest earning assets during a period of
      net
      interest margin compression, management, along with our two experienced
      commercial loan originators, continues to increase and diversify the Bank’s mix
      of commercial loans to residential loans in its portfolio. In addition, we
      intensified our marketing strategy by offering incentives to attract new
      checking accounts in an effort to attain our goal of decreasing the cost of
      our
      interest bearing liabilities, since we pay less on deposit accounts than on
      borrowings. Our directors, officers, management and staff remain committed
      in a
      unified effort to improve the Bank’s profitability.




Key
      measurements and events for the three- and nine-month periods ended September
      30, 2008 include the following:





·
            Total
                assets at September 30, 2008 increased by 2.10% to $175,855,000 as
                compared to $172,244,000 as of December 31,
                2007.




·
            Total
                borrowings decreased by 10.29% from $34,000,000 as of December 31,
                2007 to
                $30,500,000 as of September 30,
                2008.





·
            Net
                loans outstanding increased by5.12%from
                $147,744,000 as of December 31, 2007to
                $155,309,000 as of September 30,
                2008.




13




·
            Non-performing
                loans and foreclosed real estate totaled$2,363,000at
                September 30, 2008 as compared with a total of $1,551,000 at December
                31,
                2007. We believe an appropriate allowance for loan losses continues
                to be
                maintained.





·
            Deposits
                at September 30, 2008 were$123,819,000,
                an increase of $9,721,000 or 8.52%from
                $114,098,000 at December 31, 2007.





·
            We
                realized net losses of $1,574,000 and $1,390,000 for the three-month
                and
                nine-month periods ended September 30, 2008. This compares to net
                income
                of $27,000 and a net loss of $21,000 for the three-month and nine-month
                periods ended September 30, 2007. This decrease reflects a $1,678,000
                non-cash charge to earnings, as a result of an other-than-temporary
                impairment in the value of an investment in our investment portfolio.





·
            Net
                interest income, our main source of income, was$1,059,000
                and $2,986,000during
                the three-month and nine-month periods ended September 30, 2008 compared
                to $817,000 and $2,398,000 for the same periods in 2007. This represents
                an increase of29.62%
                and 24.52%for
                the three months and nine months ended September 30, 2008 as compared
                to
                the same periods in 2007.





·
            We
                hadfouroverdraft
                protection loan charge-offs totaling $2,000during
                the nine-month period ending September 30, 2008. We had a commercial
                non-real estate loan charge-off of $120,000 and three overdraft protection
                loan charge-offs totaling $2,000 during the nine-month period ending
                September 30, 2007.





·
            Non-interest
                income decreased by$1,659,000
                and $1,618,000, or 1580.00% and 584.12%, for the three-month and
                nine-month periods ended September 30, 2008, as compared to the
                three-month and nine-month periods ended September 30, 2007.The
                decline between the periods is primarily the result of the investment
                securities write-down noted above.





·
            Non-interest
                expenses increased by $100,000 and $216,000, or 11.79% and
                8.70%,for
                the three-month and nine-month periods ended September 30, 2008,
                as
                compared to the three- and nine-month periods ended September 30,
                2007.





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





**Critical
      Accounting Policies**





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




14





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, the valuation
      of foreclosed assets and the determination of other-than-temporary impairment
      as
      the accounting areas that require the most subjective or complex judgments,
      and
      as such could be most subject to revision as new information becomes available.





Securities
      available for sale are carried at fair value. Unrealized gains and losses,
      net
      of tax, on available for sale securities are reported as accumulated other
      comprehensive income (loss) until realized, unless management deems the
      investment to be other-than-temporarily impaired. Realized gains and losses
      on
      sales, determined using the specific identification method, are included in
      earnings. Investments and mortgage-backed securities held to maturity are
      carried at amortized cost since management has the ability and intention to
      hold
      them to maturity. Amortization of related premiums and discounts are computed
      using the level yield method over the terms of the securities.





The
      Company evaluates securities for other-than-temporary impairment on a quarterly
      basis. Consideration is given to (1) the length of time and the extent to which
      the fair value has been less than the cost, (2) the financial condition and
      near-term prospects of the issuer, and (3) the intent and ability of the Company
      to retain its investment with the issuer for a period of time sufficient to
      allow for an anticipated recovery in fair value. In evaluating an issuer’s
      financial condition, management considers whether the securities are issued
      by
      the federal government or its agencies, whether downgrades by bond rating
      agencies have occurred and industry analysts’ reports.





The
      Company purchased Shay Asset Management Fund (AMF) Ultra Short Mortgage Fund,
      consisting primarily of short-term adjustable rate mortgage securities, to
      control its interest rate risks and to generate interest income. It purchased
      the mutual funds incrementally between the years 2001 and 2003. As of September
      30, 2008, the mutual fund has a fair value of $7,808,000. Management has
      identified the Shay AMF Ultra Short Mortgage Fund as an impaired asset, meaning
      that the fair value is below the cost of the investment and these securities
      available for sale are carried at fair value. During the quarter ended September
      30, 2008, the Company identified the Shay AMF Ultra Short Mortgage Fund as
      being
      other-than-temporarily impaired and realized an impairment loss of $1,678,000
      on
      these securities. The write-down is a result of declines in pricing levels
      differing from those existing at the time of the purchase of the fund. The
      mutual funds have no stated maturity date.





Management
      believes that the mutual fund has performed as intended within its investment
      objectives of seeking to protect its net interest margin in periods of rising
      rates and of providing as high a level of current income as is consistent with
      the preservation of capital and maintenance of liquidity. The Shay Asset
      Management Fund has consistently paid an attractive yield, since its inception,
      and has performed better than federal funds rates. Although, at the present
      time, the mutual fund holds primarily the highest quality credit rating
      adjustable rate mortgages and the investment is paying as agreed, management
      could no longer maintain that the increased unrealized losses on the fund were
      temporary in nature. In order to adhere to Statement of Financial Accounting
      Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt Equity
      Securities,” which requires an asset that is other-than-temporarily impaired to
      be written down, management considered the duration and the severity of its
      impaired asset and felt that the sharp decline in the security’s value over the
      past nine months forced us to recognize the Shay AMF Ultra Short Mortgage Fund
      as being an other-than-temporary impaired asset and realized an impairment
      loss
      of $1,678,000 on these securities. Management expects the asset values of the
      fund to improve, however, once liquidity is restored to the market. Management
      has the intent and ability to hold these securities for the foreseeable future
      and anticipates recovery.





Assets
      acquired through, or in lieu of, loan foreclosure are held for sale and are
      initially recorded at fair value less cost to sell at the date of foreclosure,
      establishing a new cost basis. Subsequent to foreclosure, valuations are
      periodically performed by management and the assets are carried at the lower
      of
      carrying amount or fair value less cost to sell. Revenue and expenses from
      operations and changes in the valuation allowance are included in other
      expenses.




15





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, 2008 and 2007 - Provision for Loan Losses and Analysis of Allowance for
      Loan
      Losses.”





**Results
      of Operations for the Three and Nine Months Ended September 30, 2008 and
      2007**





*General* .
      Net
      income decreased $1,659,000 to a net loss of $1,574,000 for the three months
      ended September 30, 2008 compared to net income of $27,000 for the same period
      in the prior year. The decrease was due primarily to a $1,659,000 decrease
      in
      non-interest income and a $100,000 increase in non-interest expense, partially
      offset by a $99,000 increase in interest income and a $143,000 decrease in
      interest expense.





Net
      income decreased $1,369,000 to a net loss of $1,390,000 for the nine months
      ended September 30, 2008 compared to a net loss of $21,000 for the same period
      in the prior year. The decrease was due primarily to a $1,618,000 decrease
      in
      non-interest income and a $216,000 increase in non-interest expense, partially
      offset by a $355,000 increase in interest income and a $233,000 decrease in
      interest expense.


16


*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
      because 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.




**Three
                Months Ended****September
                30, 2008**
            
            **Three********Months
                Ended****September
                30, 2007****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)
            
            $
            154,818
            
            $
            2,338
            
            
            6.04
            %
            $
            145,331
            
            $
            2,130
            
            
            5.86
            %Mortgage-backed
                securities
            
            
            1,747
            
            
            18
            
            
            4.12
            
            
            2,557
            
            
            29
            
            
            4.54Investment
                securities (available for sale)
            
            
            7,941
            
            
            88
            
            
            4.43
            
            
            8,787
            
            
            117
            
            
            5.33Investment
                securities (held to maturity)
            
            
            -
            
            
            4
            
            
            -
            
            
            3,333
            
            
            32
            
            
            3.84Other
                interest-earning assets
            
            
            2,507
            
            
            18
            
            
            2.87
            
            
            3,210
            
            
            59
            
            
            7.35Total
                interest-earning assets
            
            
            167,013
            
            
            2,466
            
            
            5.91
            %
            
            163,218
            
            
            2,367
            
            
            5.80
            %Non-interest
                earning assets
            
            
            8,529
            
            
            
            
            
            
            
            
            7,920Total
                assets
            
            $
            175,542
            
            
            
            
            
            
            
            $
            171,138Interest-bearing
                liabilities:Savings
                deposits
            
            $
            13,219
            
            $
            23
            
            
            0.70
            %
            $
            15,687
            
            $
            38
            
            
            0.97
            %Demand
                and NOW accounts
            
            
            11,255
            
            
            68
            
            
            2.42
            
            
            7,507
            
            
            59
            
            
            3.14Certificates
                of deposit
            
            
            97,586
            
            
            1,024
            
            
            4.20
            
            
            90,696
            
            
            1,104
            
            
            4.87Escrows
            
            
            1
            
            
            -
            
            
            -
            
            
            3
            
            
            -
            
            
            -Borrowings
            
            
            29,667
            
            
            292
            
            
            3.94
            
            
            32,167
            
            
            349
            
            
            4.34Total
                interest-bearing liabilities
            
            
            151,728
            
            
            1,407
            
            
            3.71
            %
            
            146,060
            
            
            1,550
            
            
            4.24
            %Non-interest
                bearing liabilities
            
            
            3,106
            
            
            
            
            
            
            
            
            2,964Total
                liabilities
            
            
            154,834
            
            
            
            
            
            
            
            
            149,024Total
                equity(2)
            
            
            20,708
            
            
            
            
            
            
            
            
            22,114Total
                liabilities and equity
            
            $
            175,542
            
            
            
            
            
            
            
            $
            171,138Net
                interest income
            
            
            
            
            $
            1,059
            
            
            
            
            
            
            
            $
            817Interest
                rate spread(3)
            
            
            
            
            
            
            
            
            2.20
            %
            
            
            
            
            
            
            
            1.56
            %Net
                interest-earning assets
            
            $
            15,285
            
            
            
            
            
            
            
            $
            17,158Net
                interest margin(4)
            
            
            
            
            
            
            
            
            2.54
            %
            
            
            
            
            
            
            
            2.00
            %Ratio
                of interest earning assets to interest bearing liabilities
            
            
            
            
            
            1.10x
            
            
            
            
            
            
            
            
            1.12x





(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.


17




**Nine
                Months Ended**
              **September
                30, 2008**
            
            **Nine
                Months Ended**
              **September
                30, 2007****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)
            
            $
            152,326
            
            $
            6,863
            
            
            6.01
            %
            $
            145,344
            
            $
            6,228
            
            
            5.71
            %Mortgage-backed
                securities
            
            
            1,932
            
            
            63
            
            
            4.35
            
            
            2,807
            
            
            94
            
            
            4.45Investment
                securities (available for sale)
            
            
            8,517
            
            
            286
            
            
            4.47
            
            
            8,699
            
            
            339
            
            
            5.20Investment
                securities (held to maturity)
            
            
            1,444
            
            
            43
            
            
            3.95
            
            
            3,778
            
            
            107
            
            
            3.79Other
                interest-earning assets
            
            
            2,911
            
            
            92
            
            
            4.23
            
            
            4,710
            
            
            224
            
            
            6.35Total
                interest-earning assets
            
            
            167,130
            
            
            7,347
            
            
            5.86
            %
            
            165,338
            
            
            6,992
            
            
            5.64
            %Non-interest
                earning assets
            
            
            8,178
            
            
            
            
            
            
            
            
            7,296Total
                assets
            
            $
            175,308
            
            
            
            
            
            
            
            $
            172,634Interest-bearing
                liabilities:Savings
                deposits
            
            $
            13,724
            
            $
            87
            
            
            0.85
            %
            $
            16,539
            
            $
            133
            
            
            1.07
            %Demand
                and NOW accounts
            
            
            10,327
            
            
            188
            
            
            2.43
            
            
            7,337
            
            
            143
            
            
            2.60Certificates
                of deposit
            
            
            94,632
            
            
            3,158
            
            
            4.45
            
            
            88,554
            
            
            3,188
            
            
            4.80Escrows
            
            
            2
            
            
            -
            
            
            -
            
            
            6
            
            
            -
            
            
            -Borrowings
            
            
            31,833
            
            
            928
            
            
            3.89
            
            
            34,222
            
            
            1,130
            
            
            4.40Total
                interest-bearing liabilities
            
            
            150,518
            
            
            4,361
            
            
            3.86
            %
            
            146,658
            
            
            4,594
            
            
            4.18
            %Non-interest
                bearing liabilities
            
            
            3,394
            
            
            
            
            
            
            
            
            3,687Total
                liabilities
            
            
            153,912
            
            
            
            
            
            
            
            
            150,345Total
                equity(2)
            
            
            21,396
            
            
            
            
            
            
            
            
            22,289Total
                liabilities and equity
            
            $
            175,308
            
            
            
            
            
            
            
            $
            172,634Net
                interest income
            
            
            
            
            $
            2,986
            
            
            
            
            
            
            
            $
            2,398Interest
                rate spread(3)
            
            
            
            
            
            
            
            
            2.00
            %
            
            
            
            
            
            
            
            1.46
            %Net
                interest-earning assets
            
            $
            16,612
            
            
            
            
            
            
            
            $
            18,680Net
                interest margin(4)
            
            
            
            
            
            
            
            
            2.38
            %
            
            
            
            
            
            
            
            1.93
            %Ratio
                of interest earning assets to interest bearing liabilities
            
            
            
            
            
            1.11x
            
            
            
            
            
            
            
            
            1.13x





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


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


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


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





*Net
      Interest Income* .





Three
      months ended September 30, 2008 compared to three months ended September 30,
      2007 .





Net
      interest income increased $242,000, or 29.62%, to $1,059,000 for the three
      months ended September 30, 2008 from $817,000 for the three months ended
      September 30, 2007. The increase was primarily a result of a 3,795,000, or
      2.33%, increase in average interest earning assets to $167,013,000 from
      $163,218,000, an 11 basis point increase in the yield on average interest
      earning assets, from 5.80% to 5.91% and a 53 basis point decrease in the cost
      of
      average interest bearing liabilities, from 4.24% to 3.71%. These were partially
      offset by a $5,668,000, or 3.88%, increase in average interest bearing
      liabilities to $151,728,000 from $146,060,000.


18





Our
      interest rate spread increased to 2.20% for the quarter ended September 30,
      2008
      from 1.56% for the quarter ended September 30, 2007, reflecting an increase
      in
      the yield of our average interest earning assets and an even greater decrease
      in
      the cost of our average interest bearing liabilities. Our net interest margin
      increased to 2.54% from 2.00%, because of a higher yield on average interest
      earning assets and a decrease in the cost of our average interest bearing
      liabilities. The ratio of interest earning assets to interest bearing
      liabilities decreased slightly to 1.10 times for the three months ended
      September 30, 2008 from 1.12 times for the same period in 2007.





Nine
      months ended September 30, 2008 compared to nine months ended September 30,
      2007 .





Net
      interest income increased $588,000, or 24.52%, to $2,986,000 for the nine months
      ended September 30, 2008 from $2,398,000 for the nine months ended September
      30,
      2007. The increase was primarily a result of a $1,792,000, or 1.08%, increase
      in
      average interest earning assets to $167,130,000 from $165,338,000, a 22 basis
      point increase in the yield on average interest earning assets, from 5.64%
      to
      5.86% and a 32 basis point decrease in the cost of average interest bearing
      liabilities, from 4.18% to 3.86%. These were partially offset by a $3,860,000,
      or 2.63%, increase in average interest bearing liabilities to $150,518,000
      from
      $146,658,000.





Our
      interest rate spread increased to 2.00% from 1.46%, reflecting an increase
      in
      the yield of our average interest earning assets and an even greater decrease
      in
      the cost of our average interest bearing liabilities. Our net interest margin
      increased to 2.38% from 1.93%, because of a higher yield on average interest
      earning assets and a decrease in the cost of our average interest bearing
      liabilities. The ratio of interest earning assets to interest bearing
      liabilities decreased slightly to 1.11 times for the nine months ended September
      30, 2008 from 1.13 times for the 2007 period.





*Interest
      Income* .





Three
      months ended September 30, 2008 compared to three months ended September 30,
      2007 .





Interest
      income increased by $99,000, or 4.18%, to $2,466,000 for the three months ended
      September 30, 2008, from $2,367,000 for the three months ended September 30,
      2007. The increase in interest income resulted from an increase of $208,000,
      or
      9.77%, in interest and fee income from loans, partially offset by decreases
      of
      $57,000, or 38.26%, in interest income from investment securities, $11,000,
      or
      37.93%, in interest income from mortgage backed securities and $41,000, or
      69.49%, 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 $3,795,000, or 2.33%, increase in the
      average balance of interest earning assets to $167,013,000 during the quarter
      ended September 30, 2008 from $163,218,000 during the quarter ended September
      30, 2007 and an 11 basis point increase in the yield on average interest earning
      assets to 5.91% for the three months ended September 30, 2008 from 5.80% for
      the
      three months ended September 30, 2007. This is due to a focus on increasing
      our
      commercial real estate loan origination volume and the higher interest rates
      those loans yield.





The
      increase in interest income and fees on loans was due to a $9,487,000, or 6.53%,
      increase in average net loans receivable, from $145,331,000 during the quarter
      ended September 30, 2007 to $154,818,000 during the quarter ended September
      30,
      2008 and an 18 basis point increase in the average yield on net loans
      receivable. The decrease in interest income from investment securities was
      primarily reflective of a 29 basis point decrease in the average yield and
      a
      $4,179,000, or 34.48%, decrease in the average balance of investment securities.
      The decrease in interest income from mortgage-backed securities was primarily
      the result of an $810,000, or 31.68% decline in the average balance of
      mortgage-backed securities and a 42 basis point decrease in the average yield
      on
      these securities. The decrease in the average balance of investments is
      consistent with our strategic plan of using the proceeds of matured investments
      to fund commercial loan originations at higher yields. The decrease in the
      average yield on the mortgage-backed securities is due to the repricing of
      our
      Ginnie Mae investments at a lower rate than the prior quarter.




19





The
      decrease in interest income from other interest-earning assets (primarily
      Federal Home Loan Bank stock) was due to a $703,000, or 21.90%, decrease in
      average other interest-earning assets, from $3,210,000 during the quarter ended
      September 30, 2007 to $2,507,000 during the quarter ended September 30, 2008
      (as
      a result of using federal funds to fund commercial real estate loan originations
      and to pay down Federal Home Loan Bank borrowings) and a 448 basis point
      decrease in the average yield on these assets (as a result of decreases in
      short
      term market interest rates).





Nine
      months ended September 30, 2008 compared to nine months ended September 30,
      2007 .





Interest
      income increased by $355,000, or 5.08%, to $7,347,000 for the nine months ended
      September 30, 2008, from $6,992,000 for the nine months ended September 30,
      2007. The increase in interest income resulted primarily from an increase of
      $635,000, or 10.20%, in interest and fee income from loans, partially offset
      by
      decreases of $117,000, or 26.23%, in interest income from investment securities,
      $31,000, or 32.98%, in interest income from mortgage backed securities and
      $132,000, or 58.93%, 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 $1,792,000, or 1.08%, increase in the
      average balance of interest earning assets to $167,130,000 from $165,338,000
      and
      a 22 basis point increase in the yield on average interest earning assets to
      5.86% for the nine months ended September 30, 2008 from 5.64% for the nine
      months ended September 30, 2007, reflecting an increase in our loan volume,
      primarily commercial real estate loans, and the higher interest rates those
      loans yield.





The
      increase in interest income and fees on loans was due to a $6,982,000, or 4.80%,
      increase in average net loans receivable, from $145,344,000 for the nine months
      ended September 30, 2007 to $152,326,000 for the nine months ended September
      30,
      2008 and a 30 basis point increase in average yield on net loans receivable.
      The
      decrease in interest income from investment securities was primarily reflective
      of a 36 basis point decrease in the average yield and a $2,516,000, or 20.17%,
      decrease in the average balance of investment securities. The decrease in
      interest income from mortgage-backed securities was primarily the result of
      an
      $875,000 or 31.17% decline in the average balance of mortgage-backed securities
      and a 10 basis point decrease in the average yield on these securities. The
      decrease in the average balance and the average yield of investments is
      consistent with our strategic plan of using the proceeds of matured investments
      to fund commercial real estate loan originations at higher yields. The decrease
      in the average yield on the mortgage-backed securities is due to the repricing
      of our Ginnie Mae investments at a lower rate than the prior year.




The
      decrease in interest income from other interest earning assets (primarily
      Federal Home Loan Bank stock) was due to a $1,799,000, or 38.20%, decrease
      in
      average other interest earning assets, from $4,710,000 during the nine months
      ended September 30, 2007 to $2,911,000 during the nine months ended September
      30, 2008 (as a result of using federal funds to fund commercial real estate
      loan
      originations and to pay down Federal Home Loan Bank borrowings) and a 212 basis
      point decrease in the average yield on these assets (as a result of decreases
      in
      short term market interest rates).


20





*Interest
      Expense* .





Three
      months ended September 30, 2008 compared to three months ended September 30,
      2007 .





Interest
      expense, which consists of interest paid on deposits and borrowings, decreased
      by $143,000, or 9.23%, to $1,407,000 for the three months ended September 30,
      2008 from $1,550,000 for the three months ended September 30, 2007. The decrease
      in interest expense resulted from decreases of $86,000, or 7.16%, in interest
      paid on deposits and $57,000, or 73.08%, in interest paid on short-term
      borrowings. The decrease in interest expense reflects a 53 basis point decrease
      in the average cost of interest bearing liabilities, to 3.71% for the three
      months ended September 30, 2008 from 4.24% for the three months ended September
      30, 2007, while the average balance of interest bearing liabilities increased
      to
      $151,728,000 during the quarter ended September 30, 2008 from $146,060,000
      during the quarter ended September 30, 2007.





The
      decrease in interest paid on deposits is due to a 57 basis point decrease in
      the
      average cost of deposits as a result of lowered market interest rates, partially
      offset by a $8,170,000, or 7.17%, increase in the average balance of interest
      bearing deposits to $122,060,000 for the three months ended September 30, 2008
      from $113,890,000 for the three months ended September 30, 2007. The decrease
      in
      the interest paid on borrowings is a result of a decrease in the average balance
      of borrowings to $29,667,000 during the quarter ended September 30, 2008 from
      $32,167,000 in the same quarter of 2007 and a 40 basis point decrease in the
      average cost of borrowings as a result of borrowing at lower interest rates
      in
      connection with short-term borrowings which are renewed at current market
      interest rates, which were lower than during the same period of 2007.




Nine
      months ended September 30, 2008 compared to nine months ended September 30,
      2007 .





Interest
      expense decreased by $233,000, or 5.07%, to $4,361,000 for the nine months
      ended
      September 30, 2008 from $4,594,000 for the nine months ended September 30,
      2007.
      The decrease in interest expense resulted from a decreases of $214,000, or
      63.88%, in interest paid on short-term borrowings and $31,000, or 0.89%, in
      interest paid on deposits, partially offset by an increase of $12,000, or 1.51%,
      in interest paid on long-term borrowings. The decrease in interest expense
      reflects a 32 basis point decrease in the cost of average interest bearing
      liabilities, to 3.86% for the nine months ended September 30, 2008 from 4.18%
      for the nine months ended September 30, 2007, while the average balance of
      interest bearing liabilities increased to $150,518,000 for the nine months
      ended
      September 30, 2008 from $146,658,000 for the same period of 2007. Interest
      paid
      on deposits decreased due to a decrease in the average cost of deposits by
      25
      basis points as a result of lower market interest rates, partially offset by
      an
      increase in the average balance of interest bearing deposits to $118,683,000
      from $112,430,000. Interest on borrowings decreased because the average balance
      of borrowings decreased to $31,833,000 during the nine months ended September
      30, 2008 from $34,222,000 in the same period of 2007 and the average cost of
      borrowings decreased by 51 basis points as a result of borrowings at lower
      interest rates. Although the average balance in borrowings and the average
      cost
      of borrowings decreased, the interest on long-term borrowings increased due
      to a
      long-term convertible rate FHLB advance being called in July 2007 and replaced
      by a long-term convertible FHLB advance at a higher interest
      rate.


21





*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 $56,000 and $26,000 for the three months ended September 30,
      2008
      and September 30, 2007, and a provision of $130,000 and $208,000 for the nine
      months ended September 30, 2008 and September 30, 2007, respectively. There
      were
      four overdraft protection loan charge-offs totaling $2,000 during the nine
      months ended September 30, 2008. There was one commercial non-real estate loan
      charge-off of $120,000 during the nine months ended September 30, 2007 which
      is
      discussed below under “General Valuation Allowance on the Remainder of the Loan
      Portfolio.” We also had three overdraft protection loans charge-offs totaling
      $2,000 during the nine-month period ended September 30,  2007.  We
      have
      recently developed a more stringent methodology for computing the allowance,
      which reflects credit quality and composition trends, loan volumes and
      concentrations, seasoning of the loan portfolio, and economic and business
      conditions, which management believes will more accurately reflect current
      real
      estate values and any potential further decline of the current economic
      conditions.





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 impaired loans, primarily collateral-dependent; (2) a general valuation
      allowance on certain identified problem loans that do not meet the definition
      of
      impaired; and (3) a general valuation allowance on the remainder of the loan
      portfolio.





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




·
            loans
                90 or more days delinquent;





·
            loans
                with anticipated losses;





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





·
            nonaccrual
                loans;





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





·
            troubled
                debt restructurings and other non-performing
                loans.





Two
      of
      our officers review each loan on the watch list and establish an individual
      allowance allocation on certain 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.




22




We
      also
      review and establish, if necessary, an allowance for 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 when due under the contractual terms of the loan agreement.





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





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





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





The
      allowance for loan losses totaled  $1,100,000
      or 0.70% of  gross
      loans outstanding of  $156,710,000  at
      September 30, 2008, compared to an allowance for loan losses of $972,000 or
      0.65% of gross loans outstanding of $150,501,000 at December 31, 2007. The
      increase to the loan loss reserve is due to the increased commercial real estate
      loan balances, which historically create a mix of riskier loan products since
      commercial loans are considered to be higher risk than residential mortgage
      loans. As of September 30, 2008 and December 31, 2007, we have specific reserves
      of $100,000 within the allowance for loan losses because we believe there is
      a
      substantial likelihood that we will not collect the total amount of the
      outstanding principal balance on a commercial non-real estate loan that is
      classified as impaired. The corporate commercial loan borrower filed Chapter
      7
      corporate bankruptcy in the third quarter of 2006 and filed Chapter 7 personal
      bankruptcy in the second quarter of 2007. We restructured the remaining debt
      to
      facilitate repayment of the loan in the third quarter of 2007 and the borrower
      has been making payments in accordance with the terms of the restructured loan
      agreement. We also have classified two commercial real estate loans, with
      balances totaling $239,000, as impaired as we believe there is a possibility
      that we may not collect all outstanding balances due. In the first quarter
      of
      2008, the borrowers of the two commercial real estate loans filed Chapter 13
      personal bankruptcy, which was denied and dismissed in the third quarter of
      2008. They filed Chapter 13 personal bankruptcy again near the end of the third
      quarter of 2008 and it was converted to a Chapter 7 personal bankruptcy on
      October 3, 2008. Our attorney has filed a motion for a stay so we may proceed
      with foreclosure and we await a response. We have adequate allowance for loan
      loss reserves for these two loans.




23





The
      following table summarizes the activity in the allowance for loan losses for
      the
      three and nine months ended September 30, 2008 and 2007.





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**(Dollars
                in Thousands)Balance
                at beginning of period
            
            $
            1,044
            
            $
            912
            
            $
            972
            
            $
            850Charge-offs
                (1)
            
            
            -
            
            
            (1
            )
            
            (2
            )
            
            (121
            )Recoveries
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                Charge-offs
            
            
            -
            
            
            (1
            )
            
            (2
            )
            
            (121
            )Provision
                for loan losses
            
            
            56
            
            
            26
            
            
            130
            
            
            208Ending
                balance
            
            $
            1,100
            
            $
            937
            
            $
            1,100
            
            $
            937Ratio
                of net charge-offs during the period to average loans outstanding,
                net,
                during the period
            
            
            -
            
            
            -
            
            
            -
            
            
            0.08
            %Ratio
                of allowance for loan losses to total loans outstanding at end of
                period
            
            
            0.70
            %
            
            0.64
            %
            
            0.70
            %
            
            0.64
            %Allowance
                for loan losses as a percent of total non-performing loans at end
                of
                period
            
            
            46.55
            %
            
            63.01
            %
            
            46.55
            %
            
            63.01
            %





(1)
            Charge
                offs consisted primarily of the principal loss of overdraft protection
                lines of credit with the exception of a commercial non-real estate
                loan
                charge off of $120,000 in 2007.





*Other
      Income* .





Three
      months ended September 30, 2008 compared to three months ended September 30,
      2007 .





Historically,
      our non-interest income has been relatively modest and one of our strategic
      initiatives is to increase our non-interest income. Prior to the third quarter
      of 2008, we experienced increases in non-interest income as a result of fees
      earned from the sale of non-insured investment products and from the gains
      on
      sale of loans. However, in the third quarter of 2008, we recognized a non-cash
      charge to earnings, as a result of an other-than-temporary impairment in the
      value of an investment in our investment portfolio.




Non-interest
      income decreased $1,659,000, or 1580.00%, resulting in a loss of $1,554,000
      for
      the three months ended September 30, 2008, as compared to income of $105,000
      for
      the three months ended September 30, 2007. The primary reason for the decrease
      in non-interest income is a result of a $1,678,000, or 100.00%, increase in
      losses on investments, as a result of an other-than-temporary impairment in
      the
      value of the AMF Ultra Short Mortgage Fund held in our investment portfolio.
      Management felt that the fund was no longer temporarily impaired due to the
      longevity of its impairment and a 12 % rating downgrade, from AAA to Af, as
      a
      result of an increased delinquency of the collateral, although the tranches
      have
      not been affected and the investment is paying as agreed. There were also
      decreases of $11,000, or 61.11% in gains on sale of loans to $7,000 for the
      three months ended September 30, 2008 (as a result of not being able to sell
      as
      many loans on the secondary market due to the depressed market for the sale
      and
      purchase of these loans in the current economic environment), as compared to
      $18,000 for the three months ended September 30, 2007 and $3,000, or 7.32%,
      in
      rental income from our headquarters building to $38,000 for the three months
      ended September 30, 2008, as compared to $41,000 for the three months ended
      September 30, 2007. The decrease in rental income is a result of a tenant we
      lost during the first six months of 2008, who paid rent due pursuant to the
      agreed upon rent schedule only through July 2008. The loss of rental income
      was
      partially offset by increases in rental rates provided for in the applicable
      lease agreements of the remaining tenants. As of September 30, 2008, we leased
      93% of the total leaseable space in our headquarters building. We expect this
      figure to remain constant for the fourth quarter of 2008 as we do not anticipate
      any vacant leaseable space in our headquarters building, other than due to
      the
      tenants mentioned above. These decreases in other income were slightly offset
      by
      a $33,000, or 71.74%, increase in other income (primarily consisting of fees
      earned from the sale of non-insured investment products, processing fees and
      late charges on loan products and income from checking accounts and ATM
      usage).




24




Nine
      months ended September 30, 2008 compared to nine months ended September 30,
      2007 .





Non-interest
      income decreased $1,618,000, or 584.12%, to a loss of $1,341,000 for the nine
      months ended September 30, 2008, as compared to income of $277,000 for the
      nine
      months ended September 30, 2007. The decrease in non-interest income is a result
      primarily of a $1,678,000, or 100.00%, increase in loss on investments discussed
      above with respect to the AMF Ultra Short Mortgage Fund held as well as a
      $43,000, or 75.44%, decrease in the gain on sale of loans due to the same factor
      as stated above for the three-month period. The decreases were partially offset
      by a $23,000, or 19.01%, increase in rental income from our headquarters
      building and an $80,000, or 80.81%, increase in other income. The increase
      in
      other income is due primarily to an increase of $52,000 in fees earned from
      the
      sale of non-insured investment products. Rental income from our headquarters
      building increased as a result of an $11,500 early termination penalty and
      an
      increase in leasing rates to certain non-affiliated tenants since September
      2007, slightly offset by the loss of rent from one tenant during part of the
      period as discussed above.





*Non-interest
      Expense* .





Three
      months ended September 30, 2008 compared to three months ended September 30,
      2007 .





Non-interest
      expense was $948,000 for the three months ended September 30, 2008 as compared
      to $848,000 for the three months ended September 30, 2007, an increase of
      $100,000, or 11.79%. The increase was due primarily to increases of $38,000,
      or
      8.35%, in compensation and related expenses, $22,000, or 56.41%, in advertising
      expenses and $18,000, or 43.90%, in service bureau expenses. The increase in
      compensation and related expenses is primarily the result of the hiring of
      an
      additional experienced commercial loan originator in November 2007. The increase
      in advertising expenses is the result of spending more of the yearly advertising
      budget in the third quarter of 2008 and the increase in service bureau expenses
      is the result of multiple information technology conversions, updates and the
      addition of new products for our customers during the third quarter of 2008.





Nine
      months ended September 30, 2008 compared to nine months ended September 30,
      2007 .





Non-interest
      expense was $2,698,000 for the nine months ended September 30, 2008, as compared
      to $2,482,000 for the nine months ended September 30, 2007, an increase of
      $216,000 or 8.70%. The increase was due primarily to increases of $146,000,
      or
      11.10%, in compensation and related expenses and $24,000, or 19.35%, in service
      bureau expenses. The increase in compensation expenses for the nine months
      ended
      September 30, 2008 is due primarily to the hiring of two experienced commercial
      loan originators, one in February 2007 and the other in November 2007, and
      a
      certified financial planner in June 2007. Service bureau expenses increased
      due
      to the same factors as stated above for the three-month period.


25





*Income
      Tax Expense* .





Three
      months ended September 30, 2008 compared to three months ended September 30,
      2007 .





The
      provision for income taxes was $75,000 for the three months ended September
      30,
      2008 as compared to $21,000 for the three months ended September 30, 2007,
      representing a $54,000, or 257.14%, increase. The increase in the provision
      for
      income taxes was primarily due to our positive income before taxes of $179,000
      for the three months ended September 30, 2008, when adding back the loss on
      investments of $1,678,000, which is treated as a capital loss (and therefore
      may
      not be deducted from taxable income), as compared to income before taxes of
      $48,000 for the three months ended September 30, 2007. Excluding the investment
      loss from pre-tax earnings, the effective tax rate was 41.90% and 43.75% for
      the
      three months ended September 30, 2008 and September 30, 2007, respectively.
      A
      full valuation allowance was recorded on the tax benefit attributable to the
      investment loss.





Nine
      months ended September 30, 2008 compared to nine months ended September 30,
      2007 .





The
      provision for income taxes was $207,000 for the nine months ended September
      30,
      2008, as compared to $6,000 for the nine months ended September 30, 2007,
      representing a $201,000, or 335.00%, increase. The increase in the provision
      for
      income taxes in 2008 was primarily due to our positive income before taxes
      of
      $495,000 for the nine months ended September 30, 2008, when adding back the
      loss
      on investments of $1,678,000, which is treated as a capital loss, as compared
      to
      our pre-tax loss of $15,000 for the nine months ended September 30, 2007. The
      provision for income taxes in 2008 and 2007 was also impacted by non-deductible
      stock-based compensation. The effective tax rate, excluding the investment
      loss
      from pre-tax earnings, was 41.82% and 40.00% for the nine months ended September
      30, 2008 and September 30, 2007, respectively.





**Analysis
      of Financial Condition**





*Assets.*





General .





Our
      total
      assets increased by $3,611,000 or 2.10%, to $175,855,000 at September 30, 2008,
      from $172,244,000 at December 31, 2007. The increase in total assets resulted
      primarily from increases of $7,565,000, or 5.12%, in net loans receivable,
      from
      $147,744,000 at December 31, 2007 to $155,309,000 at September 30, 2008 and
      $877,000, or 68.68% in cash and cash equivalents, from $1,277,000 at December
      31, 2007 to $2,154,000 at September 30, 2008. These increases were offset by
      a
      $3,000,000, or 100.00% decrease in investment securities - held to maturity,
      from $3,000,000 at December 31, 2007 to $0 at September 30, 2008, a $545,000,
      or
      24.25%, decrease in mortgage backed securities held to maturity, from $2,247,000
      at December 31, 2007 to $1,702,000 at September 30, 2008, a $1,134,000, or
      12.68% decrease in investment securities - available for sale, from $8,942,000
      at December 31, 2007 to $7,808,000 at September 30, 2008 and a $138,000, or
      7.48%, decrease in Federal Home Loan Bank stock, to $1,706,000 at September
      30,
      2008 from $1,844,000 at December 31, 2007.





Investment
      Securities .





The
      investment portfolio at September 30, 2008 amounted to $9,510,000, a decrease
      of
      $4,679,000, or 32.98%, from $14,189,000 at December 31, 2007. Investment
      securities - available for sale, decreased $1,134,000, or 12.68%, to $7,808,000
      at September 30, 2008 from $8,942,000 at December 31, 2007, primarily as a
      result of impairment losses of $1,678,000 in these investments. Investment
      securities - held to maturity, decreased $3,000,000, or 100.00%, to $0 at
      September 30, 2008 from $3,000,000 at December 31, 2007, as a result of
      principal repayment on matured investments. Mortgage backed securities - held
      to
      maturity, decreased $545,000, or 24.25%, to $1,702,000 at September 30, 2008
      from $2,247,000 at December 31, 2007, as a result of principal repayments.
      As we
      are not continuing to purchase mortgage-backed securities, we expect continued
      decreases in this asset both in amount and as a percentage of our
      assets .




26




Loan
      Portfolio .





Loans
      receivable, net, increased $7,565,000, or 5.12%, to $155,309,000 at September
      30, 2008 from $147,744,000 at December 31, 2007. The commercial real estate
      loan
      portfolio increased  $5,505,000,
      or 34.70%, to $21,371,000 at September 30, 2008 from $15,866,000 at December
      31,
      2007.  One-to-four
      family residential loans decreased $1,853,000, or 1.65%, to
      $110,385,000  at
      September 30, 2008 from $112,238,000 at December 31, 2007. Our loan customers
      are generally located in the Baltimore Metropolitan area and its surrounding
      counties in 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. We consider repossessed assets and loans
      that are 90 days or more past due to be non-performing assets.


27





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 or other repossessed assets until sold. Such assets
      are recorded at fair value less estimated selling costs 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 at the time of foreclosure 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
      foreclosed real estate or other assets is recorded. We have one foreclosed
      real
      estate participation loan totaling $1,096,000 at September 30,  2008.
      This asset is an acquisition and development real estate participation that
      became delinquent in the fourth quarter of 2004 and was placed on non-accrual
      status in the third quarter of 2005. Both the principal of the borrower and
      the
      entity that owned the collateral property filed for bankruptcy in the fourth
      quarter of 2006. An automatic stay was imposed in connection with the bankruptcy
      filings that had prevented the sale of the property, which was lifted in the
      second quarter of 2007. The property was sold at auction to the lead
      participating bank, requiring us to reclassify the participation as foreclosed
      real estate in the same quarter. Subsequently, a real estate developer made
      an
      offer to purchase the foreclosed property and the lead participating bank
      accepted a letter of intent and executed a contract with a feasibility study
      period, which expired on June 15, 2008. The real estate developer requested
      reinstatement of the contract of sale, but was declined such request. The lead
      lender is negotiating a new contract of sale with a potential buyer who has
      offered to purchase the property at the previously contracted price. We still
      expect to recover the carrying amount of the real estate, although there can
      be
      no assurance that this will be the case. We had foreclosed real estate of
      $1,096,000 at September 30, 2008 and $1,083,000 at December 31, 2007.





Non-accrual
      loans totaled  $1,267,000,
      or 0.82%, $468,000, or 0.32%, and $404,000, or 0.28%, of net loans receivable
      at
      September 30, 2008, December 31, 2007 and September 30, 2007,
      respectively.  Of
      the
      non-accrual loans at September 30, 2008, $100,000 consisted of a commercial
      non-real estate loan, $239,000 consisted of two commercial real estate loans,
      and $928,000 consisted of eight one- to-four-family residential mortgage loans.
      The increase in the amount of non-accrual loans between the first nine months
      of
      2008 and 2007 is due to an increase in the number of residential loans that
      are
      over ninety days past due, primarily during the third quarter of 2008, and
      the
      addition of two commercial real estate loans that are also over ninety days
      past
      due during the third quarter of 2008.





We
      continue to experience an increase in non-performing loans and foreclosed real
      estate from a total of $ 1,551,000 at December 31, 2007 to a total of $2,363,000
      at September 30, 2008. The increase is, as stated above, the result of adding
      two commercial real estate loans totaling $239,000 to non-accrual status. The
      increase is also the result of an increase in the number of residential loans
      90
      days or more past due.





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 when 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.





As
      of
      September 30, 2008, we classified two commercial real estate loans and a
      commercial non-real estate loan as impaired as was discussed in the “Provision
      for Loan Losses and Analysis of Allowance for Loan Losses” section of this
      report. In anticipation of a minimal recovery of principal on the commercial
      non-real estate loan, we charged a portion of the loan balances against our
      allowance for loan losses and we have reserved $100,000, or 100%, of the
      remaining balance of the loan to our allowance for loan losses in 2007. The
      remaining debt was restructured at that time. We also placed the two commercial
      real estate loans on non-accrual status in the third quarter of 2008.




28




We
      have
      also placed a commercial real estate loan in the amount of $1,101,000 on our
      watch list due to slow housing sales. The borrower is a well regarded builder
      and developer and we expect all payments to be made as agreed. As of September
      30, 2008, the loan is being paid as agreed.





Other
      than as disclosed in the paragraphs above, there are no other loans at September
      30, 2008 about which management has serious doubts concerning the ability of
      the
      borrowers to comply with the present loan repayment terms. However, the
      financial market turmoil, causing the Dow Jones Industrial Average to slide
      from
      a high over 14,000 to a low of under 8,000 since the end of 2007, has been
      most
      dramatic in October 2008 after the close of the third quarter of 2008. The
      financial markets have felt the impact of losses on subprime mortgages and
      loss
      of short-term liquidity. In addition, we have seen a number of bank failures,
      while not at historically high levels, that rose to levels not seen for several
      years. Many banks that were not underwriting subprime residential real estate
      loans, including ours, have not experienced the significant losses in their
      loan
      portfolio or the liquidity concerns that the larger banks have experienced.
      However, the magnitude of the financial turmoil in the markets may have an
      impact on our operations in the following areas:





We
      have
      not engaged in the origination of subprime mortgages loans or in subprime
      lending as a business line. We have only engaged in real estate lending using
      rigorous underwriting standards involving substantial collateral protection.
      To
      date, we have not experienced any significant deterioration in our credit
      quality in our two major loan portfolio segments:





Commercial
      Loans: We lend to small to medium sized businesses that do not seem to have
      been
      impacted by the high unemployment rates as the decrease in total jobs trends
      is
      largely attributable to change in the local operations of large corporations.





Residential
      Real Estate Loans: We have not experienced an increase in our foreclosure rates,
      primarily because we did not originate or participate in underwriting subprime
      loans. However, we have experienced an increase in our residential real estate
      loans that are 90 days or more past due, which indicates that we may experience
      an increase in foreclosure rates in the future.





We
      have
      not experienced any liquidity issues as we have, in general, relied on
      asset-based liquidity (i.e. cash flow from maturing investments and loan
      repayments) with liability-based liquidity as a secondary source (Federal Home
      Loan Bank term advances). During the recent period of bank failures, some
      institutions experienced a run on deposits, even though there was no reasonable
      expectation that depositors would lose any of their insured deposits. We intend
      to establish a contingent liquidity plan whose purpose is to ensure that we
      can
      generate an adequate amount of cash to meet a variety of potential liquidity
      crises.





We
      have
      experienced moderate to strong demand for commercial loans in the past year,
      therefore, our commercial real estate loan balances have grown significantly,
      both in dollar amount and as a percentage of the overall loan portfolio. This
      pattern continued during the third quarter of 2008 as the balance in this
      category increased $5,505,000 from the prior quarter. Substantially all of
      the
      commercial real estate loans in our portfolio are extended to businesses located
      within our regional market. We have not experienced any significant weakening
      in
      our commercial real estate loan portfolio, although both the demand for such
      loans and the quality of the portfolio may be negatively affected if the
      national or regional economy continues to weaken going forward.




29




*Liabilities.*





General .





Total
      liabilities increased by $5,218,000, or 3.47%, to $155,693,000 at September
      30,
      2008, from $150,475,000 at December 31, 2007. The increase in total liabilities
      resulted from increases of $9,721,000, or 8.52%, in deposits and $323,000,
      or
      95.28%, in advance payments by borrowers for taxes and insurance, partially
      offset by decreases of $3,500,000, or 10.29%, in borrowings, $830,000, or
      77.07%, in checks outstanding in excess of bank balance and $496,000, or 51.61%,
      in other liabilities. The decrease in borrowings is the result of paying down
      the Federal Home Loan Bank advances when our liquidity is favorable. Advance
      payments by borrowers for taxes and insurance increased because of the increased
      property taxes of 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 $9,721,000, or 8.52%, to $123,819,000 at September 30, 2008 from
      $114,098,000 at December 31, 2007. Certificates of deposits increased
      $7,717,000, or 8.61%, to  $97,392,000  at
      September 30, 2008 from $89,675,000 at December 31, 2007 and NOW and money
      market demand accounts increased by $2,490,000, or 14.91%, to
      $19,195,000  at
      September 30, 2008 from  $16,705,000
      at December 31, 2007. Savings deposits  decreased
      $486,000, or 6.30%, to $7,232,000 at  September
      30, 2008, from $7,718,000 at December 31, 2007. We believe that, as deposit
      rates continue to fall and the stock market remains volatile, our customers
      are
      moving funds into shorter term investments with higher yields or keeping their
      funds liquid in anticipation of an economic recovery, thus accounting for the
      increase in certificate of deposit and core deposit accounts and the decline
      in
      lower rate paying savings deposit accounts.





Borrowings .





At
      September 30, 2008, we were permitted to borrow up  to
      $52,757,000  from
      the
      Federal Home Loan Bank of Atlanta. We had $30,500,000 and $34,000,000 of Federal
      Home Loan Bank advances outstanding as of September 30, 2008 and December 31,
      2007, respectively, and we averaged $31,833,000 and $33,917,000 of Federal
      Home
      Loan Bank advances during the nine months ended September 30, 2008 and the
      year
      ended December 31, 2007, respectively. The decrease in borrowings reflects
      $3,500,000 Federal Home Loan Bank advance pay downs and $33,000,000 in the
      rollover of advances, offset by maturing advances of $33,000,000 in the first
      nine months of 2008.





30


**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, 2008, cash and cash equivalents totaled $2,154,000.
      Securities classified as available-for-sale, which can provide additional
      sources of liquidity, totaled $7,808,000 at September 30, 2008. However, because
      management has the intent and ability to hold these securities until recovery,
      management does not consider these securities as a source of liquidity at
      September 30, 2008.  Also,
      at
      September 30, 2008, we had advances outstanding of $30,500,000 from the Federal
      Home Loan Bank of Atlanta. On that date, we had the ability to borrow an
      additional  $22,257,000.





At
      September 30, 2008, we had outstanding commitments to originate loans
      of  $1,519,000
      (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, although this is unusual. We also
      extend lines of credit to customers, primarily home equity lines of credit.
      The
      borrower is able to draw on these lines as needed, thus the funding is generally
      unpredictable. Unused home equity lines of credit amounted to
      $4,665,000  at
      September 30, 2008. Since the majority of unused lines of credit expire without
      being funded, it is anticipated that our obligation to fund the above commitment
      amounts will be substantially less than the amounts reported.





Certificate
      of deposit accounts scheduled to mature within one year totaled  $65,485,000
      or  52.89%
      of
      total deposits at September 30, 2008. 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, 2009. We believe, however, based on past experience, a significant
      portion of our certificates of deposit will remain with us. We also believe
      we
      have the ability to attract and retain deposits by adjusting the interest rates
      offered.





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, 2008 consisted of  $4,000,000  short
      term fixed rate FHLB advances bearing interest at rates ranging from 2.77%
      to
      3.25% and $26,500,000  long
      term
      convertible rate FHLB advances with fixed  interest
      rates ranging from  3.63%
      to
      4.90%. If not repaid or converted to a different product, the convertible rate
      advances will convert from a fixed to a floating rate after the initial
      borrowing periods ranging from three to sixty months.


31





Our
      primary investing activity is the origination of loans, primarily one- to
      four-family residential mortgage loans and commercial real estate loans. Our
      primary financing activity consists of activity in deposit accounts and Federal
      Home Loan Bank of Atlanta advances. Deposit growth has continued to outpace
      asset growth over the past fifteen to eighteen months and the increased
      liquidity has been placed in a federal funds account with our correspondent
      bank
      and used to pay down borrowed funds and to fund commercial real estate and
      acquisition and renovation loans. Deposit flows are affected by the overall
      level of interest rates, the interest rates and products offered by us and
      our
      local competitors and other factors. We generally manage the pricing of our
      deposits to be competitive. Occasionally, we offer promotional rates on certain
      deposit products to attract deposits.





We
      intend
      to apply to participate in the Treasury Capital Purchase Program under the
      Troubled Asset Relief Program (“TARP”) signed into law on October 3, 2008. If
      approved, we will have thirty days to submit documentation for the use of the
      capital funds. We are requesting a maximum of 3% of our risk weighted assets
      of
      $111,932,000 or approximately $3,358,000. If we are approved to participate
      in
      TARP, we will issue shares of preferred stock to the U.S. Treasury Department
      in
      exchange for the investment. The general terms for participating in the program
      are as follows: pay 5% dividends on the preferred stock for the first five
      years
      and 9% dividends thereafter; cannot increase common stock dividends for three
      years while Treasury is an investor without its permission; Treasury receives
      warrants entitling it to buy a participating company’s common stock equal to 15%
      of Treasury’s total initial investment in the participant; if the participating
      company fails to pay dividends due on the preferred stock for six quarters
      (these need not be consecutive), Treasury has the right to appoint two directors
      to the company’s board of directors; the participating company cannot repurchase
      its own shares of stock without Treasury’s permission; and with restrictions on
      the amount of executive compensation and the amount that is tax deductible,
      the
      participating company’s executives must agree to certain compensation
      restrictions; and other detailed terms and conditions. Please also see our
      discussion in Item 1A. Risk Factors.





Other
      than as discussed in this report, 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 $1,607,000, or 7.38%, to $20,162,000 at September
      30, 2008 from $21,769,000 at December 31, 2007 due to a non-cash charge to
      earnings of $1,678,000 for an other-than-temporary impairment in the value
      of
      investments in our investment portfolio, resulting in a net loss of $1,390,000.
      We also purchased $431,000 in additional Treasury stock during the nine-month
      period. 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.


32




**Financial
                  Instruments Whose****Contract
                  Amount Represents**
              
              
              **Contract
                  Amount At****Credit
                  Risk**
              
              
              **September
                  30, 2008**
              
              
              **December
                  31, 2007**(Dollars
                  in thousands)Lines
                  of credit - commercial
              
              $
              10,669
              
              $
              3,819Lines
                  of credit - home equity
              
              
              4,665
              
              
              4,964Lines
                  of credit - overdraft checking
              
              
              122
              
              
              129Mortgage
                  loan commitments
              
              
              1,519
              
              
              1,541


Commercial
      real estate lines of credit, including equipment lines of credit discussed
      below, 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. The
      available line of credit for commercial real estate loans and non-real estate
      loans, as well as acquisition and development loans and construction loans
      increased by $6,850,000, or 179.37%, from $3,819,000 at December 31, 2007 to
      $10,669,000 at September 30, 2008. The increase is due to an increase in the
      number of commercial real estate loans originated in the nine-month period
      and
      the fact that many of the loans have only used a small portion of their
      available lines of credit. The borrower is able to draw on these lines as
      needed, thus the funding is generally unpredictable.




Equipment
      lines of credit are secured by equipment being purchased and sometimes by a
      blanket lien on assets of the borrower as well. Each advance is repaid over
      a
      term of 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  7.50%
      to
      8.50%  and
      6.250% to 8.250% at September 30, 2008 and December 31, 2007, respectively.
      Loan
      commitments expire 60 days from the date of the commitment.





For
      the
      nine months ended September 30, 2008, 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.


33


**Information
      Regarding Forward-Looking Statements**





In
      addition to the historical information contained in Part I of this Quarterly
      Report on Form 10-Q, the discussion in Part I of this Quarterly Report on Form
      10-Q contains certain forward-looking statements within the meaning of Section
      27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
      Exchange Act of 1934, as amended. 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
      the development and introduction of new products and services, the allowance
      for
      loan losses, leaseable space in our headquarters building, repayment of
      non-accrual and watch list loans, improvement in the value of the Shay AMF
      Ultra
      Short Mortgage Fund, retention of maturing certificates of deposit, liquidity
      management and the establishment of a liquidity plan in a distressed financial
      environment, funding of unused lines of credit, the impact on us of weakening
      financial conditions, potential increases in foreclosure rates, our holding
      of
      investment and mortgage-backed securities 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-Q and in our Annual Report on
      Form
      10-K for the year ended December 31, 2007; the effect of falling interest rates
      on our profits and asset values; risks related to our intended increased focus
      on commercial real estate and commercial business loans; further deterioration
      of economic conditions in our market area; our dependence on key personnel;
      competitive factors within our market area; the effect of developments in
      technology on our business; adverse changes in the overall national economy
      as
      well as adverse economic conditions in our specific market area; adequacy of
      the
      allowance for loan losses; expenses as a result of our stock benefit plans;
      and
      changes in regulatory requirements and/or restrictive banking legislation.





Our
      actual results and the actual outcome of our expectations and strategies could
      differ materially from those discussed herein and you should not put undue
      reliance on any forward-looking statements. All forward-looking statements
      speak
      only as of the date of this filing, and we undertake no obligation to make
      any
      revisions to the forward-looking statements to reflect events or circumstances
      after the date of this filing or to reflect the occurrence of unanticipated
      events.





**Item
      3.**  **Quantitative
      and Qualitative Disclosures About Market Risk**





Not
      applicable





**Item
      4.**  **Controls
      and Procedures**





As
      of the
      end of the period covered by this quarterly report on Form 10-Q, SFSB, Inc.’s
      Chief Executive Officer and Chief Financial Officer evaluated the effectiveness
      of SFSB, Inc.’s disclosure controls and procedures. Based upon that evaluation,
      SFSB, Inc.’s Chief Executive Officer and Chief Financial Officer concluded that
      SFSB, Inc.’s disclosure controls and procedures are effective as of September
      30, 2008. Disclosure controls and procedures are controls and other procedures
      that are designed to ensure that information required to be disclosed by SFSB,
      Inc. in the reports that it files or submits under the Securities Exchange
      Act
      of 1934, as amended, is recorded, processed, summarized and reported within
      the
      time periods specified in the Securities and Exchange Commission’s rules and
      forms.





In
      addition, there were no changes in SFSB, Inc.’s internal control over financial
      reporting (as defined in Rule 13a-15 or Rule 15d-15 under the Securities Act
      of
      1934, as amended) during the quarter ended September 30, 2008, that have
      materially affected, or are reasonably likely to materially affect, SFSB, Inc.’s
      internal control over financial reporting.





34





**PART
      II - OTHER INFORMATION**


Item
      1.Legal
      Proceedings.





None.





Item
      1A.  Risk
      Factors.





During
      the three months ended September 30, 2008, other than as noted below there
      were
      no material changes to the risk factors relevant to our operations, which are
      described in our Annual Report on Form 10-K for the year ended December 31,
      2007.





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





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





On
      October 3, 2008, TARP was signed into law. TARP gave Treasury authority to
      deploy up to $700 billion into the financial system with an objective of
      improving liquidity in capital markets. As discussed above, we intend to apply
      to participate in TARP. As discussed above, if we participate the terms of
      this
      preferred stock program could reduce investment returns to our current
      stockholders by restricting dividends to common stockholders, preventing us
      from
      repurchasing outstanding shares of common stock, diluting existing stockholders’
interests, and restricting capital management practices. Further, we cannot
      ensure that additional restrictions will not be imposed on participating
      companies at a later date nor that any such restrictions would not have a
      material adverse affect on our operations, revenues, income and financial
      condition.





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





Our
      financial results may be adversely affected by changes in prevailing economic
      conditions, including decreases in real estate values, changes in interest
      rates
      which may cause a decrease in interest rate spreads, adverse employment
      conditions, the monetary and fiscal policies of the federal government and
      other
      significant external events. Because most of our loan portfolio is comprised
      of
      real estate related loans, continued decreases in real estate values could
      adversely affect the value of property used as collateral. Although we have
      not
      been impacted by recent adverse economic changes due to our strict underwriting
      standards, further adverse changes in the economy may have a negative effect
      on
      the ability of our borrowers to make timely repayments of their loans, which
      would have an adverse impact on our earnings.




35





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





Our
      liquidity may be adversely affected by the current environment of economic
      uncertainty reducing business activity as a result of, among other factors,
      disruptions in the financial system in the recent past. Dramatic declines in
      the
      housing market during the past year, with falling real estate prices and
      increased foreclosures and unemployment, have resulted in significant asset
      value write-downs by financial institutions, including government-sponsored
      entities and investment banks. These investment write-downs have caused
      financial institutions to seek additional capital.





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





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





**ISSUER
      PURCHASES OF SECURITIES**





**Period**
            
            **Total
                Number of**
              **Shares
                Purchased****(1)**
            
            **Average
                Price**
              **Paid
                per Share**
            
            **Total
                Number of Shares**
              **Purchased
                as Part of**
              **Publicly
                Announced**
              **Plans
                or Programs****(1)**
            
            **Maximum
                Number of Shares that May Yet**
              **Be
                Purchased Under**
              **The
                Plans or**
              **Programs****(1)**July
                1 - 31, 2008
            
            
            59,033
            
            $
            7.05
            
            
            59,033
            
            
            57,941August
                1 -31, 2008
            
            
            0
            
            
            n/a
            
            
            0
            
            
            57,941September
                1 - 30, 2008
            
            
            11,500
            
            $
            6.50
            
            
            11,500
            
            
            46,441**Total
                Third Quarter**
            
            
            **70,533**
            
            **$**
            **6.96**
            
            
            **70,533**
            
            
            **46,441**




(1)  On
      November 21, 2005, SFSB, Inc.’s board of directors adopted a stock repurchase
      program to acquire up to 53,561 shares, or approximately 4% of our outstanding
      common stock held by persons other than Slavie Bancorp, MHC. SFSB, Inc.’s board
      of directors approved additional repurchases of up to an additional 66,951
      shares on May 1, 2006, 62,334 shares on August 6, 2007, 59,052 shares on
      February 19, 2008 and 59,022 on July 21, 2008, in each case constituting
      approximately 5% of its outstanding common stock held by persons other than
      Slavie Bancorp, MHC at such time. Stock purchases are made from time to time
      in
      the open market at the discretion of management. Any share repurchases under
      the
      repurchase program are dependent upon market conditions and other applicable
      legal requirements and must be undertaken within a 12-month period of the
      board’s authorization. As of September 30, 2008, SFSB, Inc. had repurchased
      254,480 shares on the open market at an average cost of  $8.53  per
      share
      to  fund
      a
      stock-based compensation plan and to be held in Treasury. In accordance with
      the
      terms of the stock repurchase program, as of September 30, 2008, and the date
      of
      this filing, SFSB, Inc. is authorized to purchase an additional 46,441 shares
      before July 21, 2009.




Item
      3.Defaults
      Upon Senior Securities.





Not
      applicable.





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




None.





36





Item
      5.  Other
      Information.





None.





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
            Section
                1350 Certification of Chief Executive Officer and Chief Financial
                Officer




37




**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned, thereunto
      duly authorized.





SFSB,
                Inc.Date:
                November 14, 2008
            
            By:
            /s/
                Philip E. LoganPhilip
                E. Logan, President(Principal
                Executive Officer)Date:
                November 14, 2008
            
            By:
            /s/
                Sophie Torin WittelsbergerSophie
                Torin Wittelsberger, Chief Financial Officer(Principal
                Accounting and Financial Officer)





38