**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**








**FORM
      10-QSB**





(Mark
                One)x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934
              For
                the quarterly period ended June 30, 2007o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934 FOR THE TRANSITION PERIOD FROM ______TO ___________






Commission
      file number: 000-51037




**SFSB,
      INC.**


(Exact
      name of small business issuer as specified in its charter)





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





1614
      Churchville Road, Bel Air, Maryland 21015


Address
      of principal executive offices





(443)
      265-5570


Issuer’s
      telephone number





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





Yes
            x
            
            No
            o





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





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





At
      August
      9, 2007, there were 2,883,293 shares of the issuer’s Common Stock, par value
      $0.01 per share, outstanding.








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











**PART
      I - FINANCIAL INFORMATION**




Item
      1. Financial Statements




**SFSB,
      Inc.**


**CONSOLIDATED
      STATEMENTS OF FINANCIAL CONDITION**


**June
                30,**
              **2007**
            
            **December
                31,**
              **2006**(Dollars
                in thousands, except share data)**ASSETS**Cash
                and due from banks
            
            $
            793
            
            $
            881Federal
                funds sold
            
            
            3,585
            
            
            1,970Cash
                and cash equivalents
            
            
            4,378
            
            
            2,851Investment
                securities - available for sale
            
            
            8,712
            
            
            8,526Investment
                securities - held to maturity
            
            
            4,000
            
            
            4,000Mortgage
                backed securities - held to maturity
            
            
            2,730
            
            
            3,200Loans
                receivable - net of allowance for loan losses of2007
                $912; 2006 $850
            
            
            143,933
            
            
            147,118Foreclosed
                Real Estate
            
            
            1,083
            
            
            —Federal
                Home Loan Bank of Atlanta stock, at cost
            
            
            1,821
            
            
            2,098Premises
                and equipment, net
            
            
            5,213
            
            
            5,265Accrued
                interest receivable
            
            
            522
            
            
            560Other
                assets
            
            
            448
            
            
            607**Total
                assets**
            
            $
            172,840
            
            $
            174,225**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Liabilities**Deposits
            
            $
            114,290
            
            $
            111,823Checks
                outstanding in excess of bank balance
            
            
            654
            
            
            384Borrowings
            
            
            33,500
            
            
            39,000Advance
                payments by borrowers for taxes and insurance
            
            
            1,760
            
            
            350Other
                liabilities
            
            
            481
            
            
            303**Total
                liabilities**
            
            
            150,685
            
            
            151,860**Stockholders’
                Equity**Preferred
                stock, no par value, 1,000,000 shares authorized, none issued and
                outstanding
            
            
            —
            
            
            —Common
                stock, par value $.01, 9,000,000 shares authorized, 2,975,625 shares
                issued at June 30, 2007 and December 31, 2006 and 2,883,293 and 2,907,759
                shares outstanding at June 30, 2007 and December 31, 2006,
                respectively
            
            
            30
            
            
            30Additional
                paid-in capital
            
            
            12,845
            
            
            12,788Retained
                earnings (substantially restricted)
            
            
            11,345
            
            
            11,393Unearned
                Employee Stock Ownership Plan shares
            
            
            (1,021
            )
            
            (1,050
            )Treasury
                Stock at cost, June 30, 2007, 92,332 shares and December 31, 2006,
                67,866
                shares
            
            
            (886
            )
            
            (660
            )Accumulated
                other comprehensive loss
            
            
            (158
            )
            
            (136
            )**Total
                stockholders’ equity**
            
            
            22,155
            
            
            22,365**Total
                liabilities and stockholders’ equity**
            
            $
            172,840
            
            $
            174,225 See
      notes
      to consolidated financial statements.


-2-


**SFSB,
      Inc.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30**,**2007**
            
            **2006**
            
            **2007**
            
            **2006**(Dollars
                in thousands, except for per share data)Interest
                and fees on loans
            
            $
            2,056
            
            $
            2,026
            
            $
            4,098
            
            $
            4,000Interest
                and dividends on investment securities
            
            
            151
            
            
            132
            
            
            297
            
            
            255Interest
                on mortgage backed securities
            
            
            31
            
            
            40
            
            
            65
            
            
            83Other
                interest income
            
            
            85
            
            
            58
            
            
            165
            
            
            114**Total
                interest income**
            
            
            2,323
            
            
            2,256
            
            
            4,625
            
            
            4,452Interest
                on deposits
            
            
            1,149
            
            
            920
            
            
            2,263
            
            
            1,773Interest
                on short-term borrowings
            
            
            108
            
            
            83
            
            
            257
            
            
            158Interest
                on long-term borrowings
            
            
            263
            
            
            293
            
            
            524
            
            
            581**Total
                interest expense**
            
            
            1,520
            
            
            1,296
            
            
            3,044
            
            
            2,512**Net
                interest income**
            
            
            803
            
            
            960
            
            
            1,581
            
            
            1,940Provision
                for loan losses
            
            
            149
            
            
            24
            
            
            182
            
            
            38**Net
                interest income after provision for loan losses**
            
            
            654
            
            
            936
            
            
            1,399
            
            
            1,902**Other
                Income**Rental
                income
            
            
            41
            
            
            40
            
            
            80
            
            
            79Other
                income
            
            
            33
            
            
            15
            
            
            53
            
            
            34Gain
                on sale of loans
            
            
            31
            
            
            2
            
            
            39
            
            
            7**Total
                other income**
            
            
            105
            
            
            57
            
            
            172
            
            
            120**Non-Interest
                Expenses**Compensation
                and other related expenses
            
            
            426
            
            
            465
            
            
            860
            
            
            923Occupancy
                expense
            
            
            90
            
            
            87
            
            
            185
            
            
            293Advertising
                expense
            
            
            64
            
            
            46
            
            
            108
            
            
            72Service
                bureau expense
            
            
            40
            
            
            37
            
            
            83
            
            
            78Furniture,
                fixtures and equipment
            
            
            31
            
            
            55
            
            
            65
            
            
            111Telephone,
                postage and delivery
            
            
            19
            
            
            20
            
            
            38
            
            
            44Other
                expenses
            
            
            146
            
            
            189
            
            
            295
            
            
            343**Total
                non-interest expenses**
            
            
            816
            
            
            899
            
            
            1,634
            
            
            1,864**(Loss)
                Income before income tax provision**
            
            
            (57
            )
            
            94
            
            
            (63
            )
            
            158Income
                tax (benefit) provision
            
            
            (19
            )
            
            38
            
            
            (15
            )
            
            66Net
                (loss) income
            
            $
            (38
            )
            $
            56
            
            $
            (48
            )
            $
            92**Basic
                Earnings (Loss) per Share**
            
            **$**
            **(0.01**
            **)**
            **$**
            **0.02**
            
            **$**
            **(0.02**
            **)**
            **$**
            **0.03****Diluted
                Earnings (Loss) per Share**
            
            **$**
            **(0.01**
            **)**
            **$**
            **0.02**
            
            **$**
            **(0.02**
            **)**
            **$**
            **0.03**


See
      notes
      to consolidated financial statements.




-3-




**SFSB,
      Inc.**


**CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME**





**Three****Months
                Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**(Dollars
                in thousands)Net
                (loss) income
            
            $
            (38
            )
            $
            56
            
            $
            (48
            )
            $
            92Net
                unrealized loss on securities available for sale during the period
                (net of
                taxes of $(17), $(6), $(14)and
                $(13))
            
            
            (28
            )
            
            (10
            )
            
            (22
            )
            
            (20
            )Total
                Comprehensive (Loss) Income
            
            $
            (66
            )
            $
            46
            
            $
            (70
            )
            $
            72 See
      notes
      to consolidated financial statements.





-4-




**SFSB,
      Inc.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**Six
                Months Ended****June
                30,****2007**
            
            **2006**(Dollars
                in thousands)**Cash
                Flows From Operating Activities**Net
                (loss) income
            
            $
            (48
            )
            $
            92Adjustments
                to Reconcile Net (Loss) Income to Net Cash Provided by Operating
                Activities:Non-cash
                compensation under stock-based compensation plans and Employee Stock
                Ownership Plan
            
            
            87
            
            
            92Net
                amortization of premiums and discounts of investment
                securities
            
            
            5
            
            
            7Amortization
                of deferred loan fees
            
            
            (23
            )
            
            (32
            )Provision
                for loan losses
            
            
            182
            
            
            38Gain
                on sale of loans
            
            
            (39
            )
            
            (7
            )Loans
                originated for sale
            
            
            (4,688
            )
            
            (717
            )Proceeds
                from loans sold
            
            
            4,727
            
            
            724Provision
                for depreciation
            
            
            116
            
            
            264Decrease
                (increase) in accrued interest receivable and other assets
            
            
            211
            
            
            (104
            )Increase
                in accrued interest payable
            
            
            6
            
            
            3Increase
                in other liabilities
            
            
            173
            
            
            8**Net
                Cash Provided by Operating Activities**
            
            
            710
            
            
            368**Cash
                Flows from Investing Activities**Purchase
                of available for sale securities
            
            
            (222
            )
            
            (179
            )Net
                decrease (increase) in loans
            
            
            1,943
            
            
            (2,050
            )Principal
                collected on mortgage backed securities
            
            
            465
            
            
            708Purchase
                of Federal Home Loan Bank of Atlanta stock
            
            
            —
            
            
            (98
            )Redemption
                of Federal Home Loan Bank of Atlanta stock
            
            
            277
            
            
            —Purchases
                of premises and equipment
            
            
            (65
            )
            
            (23
            )**Net
                Cash Provided by (Used in) Investing Activities**
            
            
            2,398
            
            
            (1,642
            )**Cash
                Flows from Financing Activities**Net
                increase in deposits
            
            
            2,465
            
            
            344Increase
                (decrease) in checks outstanding in excess of bank balance
            
            
            270
            
            
            (1,609
            )Proceeds
                from long-term borrowings
            
            
            5,000
            
            
            6,500Repayment
                of long-term borrowings
            
            
            (5,000
            )
            
            (6,500
            )Net
                change in short-term borrowings
            
            
            (5,500
            )
            
            2,000Increase
                in advance payments by borrowers for taxes and insurance
            
            
            1,410
            
            
            1,402Issuance
                of common stock
            
            
            67
            
            
            —Purchase
                of treasury stock
            
            
            (293
            )
            
            (422
            )**Net
                Cash (Used in) Provided by Financing Activities**
            
            
            (1,581
            )
            
            1,715Increase
                (decrease) in cash and cash equivalents
            
            
            1,527
            
            
            441Cash
                and cash equivalents at beginning of period
            
            
            2,851
            
            
            1,342**Cash
                and cash equivalents at end of period**
            
            $
            4,378
            
            $
            1,783**Supplemental
                Disclosures of Cash Flows Information**:Income
                taxes paid
            
            $
            —
            
            $
            165Interest
                expense paid
            
            $
            3,037
            
            $
            2,509Transfer
                of loan to foreclosed real estate
            
            $
            1,083
            
            $
            —


See
      notes
      to consolidated financial statements.




-5-




**SLAVIE
      FEDERAL SAVINGS BANK**


**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 subsidiaries, 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 56.3% of the outstanding
      common stock of the Company as of June 30, 2007.





**Note
      2 - Business**





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





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





**Note
      3 - 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-QSB. Accordingly, they do not include all the information and footnotes
      required by GAAP for complete financial statements.





The
      foregoing consolidated financial statements in the opinion of management include
      all adjustments (consisting only of normal recurring adjustments) necessary
      for
      a fair presentation thereof. These consolidated financial statements should
      be
      read in conjunction with the consolidated financial statements and notes thereto
      included in the Company’s Annual Report on Form 10-KSB. The results of
      operations for the six months ended June 30, 2007 are not necessarily indicative
      of the results that may be expected for the full year.




-6-




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





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




**Three****Months
                Ended**
            
            **Six
                Months Ended****June
                30, 2007**
            
            **June
                30, 2007****Basic**
            
            **Diluted**
            
            **Basic**
            
            **Diluted**(Dollars
                in thousands, except per share data)Net
                (loss) income
            
            $
            (38
            )
            $
            (38
            )
            $
            (48
            )
            $
            (48
            )Weighted
                average shares outstanding
            
            
            2,795
            
            
            2,795
            
            
            2,794
            
            
            2,794Diluted
                SecuritiesStock
                Options
            
            
            —
            
            
            —
            
            
            —
            
            
            —Unvested
                Stock Awards
            
            
            —
            
            
            —
            
            
            —
            
            
            —Adjusted
                Weighted average shares
            
            
            2,795
            
            
            2,795
            
            
            2,794
            
            
            2,794Per
                Share Amount
            
            $
            (0.01
            )
            $
            (0.01
            )
            $
            (0.02
            )
            $
            (0.02
            )








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




-7-




**Note
      5 - Regulatory Capital Requirements**





At
      June
      30, 2007, the Bank met each of the three minimum regulatory capital
      requirements. The following table summarizes the Bank’s regulatory capital
      position at June 30, 2007 and December 31, 2006.





**To
                Be Well****Capitalized
                Under****For
                Capital**
            
            **Prompt
                Corrective****Actual**
            
            **Adequacy
                Purposes**
            
            **Action
                Provision****Amount**
            
            **%**
            
            **Amount%**
            
            **%**
            
            **Amount%**
            
            **%**(Dollars
                in thousands)**June
                30, 2007**Tangible
                (1)
            
            $
            16,800
            
            
            9.70
            %
            $
            2,598
            
            
            1.50
            %
            
            N/A
            
            
            N/ATier
                I capital (2)
            
            
            16,800
            
            
            16.79
            %
            
            N/A
            
            
            N/A
            
            $
            6,004
            
            
            6.00
            %Core
                (leverage) (1)
            
            
            16,800
            
            
            9.70
            %
            
            6,928
            
            
            4.00
            %
            
            8,660
            
            
            5.00
            %Risk-weighted
                (2)
            
            
            17,712
            
            
            17.70
            %
            
            8,005
            
            
            8.00
            %
            
            10,007
            
            
            10.00
            %**December
                31, 2006**Tangible
                (1)
            
            $
            16,775
            
            
            9.62
            %
            $
            2,617
            
            
            1.50
            %
            
            N/A
            
            
            N/ATier
                I capital (2)
            
            
            16,775
            
            
            16.93
            %
            
            N/A
            
            
            N/A
            
            $
            5,944
            
            
            6.00
            %Core
                (leverage) (1)
            
            
            16,775
            
            
            9.62
            %
            
            6,978
            
            
            4.00
            %
            
            8,723
            
            
            5.00
            %Risk-weighted
                (2)
            
            
            17,625
            
            
            17.79
            %
            
            7,926
            
            
            8.00
            %
            
            9,907
            
            
            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
      and $60,000 for the three and six months ended June 30, 2007. The total income
      tax benefit recognized was $8,000 and $17,000  for
      the
      three and six months ended June 30, 2007. The compensation
      cost charged against income was $32,000 and $64,000 for the three and six months
      ended June 30, 2006.




-8-




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





**Introduction**





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




**Overview**





Earnings
      declined to a net loss of $48,000 for the six months ended June 30, 2007 as
      compared to net income of $92,000 for the same period in 2006. This decrease
      was
      primarily due to an increase in interest expense as a result of an increase
      in
      deposits in an interest rate environment in which our customers are moving
      their
      funds into shorter term accounts with higher interest rates and an increase
      in
      our provision for loan losses. Interest income increased $173,000, or 3.89%,
      non-interest income increased $52,000, or 43.33%, and non-interest expenses
      decreased $230,000, or 12.34%. These improvements were offset by a $532,000,
      or
      21.18%, increase in interest expenses and a $144,000, or 378.95%, increase
      our
      provision for loan losses.





Assets
      decreased during the first six months of 2007 primarily because we decreased
      our
      loan portfolio by $3,185,000, or 2.16%, to $143,933,000 at June 30, 2007 from
      $147,118,000 at December 31, 2006. The decrease is also the result of a decrease
      in mortgage backed securities held to maturity of $470,000, or 14.69%, to
      $2,730,000 at June 30, 2007 from $3,200,000 at December 31, 2006 and a decrease
      in Federal Home Loan Bank of Atlanta stock of $277,000, or 13.20%, to $1,821,000
      at June 30, 2007 from $2,098,000 at December 31, 2006. These decreases were
      partially offset by an increase in cash and cash equivalents of $1,527,000,
      or
      53.56%, to $4,378,000 at June 30, 2007 from $2,851,000 at December 31, 2006
      and
      an increase in investment securities available for sale of $186,000, or 2.18%,
      to $8,712,000 at June 30, 2007 from $8,526,000 at December 31, 2006.





As
      discussed in detail in the Asset Quality section of this report, we hold a
      19%
      participation (approximately $1,083,000 in unpaid principal balance) in an
      acquisition and development loan. This loan became delinquent in late 2004
      and
      was placed on non-accrual status in late 2005. Due to unresolved land
      development issues with the local municipality, the borrower had been unable
      to
      sell the property. Both the principal of the borrower and the entity that owns
      the collateral property filed for bankruptcy in late 2006. The automatic stay
      that was imposed in connection with the bankruptcy filings and had prevented
      the
      sale of the property was lifted on April 10, 2007 and the property was sold
      at
      auction to the lead participating bank on May 30, 2007, requiring us to place
      the loan in the foreclosed real estate category. Subsequently, a real estate
      developer has made an offer to purchase the property and the lead participating
      bank accepted a letter of intent on June 26, 2007. The lead participating
      bank  executed
      a contract with a 90 day feasibility study period on July 26, 2007 that would
      enable us to recover the carrying amount of the real estate, although there
      can
      be no assurance that this will be the case.





In
      addition to the acquisition and development loan mentioned above, we classified
      two commercial non-real estate loans as impaired in 2006. One of these
      commercial loans is a business line of credit to a company that ceased
      operations as of July 31, 2006; the other is an unsecured term loan to the
      principal of the same company. The company filed for Chapter 7 bankruptcy on
      September 26,  2006
      and
      the borrower filed personal bankruptcy on June 28, 2007. At the end of the
      first
      quarter of 2007, in anticipation of a minimal recovery of principal on these
      loans, we charged down $120,000 of the original loan balances of $260,000,
      which
      were in default and fully reserved, against our provision for loan losses.
      A
      meeting of creditors was scheduled on July 26, 2007 in objection of the
      exemptions deadline, but the borrower is still expected to restructure the
      remaining debt by August 26, 2007, although there is no written agreement at
      this time.


-9-




To
      remain
      competitive and offer even more product line choice to our customers, we have
      implemented a health savings account for health care expenses and we continue
      to
      offer a seven month certificate of deposit with what we believe is an attractive
      interest rate.




In
      addition, we now offer a comprehensive and full service approach to managing
      finances and investing in the future. The creation of Slavie Financial Services
      and the addition of a certified financial planner in June 2007 enables us to
      bring investment guidance and financial planning expertise to our customers,
      while expanding our ability to provide personalized services that focus on
      the
      successful financial well being of our customers.





We
      continue to implement strategies formed during strategic planning meetings
      of
      the Board of Directors and the Company’s officers over the past year. In our
      continued efforts to boost the yield of our interest earning assets during
      a
      period of net interest margin compression, management is selling a larger
      percentage of the Company’s residential loan originations to facilitate our goal
      of increasing and diversifying the mix of commercial loans to residential loans
      in our portfolio. This strategy has enabled us to increase our fee income on
      loans sold. In February 2007, we hired an experienced commercial loan originator
      to further our goal of increasing the average outstanding balance of our
      commercial loan 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.





Key
      measurements and events for the three- and six-month periods ended June 30,
      2007
      include the following:





·
            Total
                assets at June 30, 2007 decreased by 0.79% to $172,840,000 as compared
                to
                $174,225,000 as of December 31,
                2006.




·
            Total
                borrowings decreased by 14.10% from $39,000,000 as of December 31,
                2006 to
                $33,500,000 as of June 30, 2007.





·
            Net
                loans outstanding decreased by 2.16% from $147,118,000 as of December
                31,
                2006 to $143,933,000 as of June 30,
                2007.





·
            Nonperforming
                assets at June 30, 2007 totaled $1,498,000 compared with a total
                of
                $1,486,000 at December 31, 2006. We believe an appropriate allowance
                for
                loan losses continues to be
                maintained.





·
            Deposits
                at June 30, 2007 were $114,290,000, an increase of $2,467,000 or
                2.22%
                from $111,823,000 at December 31, 2006.





·
            We
                realized a net loss of $38,000 and $48,000 for the three-month and
                six-month periods ended June 30, 2007. This compares to net income
                of
                $56,000 and $92,000 for the three-month and six-month periods ended
                June
                30, 2006.





·
            Net
                interest income, our main source of income, was $803,000 and $1,581,000
                during the three-month and six-month periods ended June 30, 2007
                compared
                to $960,000 and $1,940,000 for the same period in 2006. This represents
                a
                decrease of 16.35% and 18.51% for the three months and six months
                ended
                June 30, 2007 as compared to the same period in 2006.


-10-


·
            We
                had a commercial non-real estate loan charge-off of $120,000 and
                two
                overdraft protection loan charge-offs totaling $1,100 during the
                six-month
                period ending June 30, 2007. We had no loan charge-offs during the
                six-month period ending June 30, 2006.





·
            Non-interest
                income increased by $48,000 and $52,000, or 84.21% and 43.33%, for
                the
                three-month and six-month periods ended June 30, 2007, as compared
                to the
                three-month and six-month periods ended June 30, 2006.





·
            Non-interest
                expenses decreased by $83,000 and $230,000, or 9.23% and 12.34%,
                for the
                three-month and six-month periods ended June 30, 2007, as compared
                to the
                three- and six-month periods ended June 30, 2006. The decrease between
                the
                periods is the result of no longer carrying the occupancy expenses
                associated with the closing of the Edgewood branch and the decision
                not to
                increase the salary compensation of the executive officers and not
                to
                award year end bonuses to all
                employees.





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





**Critical
      Accounting Policies**





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





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





Management’s
      judgment is inherent in the determination of the provision and allowance for
      loan losses, including in connection with the valuation of collateral and the
      financial condition of the borrower. The establishment of allowance factors
      is a
      continuing exercise and allowance factors may change over time, resulting in
      an
      increase or decrease in the amount of the provision or allowance based upon
      the
      same volume and classification of loans. Changes in allowance factors or in
      management’s interpretation of those factors will have a direct impact on the
      amount of the provision, and a corresponding effect on income and assets. Also,
      errors in management’s perception and assessment of the allowance factors could
      result in the allowance not being adequate to cover losses in the portfolio,
      and
      may result in additional provisions or charge-offs, which would adversely affect
      income and capital. For additional information regarding the allowance for
      loan
      losses, see “Results of Operations for the Three and Six Months Ended June 30,
      2007 and 2006 - Provision for Loan Losses and Analysis of Allowance for Loan
      Losses.” ****


-11-




**Results
      of Operations for the Three and Six Months Ended June 30, 2007 and
      2006**





*General* .
      Net
      income decreased $94,000 to a net loss of $38,000 for the three months ended
      June 30, 2007 compared to net income of $56,000 for the same period in the
      prior
      year. The decrease was due primarily to a $224,000 increase in interest expense
      and a $125,000 increase in provision for loan losses, offset by a $67,000
      increase in interest income, a $48,000 increase in non-interest income and
      an
      $83,000 decrease in non-interest expenses.





Net
      income decreased $140,000, to a net loss of $48,000 for the six months ended
      June 30, 2007 compared to net income of $92,000 for the same period in the
      prior
      year. The decrease was due primarily to a $532,000 increase in interest expense
      and a $144,000 increase in provision for loan losses, offset by a $173,000
      increase in interest income, a $230,000 decrease in non-interest expenses and
      a
      $52,000 increase in other income.


-12-




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





**Three
                Months Ended**
              **June
                30, 2007**
            
            **Three********Months
                Ended**
              **June
                30, 2006****Average**
              **Outstanding**
              **Balance**
            
            **Interest**
              **Earned/**
              **Paid**
            
            **Yield/**
              **Rate**
            
            **Average**
              **Outstanding**
              **Balance**
            
            **Interest**
              **Earned/**
              **Paid**
            
            **Yield/**
              **Rate**Dollars
                in Thousands
            
            Dollars
                in ThousandsInterest-earning
                assets:Loans
                receivable (1)
            
            $
            144,668
            
            $
            2,056
            
            
            5.68
            %
            $
            146,513
            
            $
            2,026
            
            
            5.53
            %Mortgage-backed
                securities
            
            
            2,816
            
            
            31
            
            
            4.40
            
            
            3,932
            
            
            40
            
            
            4.07Investment
                securities (available for sale)
            
            
            8,704
            
            
            113
            
            
            5.19
            
            
            8,272
            
            
            93
            
            
            4.50Investment
                securities (held to maturity)
            
            
            4,000
            
            
            38
            
            
            3.80
            
            
            4,000
            
            
            39
            
            
            3.90Other
                interest-earning assets
            
            
            5,628
            
            
            85
            
            
            6.04
            
            
            3,846
            
            
            58
            
            
            6.03Total
                interest-earning assets
            
            
            165,816
            
            
            2,323
            
            
            5.60
            %
            
            166,563
            
            
            2,256
            
            
            5.42
            %Non-interest
                earning assets
            
            
            6,885
            
            
            
            
            
            
            
            
            7,039Total
                assets
            
            $
            172,701
            
            
            
            
            
            
            
            $
            173,602Interest-bearing
                liabilities:Savings
                deposits
            
            $
            16,580
            
            
            48
            
            
            1.16
            %
            $
            25,804
            
            
            83
            
            
            1.29
            %Demand
                and NOW accounts
            
            
            7,292
            
            
            42
            
            
            2.30
            
            
            2,678
            
            
            4
            
            
            0.60Certificates
                of deposit
            
            
            88,183
            
            
            1,059
            
            
            4.80
            
            
            81,070
            
            
            833
            
            
            4.11Escrows
            
            
            9
            
            
            —
            
            
            —
            
            
            19
            
            
            —
            
            
            —Borrowings
            
            
            33,833
            
            
            371
            
            
            4.39
            
            
            38,000
            
            
            376
            
            
            3.96Total
                interest-bearing liabilities
            
            
            145,897
            
            
            1,520
            
            
            4.17
            %
            
            147,571
            
            
            1,296
            
            
            3.51
            %Non-interest
                bearing liabilities
            
            
            4,461
            
            
            
            
            
            
            
            
            3,500Total
                liabilities
            
            
            150,358
            
            
            
            
            
            
            
            
            151,071Total
                equity (2)
            
            
            22,343
            
            
            
            
            
            
            
            
            22,531Total
                liabilities and equity
            
            $
            172,701
            
            
            
            
            
            
            
            $
            173,602Net
                interest income
            
            
            
            
            $
            803
            
            
            
            
            
            
            
            $
            960Interest
                rate spread (3)
            
            
            
            
            
            
            
            
            1.43
            %
            
            
            
            
            
            
            
            1.91
            %Net
                interest-earning assets
            
            $
            19,919
            
            
            
            
            
            
            
            $
            18,992Net
                interest margin (4)
            
            
            
            
            
            
            
            
            1.94
            %
            
            
            
            
            
            
            
            2.31
            %Ratio
                of interest earning assets to interest bearing liabilities
            
            
            
            
            
            1.14x
            
            
            
            
            
            
            
            
            1.12x





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


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


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


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


-13-




**Six
                Months Ended**
              **June
                30, 2007**
            
            **Six
                Months Ended**
              **June
                30, 2006****Average**
              **Outstanding**
              **Balance**
            
            **Interest**
              **Earned/**
              **Paid**
            
            **Yield/**
              **Rate**
            
            **Average**
              **Outstanding**
              **Balance**
            
            **Interest**
              **Earned/**
              **Paid**
            
            **Yield/**
              **Rate**Dollars
                in Thousands
            
            Dollars
                in ThousandsInterest-earning
                assets:Loans
                receivable (1)
            
            $
            145,350
            
            $
            4,098
            
            
            5.64
            %
            $
            145,488
            
            $
            4,000
            
            
            5.50
            %Mortgage-backed
                securities
            
            
            2,933
            
            
            65
            
            
            4.43
            
            
            4,109
            
            
            83
            
            
            4.04Investment
                securities (available for sale)
            
            
            8,655
            
            
            222
            
            
            5.13
            
            
            8,235
            
            
            179
            
            
            4.35Investment
                securities (held to maturity)
            
            
            4,000
            
            
            75
            
            
            3.75
            
            
            3,999
            
            
            76
            
            
            3.80Other
                interest-earning assets
            
            
            5,460
            
            
            165
            
            
            6.04
            
            
            4,396
            
            
            114
            
            
            5.19Total
                interest-earning assets
            
            
            166,398
            
            
            4,625
            
            
            5.56
            %
            
            166,227
            
            
            4,452
            
            
            5.36
            %Non-interest
                earning assets
            
            
            6,984
            
            
            
            
            
            
            
            
            7,062Total
                assets
            
            $
            173,382
            
            
            
            
            
            
            
            $
            173,289Interest-bearing
                liabilities:Savings
                deposits
            
            $
            16,965
            
            
            95
            
            
            1.12
            %
            $
            26,810
            
            
            174
            
            
            1.30
            %Demand
                and NOW accounts
            
            
            7,253
            
            
            84
            
            
            2.32
            
            
            2,738
            
            
            8
            
            
            0.58Certificates
                of deposit
            
            
            87,483
            
            
            2,084
            
            
            4.76
            
            
            80,025
            
            
            1,591
            
            
            3.98Escrows
            
            
            7
            
            
            —
            
            
            —
            
            
            15
            
            
            —
            
            
            —Borrowings
            
            
            35,250
            
            
            781
            
            
            4.43
            
            
            38,000
            
            
            739
            
            
            3.89Total
                interest-bearing liabilities
            
            
            146,958
            
            
            3,044
            
            
            4.14
            %
            
            147,588
            
            
            2,512
            
            
            3.40
            %Non-interest
                bearing liabilities
            
            
            4,048
            
            
            
            
            
            
            
            
            3,121Total
                liabilities
            
            
            151,006
            
            
            
            
            
            
            
            
            150,709Total
                equity (2)
            
            
            22,376
            
            
            
            
            
            
            
            
            22,580Total
                liabilities and equity
            
            $
            173,382
            
            
            
            
            
            
            
            $
            173,289Net
                interest income
            
            
            
            
            $
            1,581
            
            
            
            
            
            
            
            $
            1,940Interest
                rate spread (3)
            
            
            
            
            
            
            
            
            1.42
            %
            
            
            
            
            
            
            
            1.96
            %Net
                interest-earning assets
            
            $
            19,440
            
            
            
            
            
            
            
            $
            18,639Net
                interest margin (4)
            
            
            
            
            
            
            
            
            1.90
            %
            
            
            
            
            
            
            
            2.33
            %Ratio
                of interest earning assets to interest bearing liabilities
            
            
            
            
            
            1.13x
            
            
            
            
            
            
            
            
            1.12x





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


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


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


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





*Net
      Interest Income* .





Three
      months ended June 30, 2007 compared to three months ended June 30,
      2006 .





Net
      interest income decreased $157,000, or 16.35%, to $803,000 for the three months
      ended June 30, 2007 from $960,000 for the three months ended June 30, 2006.
      The
      decrease was primarily a result of a 66 basis point increase in the cost of
      average interest bearing liabilities, from 3.51% to 4.17%, while the yield
      on
      average interest earning assets only increased 18 basis points from 5.42% to
      5.60% and the balance in average interest earning assets decreased by $747,000,
      or 0.45%, to $165,816,000 from $166,563,000. These were partially offset by
      a
      $1,674,000, or 1.13%, decrease in average interest bearing liabilities to
      $145,897,000 from $147,571,000.


-14-




Our
      interest rate spread decreased to 1.43% for the quarter ended June 30, 2007
      from
      1.91% for the quarter ended June 30, 2006, reflecting the more rapid increase
      in
      the cost of our average interest bearing liabilities as compared to the increase
      in the yield of our interest earning assets. Our net interest margin decreased
      to 1.94% from 2.31%, because the growth in average interest earning assets
      was
      not enough to offset the increase in the cost of interest bearing liabilities.
      The ratio of interest earning assets to interest bearing liabilities remained
      relatively steady at 1.14 times for the three months ended June 30, 2007 and
      1.12 times for the same period in 2006.





Six
      months ended June 30, 2007 compared to six months ended June 30,
      2006 .





Net
      interest income decreased $359,000, or 18.51%, to $1,581,000 for the six months
      ended June 30, 2007 from $1,940,000 for the six months ended June 30, 2006.
      The
      decrease was primarily a result of a 74 basis point increase in the cost of
      average interest bearing liabilities, from 3.40% to 4.14%, while the yield
      on
      average interest earning assets only increased 20 basis points from 5.36% to
      5.56%. The decrease was partially offset by a $630,000, or 0.43%, decrease
      in
      average interest bearing liabilities to $146,958,000 from $147,588,000 and
      an
      increase of $171,000, or 0.10%, in average interest earning assets to
      $166,398,000 from $166,227,000.





Our
      interest rate spread decreased to 1.42% from 1.96%, reflecting the more rapid
      increase in the cost of our average interest bearing liabilities as compared
      to
      the increase in the yield of our average interest earning assets. Our net
      interest margin decreased to 1.90% from 2.33%, because the growth in average
      interest earning assets was not enough to offset the increase in the cost of
      interest bearing liabilities. The ratio of interest earning assets to interest
      bearing liabilities remained relatively steady at 1.13 times for the six months
      ended June 30, 2007 from 1.12 times for 2006.





*Interest
      Income* .





Three
      months ended June 30, 2007 compared to three months ended June 30,
      2006 .





Interest
      income increased by $67,000, or 2.97%, to $2,323,000 for the three months ended
      June 30, 2007, from $2,256,000 for the three months ended June 30, 2006. The
      increase in interest income resulted primarily from increases of $30,000, or
      1.48%, in interest and fee income from loans, $19,000, or 14.39%, in interest
      income from investment securities and $27,000, or 46.55%, in interest income
      from other interest earning assets (primarily consisting of interest earned
      on
      federal funds sold and Federal Home Loan Bank stock), partially offset by a
      decrease of $9,000, or 22.50%, in interest income from mortgage backed
      securities.





The
      increase in interest income reflects a $747,000, or 0.45%, decrease in the
      average balance of interest-earning assets to $165,816,000 during the quarter
      ended June 30, 2007 from $166,563,000 during the quarter ended June 30, 2006,
      and an 18 basis point increase in the yield on average interest-earning assets
      to 5.60% for the three months ended June 30, 2007 from 5.42% for the three
      months ended June 30, 2006, reflecting an increase in market interest rates.





The
      increase in interest income and fees on loans was due to a 15 basis point
      increase in the average yield on net loans receivable, offset by a $1,845,000,
      or 1.26% decrease in average net loans receivable, from $146,513,000 during
      the
      quarter ended June 30, 2006 to $144,668,000 during the quarter ended June 30,
      2007.





The
      increase in interest income from other interest-earning assets (primarily
      federal funds sold) was due to a $1,782,000, or 46.33%, increase in average
      other interest-earning assets, from $3,846,000 during the quarter ended June
      30,
      2006 to $5,628,000 during the quarter ended June 30, 2007.


-15-


The
      decrease in interest income from mortgage-backed securities was primarily the
      result of a $1,116,000 or 28.38% decline in the average balance of
      mortgage-backed securities, which was partially offset by a 33 basis point
      increase in the yield on these securities.





Six
      months ended June 30, 2007 compared to six months ended June 30,
      2006 .





Interest
      income increased by $173,000, or 3.86%, to $4,625,000 for the six months ended
      June 30, 2007, from $4,452,000 for the six months ended June 30, 2006. The
      increase in interest income resulted primarily from increases of $98,000, or
      2.45%, in interest and fee income from loans, $42,000, or 16.47%, in interest
      income from investment securities and $51,000, or 44.74%, in interest income
      from other interest earning assets (primarily consisting of interest earned
      on
      federal funds sold and Federal Home Loan Bank stock), partially offset by a
      decrease of $18,000, or 21.69%, in interest income from mortgage backed
      securities.





The
      increase in interest income reflects a $171,000, or 0.10%, increase in the
      average balance of interest-earning assets to $166,398,000 from $166,227,000,
      and a 20 basis point increase in the yield on average interest-earning assets
      to
      5.56% for the six months ended June 30, 2007 from 5.36% for the six months
      ended
      June 30, 2006, reflecting an increase in market interest rates.





The
      increase in interest income and fees on loans was due to a 14 basis point
      increase in average yield on net loans receivable. The increase in interest
      income from investment securities was primarily reflective of a 78 basis point
      increase in the average yield and a $420,000, or 5.10%, increase in the average
      balance of available for sale investment securities.





The
      increase in interest income from other interest-earning assets (primarily
      federal funds sold) was due to a $1,064,000, or 24.20%, increase in average
      other interest-earning assets, from $4,396,000 during the six months ended
      June
      30, 2006 to $5,460,000 during the six months ended June 30, 2007, and a 85
      basis
      point increase in the average yield on these assets (as a result of increases
      in
      short term market interest rates).





The
      decrease in interest income from mortgage-backed securities was primarily the
      result of a $1,176,000 or 28.62% decline in the average balance of
      mortgage-backed securities, which was partially offset by a 39 basis point
      increase in the yield on these securities.





*Interest
      Expense* .





Three
      months ended June 30, 2007 compared to three months ended June 30,
      2006 .





Interest
      expense, which consists of interest paid on deposits and borrowings, increased
      by $224,000, or 17.28%, to $1,520,000 for the three months ended June 30, 2007
      from $1,296,000 for the three months ended June 30, 2006. The increase in
      interest expense resulted from an increase in the average cost of
      interest-bearing liabilities, while the average balance of interest-bearing
      liabilities decreased slightly. The average balance of interest-bearing deposits
      increased to $112,055,000 during the quarter ended June 30, 2007 from
      $109,552,000 during the quarter ended June 30, 2006, and the average cost of
      deposits increased by 74 basis points as a result of increased market interest
      rates. The average balance of borrowings decreased to $33,833,000 during the
      quarter ended June 30, 2007 from $38,000,000 in the same quarter of 2006 and
      the
      average cost of borrowings increased by 43 basis points as a result of borrowing
      at a higher interest rate.


-16-




Six
      months ended June 30, 2007 compared to six months ended June 30,
      2006 .





Interest
      expense increased by $532,000, or 21.18%, to $3,044,000 for the six months
      ended
      June 30, 2007 from $2,512,000 for the six months ended June 30, 2006. The
      increase in interest expense resulted from an increase in the average cost
      of
      interest-bearing liabilities, while the average balance of interest-bearing
      liabilities decreased slightly. The average balance of deposits increased to
      $111,701,000 from $109,573,000 and the average cost of deposits increased by
      81
      basis points as a result of increased market interest rates. The average balance
      of borrowings decreased to $35,250,000 during the six months ended June 30,
      2007
      from $38,000,000 in the same period of 2006 and the average cost of borrowings
      increased by 54 basis points as a result of borrowing at higher interest
      rates.





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





Based
      on
      our evaluation of these factors, and as discussed further below, management
      made
      a provision of $149,000 and $24,000 for the three months ended June 30, 2007
      and
      June 30, 2006, and a provision of $182,000 and $38,000 for the six months ended
      June 30, 2007 and June 30, 2006, respectively. There was one commercial non-real
      estate loan charge-off during the six-month period ended June 30, 2007 for
      $120,000 which is discussed below under “General Valuation Allowance on the
      Remainder of the Loan Portfolio.” There were no charge-offs during the six-month
      period ended June 30, 2006. We used the same methodology  and
      generally similar assumptions in computing the allowance for these periods.





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




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




·
            loans
                90 or more days delinquent;





·
            loans
                with anticipated losses;





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





·
            nonaccrual
                loans;





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





·
            troubled
                debt restructurings and other non-performing
                loans.


-17-




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




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





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




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





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.


-18-


The
      allowance for loan losses totaled $912,000  or
      0.63%
      of gross loans outstanding of $145,010,000 at June 30, 2007, compared to an
      allowance for loan losses of $512,000, or 0.35%, of gross loans outstanding
      of
      $147,439,000 at June 30, 2006. The increase to the loan loss reserve is due
      to
      the increased balance of impaired loans. As of June 30, 2007, we have specific
      reserves of $140,000 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 two commercial non-real estate loans that
      are classified as impaired. In mid-July 2006, a corporate commercial loan
      borrower informed the Bank that it was contemplating ceasing business
      operations, which it did as of July 31, 2006. The principal of this company
      also
      borrowed additional funds from the Bank directly. Both of these loans were
      cross-guaranteed, cross-defaulted and cross-collateralized. Once the company
      ceased operations, the borrower and guarantor were in non-financial default
      on
      these loans, even though the loans were current as of that date. On September
      11, 2006, the Bank gave written notice to the borrower and the guarantor that
      they had defaulted on their loan agreements. Subsequently, the company filed
      for
      Chapter 7 bankruptcy on September 26, 2006 and the borrower filed for Chapter
      7
      personal bankruptcy on June 28, 2007. The borrower has made a partial settlement
      offer, to which the Bank made a counter offer. A written agreement to
      restructure the remaining debt is expected by August 26, 2007, although there
      can be no assurance that this will be the case or that we will recover any
      amounts on these loans.




The
      following table summarizes the activity in the provision for loan losses for
      the
      three and six months ended June 30, 2007 and 2006.





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**(Dollars
                in Thousands)Balance
                at beginning of period
            
            $
            764
            
            $
            488
            
            $
            850
            
            $
            474Charge-offs
            
            
            (1
            )
            
            —
            
            
            (120
            )
            
            —Recoveries
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                charge-offs
            
            
            (1
            )
            
            —
            
            
            (120
            )
            
            —Provision
                for loan losses
            
            
            149
            
            
            24
            
            
            182
            
            
            38Ending
                balance
            
            $
            912
            
            $
            512
            
            $
            912
            
            $
            512Ratio
                of net charge-offs (recoveries) during the period to average loans
                outstanding, net, during the period
            
            
            —
            
            
            —
            
            
            0.08
            %
            
            —Ratio
                of allowance for loan losses to total loans outstanding
            
            
            0.63
            %
            
            0.35
            %
            
            0.63
            %
            
            0.35
            %Allowance
                for loan losses as a percent of total non-performing loans
            
            
            219.76
            %
            
            38.47
            %
            
            219.76
            %
            
            38.47
            %





-19-




*Other
      Income* .





Three
      months ended June 30, 2007 compared to three months ended June 30,
      2006 .





Historically,
      our non-interest income has been relatively modest and one of our strategic
      initiatives is to increase our non-interest income. Non-interest income
      increased $48,000, or 84.21%, to $105,000 for the three months ended June 30,
      2007, as compared to $57,000 for the three months ended June 30, 2006. The
      primary reason for the increase in non-interest income is a $29,000, or
      1450.00%, increase in gain on sale of loans and an $18,000, or 120.00%, increase
      in other income (primarily consisting of processing fees and late charges on
      loans, and income from checking accounts and ATM usage). Rental income from
      our
      headquarters building has remained relatively steady. While a tenant has vacated
      a portion of our leaseable space, the tenant continues to pay the rent due
      pursuant to the agreed upon rent schedule while they seek to sublet the space.
      As of June 30, 2007, we leased 100% of the total leaseable space in our
      headquarters building. We expect this figure to remain constant for the third
      quarter of 2007 as we do not anticipate any vacant leaseable space in our
      headquarters building, other than due to the tenant mentioned
      above.





Six
      months ended June 30, 2007 compared to six months ended June 30,
      2006 .





Non-interest
      income increased $52,000, or 43.33%, to $172,000 for the six months ended June
      30, 2007, as compared to $120,000 for the six months ended June 30, 2006. The
      primary reason for the increase in non-interest income is a $32,000, or 457.14%,
      increase in gain on sale of loans and a $19,000, or 55.88%, increase in other
      income. Rental income from our headquarters building has remained relatively
      steady.





*Non-interest
      Expense* .





Three
      months ended June 30, 2007 compared to three months ended June 30,
      2006 .





Non-interest
      expense was $816,000 for the three months ended June 30, 2007 as compared to
      $899,000 for the three months ended June 30, 2006, a decrease of $83,000, or
      9.23%. The decrease was due primarily to a $39,000, or 8.39%, decrease in
      compensation and related expenses, a $24,000, or 43.64%, decrease in furniture,
      fixtures and equipment expenses and a $43,000, or 22.75%, decrease in other
      expenses (primarily consisting of IT support, bank services fees, professional
      services fees, including legal, audit and accounting, insurance premiums and
      office supply expenses), partially offset by an increase of $18,000, 39.13%,
      in
      advertising expenses. The decrease in compensation expense is the result of
      not
      increasing executive officers’ salaries and of replacing departing full-time
      salaried employees with part-time hourly employees in the quarter ending June
      30, 2007. The decrease in furniture, fixtures and equipment expenses is due
      to
      the full depreciation of items purchased in 2001 to establish our new offices
      in
      Harford County and the decrease in other expenses is the result of a decrease
      in
      legal fees as fewer legal issues have arisen as we have gained experience with
      the requirements of being a public company, as well as a concerted effort to
      reduce costs in such areas of operation as office supplies, insurance premiums
      and loan expenses.


-20-




Six
      months ended June 30, 2007 compared to six months ended June 30,
      2006 .





Non-interest
      expense was $1,634,000 for the six months ended June 30, 2007, as compared
      to
      $1,864,000 for the six months ended June 30, 2006, a decrease of
      $230,000  or
      12.34%. The decrease was due  primarily
      to a $108,000, or 36.86%, decrease in occupancy expenses, a $63,000, or 6.83%,
      decrease in compensation and related expenses, a $46,000, or 41.44%, decrease
      in
      furniture, fixtures and equipment expenses and a $48,000, or 13.99%, decrease
      in
      other expenses, partially offset by an increase of $36,000, or 50.00%, in
      advertising expenses. The decrease in occupancy expenses is the result of no
      longer carrying the costs associated with the operation of the Edgewood branch,
      which we closed in 2006. The decrease in compensation expenses, furniture,
      fixtures and equipment expenses and other expenses for the six months ended
      June
      30, 2007 is due to the same factors as stated above for the three month period.





*Income
      Tax Expense* .





Three
      months ended June 30, 2007 compared to three months ended June 30,
      2006 .





The
      benefit for income taxes was $19,000 for the three months ended June 30, 2007
      compared to a provision for income tax of $38,000 for the three months ended
      June 30, 2006, representing a $57,000, or 150.00%, decrease in the income tax
      provision. The benefit for income taxes was due to our loss before taxes of
      $57,000 for the three months ended June 30, 2007, as compared to income before
      taxes of $94,000 for the three months ended June 30, 2006.





Six
      months ended June 30, 2007 compared to six months ended June 30,
      2006 .





The
      benefit for income taxes was $15,000 for the six months ended June 30, 2007
      compared to a provision for income tax of $66,000 for the six months ended
      June
      30, 2006, representing an $81,000, or 122.73%, decrease in the income tax
      provision. The benefit for income taxes was due to our loss before taxes of
      $63,000 for the six months ended June 30, 2007, as compared to income before
      taxes of $158,000 for the six months ended June 30, 2006.





**Analysis
      of Financial Condition**





*Assets.*





General .





Our
      total
      assets decreased by $1,385,000 or 0.79%, to $172,840,000 at June 30, 2007,
      from
      $174,225,000 at December 31, 2006. The decrease in total assets resulted
      primarily from a $3,185,000, or 2.16% decrease in net loans receivable, from
      $147,118,000  at
      December 31, 2006  to
      $143,933,000 at June 30, 2007, a $470,000,  or
      14.69%, decrease in mortgage backed securities- held to maturity, from
      $3,200,000 at December 31, 2006 to $2,730,000 at June 30, 2007 and a $277,000
      decrease in Federal Home Loan Bank stock, from $2,098,000 at December 31, 2006
      to $1,821,000 at June 30, 2007. These decreases were offset by a
      $1,527,000,  or
      53.56%
      increase in cash and cash equivalents, from $2,851,000 at December 31, 2006
      to
      $4,378,000 at June 30, 2007 and a $186,000, or 2.18% increase in investment
      securities - available for sale, from $8,526,000 at December 31, 2006 to
      $8,712,000 at June 30, 2007.


-21-




Investment
      Securities .





The
      investment portfolio at June 30, 2007 amounted to $15,442,000, a decrease of
      $284,000, or 1.81%,  from
      $15,726,000 at December 31, 2006. Investment securities - available for sale,
      increased $186,000, or 1.01%, to $8,712,000 at June 30, 2007 from $8,526,000
      at
      December 31, 2006, primarily as a result of dividends credited to the account.
      Mortgage backed securities - held to maturity, decreased $470,000, or 14.69%,
      to
      $2,730,000 at June 30, 2007 from $3,200,000 at December 31, 2006, 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 .





The
      carrying value of available for sale securities includes a net unrealized loss
      of $258,000 at June 30, 2007 (reflected as accumulated other comprehensive
      loss
      of $158,000 in equity after deferred taxes) as compared to a net unrealized
      loss
      of $222,000 ($136,000 net of taxes) as of December 31, 2006. In general, the
      increase in unrealized loss was a result of **** a
      slight
      decrease in the interest **** rate
      yield curve.





Loan
      Portfolio





Loans
      receivable, net, decreased $3,185,000, or 2.16%, to $143,933,000 at June 30,
      2007 from $147,118,000 at December 31, 2006. The commercial loan portfolio
      increased $3,748,000, or 43.83%, to $12,301,000 at  June
      30,
      2007 from $8,552,000  at
      December 31, 2006. One-to-four family residential  loans
      decreased  $4,965,000,
      or 4.22% to $112,790,000  at
      June
      30, 2007 from  $117,755,000  at
      December 31, 2006. The decrease is primarily due to a strategic initiative
      to
      sell a larger percentage of our residential mortgage loan originations to
      facilitate our goal of increasing and diversifying the mix of commercial loans
      to residential loans in our loan portfolio. Our loan customers are generally
      located in the Baltimore Metropolitan area and its surrounding counties in
      Maryland.





Asset
      Quality .





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





We
      hold a
      19% participation (approximately $1,083,000 in unpaid principal balance) in
      an
      acquisition and development loan. This loan became delinquent in the fourth
      quarter of 2004 and was placed on non-accrual status in the third quarter of
      2005. Due to unresolved land development issues with the local municipality,
      the
      borrower had been unable to sell the property. In mid-September 2006, the
      participating lenders had the collateral property docketed for foreclosure.
      The
      principal of the borrower and the entity that owns the collateral property
      filed
      bankruptcy in November 2006, which caused the cancellation of the scheduled
      foreclosure auction that had also been scheduled for November 2006. The
      automatic stay was lifted on April 10, 2007 and the participating lenders
      proceeded with the sale of the property at auction on May 30, 2007. The lead
      participating bank purchased the property at that time, requiring us to place
      the loan in the foreclosed real estate category. Subsequently, a real estate
      developer has made an offer to purchase the property and we accepted a letter
      of
      intent on June 26, 2007. An executed contract with a 90 day feasibility study
      period was received on July 26, 2007 that would enable us to recover the
      carrying amount of the real estate, although there can be no assurance that
      this
      will be the case. Prior to expiration of the 90-day feasibility period, the
      buyer may terminate this agreement at any time and for any reason in its sole
      discretion. Resolution of this matter will extend at least into the third
      quarter of 2007.


-22-


Real
      estate and other assets that we acquire as a result of foreclosure or by
      deed-in-lieu of foreclosure or repossession on collateral-dependent loans are
      classified as real estate owned or other repossessed assets until sold. Such
      assets are recorded at fair value less estimated selling costs at foreclosure
      or
      other repossession and updated quarterly at the lower of cost or estimated
      fair
      value less estimated selling costs. Any portion of the outstanding loan balance
      in excess of fair value at the time of foreclosure is charged off against the
      allowance for loan losses. If, upon ultimate disposition of the property, net
      sales proceeds exceed the net carrying value of the property, a gain on sale
      of
      real estate or other assets is recorded. As discussed above, we have one
      foreclosed real estate participation loan totaling $1,083,000 at June 30, 2007.
      We did not have a real estate owned or other repossessed assets at December
      31,
      2006.


Non-accrual
      loans totaled $415,000, or 0.29%, $1,485,000, or 1.01%, and $1,331,000, or
      0.91%, of net loans receivable at June 30, 2007, December 31, 2006 and June
      30,
      2006, respectively.




Of
      the
      non-accrual loans at June 30, 2007, $140,000 consisted of two commercial
      non-real estate loans, and $275,000 consisted of a one-to-four residential
      mortgage loan at June 30, 2007.





Under
      current accounting guidelines, a loan is defined as impaired when, based on
      current information and events, it is probable that a creditor will be unable
      to
      collect all amounts due under the contractual terms of the loan agreement. 
We consider one- to four-family mortgage loans and consumer installment loans
      to
      be homogeneous and, therefore, do not separately evaluate them for
      impairment.  All other loans are evaluated for impairment on an individual
      basis. We generally classify non-accrual loans as impaired and we are doing
      so
      with respect to the $1,083,000 commercial land acquisition and development
      participation loan as management believes that we will not be able to collect
      all amounts due under the contractual terms of the loan agreement.




As
      of
      June 30, 2007, we have classified two commercial non-real estate loans as
      impaired as was discussed in detail in the “Provision for Loan Losses and
      Analysis of Allowance for Loan Losses” section of this report. At the end of the
      first six months, in anticipation of a minimal recovery of principal on these
      loans, we charged a portion of the loan balances against our allowance for
      loan
      losses and we have reserved $140,000, or 100%, of the remaining balance of
      the
      loans to our allowance for loan losses. Final disposition of this matter is
      still pending as of the date of this report.





**** Other
      than as disclosed in the paragraphs above, there are no other loans at June
      30,
      2007 about which management has serious doubts concerning the ability of the
      borrowers to comply with the present loan repayment terms.





*Liabilities.*





General .





Total
      liabilities decreased by $1,175,000, or 0.77%, to $150,685,000 at June 30,
      2007,
      from $151,860,000 at December 31, 2006. The decrease in total liabilities
      resulted from a $5,500,000, or 14.10% decrease in borrowings, offset by
      increases of $2,467,000, or 2.21% in deposits, $1,410,000, or 402.86% in advance
      payments by borrowers for taxes and insurance and $270,000, or 70.31% in checks
      outstanding in excess of bank balance. The decrease in borrowings is the result
      of paying down the Federal Home Loan Bank advances when our liquidity is
      favorable. Advance payments by borrowers for taxes and insurance increased
      because the July 2007 semi-annual property taxes had not been paid as
      of  June 30,
      2007. The balance in checks outstanding in excess of bank balance at the end
      of
      a period is dependent on the number and amounts of checks issued on the account
      at our correspondent’s bank and when such checks are presented for payment. Any
      excess funds are automatically transferred into an interest-earning federal
      funds account. Therefore, changes in checks outstanding in excess of bank
      balance as reflected on the balance sheet, generally, do not reflect any
      underlying changes in the Company’s financial condition. The other liabilities
      consist primarily of accrued federal and state income taxes and accrued interest
      on Federal Home Loan Bank borrowings.


-23-


Deposits





Deposits
      increased $2,467,000, or 2.21%, to $114,290,000 at June 30, 2007 from
      $111,823,000 at December 31, 2006. Certificates of deposits increased $2,310,000
      to $88,306,000 at June 30, 2007 from $85,996,000 at December 31, 2006, and
      NOW
      and money market demand accounts increased by $461,000 to $17,196,000 at June
      30, 2007 from $16,735,000 at December 31, 2006. Savings deposits decreased
      $304,000 to $8,788,000 at June 30, 2007 from $9,092,000 at December 31, 2006.
      We
      believe that, as deposit rates have risen, some customers are moving funds
      into
      higher-yielding investments, thus accounting for the increase in certificate
      of
      deposit and money market deposit accounts and the decline in lower rate paying
      core deposit accounts.





Borrowings .





At
      June
      30, 2007, we were permitted to borrow up to $51,852,000 from the Federal Home
      Loan Bank of Atlanta. We had $33,500,000 and $39,000,000 of Federal Home Loan
      Bank advances outstanding as of June 30, 2007 and December 31, 2006,
      respectively, and we averaged  $35,250,000
      and $39,250,000 of Federal Home Loan Bank advances during the six months ended
      June 30, 2007 and the year ended December 31, 2006, respectively. The decrease
      in borrowings reflects $5,500,000 Federal Home Loan Bank advance pay downs
      and
      $25,500,000 in the rollover of advances, offset by maturing advances of
      $25,500,000 in the first half of 2007.




**Liquidity
      Management**





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





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





Our
      most
      liquid assets are cash and cash equivalents. The levels of these assets depend
      on our operating, financing, lending and investing activities during any given
      period. At June 30, 2007, cash and cash equivalents totaled $4,378,000.
      Securities classified as available-for-sale, which can provide additional
      sources of liquidity, totaled $8,712,000 at June 30, 2007. However, because
      all
      of these securities were in an unrealized loss position at June 30, 2007, and
      because management has the intent and ability to hold these securities until
      recovery or maturity, management does not consider these securities as a source
      of liquidity at June 30, 2007.  Also,
      at
      June 30, 2007, we had advances outstanding of $33,500,000 from the Federal
      Home
      Loan Bank of Atlanta. On that date, we had the ability to borrow an additional
      $18,352,000.





At
      June
      30, 2007, we had outstanding commitments to originate loans of $1,147,000
      (excluding the undisbursed portions of loans). These commitments do not
      necessarily represent future cash requirements since certain of these
      instruments may expire without being funded, although this is unusual. We also
      extend lines of credit to customers, primarily home equity lines of credit.
      The
      borrower is able to draw on these lines as needed, thus the funding is generally
      unpredictable. Unused home equity lines of credit amounted to $5,425,000 at
      June
      30, 2007. Since the majority of unused lines of credit expire without being
      funded, it is anticipated that our obligation to fund the above commitment
      amount will be substantially less than the amounts reported.


-24-


Certificates
      of deposit accounts scheduled to mature within one year totaled $57,393,000
      or
      50.22% of total deposits at June 30, 2007. 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 in which long-term rates are lower
      than
      short-term rates. If these deposits do not remain with us, we will be required
      to seek other sources of funds, including other certificates of deposit and/or
      additional borrowings. Depending on market conditions, we may be required to
      pay
      higher rates on such deposits or other borrowings than we currently pay on
      the
      certificates of deposit due on or before June 30, 2008. We believe, however,
      that, based on past experience, a significant portion of our certificates of
      deposit will remain with us. We also believe we have the ability to attract
      and
      retain deposits by adjusting the interest rates offered.





Our
      borrowings are with the Federal Home Loan Bank of Atlanta and are secured by
      Federal Home Loan Bank of Atlanta stock that we own and a blanket lien on
      mortgages. Borrowings at June 30, 2007 consisted of  $7,000,000  short
      term fixed rate FHLB advances bearing interest at rates ranging from 5.28%
      to
      5.43% and $26,500,000 long term convertible rate FHLB advances with fixed
      interest rates ranging from 3.63% to 4.90%. If not repaid or converted to a
      different product, the convertible rate advances will convert from a fixed
      to a
      floating rate after the initial borrowing periods ranging from three months
      to
      five years.





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





We
      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 $210,000, or 0.94%, to $22,155,000 at June 30,
      2007 from $22,365,000 at December 31, 2006 primarily as a result of the purchase
      of $226,000 in additional Treasury stock and a net loss of $48,000. The net
      loss
      is primarily due to an increase in the provision for loan losses due to the
      expected default of two commercial non-real estate loans and an acquisition
      and
      development participation loan. We are considered “well capitalized” under the
      risk-based capital guidelines applicable to us.


-25-




***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.





**Financial
                Instruments Whose****Contract
                Amount Represents**
            
            **Contract
                Amount At****Credit
                Risk**
            
            **June
                30, 2007**
            
            **December
                31, 2006**(Dollars
                in thousands)Lines
                of credit - commercial
            
            $
            1,585
            
            $
            1,210Lines
                of credit - home equity
            
            
            5,425
            
            
            5,335Lines
                of credit - overdraft checking
            
            
            125
            
            
            118Mortgage
                loan commitments
            
            
            1,147
            
            
            830




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





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





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





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





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




Our
      outstanding commitments to make mortgages are at fixed rates ranging from 6.50%
      to  10.50%
      and 5.625% to 7.125% at June 30, 2007 and December 31, 2006, respectively.
      Loan
      commitments expire 60 days from the date of the commitment.





For
      the
      six months ended June 30, 2007, 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.


-26-




**Information
      Regarding Forward-Looking Statements**





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





Our
      goals, objectives, expectations and intentions, including statements regarding
      profitability, growth and operating strategy, liquidity, asset quality of our
      loan and investment portfolio, the allowance for loan losses, repayment of
      non-accrual loans, interest rate sensitivity, liquidity management, market
      risk
      and financial and other goals are forward looking. These statements are based
      on
      our beliefs, assumptions and on information available to us as of the date
      of
      this filing, and involve risks and uncertainties. These risks and uncertainties
      include, among others, those discussed in this Quarterly Report on Form 10-QSB
      and in our Annual Report on Form 10-KSB for the year ended December 31, 2006;
      the effect of rising interest rates on our profits and asset values; risks
      related to our intended increased focus on commercial real estate and commercial
      business loans; our limited recognition and reputation in our markets; adverse
      economic conditions in our market area; our dependence on key personnel;
      competitive factors within our market area; the effect of developments in
      technology on our business; adverse changes in the overall national economy
      as
      well as adverse economic conditions in our specific market area; adequacy of
      the
      allowance for loan losses; expenses as a result of our stock benefit plans;
      and
      changes in regulatory requirements and/or restrictive banking legislation.





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




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





As
      of the
      end of the period covered by this quarterly report on Form 10-QSB, SFSB, Inc.’s
      Chief Executive Officer and Chief Financial Officer evaluated the effectiveness
      of SFSB, Inc.’s 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 June 30,
      2007. Disclosure controls and procedures are controls and other procedures
      that
      are designed to ensure that information required to be disclosed by SFSB, Inc.
      in the reports that it files or submits under the Securities Exchange Act of
      1934, as amended, is recorded, processed, summarized and reported within the
      time periods specified in the Securities and Exchange Commission’s rules and
      forms.





In
      addition, there were no changes in SFSB, Inc.’s internal control over financial
      reporting (as defined in Rule 13a-15 or Rule 15d-15 under the Securities Act
      of
      1934, as amended) during the quarter ended June 30, 2007, that have materially
      affected, or are reasonably likely to materially affect, SFSB, Inc.’s internal
      control over financial reporting.




-27-




**PART
      II - OTHER INFORMATION**





Item
      1.  Legal
      Proceedings.





None.





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





The
      table
      below summarizes our repurchases of equity securities during the second quarter
      of 2007.





**SMALL
      BUSINESS 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)**April
                1 - 30, 2007
            
            
            0
            
            
            n/a
            
            
            0
            
            
            42,151May
                1 -31, 2007
            
            
            0
            
            
            n/a
            
            
            0
            
            
            42,151June
                1 - 30, 2007
            
            
            31,756
            
            $
            9.22
            
            
            31,756
            
            
            10,395**Total
                Second Quarter**
            
            
            **31,756**
            
            **$**
            **9.22**
            
            
            **31,756**
            
            
            **10,395**





(1)
            On
                November 21, 2005, our board of directors adopted a stock repurchase
                program to acquire up to 53,561 shares, or approximately 4% of our
                outstanding common stock held by persons other than Slavie Bancorp,
                MHC.
                On May 10, 2006, our board of directors approved the repurchase of
                up to
                an additional 66,951 shares, or approximately 5% of our outstanding
                common
                stock held by persons other than Slavie Bancorp, MHC. On August 6,
                2007,
                our board of directors approved the repurchase of up to an additional
                62,334 shares, or approximately 5% of our outstanding common stock
                held by
                persons other than Slavie Bancorp, MHC. Stock purchases are made
                from time
                to time in the open market at the discretion of management. The repurchase
                program is dependent upon market conditions and other applicable
                legal
                requirements. As of June 30, 2007, SFSB, Inc. had repurchased 56,556
                shares on the open market at an average cost of $9.48 per share to
                fund a
                stock-based compensation plan. In accordance with the terms of the
                stock
                repurchase program, as approved by the board, we are authorized to
                purchase an additional 10,395 shares at June 30, 2007 and an aggregate
                of
                72,729 shares as of the date of this filing.





Item
      3.  Defaults
      Upon Senior Securities.





Not
      applicable.





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




(a)  SFSB,
      Inc. held its annual meeting of stockholders on May 17, 2007.


-28-




(b)  At
      the
      annual meeting, Thomas J. Drechsler and Charles E. Wagner, Jr. were elected
      to
      serve a three-year term expiring upon the date of SFSB, Inc.’s 2010 Annual
      Meeting. The term of office of the following directors continued after the
      meeting: J. Benson Brown, Philip E. Logan, Robert M. Stahl IV, and James D.
      Wise.





(c)  1.
      The
      following individuals were nominees for the Board of Directors for a term to
      expire at the 2010 annual meeting of stockholders. The number of votes for
      or
      withheld for each nominee is as follows:




For
            
            Withheld
            
            TotalThomas
                J. Drechsler
            
            
            2,810,871
            
            
            57,950
            
            
            2,868,821Charles
                E. Wagner, Jr.
            
            
            2,810,871
            
            
            57,950
            
            
            2,868,821


2.
      The
      ratification of the appointment of Beard Miller Company LLP as independent
      public accountants to audit the financial statements of SFSB, Inc. for
      2007:





For
            
            Against
            
            Abstain
            
            Broker
                Non-Votes
            
            Total2,844,021
            
            
            23,300
            
            
            1,500
            
            
            0
            
            
            2,868,821




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






-29-




**SIGNATURES**





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








SFSB,
                Inc.Date:
                August 9,2007
            
            By:
            /s/
                Philip E. LoganPhilip
                E. Logan, President(Principal
                Executive Officer)Date:
                August 9, 2007
            
            By:
            /s/
                Sophie T. WittelsbergerSophie
                Torin Wittelsberger, Chief Financial Officer(Principal
                Accounting and Financial Officer)




-30-