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 March 31, 2009 ̈
            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 East
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.


Yesþ                                           Noo





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


Yes o                                           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 May 13, 2009, there were
2,672,652 shares of the issuer’s Common Stock, par value $0.01 per share,
outstanding.











TABLE
OF CONTENTS





Item
                                          
                                          Description
                                          
                                          PagePART
      I1
                                          
                                          Financial
      Statements (Unaudited)Consolidated
      Statements of Financial Condition
                                          
                                          2Consolidated
      Statements of Operations
                                          
                                          3Consolidated
      Statements of Comprehensive Income (Loss)
                                          
                                          4Consolidated
      Statements of Cash Flows
                                          
                                          5Notes
      to Consolidated Financial Statements
                                          
                                          6-102
                                          
                                          Management’s
      Discussion and Analysis of Financial Condition and Results
    ofOperations
                                          
                                          113
                                          
                                          Quantitative
      and Qualitative Disclosures about Market Risk
                                          
                                          284T
                                          
                                          Controls
      and Procedures
                                          
                                          28PART
      II1
                                          
                                          Legal
      Proceedings
                                          
                                          291A
                                          
                                          Risk
      Factors
                                          
                                          292
                                          
                                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                                          
                                          293
                                          
                                          Defaults
      upon Senior Securities
                                          
                                          304
                                          
                                          Submission
      of Matters to a Vote of Securities Holders
                                          
                                          305
                                          
                                          Other
      Information
                                          
                                          306
                                          
                                          Exhibit
      Index
                                          
                                          30Signatures
                                          
                                          31Exhibits
                                          
                                          32











PART
I - FINANCIAL INFORMATION


Item 1. Financial
Statements.


SFSB,
Inc.


CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)




March
      31, 2009
                                                                              
                                                                              
                                                                              December
      31, 2008(Dollars
      in thousands, except per share data)ASSETSCash
      and due from banks
                                                                              
                                                                              $
                                                                              2,633
                                                                              
                                                                              
                                                                              $
                                                                              1,622Federal
      funds sold
                                                                              
                                                                              
                                                                              3,869
                                                                              
                                                                              
                                                                              
                                                                              2,234Cash
      and cash equivalents
                                                                              
                                                                              
                                                                              6,502
                                                                              
                                                                              
                                                                              
                                                                              3,856Investment
      securities - available for sale
                                                                              
                                                                              
                                                                              6,529
                                                                              
                                                                              
                                                                              
                                                                              7,040Mortgage
      backed securities - held to maturity (fair value of2009
      $1,331; 2008 $1,525)
                                                                              
                                                                              
                                                                              1,321
                                                                              
                                                                              
                                                                              
                                                                              1,552Loans
      receivable - net of allowance for loan losses of2009
      $1,205; 2008 $1,149
                                                                              
                                                                              
                                                                              160,369
                                                                              
                                                                              
                                                                              
                                                                              157,309Foreclosed
      real estate
                                                                              
                                                                              
                                                                              1,096
                                                                              
                                                                              
                                                                              
                                                                              1,096Federal
      Home Loan Bank of Atlanta stock, at cost
                                                                              
                                                                              
                                                                              1,912
                                                                              
                                                                              
                                                                              
                                                                              1,899Premises
      and equipment, net
                                                                              
                                                                              
                                                                              4,966
                                                                              
                                                                              
                                                                              
                                                                              4,979Accrued
      interest receivable
                                                                              
                                                                              
                                                                              649
                                                                              
                                                                              
                                                                              
                                                                              648Other
      assets
                                                                              
                                                                              
                                                                              503
                                                                              
                                                                              
                                                                              
                                                                              503Total
      assets
                                                                              
                                                                              $
                                                                              183,847
                                                                              
                                                                              
                                                                              $
                                                                              178,882LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilitiesDeposits
                                                                              
                                                                              $
                                                                              128,358
                                                                              
                                                                              
                                                                              $
                                                                              123,203Checks
      outstanding in excess of bank balance
                                                                              
                                                                              
                                                                              19
                                                                              
                                                                              
                                                                              
                                                                              333Short
      term borrowings
                                                                              
                                                                              
                                                                              10,300
                                                                              
                                                                              
                                                                              
                                                                              10,300Long
      term borrowings
                                                                              
                                                                              
                                                                              25,000
                                                                              
                                                                              
                                                                              
                                                                              25,000Advance
      payments by borrowers for taxes and insurance
                                                                              
                                                                              
                                                                              1,093
                                                                              
                                                                              
                                                                              
                                                                              369Other
      liabilities
                                                                              
                                                                              
                                                                              240
                                                                              
                                                                              
                                                                              
                                                                              540Total
      liabilities
                                                                              
                                                                              
                                                                              165,010
                                                                              
                                                                              
                                                                              
                                                                              159,745Stockholders’
      EquityPreferred
      stock, no par value, 1,000,000 shares authorized,none
      issued and outstanding
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -Common
      stock, par value $.01, 9,000,000 shares authorized,2,975,625
      shares issued at March 31, 2009,and
      December 31, 2008, and 2,672,652 and 2,707,652shares
      outstanding at March 31, 2009 andDecember
      31, 2008, respectively
                                                                              
                                                                              
                                                                              30
                                                                              
                                                                              
                                                                              
                                                                              30Additional
      paid-in capital
                                                                              
                                                                              
                                                                              12,886
                                                                              
                                                                              
                                                                              
                                                                              12,864Retained
      earnings (substantially restricted)
                                                                              
                                                                              
                                                                              9,180
                                                                              
                                                                              
                                                                              
                                                                              9,343Unearned
      Employee Stock Ownership Plan shares
                                                                              
                                                                              
                                                                              (918
                                                                              )
                                                                              
                                                                              
                                                                              (933
                                                                              )Treasury
      Stock at cost, March 31, 2009, 302,973 sharesand
      December 31, 2008, 267,973 shares
                                                                              
                                                                              
                                                                              (2,341
                                                                              )
                                                                              
                                                                              
                                                                              (2,167
                                                                              )Total
      stockholders’ equity
                                                                              
                                                                              
                                                                              18,837
                                                                              
                                                                              
                                                                              
                                                                              19,137Total
      liabilities and stockholders’ equity
                                                                              
                                                                              $
                                                                              183,847
                                                                              
                                                                              
                                                                              $
                                                                              178,882





See
notes to consolidated financial statements.




2




SFSB,
Inc.


CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)





Three
      Months EndedMarch
      31,2009
                                                        
                                                        
                                                        2008(Dollars
      in thousands, except for per share data)Interest
      and fees on loans
                                                        
                                                        $
                                                        2,326
                                                        
                                                        
                                                        $
                                                        2,225Interest
      and dividends on investment securities
                                                        
                                                        
                                                        73
                                                        
                                                        
                                                        
                                                        127Interest
      on mortgage backed securities
                                                        
                                                        
                                                        13
                                                        
                                                        
                                                        
                                                        24Other
      interest income
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        36Total
      interest income
                                                        
                                                        
                                                        2,412
                                                        
                                                        
                                                        
                                                        2,412Interest
      on deposits
                                                        
                                                        
                                                        1,042
                                                        
                                                        
                                                        
                                                        1,176Interest
      on short-term borrowings
                                                        
                                                        
                                                        16
                                                        
                                                        
                                                        
                                                        67Interest
      on long-term borrowings
                                                        
                                                        
                                                        247
                                                        
                                                        
                                                        
                                                        268Total
      interest expense
                                                        
                                                        
                                                        1,305
                                                        
                                                        
                                                        
                                                        1,511Net
      interest income
                                                        
                                                        
                                                        1,107
                                                        
                                                        
                                                        
                                                        901Provision
      for loan losses
                                                        
                                                        
                                                        51
                                                        
                                                        
                                                        
                                                        36Net
      interest income after provision for loanlosses
                                                        
                                                        
                                                        1,056
                                                        
                                                        
                                                        
                                                        865Non-
      interest (loss) incomeImpairment
      charge on investment securities
                                                        
                                                        
                                                        (261
                                                        )
                                                        
                                                        
                                                        -Rental
      income
                                                        
                                                        
                                                        36
                                                        
                                                        
                                                        
                                                        42Other
      income
                                                        
                                                        
                                                        57
                                                        
                                                        
                                                        
                                                        41Total
      non-interest (loss) income
                                                        
                                                        
                                                        (168
                                                        )
                                                        
                                                        
                                                        83Non-interest
      expensesCompensation
      and other related expenses
                                                        
                                                        
                                                        470
                                                        
                                                        
                                                        
                                                        484Occupancy
      expense
                                                        
                                                        
                                                        98
                                                        
                                                        
                                                        
                                                        97Advertising
      expense
                                                        
                                                        
                                                        53
                                                        
                                                        
                                                        
                                                        54Service
      bureau expense
                                                        
                                                        
                                                        61
                                                        
                                                        
                                                        
                                                        47Furniture,
      fixtures and equipment
                                                        
                                                        
                                                        31
                                                        
                                                        
                                                        
                                                        31Telephone,
      postage and delivery
                                                        
                                                        
                                                        23
                                                        
                                                        
                                                        
                                                        21Professional
      fees
                                                        
                                                        
                                                        73
                                                        
                                                        
                                                        
                                                        26OTS
      assessment
                                                        
                                                        
                                                        14
                                                        
                                                        
                                                        
                                                        14FDIC
      assessment
                                                        
                                                        
                                                        26
                                                        
                                                        
                                                        
                                                        3Other
      expenses
                                                        
                                                        
                                                        128
                                                        
                                                        
                                                        
                                                        105Total
      non-interest expenses
                                                        
                                                        
                                                        977
                                                        
                                                        
                                                        
                                                        882(Loss)
      Income before income tax provision
                                                        
                                                        
                                                        (89
                                                        )
                                                        
                                                        
                                                        66Income
      tax provision
                                                        
                                                        
                                                        74
                                                        
                                                        
                                                        
                                                        24Net
      (loss) income
                                                        
                                                        $
                                                        (163
                                                        )
                                                        
                                                        $
                                                        42Basic
      and Diluted (Loss) Earnings per Share
                                                        
                                                        $
                                                        (0.06
                                                        )
                                                        
                                                        $
                                                        0.02




See
notes to consolidated financial statements.





3





SFSB,
Inc.


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)





Three
      Months EndedMarch
      31,2009
                                                              
                                                              
                                                              2008(Dollars
      in thousands)Net
      (loss) income
                                                              
                                                              $
                                                              (163
                                                              )
                                                              
                                                              $
                                                              42Net
      unrealized loss on securitiesAvailable
      for sale during the period(net
      of taxes of $(103) and $(37) prior tovaluation
      allowance)
                                                              
                                                              
                                                              (158
                                                              )
                                                              
                                                              
                                                              (56
                                                              )Securities
      impairment loss reclassificationinto
      Statement of Operations during the period
                                                              
                                                              158
                                                              
                                                              
                                                              
                                                              -Other
      Comprehensive Income (Loss)
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              (56
                                                              )Total
      Comprehensive Loss
                                                              
                                                              $
                                                              (163
                                                              )
                                                              
                                                              $
                                                              (14
                                                              )





See
notes to consolidated financial statements.




4




SFSB,
Inc.


CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)




Three
      Months EndedMarch
      31,2009
                                                            
                                                            
                                                            2008(Dollars
      in thousands)Cash
      Flows From Operating ActivitiesNet
      (loss) income
                                                            
                                                            $
                                                            (163
                                                            )
                                                            
                                                            $
                                                            42Adjustments
      to Reconcile Net (Loss) Income to Net CashUsed
      in Operating Activities:Non-cash
      compensation under stock based compensation plansand
      Employee Stock Ownership Plan
                                                            
                                                            
                                                            37
                                                            
                                                            
                                                            
                                                            41Net
      amortization of premiums and discounts ofmortgage
      backed securities
                                                            
                                                            
                                                            3
                                                            
                                                            
                                                            
                                                            2Amortization
      of deferred loan fees
                                                            
                                                            
                                                            (72
                                                            )
                                                            
                                                            
                                                            (34
                                                            )Provision
      for loan losses
                                                            
                                                            
                                                            51
                                                            
                                                            
                                                            
                                                            36Impairment
      charge on investment securities
                                                            
                                                            
                                                            261
                                                            
                                                            
                                                            
                                                            -Loans
      originated for sale
                                                            
                                                            
                                                            (310
                                                            )
                                                            
                                                            
                                                            (430
                                                            )Proceeds
      from loans sold
                                                            
                                                            
                                                            310
                                                            
                                                            
                                                            
                                                            430Provision
      for depreciation
                                                            
                                                            
                                                            51
                                                            
                                                            
                                                            
                                                            58Increase
      in accrued interest receivable and other assets
                                                            
                                                            
                                                            (1
                                                            )
                                                            
                                                            
                                                            (39
                                                            )Decrease
      in other liabilities
                                                            
                                                            
                                                            (300
                                                            )
                                                            
                                                            
                                                            (317
                                                            )Net
      Cash Used in Operating Activities
                                                            
                                                            
                                                            (133
                                                            )
                                                            
                                                            
                                                            (211
                                                            )Cash
      Flows from Investing ActivitiesPurchase
      of available for sale investment securities
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (104
                                                            )Proceeds
      from redemption of available for sale investment
securities
                                                            
                                                            
                                                            250
                                                            
                                                            
                                                            
                                                            -Proceeds
      from redemption of held to maturity investment securities
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            1,000Net
      increase in loans originated
                                                            
                                                            
                                                            (3,039
                                                            )
                                                            
                                                            
                                                            (3,403
                                                            )Purchase
      of loans
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (134
                                                            )Principal
      collected on mortgage backed securities
                                                            
                                                            
                                                            228
                                                            
                                                            
                                                            
                                                            184Purchase
      of Federal Home Loan Bank of Atlanta stock
                                                            
                                                            
                                                            (13
                                                            )
                                                            
                                                            
                                                            (23
                                                            )Redemption
      of Federal Home Loan Bank of Atlanta stock
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            3Purchase
      of premises and equipment
                                                            
                                                            
                                                            (38
                                                            )
                                                            
                                                            
                                                            (22
                                                            )Net
      Cash Used in Investing Activities
                                                            
                                                            
                                                            (2,612
                                                            )
                                                            
                                                            
                                                            (2,499
                                                            )Cash
      Flows from Financing ActivitiesNet
      increase in deposits
                                                            
                                                            
                                                            5,155
                                                            
                                                            
                                                            
                                                            3,605Decrease
      in checks outstanding in excess of bank balance
                                                            
                                                            
                                                            (314
                                                            )
                                                            
                                                            
                                                            (1,077
                                                            )Increase
      in advance payments by borrowers for taxes and insurance
                                                            
                                                            
                                                            724
                                                            
                                                            
                                                            
                                                            718Purchase
      of treasury stock
                                                            
                                                            
                                                            (174
                                                            )
                                                            
                                                            
                                                            -Net
      Cash Provided by Financing Activities
                                                            
                                                            
                                                            5,391
                                                            
                                                            
                                                            
                                                            3,246Increase
      in cash and cash equivalents
                                                            
                                                            
                                                            2,646
                                                            
                                                            
                                                            
                                                            536Cash
      and cash equivalents at beginning of period
                                                            
                                                            
                                                            3,856
                                                            
                                                            
                                                            
                                                            1,277Cash
      and cash equivalents at end of period
                                                            
                                                            $
                                                            6,502
                                                            
                                                            
                                                            $
                                                            1,813Supplemental
      Disclosures of Cash Flows Information:Income
      taxes paid
                                                            
                                                            $
                                                            143
                                                            
                                                            
                                                            $
                                                            133Interest
      expense paid
                                                            
                                                            $
                                                            1,312
                                                            
                                                            
                                                            $
                                                            1,519  See
notes to consolidated financial
statements.




5




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 61.23% and 60.44% of the outstanding common stock of
the Company as of March 31, 2009, and December 31, 2008,
respectively.





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 unaudited 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, 2008.  The
results of operations for the three months ended March 31, 2009, are not
necessarily indicative of the results that may be expected for the full
year.





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. There are 94,541 and 30,214
anti-dilutive shares at March 31, 2009 and 2008, respectively. Information
related to the calculation of (loss) earnings per share is summarized for the
three months ended March 31 as follows:





(In
      thousands, except per share data)March
      312009
                                
                                
                                2008Net
      (loss) income
                                
                                $
                                (163
                                )
                                
                                $
                                42Weighted
      average common shares outstanding
                                
                                
                                2,588
                                
                                
                                
                                2,716Dilutive
      securities:Stock
      options
                                
                                
                                -
                                
                                
                                
                                -Unvested
      Stock Awards
                                
                                
                                -
                                
                                
                                
                                -Adjusted
      weighted average shares
                                
                                
                                2,588
                                
                                
                                
                                2,716Per
      share amount
                                
                                $
                                (0.06
                                )
                                
                                $
                                0.02




6




Note
4 – Investment Securities – Available for Sale





We
purchased the Shay Asset Management Fund (AMF) Ultra Short Mortgage Fund,
consisting primarily of short-term adjustable rate mortgage securities, to
control our interest rate risk and to generate interest income.  We
purchased the mutual fund incrementally between 2001 and 2003.  As of
March 31, 2009, the mutual fund has a fair value of
$6,529,000.  Management has identified the Shay AMF Ultra Short
Mortgage Fund as an impaired asset, meaning that the fair value is below the
cost of the investment and these securities available for sale are carried at
fair value.  At the end of the third quarter of 2008, management
identified the Shay AMF Ultra Short Mortgage Fund as being
other-than-temporarily impaired and we realized an impairment loss of $2,477,000
on these securities in 2008.  We realized an additional impairment
loss of $261,000 during the quarter ended March 31, 2009.  The
write-down is a result of declines in pricing levels differing from those
existing at the time of the purchase of the fund due to the deterioration of the
underlying collateral portfolio.  The mutual fund has no stated
maturity date.





Note
5 – Regulatory Capital Requirements





At March
31, 2009, the Bank met each of the three minimum regulatory capital
requirements.  The following table summarizes the Bank’s regulatory
capital position at March 31, 2009, and December 31, 2008.





MinimumTo
      Be WellMinimum
                                                                                                                      
                                                                                                                      
                                                                                                                      Capitalized
      UnderFor
      Capital
                                                                                                                      
                                                                                                                      
                                                                                                                      Prompt
      CorrectiveActual
                                                                                                                      
                                                                                                                      
                                                                                                                      Adequacy
      Purposes
                                                                                                                      
                                                                                                                      
                                                                                                                      Action
      ProvisionAmount
                                                                                                                      
                                                                                                                      
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      Amount
                                                                                                                      
                                                                                                                      
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      Amount
                                                                                                                      
                                                                                                                      
                                                                                                                      %(Dollars in thousands)March 31, 2009Tangible
      (1)
                                                                                                                      
                                                                                                                      $
                                                                                                                      14,705
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      7.99
                                                                                                                      %
                                                                                                                      
                                                                                                                      $
                                                                                                                      2,759
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1.50
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      N/A
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      N/ATier
      I risk-based (2)
                                                                                                                      
                                                                                                                      
                                                                                                                      14,705
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      12.71
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      N/A
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      N/A
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      6,941
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      6.00
                                                                                                                      %Core
      (leverage) (1)
                                                                                                                      
                                                                                                                      
                                                                                                                      14,705
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      7.99
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      7,358
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      4.00
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      9,197
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      5.00
                                                                                                                      %Total
      risk-based (2)
                                                                                                                      
                                                                                                                      
                                                                                                                      15,910
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      13.75
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      9,254
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      8.00
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      11,568
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      10.00
                                                                                                                      %December 31, 2008Tangible
      (1)
                                                                                                                      
                                                                                                                      $
                                                                                                                      14,866
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      8.28
                                                                                                                      %
                                                                                                                      
                                                                                                                      $
                                                                                                                      2,693
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1.50
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      N/A
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      N/ATier
      I risk-based (2)
                                                                                                                      
                                                                                                                      
                                                                                                                      14,866
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      13.14
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      N/A
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      N/A
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      6,791
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      6.00
                                                                                                                      %Core
      (leverage) (1)
                                                                                                                      
                                                                                                                      
                                                                                                                      14,866
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      8.28
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      7,181
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      4.00
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      8,977
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      5.00
                                                                                                                      %Total
      risk-based (2)
                                                                                                                      
                                                                                                                      
                                                                                                                      16,015
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      14.15
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      9,054
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      8.00
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      11,318
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      10.00
                                                                                                                      %








(1)  To
      adjusted total assets.


(2)  To
      risk-weighted assets.





Note
6 - Stock-Based Compensation




The
compensation cost charged against income for stock-based compensation plans,
excluding ESOP, was $30,000 for each of the three months ended March 31, 2009
and 2008.  The total income tax benefit recognized was $8,000 for each
of the three months ended March 31, 2009 and 2008.




7




Note
7 – Fair Values for Financial Instruments




FASB
Statement No. 157, Fair Value
Measurements (“SFAS 157”) 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 Company adopted SFAS 157 effective for its fiscal
year beginning January 1, 2008.  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 measurement).




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
financial assets measured at fair value on a recurring basis, the fair value
measurements by level within the fair value hierarchy used at March 31, 2009,
and December 31, 2008, are as follows:





March
      31, 2009:
                    
                    Balance
                    
                    
                    (Level
      1)
                      Quoted
                      Prices
      in
                      Active
                      Markets
      for
                      Identical
                      Assets
                    
                    
                    (Level
      2)
                      Significant
                      Other
                      Observable
                      Inputs
                    
                    
                    (Level
      3)
                      Significant
                      Unobservable
                      Inputs(Dollars
      in thousands)Securities
      available for sale
                    
                    $
                    6,529
                    
                    
                    $
                    6,529
                    
                    
                    $
                    -
                    
                    
                    $
                    -December
      31, 2008:(Dollars
      in thousands)Securities
      available for sale
                    
                    $
                    7,040
                    
                    
                    $
                    7,040
                    
                    
                    $
                    -
                    
                    
                    $
                    -





The
following valuation technique was used to measure the fair value of assets in
the table above on a recurring basis as of March 31, 2009, and December 31,
2008.





Available for sale securities
– The fair value of available for sale investment securities was based on
available market pricing for the securities.





8





The
following valuation technique was used to measure the fair value of an impaired
loan on a non-recurring basis as of March 31, 2009, and December 31,
2008.





Impaired Loans – Impaired
loans are those that are accounted for under FASB Statement No. 114, Accounting by Creditors for
Impairment of a Loan(“SFAS 114”),in which the Company has
measured impairment generally based on the fair value of the loan’s
collateral.  Fair value is generally determined based upon independent
third-party appraisals of the properties, or discounted cash flows based upon
the expected proceeds.  These assets are included as Level 3 fair
value, based upon the lowest level of input that is significant to the fair
value measurements.  The fair value consisted of a loan balance of
$100,000, net of a valuation allowance of $100,000, for a Level 3 value of
$0.





Note
8 – Income Tax Provision





The
provision for income taxes was $74,000 and $24,000 for the three months ended
March 31, 2009 and 2008, respectively.  We calculated a provision for
income taxes even though we show a loss before income taxes of $89,000 for the
three months ended March 31, 2009, because the impairment loss on our
investments of $261,000 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 ended March 31, 2009, if we have a feasible plan implemented to generate
capital gains to offset the capital losses.  A full valuation
allowance was recorded on the tax benefit attributable to the investment loss
due to our uncertain ability to generate sufficient capital gains to utilize the
capital loss.





Note
9 - Recent Accounting Pronouncements




In April
2009, the FASB issued FASB Staff Position (FSP) No. FAS 157-4,
Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions that are not
Orderly (FSP FAS 157-4).  FASB Statement 157, Fair Value Measurements,
defines fair value as the price that would be received to sell the asset or
transfer the liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement
date under current market conditions.   FSP FAS 157-4 provides
additional guidance on determining when the volume and level of activity for the
asset or liability has significantly decreased.  The FSP also includes
guidance on identifying circumstances when a transaction may not be considered
orderly.




FSP FAS
157-4 provides a list of factors that a reporting entity should evaluate to
determine whether there has been a significant decrease in the volume and level
of activity for the asset or liability in relation to normal market activity for
the asset or liability.  When the reporting entity concludes there has
been a significant decrease in the volume and level of activity for the asset or
liability, further analysis of the information from that market is needed and
significant adjustments to the related prices may be necessary to estimate fair
value in accordance with SFAS 157.




This FSP
clarifies that when there has been a significant decrease in the volume and
level of activity for the asset or liability, some transactions may not be
orderly. In those situations, the entity must evaluate the weight of the
evidence to determine whether the transaction is orderly.  The FSP
provides a list of circumstances that may indicate that a transaction is not
orderly.  A transaction price that is not associated with an orderly
transaction is given little, if any, weight when estimating fair
value.




This FSP
is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009.  The Company is currently assessing the impact of FSP FAS 157-4
on its consolidated financial position and results of operations.




9




In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS
124-2).  FSP FAS 115-2 and FAS 124-2 clarify the interaction of the
factors that should be considered when determining whether a debt security is
other-than-temporarily impaired.  For debt securities, management must
assess whether (a) it has the intent to sell the security and (b) it
is more likely than not that it will be required to sell the security prior to
its anticipated recovery. These steps are done before assessing whether the
entity will recover the cost basis of the investment.  Previously,
this assessment required management to assert it has both the intent and the
ability to hold a security for a period of time sufficient to allow for an
anticipated recovery in fair value to avoid recognizing an other-than-temporary
impairment.  This change does not affect the need to forecast recovery
of the value of the security through either cash flows or market
price.




In
instances when a determination is made that an other-than-temporary impairment
exists but the investor does not intend to sell the debt security and it is more
likely than not that it will be required to sell the debt security prior to its
anticipated recovery, FSP FAS 115-2 and FAS 124-2 changes the presentation and
amount of the other-than-temporary impairment recognized in the income
statement.  The other-than-temporary impairment is separated into
(a) the amount of the total other-than-temporary impairment related to a
decrease in cash flows expected to be collected from the debt security (the
credit loss) and (b) the amount of the total other-than-temporary
impairment related to all other factors.  The amount of the total
other-than-temporary impairment related to the credit loss is recognized in
earnings.   The amount of the total other-than-temporary
impairment related to all other factors is recognized in other comprehensive
income.




This FSP
is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009.  The Company is currently assessing the impact of FSP FAS 115-2
and FAS 124-2 on its consolidated financial position and results of
operations.




In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments (FSP FAS 107-1 and APB
28-1).  FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107,
Disclosures about Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial
statements.  This FSP also amends APB Opinion No. 28, Interim
Financial Reporting, to require those disclosures in summarized financial
information at interim reporting periods.




This FSP
is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009.  The Company is currently assessing the impact of FSP FAS 107-1
and APB 28-1 on its consolidated financial position and results of
operations.




10





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 $163,000 for the three months ended March 31, 2009, as
compared to net income of $42,000 for the same period in 2008.  This
decline was primarily due to a non-cash charge to earnings of $261,000 as a
result of an other-than-temporary impairment in the value of the AMF Ultra Short
Mortgage Fund held in our investment portfolio.  This impairment loss
is the primary reason for the decrease of $205,000, or 488.10%, in net income
(loss) during the three-month period compared to the same period in 2008, as
well as for the decrease in non-interest income of $251,000, or 302.41%, during
the period.  The decline in earnings is also the result of an increase
of $95,000, or 10.77%, in non-interest expenses, primarily as a result of
increases in professional fees related to an increase in accounting fees, our
FDIC assessment and an increase in other expenses related to an increase in the
cost to provide additional electronic delivery channels to our customers,
including an upgrade to our internet banking system and the addition of remote
deposit for commercial accountholders and check imaging services for checking
accountholders (with the option to receive their monthly account activity
electronically via E-statements).  These declines were partially
offset by a decrease of $206,000, or 13.63%, in interest expense primarily as a
result of decreases in the interest rates we pay on deposit
accounts.  These rates declined as a result of the decrease in the
Prime Rate.





Assets
increased 2.78% during the first three months of 2009 primarily because of a
1.95% increase in our loan portfolio and a 68.62% increase in cash and cash
equivalents, partially offset by decreases in investment securities available
for sale of 7.26% and mortgage backed securities held to maturity of 14.88%
compared to December 31, 2008.





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 is a foreclosed real estate
participation loan.  The property is currently under a purchase
agreement that is subject to (i) completion of a feasibility study that allows
the buyer to perform due diligence with respect to environmental approvals and
permits and (ii) a zoning change from partially residential and commercial
development to strictly commercial development.  Once the zoning
change is approved by the city council of the local municipality, the buyer
expects to settle on the subject property.  The zoning change approval
is expected by June 2009, which is expected to coincide with the results of the
environmental due diligence mentioned above.  We still believe that we
will recover the carrying amount of the real estate, 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 and two acquisition and renovation loans
totaling $201,000 are also classified as impaired as we believe that it may
become difficult to collect the entire amount of the outstanding principal
balances on these loans.




11




To remain
competitive and offer even more choices to our customers, in 2008 we implemented
remote deposit for commercial accountholders and check imaging services for our
checking accountholders.  We expanded our Automated Teller Machine
network to include access to more than 52,500 ATMs throughout the United
States.  We offer a 13 month relationship certificate of deposit and a
premium rate checking account with what we believe are attractive interest
rates.  We have also implemented a Slavie credit card, foreign
currency services for our customers traveling abroad and coin counting services
in each of our branch lobbies.  In the first quarter of 2009, we
implemented a Health Savings Account debit card and the option for our checking
accountholder to receive their monthly account activity electronically via
E-statements.





As a
gesture of our commitment to our customers and neighbors, and as a result of
successful events held in 2008 and 2007, the Bank celebrated Customer
Appreciation Days at each of its two branch locations again in the first quarter
of 2009, promoting its newest products.  Also, in the first quarter of
2009, we participated in the Maryland Saves “Roll in the Dough” campaign to
encourage individuals to save.  We also offer a comprehensive and
full-service approach to managing finances and investing in the
future.  The creation of Slavie Financial Services in mid-year 2007,
the addition of a certified financial planner at that time and an investment
planner in November 2008 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.  In “Today’s Slavie”, our quarterly newsletter, we keep our
customers informed of what is happening at the Bank.





In
addition to the variety of products we offer, including the new ones mentioned
above, our product development and review committee expects to have the Bank
implement on-line account opening for a special “on-line only” savings account
paying a competitive rate.  We also plan to implement a new children’s
savings program.  We expect to develop and offer these services during
2009.





We
continue to implement the strategies outlined in the strategic plan
developed by the Board of Directors and the Company’s officers.  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 other types of 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 yield on our interest bearing liabilities.  Our
directors, officers, management and staff remain committed in a unified effort
to improve the Bank’s profitability and net interest margin.





Key
measurements and events for the three-month period ended March 31, 2009, include
the following:





·
            Total
      assets at March 31, 2009, increased by 2.78% to $183,847,000, as compared
      to $178,882,000 as of December 31,
2008.





·
            Net
      loans outstanding increased by 1.95% to $160,369,000 as of March 31, 2009
      from $157,309,000 as of December 31,
2008.





·
            Nonperforming
      loans and foreclosed real estate totaled $4,235,000 at March 31, 2009, as
      compared with a total of $2,615,000 at December 31, 2008.  We
      believe an appropriate allowance for loan losses continues to be
      maintained.





·
            Deposits
      at March 31, 2009, were $128,358,000, an increase of $5,155,000 or 4.18%
      from $123,203,000 at December 31,
2008.





·
            We
      realized a net loss of $163,000 for the three-month period ended March 31,
      2009, compared to net income of $42,000 for the three-month period ended
      March 31, 2008.  This decrease reflects primarily a $261,000
      non-cash charge to earnings, as a result of an other-than-temporary
      impairment in the value of an investment in our investment
      portfolio.




12




·
            Net
      interest income, our main source of income, was $1,107,000 during the
      three-month period ended March 31, 2009, compared to $901,000 for the same
      period in 2008.  This represents an increase of 22.86% for the
      three months ended March 31, 2009, as compared to the same period in
      2008.  Our interest rate spread increased by 57 basis points,
      from 1.75% at March 31, 2008, to 2.32% at March 31, 2009.  Our
      net interest margin was 2.56% at March 31, 2009, as compared to 2.17% at
      March 31, 2008, an increase of 39 basis points, or
  17.97%.





·
            We
      had no loan charge-offs during the three-month period ended March 31,
      2009.  We had three overdraft protection loan charge-offs
      totaling $1,000 during the same period in
2008.





·
            Non-interest
      income decreased by $251,000, or 302.41%, for the three-month period ended
      March 31, 2009, as compared to the same period in 2008.  The
      decline between periods is primarily the result of an investment
      securities write-down.





·
            Non-interest
      expense increased by $95,000, or 10.77%, for the three-month period ended
      March 31, 2009, as compared to the same period in 2008, from $882,000 to
      $977,000.  The increase between the periods is primarily the
      result of an increase in professional fees, our FDIC assessment and in the
      cost to provide additional electronic delivery channels to our
      customers.





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 warrants an impairment write-down or
valuation allowance to be established, or when an asset or liability needs to be
recorded contingent upon a future event. Carrying assets and liabilities at fair
value inherently results in more financial statement volatility. The fair values
and the information used to record valuation adjustments for certain assets and
liabilities are based either on quoted market prices or are provided by other
third-party sources, when available.





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




13




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. If the fair value of these
securities does not recover in a reasonable period of time or management can no
longer demonstrate the ability and intent to hold them until recovery, a write
down through the statement of operations would be necessary. Realized gains and
losses on sales, determined using the specific identification method, and
other-than-temporary impairment of investment securities are included in
earnings. As declines in the fair value of available for sale and held to
maturity securities that cause them to drop below their cost are deemed to be
other-than-temporary in nature, such declines are reflected in earnings as
realized losses. 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 the 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 March 31, 2009, the mutual fund has a fair value of
$6,529,000.  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.  In 2008, the Company identified the Shay AMF Ultra Short
Mortgage Fund as being other-than-temporarily impaired and realized an
impairment loss of $2,477,000 on these securities.  We realized an
additional impairment of $261,000 in the first quarter of 2009.  The
write-down is a result of declines in pricing levels differing from those
existing at the time of the purchase of the fund due to the deterioration of the
underlying collateral portfolio.  The loss on our investments of
$261,000 is treated as a capital loss and we would only be able to recognize a
tax benefit for the three months ended March 31, 2009, if we have a feasible
plan implemented to generate capital gains to offset the capital
losses.  We would have to implement a feasible plan, such as the sale
of a branch building, within the next five years, in order to be able to
recognize the tax benefit.  Since we do not intend to sell a branch or
take any other action that would create a capital gain, we do not expect to be
able to utilize this potential tax benefit.  A full valuation
allowance was recorded on the tax benefit attributable to the investment loss
due to our uncertain ability to generate sufficient capital gains to utilize the
capital loss.  The mutual funds have no stated maturity
date.





The Shay
Asset Management Fund continues to pay an attractive yield, as has been the case
since our initial investment.  However, although the mutual fund holds
primarily the highest quality credit rated 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 12 months forced us to
recognize the Shay AMF Ultra Short Mortgage Fund as being an
other-than-temporarily impaired asset and recognized an additional impairment
loss of $261,000 on these securities.  Further, in order to reduce our
exposure to continued short-term volatility in the value of this asset,
management initiated a $250,000 90-day rolling period redemption of shares in
the fund, beginning with the first quarter of 2009.  Because we did
not receive accounting relief from FASB’s latest ruling on other-than-temporary
impairment, we will continue to redeem the $250,000 90-day rolling period
maximum allowed.  Management anticipates that, over time, the asset
values of the fund will improve as liquidity is restored to the
market.




14




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.  In determining the valuation allowance, management
considers the estimated net realizable value of the property collateralizing the
loan, including liquidation expenses.





Management’s
judgment is inherent in the determination of the provision and allowance for
loan losses, including in connection with the valuation of collateral and the
financial condition of the borrower.  The establishment of allowance
factors is a continuing exercise and allowance factors may change over time,
resulting in an increase or decrease in the amount of the provision or allowance
based upon the same volume and classification of loans.  Changes in
allowance factors or in management’s interpretation of those factors will have a
direct impact on the amount of the provision, and a corresponding effect on
income and assets.  Also, errors in management’s perception and
assessment of the allowance factors could result in the allowance not being
adequate to cover losses in the portfolio, and may result in additional
provisions or charge-offs, which would adversely affect income and
capital.  For additional information regarding the allowance for loan
losses, see “Results of Operations for the Three Months Ended March 31, 2009 and
2008 - Provision for Loan Losses and Analysis of Allowance for Loan
Losses.”





Results
of Operations for the Three Months Ended March 31, 2009 and 2008





General.  Net
income decreased $205,000 to a net loss of $163,000 for the three months ended
March 31, 2009, compared to net income of $42,000 for the same period in the
prior year.  The decrease was due primarily to a $251,000 decrease in
non-interest income and a $95,000 increase in non-interest expense, partially
offset by a $206,000 decrease in interest expense.





Average Balances, Net Interest
Income, Yields Earned and Rates Paid.The following table
presents 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 as 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.




15


Three
      Months Ended
                  March
      31, 2009
              
              
              Three
      Months Ended
                  March
      31, 2008Average
                  Outstanding
                  Balance
              
              
              Interest
                  Earned/
                  Paid
              
              
              Yield/
                  Rate
              
              
              Average
                  Outstanding
                  Balance
              
              
              Interest
                  Earned/
                  Paid
              
              
              Yield/
                  Rate(Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable(1)
              
              $
              159,203
              
              
              $
              2,326
              
              
              
              5.84
              %
              
              $
              149,821
              
              
              $
              2,225
              
              
              
              5.94
              %Mortgage-backed
      securities
              
              
              1,403
              
              
              
              13
              
              
              
              3.71
              
              
              
              2,131
              
              
              
              24
              
              
              
              4.50Investment
      securities (available for sale)
              
              
              6,743
              
              
              
              73
              
              
              
              4.33
              
              
              
              8,969
              
              
              
              104
              
              
              
              4.64Investment
      securities (held to maturity)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,333
              
              
              
              23
              
              
              
              3.94Other
      interest-earning assets (2)
              
              
              5,865
              
              
              
              -
              
              
              
              -
              
              
              
              2,784
              
              
              
              36
              
              
              
              5.17Total
      interest-earning assets
              
              
              173,214
              
              
              
              2,412
              
              
              
              5.57
              %
              
              
              166,038
              
              
              
              2,412
              
              
              
              5.81
              %Non-interest
      earning assets
              
              
              9,880
              
              
              
              
              
              
              
              
              
              
              
              7,845Total
      assets
              
              $
              183,094
              
              
              
              
              
              
              
              
              
              
              $
              173,883Interest-bearing
      liabilities:Savings
      deposits
              
              $
              12,949
              
              
              
              18
              
              
              
              0.56
              %
              
              $
              14,291
              
              
              
              36
              
              
              
              1.01
              %Demand
      and NOW accounts
              
              
              11,680
              
              
              
              43
              
              
              
              1.47
              
              
              
              8,730
              
              
              
              58
              
              
              
              2.66Certificates
      of deposit
              
              
              100,446
              
              
              
              981
              
              
              
              3.91
              
              
              
              91,520
              
              
              
              1,082
              
              
              
              4.73Escrows
              
              
              1
              
              
              
              -
              
              
              
              -
              
              
              
              1
              
              
              
              -
              
              
              
              -Borrowings
              
              
              35,300
              
              
              
              263
              
              
              
              2.98
              
              
              
              34,167
              
              
              
              335
              
              
              
              3.92Total
      interest-bearing liabilities
              
              
              160,376
              
              
              
              1,305
              
              
              
              3.25
              %
              
              
              148,709
              
              
              
              1,511
              
              
              
              4.06
              %Non-interest
      bearing liabilities
              
              
              3,719
              
              
              
              
              
              
              
              
              
              
              
              3,377Total
      liabilities
              
              
              164,095
              
              
              
              
              
              
              
              
              
              
              
              152,086Total
      equity(3)
              
              
              18,999
              
              
              
              
              
              
              
              
              
              
              
              21,797Total
      liabilities and equity
              
              $
              183,094
              
              
              
              
              
              
              
              
              
              
              $
              173,883Net
      interest income
              
              
              
              
              
              $
              1,107
              
              
              
              
              
              
              
              
              
              
              $
              901Interest
      rate spread(4)
              
              
              
              
              
              
              
              
              
              
              2.32
              %
              
              
              
              
              
              
              
              
              
              
              1.75
              %Net
      interest-earning assets
              
              $
              12,838
              
              
              
              
              
              
              
              
              
              
              $
              17,329Net
      interest margin(5)
              
              
              
              
              
              
              
              
              
              
              2.56
              %
              
              
              
              
              
              
              
              
              
              
              2.17
              %Ratio
      of interest earning assets to interest bearing liabilities
              
              
              
              
              
              
              1.08x
              
              
              
              
              
              
              
              
              
              
              
              1.11x





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


(2)
            The
      Federal Home Loan Bank did not pay dividends during the first quarter of
      2009.  Interest earned on other interest-earning assets includes
      the reversal of an accrual for the fourth quarter of
      2008.  Therefore, interest earned during the first quarter of
      2009 was $300.00


(3)
            Total
      equity includes retained earnings and accumulated other comprehensive
      income (loss).


(4)
            Net
      interest rate spread represents the difference between the average yield
      on interest earning assets and the average cost of interest bearing
      liabilities.


(5)
            Net
      interest margin represents net interest income as a percentage of average
      interest earning assets.





Net Interest
Income.





Net
interest income increased $206,000, or 22.86%, to $1,107,000 for the three
months ended March 31, 2009, from $901,000 for the three months ended March 31,
2008.  The increase was a result of a $7,176,000, or 4.32%, increase
in average interest earning assets to $173,214,000 from $166,038,000 and an 81
basis point decrease in the cost of average interest bearing liabilities, from
4.06% to 3.25%.  These were partially offset by a decrease of 24 basis
points in the yield on average interest earning assets, from 5.81% to 5.57% and
an $11,667,000, or 7.84%, increase in average interest bearing liabilities to
$160,376,000 from $148,709,000.





Our
interest rate spread increased to 2.32% for the quarter ended March 31, 2009,
from 1.75% for the quarter ended March 31, 2008, reflecting a decrease in the
cost of our average interest bearing liabilities.  Our net interest
margin increased to 2.56% from 2.17%, because of a decrease in the cost of the
average interest bearing liabilities.  The ratio of interest earning
assets to interest bearing liabilities decreased to 1.08 times for the three
months ended March 31, 2009, from 1.11 times for the same period in
2008.




16




Interest Income





Interest
income remained steady at $2,412,000 for the three months ended March 31, 2009
and for the same period of 2008.  There was an increase of $101,000,
or 4.54%, in interest and fee income from loans during the 2009 period,
partially offset by decreases of $54,000, or 42.52%, in interest income from
investment securities, $36,000, or 100.00% (to $300 in the 2009 period), in
interest income from other interest-earning assets (primarily consisting of
interest earned on federal funds sold) and $11,000, or 45.83%, in interest
income from mortgage backed securities.





Also
reflected is a 24 basis point decrease in the yield on average interest earning
assets to 5.57% for the three months ended March 31, 2009, from 5.81% for the
three months ended March 31, 2008.  This is due to our loans repricing
at lower market interest rates and a decrease on the interest rate yield we
received on our investments.  The decrease is also due to the Federal
Home Loan Bank (“FHLB”) not making a dividend payment on their stock during the
first quarter of 2009.





The
increase in interest income and fees on loans was due to a $9,382,000, or 6.26%,
increase in average net loans receivable, from $149,821,000 to $159,203,000,
slightly offset by a 10 basis point decrease in the average yield on net loans
receivable.  The decrease in interest income from investment
securities was primarily reflective of a 31 basis point decrease in the average
yield and a $2,226,000, or 24.82%, decrease in the average balance of the
investment securities.  The decrease in interest income from other
interest-earning assets (federal funds sold and Federal Home Loan Bank stock)
was due to a 517 basis point decrease in the average yield on other
interest-earning assets (as a result of decreases in short term market interest
rates and a decision by the FHLB system to not pay dividends on their stock
during the quarter whereas they had paid such dividends during the first quarter
of 2008, as well as the reversal for the accrual of the dividend for the fourth
quarter of 2008), partially offset by a $3,081,000, or 110.67%, increase in
these assets, from $2,784,000 during the quarter ended March 31, 2008, to
$5,865,000 during the quarter ended March 31, 2009 (as a result of a concerted
effort to increase our liquidity position).





The
decrease in interest income from mortgage backed securities was primarily the
result of a $728,000, or 34.16%, decrease in the average balance of
mortgage-backed securities and a 79 basis point decrease in the yield on these
securities.  The decrease in the average yield on the mortgage backed
securities is due to the repricing of our Ginnie Mae Adjustable Rate Mortgage
investments at a lower rate than the prior period.





Interest Expense





Interest
expense, which consists of interest paid on deposits and borrowings, decreased
by $206,000, or 13.63%, to $1,305,000 for the three months ended March 31, 2009,
from $1,511,000 for the three months ended March 31, 2008.  The
decrease in interest expense resulted from decreases of $134,000, or 11.39%, in
interest paid on deposits, $51,000, or 76.12%, in interest paid on short-term
borrowings and $21,000, or 7.84%, in interest paid on long-term
borrowings.  The decrease in interest expense reflects an 81 basis
point decrease in the cost of average interest-bearing liabilities, to 3.25% for
the three months ended March 31, 2009 from 4.06% for the three months ended
March 31, 2008, while the balance of average interest bearing liabilities
increased by $11,667,000, or 7.85%, from $148,709,000 for the three months ended
March 31, 2008 to $160,376,000 for the three months ended March 31,
2009.  Interest paid on deposits decreased due to a decrease of 78
basis points in the average cost of deposits as a result of lower market
interest rates, partially offset by an increase in the average balance of
interest bearing deposits to $125,075,000 for the three months ended March 31,
2009, from $114,541,000 for the same period of 2008.  The decrease in
interest paid on borrowings is a result of a decrease in the average cost of
borrowings by 94 basis points as a result of borrowing at lower interest rates,
partially offset by an increase in the average balance of borrowings to
$35,300,000 for the three months ended March 31, 2009, from $34,167,000 for the
three months ended March 31, 2008.





17


Provision for Loan Losses and
Analysis of Allowance for Loan Losses.We establish provisions
for loan losses, which are charged to operations, at a level estimated as
necessary to absorb known and inherent losses that are both probable and
reasonably estimable at the date of the financial statements.  In
evaluating the level of the allowance for loan losses, management considers,
among other things, historical loss experience, the types of loans and the
amount of loans in the loan portfolio, adverse situations that may affect the
borrower’s ability to repay, estimated value of any underlying collateral, and
prevailing economic conditions (particularly as such conditions relate to our
market area).  We charge losses on loans against the allowance when we
believe that collection of loan principal is unlikely.  Recoveries on
loans previously charged off are added back to the allowance.
 
 Based on
our evaluation of these factors, and as discussed further below, management made
a provision of $51,000 and $36,000 for the three months ended March 31, 2009 and
March 31, 2008, respectively.  There were no loan charge-offs during
the three-month period ended March 31, 2009.  There were three
overdraft protection loan charge offs of $1,000 during the three-month period
ended March 31, 2008.  In the third quarter of 2008, we developed a
more stringent methodology for determining 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 decline of the current economic conditions.
 
 Our
methodology for assessing the adequacy of the allowance for loan losses consists
of three key elements:  (1) specific allowances for identified problem
loans, including primarily collateral-dependent loans; (2) a general valuation
allowance on certain identified problem loans that do not meet the definition of
impaired; and (3) a general valuation allowance on the remainder of the loan
portfolio.
  Specific Allowance on Identified
Problem Loans. The loan portfolio is segregated first between loans that
are on our “watch list” and loans that are not.  Our watch list
includes:
  ·
              loans
      90 or more days delinquent;
 
 ·
              loans
      with anticipated losses;
 
 ·
              loans
      referred to attorneys for collection or in the process of
      foreclosure;
 
 ·
              non-accrual
      loans;
 
 ·
              loans
      classified as substandard, doubtful or loss by either our internal
      classification system or by regulators during the course of their
      examination of us; and
 
 ·
              troubled
      debt restructurings and other non-performing
  loans.
 
 Two of
our officers review each loan on the watch list and establish an individual
allowance allocation on certain impaired loans based on such factors
as:  (1) the strength of the customer’s personal or business cash
flow; (2) the availability of other sources of repayment; (3) the amount due or
past due; (4) the type and value of collateral; (5) the strength of our
collateral position; (6) the estimated cost to sell the collateral; and (7) the
borrower’s efforts to cure the delinquency.
  We 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.




18




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 $1,205,000, or 0.72%, of gross loans
outstanding of $167,112,000 at March 31, 2009, compared to an allowance for loan
losses of $1,149,000, or 0.70%, of gross loans outstanding of $164,164,000 at
December 31, 2008, and $1,007,000, or 0.66%, of gross loans outstanding of
$152,754,000 at March 31, 2008. The increase to the loan loss reserve is due to
the increased commercial real estate loan balances, which creates a riskier mix
of loan products since commercial loans are considered to be higher risk than
residential mortgage loans, as well as an increase in non-accrual loans at March
31, 2009. We have classified two commercial real estate loans and two
acquisition and renovation loans, with balances totaling $440,000 at March 31,
2009, as impaired as we believe there is a possibility that we may not collect
all outstanding balances due. We classified the two commercial real estate
loans, with balances totaling $239,000, as impaired during 2008. 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 which was converted to a Chapter 7 personal bankruptcy
in October 2008. Our attorney filed an Order of Relief from Stay on mid-November
2008 and sent the Notice of Intent to Foreclose in December 2008. We purchased
one of the properties at a foreclosure auction in March 2009. We await the
ratification of the sale to place the loan in foreclosed real estate. We also
await resolution of a judgment of title issue on the second property. The two
acquisition and renovation loans, totaling $201,000, were classified as impaired
in the first quarter of 2009. These two properties are both slated for
foreclosure sales in May 2009. We have adequate allowance for loan loss
provisions for these four loans. In addition, as of March 31, 2009, and December
31, 2008, pursuant to regulatory requirements, 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.




19




The
following table summarizes the activity in the provision for loan losses for the
three months ended March 31, 2009 and 2008:





Three
      Months EndedMarch
      31,2009
                    
                    
                    2008(Dollars
      in thousands)Balance
      at beginning of period
                    
                    $
                    1,149
                    
                    
                    $
                    972Charge-offs
      (1)
                    
                    
                    -
                    
                    
                    
                    (1
                    )Recoveries
      (2)
                    
                    
                    5
                    
                    
                    
                    -Net
      charge-offs
                    
                    
                    5
                    
                    
                    
                    (1
                    )Provision
      for loan losses
                    
                    
                    51
                    
                    
                    
                    36Ending
      balance
                    
                    $
                    1,205
                    
                    
                    $
                    1,007Ratio
      of net charge-offs during the period to average loans outstanding, net,
      during the period
                    
                    
                    -
                    %
                    
                    
                    -
                    %Ratio
      of allowance for loan losses to total loans outstanding
                    
                    
                    0.72
                    %
                    
                    
                    0.66
                    %Allowance
      for loan losses as a percent of total non-performing loans
                    
                    
                    38.39
                    %
                    
                    
                    66.29
                    %


(1)
            Charge
      offs consisted of the principal loss of three overdraft protection lines
      of credit totaling $1,000 in 2008.


(2)
            Recoveries
      consisted of the principal repayment from the bankruptcy court on a
      commercial non-real estate loan we charged off in
  2007.





Non-interest (Loss)
Income





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 gain on
sale of loans. However, beginning with the third quarter of 2008, and including
the first quarter of 2009, we have 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 $251,000, or 302.41%, to a loss of $168,000 for the three
months ended March 31, 2009, as compared to income of $83,000 for the three
months ended March 31, 2008. The decrease in non-interest income is primarily
the result of a $261,000 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. The fund is considered 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. Management determined
during the third quarter of 2008 that the fund was no longer temporarily
impaired due to the longevity of its impairment and a credit rating downgrade,
from AAA to Af, as a result of an increase of delinquencies in the underlying
collateral. As a result, we continue to recognize an impairment based on
continued declines in pricing levels of the fund from those existing at the time
of our purchase of the fund. There was also a decrease of $6,000, or 14.29%, in
rental income from our headquarters building to $36,000 for the three months
ended March 31, 2009, as compared to $42,000 for the three months ended March
31, 2008. The decrease in rental income is a result of a tenant we lost during
the first half of 2008, who paid rent due pursuant to the agreed upon rent
schedule through July 2008. While another tenant vacated a portion of our
leasable space in the second quarter of 2008, the tenant continues to pay the
rent due pursuant to the agreed upon rent schedule while we seek to sublease
their space on their behalf. The loss of rental income was partially offset by
increases in leasing rates provided for in the applicable lease agreements of
the remaining tenants. As of March 31, 2009, we leased 93% of the total
leaseable space in our headquarters building. We expect another tenant to vacate
leased space in our headquarter building during the second quarter of 2009,
prior to the end of the lease, although we have not received formal notification
in that regard. We may continue to experience a decrease in rental income if the
tenant does not continue to pay rent due pursuant to the agreed upon rent
schedule and we are unable to re-lease the space. We do not anticipate any
additional vacant leaseable space in our headquarters building, other than due
to the tenants mentioned above. These deceases in non-interest income were
slightly offset by a $16,000, or 39.02%, 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) to $57,000 for the three months ended March 31, 2009, as
compared to $41,000 for the three months ended March 31, 2008.




20




Non-interest
Expense





Non-interest
expense increased $95,000, or 10.77%, to $977,000 for the three months ended
March 31, 2009, as compared to $882,000 for the three months ended March 31,
2008. The increase was due primarily to an increase of $47,000, or 180.77%, in
professional fees, $23,000, or 766.67%, in FDIC assessments, $23,000, or 21.90%,
in other expenses and $14,000, or 29.79%, in service bureau expenses, partially
offset by a decrease of $14,000, or 2.89%, in compensation and related expenses.
The increase in professional fees is the result of increased accounting fees for
the audit of our 2008 financials. The increase in the FDIC assessment relates to
a one-time credit of $19,000 received in March 2008. The increases in service
bureau expenses and other expenses are the result of multiple information
technology conversions, software upgrades and the addition of new products for
our customers.





Income Tax
Provision





The
provision for income taxes was $74,000 for the three months ended March 31,
2009, as compared to $24,000 for the three months ended March 31, 2008,
representing a $50,000, or 208.33% increase. We calculated a provision for
income taxes even though we show a loss before income taxes of $89,000 for the
three months ended March 31, 2009, because the loss on our investments of
$261,000 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 three months ended March 31, 2009, if we had
implemented a feasible plan to generate capital gains to offset the capital
losses. We have not implemented such a plan because it would entail selling a
branch or taking any other action that would create a capital gain and we do not
expect such action to be part of our strategic plan within the next five years.
A full valuation allowance was recorded on the tax benefit attributable to the
investment loss due to our uncertain ability to generate sufficient capital
gains to utilize the capital loss. The increase in the provision for income
taxes was primarily due to our positive income before taxes of $172,000 for the
three months ended March 31, 2009, when adding back the loss on investments of
$261,000 (which as a capital loss may not be deducted from taxable income), as
compared to income before taxes of $66,000 for the three months ended March 31,
2008. Excluding the investment loss from pre-tax earnings, the effective tax
rate was 43.02% and 36.36% for the three months ended March 31, 2009 and March
31, 2008, respectively.





Analysis
of Financial Condition





Assets





General





Our total
assets increased by $4,965,000, or 2.78%, to $183,847,000 at March 31, 2009,
from $178,882,000 at December 31, 2008. The increase in total assets resulted
primarily from a $3,060,000, or 1.95%, increase in net loans receivable, from
$157,309,000 at December 31, 2008 to $160,369,000 at March 31, 2009, and a
$2,646,000, or 68.62%, increase in cash and cash equivalents, from $3,856,000 at
December 31, 2008, to $6,502,000 at March 31, 2009. These increases were offset
by a $511,000, or 7.26%, decrease in investment securities – available for sale,
from $7,040,000 at December 31, 2008 to $6,529,000 at March 31, 2009, and a
$231,000, or 14.88%, decrease in mortgage backed securities – held to maturity,
from $1,552,000 at December 31, 2008, to $1,321,000 at March 31,
2009.




21




Investment
Securities





The
investment portfolio at March 31, 2009, amounted to $7,850,000, a decrease of
$742,000, or 8.64%, from $8,592,000 at December 31, 2008. Investment securities
– available for sale, decreased $511,000, or 7.26%, to $6,529,000 at March 31,
2009, from $7,040,000 at December 31, 2008, primarily as a result of impairment
losses of $261,000 in these investments and a redemption of securities of
$250,000. Mortgage backed securities – held to maturity, decreased $231,000, or
14.88%, to $1,321,000 at March 31, 2009, from $1,552,000 at December 31, 2008,
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.





Loan
Portfolio





Loans
receivable, net, increased $3,060,000, or 1.95%, to $160,369,000 at March 31,
2009, from $157,309,000 at December 31, 2008. Our loan portfolio increased
primarily as a result of the continued success of our efforts to originate
commercial real estate loans, and acquisition and renovation loans. The
commercial real estate loan portfolio increased $1,953,000, or 10.06%, to
$21,361,000 at March 31, 2009, from $19,408,000 at December 31, 2008,
acquisition and development loans increased $655,000, or 12.82%, to $5,766,000
at March 31, 2009, from $5,111,000 at December 31, 2008, and home equity loans
increased $510,000, or 3.27%, to $16,096,000 at March 31, 2009 from $15,586,000
at December 31, 2008. 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. We return a non-accrual loan to accrual
status when factors indicating doubtful collection no longer exist and the loan
has been brought current. We consider repossessed assets and loans that are 90
days or more past due to be non-performing assets.





Real
estate and other assets that we acquire as a result of foreclosure or by
deed-in-lieu of foreclosure or repossession on collateral-dependent loans are
classified as foreclosed real estate or other repossessed assets until sold.
Such assets are recorded at foreclosure or other repossession and updated
quarterly at estimated fair value less estimated selling costs. Any portion of
the outstanding loan balance in excess of fair value is charged off against the
allowance for loan losses. If, upon ultimate disposition of the property, net
sales proceeds exceed the net carrying value of the property, a gain on sale of
foreclosed real estate or other assets is recorded. We have one foreclosed real
estate participation loan totaling $1,096,000 at March 31, 2009. As we
previously reported, the property securing this asset was sold at auction to the
lead participating bank in the second quarter of 2007, at which time we
reclassified the participation as foreclosed real estate. As we previously
disclosed, the foreclosed property had previously been under a contract of sale
that was subject to a feasibility study that expired on June 15, 2008. The
property is currently under a new purchase agreement contract. The purchase
agreement is subject to a feasibility study which allows the buyer to perform
due diligence with regards to environmental approvals and permits and a zoning
change that would allow strictly commercial zoning. Once the zoning change is
approved by the city council of the local municipality, the buyer expects to
settle on the subject property. The zoning change is expected by June 2009,
which is expected to coincide with the results of the environmental due
diligence mentioned above. We still believe that we will recover the carrying
amount of the real estate pursuant to the sale of the property, although there
can be no assurance that this will be the case. We had foreclosed real estate of
$1,096,000 at March 31, 2009, and December 31, 2008.




22




Non-accrual
loans totaled $3,139,000, or 1.96%, $1,519,000, or 0.97% and $839,000, or 0.55%,
of net loans receivable at March 31, 2009, December 31, 2008, and March 31,
2008, respectively. Of the non-accrual loans at March 31, 2009, $100,000
consisted of a commercial non-real estate loan, $391,000 consisted of three
commercial real estate loans and $2,648,000 consisted of 18 one- to-four-family
residential mortgage loans, including acquisition and renovation loans. The
increase in the amount of non-accrual loans between March 31, 2009 and 2008 is
due to an increase in the number of acquisition and renovation loans and the
addition of a commercial real estate loan that are over 90 days past due during
the first quarter of 2009.





We
continue to experience an increase in non-performing loans and foreclosed real
estate from a total of $2,615,000 at December 31, 2008, to a total of $4,235,000
at March 31, 2009. The increase is, as stated above, the result of adding a
commercial real estate loan totaling $153,000 and seven acquisition and
renovation loans totaling $831,000 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, from $619,000 at December 31, 2008, to $1,256,000 at March 31,
2009.





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. As of March
31, 2009, we classified five non-accrual loans as impaired totaling $540,000
because we believe that we may not collect all outstanding balances due on these
loans, in accordance with their contractual terms.





As of
March 31, 2009, we classified a commercial non-real estate loan, two commercial
real estate loans and two acquisition and renovation residential loans 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 balance 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 two commercial real estate loans on non-accrual status in
the third quarter of 2008 and we added two acquisition and renovation loans to
non-accrual status in the first quarter of 2009.





Other
than as disclosed in the paragraphs above, there are no other loans at March 31,
2009, 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 has been most dramatic near the end of 2008 and the
trends continued during the first quarter of 2009. 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:




23




Commercial
Real Estate 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 real estate 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 first quarter of 2009 as the
balance in this category increased $1,953,000 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.





Liabilities





General





Total
liabilities increased by $5,265,000, or 3.30%, to $165,010,000 at March 31,
2009, from $159,745,000 at December 31, 2008. The increase in total liabilities
resulted from increases of $5,155,000, or 4.18%, in deposits and $724,000, or
196.21%, in advance payments by borrowers for taxes and insurance, partially
offset by decreases of $314,000, or 94.29%, in checks outstanding in excess of
bank balance and $300,000, or 55.56%, in other liabilities. 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 checking accounts drawn on the Bank, as well as a correspondent bank
account, 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 balances as reflected
on the statements of financial condition, 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 $5,155,000, or 4.18%, to $128,358,000 at March 31, 2009, from
$123,203,000 at December 31, 2008. Certificates of deposits increased $3,974,000
to $101,219,000 at March 31, 2009, from $97,245,000 at December 31, 2008, and
NOW and money market demand deposit accounts increased by $1,306,000 to
$20,070,000 at March 31, 2009, from $18,764,000 at December 31, 2008. Savings
deposits decreased by $125,000 to $7,069,000 at March 31, 2009, from $7,194,000
at December 31, 2008. 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.




24




Borrowings





At March 31, 2009, we were permitted to
borrow up to $55,185,000 from the Federal Home Loan Bank of Atlanta. We had
$35,300,000 of Federal Home Loan Bank advances outstanding as of March 31, 2009
and December 31, 2008, and we averaged $35,300,000 of Federal Home Loan Bank
advances during the three months ended March 31, 2009, and the year ended
December 31, 2008. The borrowings remained steady reflecting $500,000 in the
rollover of Federal Home Loan Bank short term advances, offset by maturing short
term advances of $500,000 in the first quarter of 2009.





Liquidity
Management





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





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





Our most
liquid assets are cash and cash equivalents. The levels of these assets depend
on our operating, financing, lending and investing activities during any given
period. At March 31, 2009, cash and cash equivalents totaled $6,502,000. We have
increased our cash and cash equivalents during the quarter ended March 31, 2009,
pursuant to a concerted effort to increase our liquidity position to offset
decreased liquidity resulting from the decrease in value of the Shay AMF Ultra
Short Mortgage Fund. Securities classified as available-for-sale, which can
provide additional sources of liquidity, totaled $6,529,000 at March 31, 2009.
Management redeems $250,000 during every 90-day rolling period from the fund,
which is the maximum amount permitted to be redeemed under the terms of the
fund. Since management does not intend to otherwise sell the securities
classified as available-for-sale, management does not otherwise consider these
securities as a source of liquidity at March 31, 2009.Also, at March 31, 2009, we had
advances outstanding of $35,300,000 from the Federal Home Loan Bank of Atlanta.
On that date, we had the ability to borrow an additional
$19,885,000.





At March
31, 2009, we had outstanding commitments to originate loans of $1,099,000
(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 commercial and home equity lines
of credit. The borrower is able to draw on these lines as needed, thus the
funding is generally unpredictable. Unused home equity lines of credit amounted
to $5,277,000 at March 31, 2009, and unused commercial lines of credit amounted
to $10,236,000 at March 31, 2009. Since the majority of unused lines of credit
expire without being funded, we anticipate 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 $66,767,000, or
52.02%, of total deposits at March 31, 2009. 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
March 31, 2010. 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.




25




Our
borrowings are with the Federal Home Loan Bank of Atlanta and are secured by
Federal Home Loan Bank of Atlanta stock that we own and a blanket lien on
mortgages. Borrowings at March 31, 2009, consisted of $25,000,000 long term
convertible rate FHLB advances with fixed interest rates ranging from 3.63% to
4.59%. 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 months to 60 months. There is also a
$10,300,000 short term daily rate FHLB advance bearing an interest rate of 0.45%
as of March 31, 2009.





Our
primary investing activity is the origination of loans, primarily one- to
four-family residential mortgage loans, acquisition and renovation loans,
investor lending, commercial real estate loans, and the purchase of securities.
Our primary financing activity consists of activity in deposit accounts and
Federal Home Loan Bank of Atlanta advances. Deposit growth has outpaced asset
growth over the past two years and the excess liquidity was placed in a federal
funds account with our correspondent bank. During the quarter ended March 31,
2009, we have used such excess liquidity 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.





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 $300,000, or 1.57%, to $18,837,000 at March 31,
2009, compared to $19,137,000 at December 31, 2008 due to a non-cash charge to
earnings of $261,000 for an other-than-temporary impairment in the value of
investments in our investment portfolio, resulting in a net loss of $163,000. We
also purchased $174,000 in additional Treasury stock during the first quarter of
2009. 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; therefore, the credit risk involved
in these financial instruments is essentially the same as that involved in
extending loan facilities to customers. We evaluate each customer’s credit
worthiness on a case-by-case basis on all types of credit
extension.




26




Financial
      Instruments WhoseContract
      Amount Represents
                    
                    Contract Amount atCredit Risk
                    
                    March 31, 2009
                    
                    
                    December 31, 2008(Dollars
      in thousands)Lines
      of credit – commercial real estate
                    
                    $
                    10,236
                    
                    
                    $
                    9,849Lines
      of credit – home equity
                    
                    
                    5,277
                    
                    
                    
                    4,896Lines
      of credit – overdraft protection
                    
                    
                    125
                    
                    
                    
                    125Mortgage
      loan commitments
                    
                    
                    1,099
                    
                    
                    
                    3,841





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.





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 75% of the cost of the new or used equipment. These credit
facilities are revolving in nature and the commitment is subject to annual
reaffirmation.





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.





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 4.250%
to 8.500% at both March 31, 2009 and December 31, 2008. Loan commitments expire
60 days from the date of the commitment.





For the
three months ended March 31, 2009, we engaged in no off-balance sheet
transactions reasonably likely to have a material effect on our financial
condition, results of operations or cash flows.





Information
Regarding Forward-Looking Statements





In
addition to the historical information contained in Part I of this Quarterly
Report on Form 10-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.




27




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, non-repayment of
impaired loans, improvement in the value of the Shay AMF Ultra Short Mortgage
Fund, our ability to realize a tax benefit with respect to the capital loss we
have realized on the fund, retention of maturing certificates of deposit,
liquidity management and the establishment of a liquidity plan in a distressed
financial environment, funding of unused lines of credit, the impact on us of
weakening economic conditions, potential increases in foreclosure rates, our
holding of mortgage backed securities, sources of revenues or income,
cross-selling opportunities, loan mix and growth, expected recovery of the
carrying amount of real estate in connection with foreclosed property, the
expectation of increasing the volume of loans sold to the secondary market 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, 2008 (the
“2008 Form 10-K”); the effect of changing 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 and nationally; our dependence on key personnel;
competitive factors within our market area; the effect of developments in
technology on our business; adequacy of the allowance for loan losses; 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
      4T.
            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 March 31,
2009.  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
Exchange Act of 1934, as amended) during the quarter ended March 31, 2009, that
have materially affected, or are reasonably likely to materially affect, SFSB,
Inc.’s internal control over financial reporting.




28




PART
II - OTHER INFORMATION





Item
      1.
            Legal
      Proceedings





None





Item
      1A.
            Risk
      Factors





During the three months ended March 31,
2009, other than as noted below, there were no material changes to the risk
factors relevant to our operations, which are described in the 2008 Form
10-K.





As
previously reported, we had applied to participate in the Treasury Capital
Purchase Program under the Troubled Asset Relief Program (“TARP”) signed into
law on October 3, 2008. Subsequently, we received a request from the Office of
Thrift Supervision as to whether we wished to continue to be considered in the
application process or if we wish to withdraw our application. On May 4, 2009,
our board of directors determined that we should withdraw the application. Among
other things, the board considered the changes in the public’s perception of
TARP participants, in particular the fact that entities receiving such federal
assistance are now viewed negatively, as well as the additional restrictions
imposed on TARP recipients under the American Reinvestment and Recovery Act and
the possibility of being subject to additional, unknown restrictions and
requirements pursuant to future legislation as a result of having participated
in the TARP program. As a result, the board of directors believes that it is no
longer in the best interest of the Company and its stockholders to participate
in the program. Therefore, the risk factor disclosure in the 2008 Form 10-K with
respect to participation in TARP are no longer applicable.





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





The table
below summarizes our repurchases of equity securities during the first quarter
of 2009.





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)January
      1 – 31, 2009
              
              
              25,000
              
              
              $
              5.05
              
              
              
              25,000
              
              
              
              28,553February
      1 –28, 2009
              
              
              0
              
              
              
              n/a
              
              
              
              0
              
              
              
              28,553March
      1 - 31, 2009
              
              
              10,000
              
              
              $
              4.80
              
              
              
              10,000
              
              
              
              18,553Total
      First Quarter
              
              
              35,000
              
              
              $
              4.98
              
              
              
              35,000
              
              
              
              18,553


(1) 
On November 18, 2005, SFSB, Inc.’s board of directors adopted a stock repurchase
program to acquire up to 53,561 shares, or approximately 4% of its outstanding
common stock held by persons other than Slavie Bancorp, MHC. SFSB, Inc.’s board
of directors approved additional repurchases of up to an additional 66,951
shares on May 1, 2006, 62,334 shares on August 6, 2007, 59,052 shares on
February 19, 2008, 59,022 on July 21, 2008 and 53,552 on December 15, 2008, in
each case constituting approximately 5% of its outstanding common stock held by
persons other than Slavie Bancorp, MHC at such time. Stock purchases are made
from time to time in the open market at the discretion of 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 March 31, 2009, SFSB, Inc. had
repurchased 335,920 shares on the open market at an average cost of $7.88 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 March 31, 2009,
and the date of this filing, SFSB, Inc. is currently authorized to purchase an
additional 18,553 shares before December 15, 2009.
  29


Item
      3.
            Defaults
      Upon Senior Securities





Not applicable





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





None





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




30




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:
      May 14, 2009
              By:
              /s/
      Philip E. LoganPhilip
      E. Logan, Chairman and President(Principal
      Executive Officer)Date:
      May 14, 2009
              By:
              /s/
      Sophie Torin WittelsbergerSophie
      Torin Wittelsberger, Chief Financial
                Officer(Principal
      Accounting and Financial
Officer)




31