UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-QSB





(Mark
                One)x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934
              
              For
                the quarterly period ended September 30, 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
      November 5, 2007, there were 2,874,874 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**


**September
                  30, 2007**
              
              **December
                  31, 2006**(Dollars
                  in thousands, except share data)**ASSETS**Cash
                  and due from banks
              
              $
              640
              
              $
              881Federal
                  funds sold
              
              
              901
              
              
              1,970Cash
                  and cash equivalents
              
              
              1,541
              
              
              2,851Investment
                  securities - available for sale
              
              
              8,819
              
              
              8,526Investment
                  securities - held to maturity
              
              
              3,000
              
              
              4,000Mortgage
                  backed securities - held to maturity
              
              
              2,474
              
              
              3,200Loans
                  receivable - net of allowance for loan losses of2007
                  $937; 2006 $850
              
              
              146,164
              
              
              147,118Foreclosed
                  Real Estate
              
              
              1,083
              
              
              -Federal
                  Home Loan Bank of Atlanta stock, at cost
              
              
              1,821
              
              
              2,098Premises
                  and equipment, net
              
              
              5,159
              
              
              5,265Accrued
                  interest receivable
              
              
              581
              
              
              560Other
                  assets
              
              
              450
              
              
              607**Total
                  assets**
              
              $
              171,092
              
              $
              174,225**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY****Liabilities**Deposits
              
              $
              114,685
              
              $
              111,823Checks
                  outstanding in excess of bank balance
              
              
              1,439
              
              
              384Borrowings
              
              
              31,500
              
              
              39,000Advance
                  payments by borrowers for taxes and insurance
              
              
              664
              
              
              350Other
                  liabilities
              
              
              720
              
              
              303**Total
                  liabilities**
              
              
              149,008
              
              
              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 September 30, 2007 and December 31, 2006 and 2,874,874
                  and
                  2,907,759 shares outstanding at September 30, 2007 and December
                  31, 2006,
                  respectively
              
              
              30
              
              
              30Additional
                  paid-in capital
              
              
              12,800
              
              
              12,788Retained
                  earnings (substantially restricted)
              
              
              11,371
              
              
              11,393Unearned
                  Employee Stock Ownership Plan shares
              
              
              (1,006
              )
              
              (1,050
              )Treasury
                  Stock at cost, September 30, 2007, 100,751 shares and December
                  31, 2006,
                  67,866 shares
              
              
              (947
              )
              
              (660
              )Accumulated
                  other comprehensive loss
              
              
              (164
              )
              
              (136
              )**Total
                  stockholders’ equity**
              
              
              22,084
              
              
              22,365**Total
                  liabilities and stockholders’ equity**
              
              $
              171,092
              
              $
              174,225




See
      notes to consolidated financial
      statements.










**SFSB,
        Inc.**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
  **Three
                    Months Ended**
                
                **Nine
                    Months Ended****September
                    30,**
                
                **September
                    30**,**2007**
                
                **2006**
                
                **2007**
                
                **2006**(Dollars
                    in thousands, except for per share data)Interest
                    and fees on loans
                
                $
                2,130
                
                $
                2,080
                
                $
                6,228
                
                $
                6,080Interest
                    and dividends on investment securities
                
                
                149
                
                
                140
                
                
                446
                
                
                395Interest
                    on mortgage backed securities
                
                
                29
                
                
                39
                
                
                94
                
                
                122Other
                    interest income
                
                
                59
                
                
                45
                
                
                224
                
                
                159**Total
                    interest income**
                
                
                2,367
                
                
                2,304
                
                
                6,992
                
                
                6,756Interest
                    on deposits
                
                
                1,201
                
                
                998
                
                
                3,464
                
                
                2,771Interest
                    on short-term borrowings
                
                
                78
                
                
                119
                
                
                335
                
                
                277Interest
                    on long-term borrowings
                
                
                271
                
                
                299
                
                
                795
                
                
                880**Total
                    interest expense**
                
                
                1,550
                
                
                1,416
                
                
                4,594
                
                
                3,928**Net
                    interest income**
                
                
                817
                
                
                888
                
                
                2,398
                
                
                2,828Provision
                    for loan losses
                
                
                26
                
                
                302
                
                
                208
                
                
                340**Net
                    interest income after provision for loan****losses**
                
                
                791
                
                
                586
                
                
                2,190
                
                
                2,488**Other
                    Income**Rental
                    income
                
                
                41
                
                
                35
                
                
                121
                
                
                114Other
                    income
                
                
                46
                
                
                19
                
                
                99
                
                
                53Gain
                    on sale of loans
                
                
                18
                
                
                1
                
                
                57
                
                
                8**Total
                    other income**
                
                
                105
                
                
                55
                
                
                277
                
                
                175**Non-Interest
                    Expenses**Compensation
                    and other related expenses
                
                
                455
                
                
                462
                
                
                1,315
                
                
                1,385Occupancy
                    expense
                
                
                93
                
                
                93
                
                
                278
                
                
                386Advertising
                    expense
                
                
                39
                
                
                47
                
                
                147
                
                
                119Service
                    bureau expense
                
                
                41
                
                
                42
                
                
                124
                
                
                120Furniture,
                    fixtures and equipment
                
                
                33
                
                
                50
                
                
                98
                
                
                161Telephone,
                    postage and delivery
                
                
                22
                
                
                20
                
                
                60
                
                
                64Other
                    expenses
                
                
                165
                
                
                155
                
                
                460
                
                
                498**Total
                    non-interest expenses**
                
                
                848
                
                
                869
                
                
                2,482
                
                
                2,733**Income
                    (Loss) before income tax provision**
                
                
                48
                
                
                (228
                )
                
                (15
                )
                
                (70
                )Income
                    tax (benefit) provision
                
                
                21
                
                
                (86
                )
                
                6
                
                
                (20
                )Net
                    income (loss)
                
                $
                27
                
                $
                (142
                )
                $
                (21
                )
                $
                (50
                )**Basic
                    Earnings (Loss) per Share**
                
                **$**
                **0.01**
                
                **$**
                **(0.05**
                **)**
                **$**
                **(0.01**
                **)**
                **$**
                **(0.02**
                **)****Diluted
                    Earnings (Loss) per Share**
                
                **$**
                **0.01**
                
                **$**
                **(0.05**
                **)**
                **$**
                **(0.01**
                **)**
                **$**
                **(0.02**
                **)**
  See
        notes
        to consolidated financial statements.


**SFSB,
      Inc.**


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


**Three****Months
                  Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2007**
              
              **2006**
              
              **2007**
              
              **2006**(Dollars
                  in thousands)Net
                  income (loss)
              
              $
              27
              
              $
              (142
              )
              $
              (21
              )
              $
              (50
              )Net
                  unrealized (loss) gain on securitiesavailable
                  for sale during the period(net
                  of taxes of $(4), $13, ($17) and $0)
              
              
              (5
              )
              
              21
              
              
              (27
              )
              
              1Total
                  Comprehensive Income (Loss)
              
              $
              22
              
              $
              (121
              )
              $
              (48
              )
              $
              (49
              )
  See
        notes
        to consolidated financial statements.








**SFSB,
      Inc.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**Nine
                  Months Ended****2007**
              
              **2006**(Dollars
                  in thousands)**Cash
                  Flows From Operating Activities**Net
                  loss
              
              $
              (21
              )
              $
              (50
              )Adjustments
                  to Reconcile Net Loss to Net CashProvided
                  by Operating Activities:Non-cash
                  compensation under stock-based compensation plansand
                  Employee Stock Ownership Plan
              
              
              129
              
              
              173Net
                  amortization of premiums and discounts of investment
                  securities
              
              
              9
              
              
              11Amortization
                  of deferred loan fees
              
              
              (53
              )
              
              (45
              )Provision
                  for loan losses
              
              
              208
              
              
              340Gain
                  on sale of loans
              
              
              (57
              )
              
              (8
              )Loans
                  originated for sale
              
              
              (6,871
              )
              
              (1,510
              )Proceeds
                  from loans sold
              
              
              6,928
              
              
              1,518Provision
                  for depreciation
              
              
              175
              
              
              340Decrease
                  (increase) in accrued interest receivableand
                  other assets
              
              
              152
              
              
              (190
              )Increase
                  in accrued interest payable
              
              
              4
              
              
              10Increase
                  in other liabilities
              
              
              414
              
              
              9**Net
                  Cash Provided by Operating Activities**
              
              
              1,017
              
              
              598**Cash
                  Flows from Investing Activities**Purchase
                  of available for sale securities
              
              
              (339
              )
              
              (281
              )Proceeds
                  from redemption of held to maturity securities
              
              
              1,000
              
              
              -Net
                  increase in loans
              
              
              (284
              )
              
              (6,269
              )Principal
                  collected on mortgage backed securities
              
              
              717
              
              
              1,033Purchase
                  of Federal Home Loan Bank of Atlanta stock
              
              
              -
              
              
              (278
              )Redemption
                  of Federal Home Loan Bank of Atlanta stock
              
              
              277
              
              
              -Purchases
                  of premises and equipment
              
              
              (69
              )
              
              (55
              )**Net
                  Cash Provided by (Used in) Investing Activities**
              
              
              1,302
              
              
              (5,850
              )**Cash
                  Flows from Financing Activities**Net
                  increase in deposits
              
              
              2,862
              
              
              81Increase
                  (decrease) in checks outstanding in excess of bank balance
              
              
              1,055
              
              
              (845
              )Proceeds
                  from long-term borrowings
              
              
              10,000
              
              
              6,500Repayment
                  of long-term borrowings
              
              
              (10,000
              )
              
              (6,500
              )Net
                  change in short-term borrowings
              
              
              (7,500
              )
              
              6,000Increase
                  in advance payments by borrowers for taxes and insurance
              
              
              314
              
              
              485Issuance
                  of common stock
              
              
              67
              
              
              -Purchase
                  of treasury stock
              
              
              (427
              )
              
              (422
              )**Net
                  Cash (Used in) Provided by Financing Activities**
              
              
              (3,629
              )
              
              5,299(Decrease)
                  increase in cash and cash equivalents
              
              
              (1,310
              )
              
              47Cash
                  and cash equivalents at beginning of year
              
              
              2,851
              
              
              1,342**Cash
                  and cash equivalents at end of period**
              
              $
              1,541
              
              $
              1,389**Supplemental
                  Disclosures of Cash Flows Information**:Income
                  taxes paid
              
              $
              -
              
              $
              230Interest
                  expense paid
              
              $
              4,589
              
              $
              3,918Transfer
                  of loan to foreclosed real estate
              
              $
              1,083
              
              $
              -




See
      notes
      to consolidated financial statements.









**SFSB,
      Inc.**


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





**Note
      1 - Principles of Consolidation**





The
      consolidated financial statements include the accounts of SFSB, Inc. (“the
      Company”), its wholly-owned subsidiary, Slavie Federal Savings Bank (“the Bank”)
      and the Bank’s wholly-owned subsidiary, Slavie Holdings, LLC (“Holdings”). The
      accompanying consolidated financial statements include the accounts and
      transactions of these companies on a consolidated basis since inception. All
      intercompany accounts and transactions have been eliminated in the consolidated
      financial statements.





Slavie
      Bancorp, MHC, a mutual holding company whose activity is not included in the
      accompanying consolidated financial statements, owns 56.9% of the outstanding
      common stock of the Company as of September 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 for the year ended
      December 31, 2006. The results of operations for the nine months ended September
      30, 2007 are not necessarily indicative of the results that may be expected
      for
      the full year.










**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 nine
      months ended September 30, 2007 and 2006 as follows:


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


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





**Note
      5 - Regulatory Capital Requirements**





At
      September 30, 2007, the Bank met each of the three minimum regulatory capital
      requirements. The following table summarizes the Bank’s regulatory capital
      position at September 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)**September
                  30, 2007**Tangible
                  (1)
              
              $
              16,790
              
              
              9.79
              %
              $
              2,572
              
              
              1.50
              %
              
              N/A
              
              
              N/ATier
                  I capital (2)
              
              
              16,790
              
              
              16.29
              %
              
              N/A
              
              
              N/A
              
              $
              6,186
              
              
              6.00
              %Core
                  (leverage) (1)
              
              
              16,790
              
              
              9.79
              %
              
              6,860
              
              
              4.00
              %
              
              8,575
              
              
              5.00
              %Risk-weighted
                  (2)
              
              
              17,727
              
              
              17.19
              %
              
              8,248
              
              
              8.00
              %
              
              10,310
              
              
              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 $89,000, for the three and nine months ended September 30, 2007. The total
      income tax benefit recognized was $8,000 and $25,000  for
      the
      three and nine months ended September 30, 2007. The compensation cost charged
      against income for stock-based compensation plans, excluding ESOP, was $67,000
      and $131,000 for the three and nine months ended September 30, 2006. The total
      income tax benefit recognized was $9,000 and $28,000  for
      the
      three and nine months ended September 30, 2006.




**Note
      7 - Reclassification**




Certain
      amounts in the 2006 consolidated financial statements have been reclassified
      to
      conform to the 2007 presentation.




**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
      reflected a net loss of $21,000 for the nine months ended September 30, 2007
      as
      compared to net loss of $50,000 for the same period in 2006. This improvement
      was primarily due to an increase in interest income as a result of an increase
      in higher yielding commercial loan originations and an increase in gain on
      sale
      of loans as a result of selling residential loan originations, as well as a
      decrease in non-interest expenses. These increases were partially offset by
      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. Interest income increased
      $236,000, or 3.49%, non-interest income increased $102,000, or 58.29%, our
      provision for loan losses decreased $132,000, or 38.82% and non-interest
      expenses decreased $251,000, or 9.18%. These improvements were offset by a
      $666,000, or 16.96%, increase in interest expenses.





Assets
      declined during the first nine months of 2007 primarily because of our use
      of
      cash to repay $7,500,000 of borrowings. The decrease is also the result of
      a
      decrease in cash and cash equivalents of $1,310,000, or 45.95%, to $1,541,000
      at
      September 30, 2007 from $2,851,000 at December 31, 2006, a decrease in mortgage
      backed securities held to maturity of $726,000, or 22.69%, to $2,474,000 at
      September 30, 2007 from $3,200,000 at December 31, 2006, and a decrease in
      investment securities held to maturity of $1,000,000, or 25.00%, to $3,000,000
      at September 30, 2007 from $4,000,000 at December 31, 2006. These decreases
      were
      partially offset by an increase in investment securities available for sale
      of
      $293,000, or 3.44%, to $8,819,000 at September 30, 2007 from $8,526,000 at
      December 31, 2006.





As
      discussed 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 is a foreclosed real estate
      participation loan. Recently, 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, which was extended to expire
      on November 15, 2007. With a pending settlement by year end, we expect to
      recover the carrying amount of the real estate, although there can be no
      assurance that this will be the case. Additionally, a $100,000 business line
      of
      credit loan, restructured in the third quarter of 2007, is classified as
      impaired, because we believe that there is a substantial likelihood that we
      will
      not collect the total amount of the outstanding principal balance on this loan.





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 nine-month periods ended September
      30, 2007 include the following:





·
            Total
                assets at September 30, 2007 decreased by 1.80% to $171,092,000 as
                compared to $174,225,000 as of December 31,
                2006.




·
            Total
                borrowings decreased by 19.23% from $39,000,000 as of December 31,
                2006 to
                $31,500,000 as of September 30,
                2007.





·
            Net
                loans outstanding decreased by 0.65% from $147,118,000 as of December
                31,
                2006 to $146,164,000 as of September 30,
                2007.





·
            Nonperforming
                loans and foreclosed real estate at September 30, 2007 remained relatively
                unchanged at $1,487,000compared
                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 September 30, 2007 were $114,685,000, an increase of $2,862,000
                or
                2.56% from $111,823,000 at December 31, 2006.





·
            We
                realized net income of $27,000 and a net loss of $21,000 for the
                three-month and nine-month periods ended September 30, 2007. This
                compares
                to a net loss of $142,000 and $50,000 for the three-month and nine-month
                periods ended September 30, 2006.





·
            Net
                interest income, our main source of income, was $817,000 and $2,398,000
                during the three-month and nine-month periods ended September 30,
                2007
                compared to $888,000 and $2,828,000 for the same periods in 2006.
                This
                represents a decrease of 8.00% and 15.21% for the three months and
                nine
                months ended September 30, 2007 as compared to the same periods in
                2006.





·
            We
                had a commercial non-real estate loan charge-off of $120,000 and
                three
                overdraft protection loan charge-offs totaling $2,000 during the
                nine-month period ending September 30, 2007. We had no loan charge-offs
                during the nine-month period ending September 30,
                2006.





·
            Non-interest
                income increased by $50,000 and $102,000, or 90.91% and 58.29%, for
                the
                three-month and nine-month periods ended September 30, 2007, as compared
                to the three-month and nine-month periods ended September 30, 2006.
                The
                increase between the periods is primarily the result of an increased
                gain
                on sale of loans.





·
            Non-interest
                expenses decreased by $21,000 and $251,000, or 2.42% and 9.18%, for
                the
                three-month and nine-month periods ended September 30, 2007, as compared
                to the three- and nine-month periods ended September 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 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 Nine Months Ended September
      30, 2007 and 2006 - Provision for Loan Losses and Analysis of Allowance for
      Loan
      Losses.”




**Results
      of Operations for the Three and Nine Months Ended September 30, 2007 and
      2006**





*General* .
      Net
      income increased $169,000 to a net income of $27,000 for the three months ended
      September 30, 2007 compared to a net loss of $142,000 for the same period in
      the
      prior year. The increase was due primarily to a $276,000 decrease in provision
      for loan losses, a $63,000 increase in interest income, a $50,000 increase
      in
      non-interest income and a $21,000 decrease in non-interest expenses, offset
      by a
      $134,000 increase in interest expense.





Net
      income increased $29,000, to a net loss of $21,000 for the nine months ended
      September 30, 2007 compared to net loss of $50,000 for the same period in the
      prior year. The increase was due primarily to a $236,000 increase in interest
      income, a $102,000 increase in non-interest income, a $132,000 decrease in
      provision for loan losses, and a $251,000 decrease in non-interest expenses,
      offset by a $666,000 increase in interest expense.











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


**Three
                  Months Ended**
                **September
                  30, 2007**
              
              **Three Months
                  Ended**
                **September
                  30, 2006****Average**
                **Outstanding**
                **Balance**
              
              **Interest**
                **Earned/**
                **Paid**
              
              **Yield/**
                **Rate**
              
              **Average**
                **Outstanding**
                **Balance**
              
              **Interest**
                **Earned/**
                **Paid**
              
              **Yield/**
                **Rate**(Dollars
                  in thousands)
              
              (Dollars
                  in thousands)Interest-earning
                  assets:Loans
                  receivable(1)
              
              $
              145,331
              
              $
              2,130
              
              
              5.86
              %
              $
              149,409
              
              $
              2,080
              
              
              5.57
              %Mortgage-backed
                  securities
              
              
              2,557
              
              
              29
              
              
              4.54
              
              
              3,584
              
              
              39
              
              
              4.35Investment
                  securities (available for sale)
              
              
              8,787
              
              
              117
              
              
              5.33
              
              
              8,389
              
              
              102
              
              
              4.86Investment
                  securities (held to maturity)
              
              
              3,333
              
              
              32
              
              
              3.84
              
              
              4,000
              
              
              38
              
              
              3.80Other
                  interest-earning assets
              
              
              3,210
              
              
              59
              
              
              7.35
              
              
              2,580
              
              
              45
              
              
              6.98Total
                  interest-earning assets
              
              
              163,218
              
              
              2,367
              
              
              5.80
              %
              
              167,962
              
              
              2,304
              
              
              5.49
              %Non-interest
                  earning assets
              
              
              7,920
              
              
              
              
              
              
              
              
              7,069Total
                  assets
              
              $
              171,138
              
              
              
              
              
              
              
              $
              175,031Interest-bearing
                  liabilities:Savings
                  deposits
              
              $
              15,687
              
              $
              38
              
              
              0.97
              %
              $
              20,314
              
              $
              62
              
              
              1.22
              %Demand
                  and NOW accounts
              
              
              7,507
              
              
              59
              
              
              3.14
              
              
              4,849
              
              
              16
              
              
              1.32Certificates
                  of deposit
              
              
              90,696
              
              
              1,104
              
              
              4.87
              
              
              82,892
              
              
              920
              
              
              4.44Escrows
              
              
              3
              
              
              -
              
              
              -
              
              
              7
              
              
              -
              
              
              -Borrowings
              
              
              32,167
              
              
              349
              
              
              4.34
              
              
              40,666
              
              
              418
              
              
              4.11Total
                  interest-bearing liabilities
              
              
              146,060
              
              
              1,550
              
              
              4.24
              %
              
              148,728
              
              
              1,416
              
              
              3.81
              %Non-interest
                  bearing liabilities
              
              
              2,964
              
              
              
              
              
              
              
              
              3,729Total
                  liabilities
              
              
              149,024
              
              
              
              
              
              
              
              
              152,457Total
                  equity(2)
              
              
              22,114
              
              
              
              
              
              
              
              
              22,574Total
                  liabilities and equity
              
              $
              171,138
              
              
              
              
              
              
              
              $
              175,031Net
                  interest income
              
              
              
              
              $
              817
              
              
              
              
              
              
              
              $
              888Interest
                  rate spread(3)
              
              
              
              
              
              
              
              
              1.56
              %
              
              
              
              
              
              
              
              1.68
              %Net
                  interest-earning assets
              
              $
              17,158
              
              
              
              
              
              
              
              $
              19,234Net
                  interest margin(4)
              
              
              
              
              
              
              
              
              2.00
              %
              
              
              
              
              
              
              
              2.11
              %Ratio
                  of interest earning assets to interest bearing liabilities
              
              
              
              
              
              1.12x
              
              
              
              
              
              
              
              
              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.








**Nine
                Months Ended**
              **September
                30, 2007**
            
            **Nine
                Months Ended**
              **September
                30, 2006****Average**
              **Outstanding**
              **Balance**
            
            **Interest**
              **Earned/**
              **Paid**
            
            **Yield/**
              **Rate**
            
            **Average**
              **Outstanding**
              **Balance**
            
            **Interest**
              **Earned/**
              **Paid**
            
            **Yield/**
              **Rate**(Dollars
                in thousands)
            
            (Dollars
                in thousands)Interest-earning
                assets:Loans
                receivable(1)
            
            $
            145,344
            
            $
            6,228
            
            
            5.71
            %
            $
            146,795
            
            $
            6,080
            
            
            5.52
            %Mortgage-backed
                securities
            
            
            2,807
            
            
            94
            
            
            4.45
            
            
            3,934
            
            
            122
            
            
            4.14Investment
                securities (available for sale)
            
            
            8,699
            
            
            339
            
            
            5.20
            
            
            8,286
            
            
            281
            
            
            4.53Investment
                securities (held to maturity)
            
            
            3,778
            
            
            107
            
            
            3.79
            
            
            4,000
            
            
            114
            
            
            3.80Other
                interest-earning assets
            
            
            4,710
            
            
            224
            
            
            6.35
            
            
            3,790
            
            
            159
            
            
            5.59Total
                interest-earning assets
            
            
            165,338
            
            
            6,992
            
            
            5.64
            %
            
            166,805
            
            
            6,756
            
            
            5.40
            %Non-interest
                earning assets
            
            
            7,296
            
            
            
            
            
            
            
            
            7,065Total
                assets
            
            $
            172,634
            
            
            
            
            
            
            
            $
            173,870Interest-bearing
                liabilities:Savings
                deposits
            
            $
            16,539
            
            $
            133
            
            
            1.07
            %
            $
            24,645
            
            $
            236
            
            
            1.28
            %Demand
                and NOW accounts
            
            
            7,337
            
            
            143
            
            
            2.60
            
            
            3,441
            
            
            24
            
            
            0.93Certificates
                of deposit
            
            
            88,554
            
            
            3,188
            
            
            4.80
            
            
            80,981
            
            
            2,511
            
            
            4.13Escrows
            
            
            6
            
            
            -
            
            
            -
            
            
            12
            
            
            -
            
            
            -Borrowings
            
            
            34,222
            
            
            1,130
            
            
            4.40
            
            
            38,889
            
            
            1,157
            
            
            3.97Total
                interest-bearing liabilities
            
            
            146,658
            
            
            4,594
            
            
            4.18
            %
            
            147,968
            
            
            3,928
            
            
            3.54
            %Non-interest
                bearing liabilities
            
            
            3,687
            
            
            
            
            
            
            
            
            3,324Total
                liabilities
            
            
            150,345
            
            
            
            
            
            
            
            
            151,292Total
                equity(2)
            
            
            22,289
            
            
            
            
            
            
            
            
            22,578Total
                liabilities and equity
            
            $
            172,634
            
            
            
            
            
            
            
            $
            173,870Net
                interest income
            
            
            
            
            $
            2,398
            
            
            
            
            
            
            
            $
            2,828Interest
                rate spread(3)
            
            
            
            
            
            
            
            
            1.46
            %
            
            
            
            
            
            
            
            1.86
            %Net
                interest-earning assets
            
            $
            18,680
            
            
            
            
            
            
            
            $
            18,837Net
                interest margin(4)
            
            
            
            
            
            
            
            
            1.93
            %
            
            
            
            
            
            
            
            2.28
            %Ratio
                of interest earning assets to interest bearing liabilities
            
            
            
            
            
            1.13
            x
            
            
            
            
            
            
            
            1.13
            x







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




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




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




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





*Net
      Interest Income* .





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





Net
      interest income decreased $71,000, or 8.00%, to $817,000 for the three months
      ended September 30, 2007 from $888,000 for the three months ended September
      30,
      2006. The decrease was primarily a result of a 43 basis point increase in the
      cost of average interest bearing liabilities, from 3.81% to 4.24%, while the
      yield on average interest earning assets only increased 31 basis points from
      5.49% to 5.80% and the balance of average interest earning assets decreased
      by
      $4,744,000, or 2.82%, to $163,218,000 from $167,962,000. These factors, serving
      to reduce net interest income, were partially offset by a $2,668,000, or 1.79%,
      decrease in the balance of average interest bearing liabilities to $146,060,000
      from $148,728,000.










Our
      interest rate spread decreased to 1.56% for the quarter ended September 30,
      2007
      from 1.68% for the quarter ended September 30, 2006, reflecting the more rapid
      increase in the cost of average interest bearing liabilities as compared to
      the
      increase in the yield of average interest earning assets. Our net interest
      margin decreased to 2.00% from 2.11%, because the higher yield on average
      interest earning assets was not enough to offset the increase in the cost of
      our
      average interest bearing liabilities. The ratio of interest earning assets
      to
      interest bearing liabilities remained steady at 1.12 times for the three months
      ended September 30, 2007 and September 30, 2006.





Nine
      months ended September 30, 2007 compared to nine months ended September 30,
      2006 .





Net
      interest income decreased $430,000, or 15.21%, to $2,398,000 for the nine months
      ended September 30, 2007 from $2,828,000 for the nine months ended September
      30,
      2006. The decrease was primarily a result of a 64 basis point increase in the
      cost of average interest bearing liabilities, from 3.54% to 4.18%, while the
      yield on average interest earning assets only increased 24 basis points from
      5.40% to 5.64% and the balance in average interest earning assets decreased
      by
      $1,467,000, or 0.88%, to $165,338,000 from $166,805,000. The decrease was
      partially offset by a $1,310,000, or 0.89%, decrease in average interest bearing
      liabilities to $146,658,000 from $147,968,000.





Our
      interest rate spread decreased to 1.46% from 1.86%, 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 1.93% from 2.28%, because the growth in average
      interest earning assets was not enough to offset the increase in the cost of
      average interest bearing liabilities. The ratio of interest earning assets
      to
      interest bearing liabilities remained steady at 1.13 times for the nine months
      ended September 30, 2007 and September 30, 2006.





*Interest
      Income* .





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





Interest
      income increased by $63,000, or 2.73%, to $2,367,000 for the three months ended
      September 30, 2007, from $2,304,000 for the three months ended September 30,
      2006. The increase in interest income resulted primarily from increases of
      $50,000, or 2.40%, in interest and fee income from loans, $9,000, or 6.43%,
      in
      interest income from investment securities and $14,000, or 31.11%, 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 $10,000, or 25.64%, in interest income from mortgage backed
      securities.





The
      increase in interest income reflects a $4,744,000, or 2.82%, decrease in the
      balance of average interest-earning assets to $163,218,000 during the quarter
      ended September 30, 2007 from $167,962,000 during the quarter ended September
      30, 2006, and a 31 basis point increase in the yield on average interest-earning
      assets to 5.80% for the three months ended September 30, 2007 from 5.49% for
      the
      three months ended September 30, 2006, reflecting an increase in market interest
      rates.





The
      increase in interest and fees on loans was due to a 29 basis point increase
      in
      the average yield on net loans receivable, offset by a $4,078,000, or 2.73%
      decrease in the average balance of net loans receivable, from $149,409,000
      during the quarter ended September 30, 2006 to $145,331,000 during the quarter
      ended September 30, 2007.





The
      increase in interest income from other interest-earning assets (federal funds
      sold and Federal Home Loan Bank stock) was due to a $630,000, or 24.42%,
      increase in the average balance of other interest-earning assets, from
      $2,580,000 during the quarter ended September 30, 2006 to $3,210,000 during
      the
      quarter ended September 30, 2007.











The
      decrease in interest income from mortgage-backed securities was primarily the
      result of a $1,027,000 or 28.66% decline in the average balance of
      mortgage-backed securities, which was partially offset by a 19 basis point
      increase in the average yield on these securities.





Nine
      months ended September 30, 2007 compared to nine months ended September 30,
      2006 .





Interest
      income increased by $236,000, or 3.49%, to $6,992,000 for the nine months ended
      September 30, 2007, from $6,756,000 for the nine months ended September 30,
      2006. The increase in interest income resulted primarily from increases of
      $148,000, or 2.43%, in interest and fee income from loans and $51,000, or
      12.91%, in interest income from investment securities, and a $65,000, or 40.88%,
      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 $28,000, or 22.95%, in interest income from
      mortgage backed securities.




The
      increase in interest income reflects a 24 basis point increase in the yield
      on
      average interest-earning assets to 5.64% for the nine months ended September
      30,
      2007 from 5.40% for the nine months ended September 30, 2006, reflecting an
      increase in market interest rates.





The
      increase in interest income and fees on loans was due to a 19 basis point
      increase in the average yield on net loans receivable. The increase in interest
      income from investment securities was primarily reflective of a 67 basis point
      increase in the average yield and a $413,000, or 4.98%, increase in the average
      balance of available for sale investment securities.





The
      increase in interest income from other interest earning assets (federal funds
      sold and Federal Home Loan Bank stock) was due to a $920,000, or 24.27% increase
      in the average balance of other interest earning assets, from $3,790,000 during
      the nine months ended September 30, 2006 to $4,710,000 during the nine months
      ended September 30, 2007, and a 76 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 $1,127,000 or 28.65% decline in the average balance of
      mortgage-backed securities, which was partially offset by a 31 basis point
      increase in the average yield on these securities.





*Interest
      Expense* .





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





Interest
      expense, which consists of interest paid on deposits and borrowings, increased
      by $134,000, or 9.46%, to $1,550,000 for the three months ended September 30,
      2007 from $1,416,000 for the three months ended September 30, 2006. The increase
      in interest expense resulted from an increase in the cost of average
      interest-bearing liabilities, while the balance of average interest-bearing
      liabilities decreased slightly. The average balance of interest-bearing deposits
      increased to $113,890,000 during the quarter ended September 30, 2007 from
      $108,055,000 during the quarter ended September 30, 2006, and the average cost
      of deposits increased by 53 basis points as a result of increased market
      interest rates. The average balance of borrowings decreased to $32,167,000
      during the quarter ended September 30, 2007 from $40,666,000 in the same quarter
      of 2006 and the average cost of borrowings increased by 23 basis points as
      a
      result of borrowing at a higher interest rate.










Nine
      months ended September 30, 2007 compared to nine months ended September 30,
      2006 .





Interest
      expense increased by $666,000, or 16.96%, to $4,594,000 for the nine months
      ended September 30, 2007 from $3,928,000 for the nine months ended September
      30,
      2006. The increase in interest expense resulted from an increase in the average
      balance of deposits and the cost of average interest-bearing liabilities, while
      the balance of average interest-bearing liabilities decreased slightly. The
      average balance of deposits increased to $112,430,000 from $109,067,000 and
      the
      average cost of deposits increased by 72 basis points as a result of increased
      market interest rates. The average balance of borrowings decreased to
      $34,222,000 during the nine months ended September 30, 2007 from $38,889,000
      in
      the same period of 2006 and the average cost of borrowings increased by 43
      basis
      points as a result of borrowings 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 $26,000 and $302,000 for the three months ended September 30,
      2007 and September 30, 2006, and a provision of $208,000 and $340,000 for the
      nine months ended September 30, 2007 and September 30, 2006, respectively.
      There
      was one commercial non-real estate loan charge-off during the nine-month period
      ended September 30, 2007 which is discussed below under “General Valuation
      Allowance on the Remainder of the Loan Portfolio.” We also had three overdraft
      protection loans charge-offs totaling $2,000 during the nine-month period ended
      September 30, 2007. There were no charge-offs during the nine-month period
      ended
      September 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, primarily collateral-dependent; (2) a general
      valuation allowance on certain identified problem loans; and (3) a general
      valuation allowance on the remainder of the loan portfolio.




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




·
            loans
                90 or more days delinquent;





·
            loans
                with anticipated losses;





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





·
            nonaccrual
                loans;





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





·
            troubled
                debt restructurings and other non-performing
                loans.









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




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





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





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





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





The
      allowance for loan losses totaled $937,000 or 0.64% of gross loans outstanding
      of $147,556,000 at September 30, 2007, compared to an allowance for loan losses
      of $814,000 or 0.54% of gross loans outstanding of $151,575,000 at September
      30,
      2006. The increase to the loan loss reserve is due to the increased commercial
      loan balances, which historically create a mix of riskier loan products. As
      of
      September 30, 2007, we have specific reserves of $100,000 within the allowance
      for loan losses because we believe there is a substantial likelihood that we
      will not collect the total amount of the outstanding principal balance on a
      commercial non-real estate loan that is classified as impaired. The corporate
      commercial loan borrower filed Chapter 7 corporate bankruptcy in the third
      quarter of 2006 and filed Chapter 7 personal bankruptcy in the second quarter
      of
      2007. We restructured the remaining debt to facilitate repayment of the loan
      in
      the third quarter of 2007.









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





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**(Dollars
                in Thousands)Balance
                at beginning of period
            
            $
            912
            
            $
            512
            
            $
            850
            
            $
            474Charge-offs
            
            
            (1
            )
            
            -
            
            
            (121
            )
            
            -Recoveries
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                Charge-offs
            
            
            (1
            )
            
            -
            
            
            (121
            )
            
            -Provision
                for loan losses
            
            
            26
            
            
            302
            
            
            208
            
            
            340Ending
                balance
            
            $
            937
            
            $
            814
            
            $
            937
            
            $
            814Ratio
                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
            
            
            0.64
            %
            
            0.54
            %
            
            0.64
            %
            
            0.54
            %Allowance
                for loan losses as a percent of total non-performing loans
            
            
            62.55
            %
            
            71.59
            %
            
            62.55
            %
            
            71.59
            %




*Other
      Income* .





Three
      months ended September 30, 2007 compared to three months ended September 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 $50,000, or 90.91%, to $105,000 for the three months ended September
      30, 2007, as compared to $55,000 for the three months ended September 30, 2006.
      The primary reason for the increase in non-interest income is a $17,000, or
      1700.00%, increase in gain on sale of loans and a $27,000, or 142.11%, 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 increased by $6,000, or 17.14%. 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 September 30, 2007, we leased 100% of the total leaseable space in our
      headquarters building. We expect this figure to remain constant for the fourth
      quarter of 2007 as we do not anticipate any vacant leaseable space in our
      headquarters building, other than due to the tenant mentioned
      above.




Nine
      months ended September 30, 2007 compared to nine months ended September 30,
      2006 .





Non-interest
      income increased $102,000, or 58.29%, to $277,000 for the nine months ended
      September 30, 2007, as compared to $175,000 for the nine months ended September
      30, 2006. The primary reason for the increase in non-interest income is a
      $49,000, or 612.50%, increase in gain on sale of loans and a $46,000, or 86.79%,
      increase in other income. Rental income from our headquarters building has
      remained relatively steady.







*Non-interest
      Expense* .





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





Non-interest
      expense was $848,000 for the three months ended September 30, 2007 as compared
      to $869,000 for the three months ended September 30, 2006, a decrease of
      $21,000, or 2.42%. The decrease was due  primarily
      to a $17,000, or 34.00%, decrease in furniture, fixtures and equipment expenses,
      an $8,000, or 17.02%, decrease in advertising expenses, and a $7,000, or 1.52%,
      decrease in compensation and related expenses, partially offset by an increase
      of $10,000, or 6.45%, 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). 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, the
      decrease in advertising expenses is due to spending more of the yearly
      advertising budget in the first half of the year and the decrease in
      compensation expense is the result of replacing departing full-time salaried
      employees with part-time hourly employees in the quarter ending September 30,
      2007. The increase in other expenses is the result of an increase in
      correspondent bank services fees, printing and filing expenses and dues and
      subscription expenses as these costs have risen significantly.





Nine
      months ended September 30, 2007 compared to nine months ended September 30,
      2006 .





Non-interest
      expense was $2,482,000 for the nine months ended September 30, 2007, as compared
      to $2,733,000 for the nine months ended September 30, 2006, a decrease of
      $251,000  or
      9.18%.
      The decrease was due  primarily
      to decreases of $108,000, or 27.98%, in occupancy expenses, $70,000, or 5.05%,
      in compensation and related expenses, $63,000, or 39.13%, in furniture, fixtures
      and equipment expenses and $38,000, or 7.63%, in other expenses, partially
      offset by increases of $28,000, or 23.53%, 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 decease
      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. The decrease
      in compensation expenses is the result of a decision not to award year end
      bonuses to all employees and replacing departing full-time salaried employees
      with part-time hourly employees. The furniture, fixtures and equipment expenses
      for the nine months ended September 30, 2007 is due to the same factors as
      stated above for the three-month period.





*Income
      Tax Expense* .





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





The
      provision for income taxes was $21,000 for the three months ended September
      30,
      2007, an increase of $107,000 from a benefit for income tax of $86,000 for
      the
      three months ended September 30, 2006, representing a 124.42%, increase in
      the
      income tax provision. The provision for income taxes was due to our positive
      income before taxes. The effective tax rate was 43.75%  and
      37.72% for the three months ended September 30, 2007 and September 30, 2006,
      respectively.











Nine
      months ended September 30, 2007 compared to nine months ended September 30,
      2006 .





The
      provision for income taxes was $6,000 for the nine months ended September 30,
      2007, an increase of $26,000 from a benefit for income tax of $20,000 for the
      nine months ended September 30, 2006, representing a 130.00%, increase in the
      income tax provision . The
      provision for income taxes was due to non-deductible stock-based compensation
      awarded during the nine-month period ended September 30, 2007. The effective
      tax
      rate was 40.00% and 28.57% for the nine months ended September 30, 2007 and
      September 30, 2006, respectively, as nondeductible expenses were a
      proportionately larger part of pre-tax results .





**Analysis
      of Financial Condition**





*Assets.*





General .





Our
      total
      assets decreased by $3,133,000 or 1.80%, to $171,092,000 at September 30, 2007,
      from $174,225,000 at December 31, 2006. The decrease in total assets resulted
      primarily from $1,310,000,  or
      45.95%
      decrease in cash and cash equivalents, from $2,851,000 at December 31, 2006
      to
      $1,541,000 at September 30, 2007, a $1,000,000,  or
      25.00%
      decrease in investment securities - held to maturity, from $4,000,000 at
      December 31, 2006 to $3,000,000 at September 30, 2007, a $726,000, or 22.69%,
      decrease in mortgage backed securities held to maturity, from $3,200,000 at
      December 31, 2006 to $2,474,000 at September 30, 2007, and a
      $277,000,  or
      13.20%, decrease in Federal Home Loan Bank stock, to $1,821,000 at September
      30,
      2007 from $2,098,000 at December 31, 2006. These decreases were offset by a
      $293,000, or 3.44% increase in investment securities - available for sale,
      from
      $8,526,000 at December 31, 2006 to $8,819,000 at September 30, 2007.





Investment
      Securities .





The
      investment portfolio at September 30, 2007 amounted to $14,293,000, a decrease
      of $1,433,000, or 9.11%,  from
      $15,726,000 at December 31, 2006. Investment securities - available for sale,
      increased $293,000, or 3.44%, to $8,819,000 at September 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
      $1,000,000, or 25.00%, to $3,000,000 at September 30, 2007 from $4,000,000
      at
      December 31, 2006, as a result of a principal repayment on a matured investment.
      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 $267,000 at September 30, 2007 (reflected as accumulated other comprehensive
      loss of $164,000 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 an instability in the
      mortgage-backed securities market.









Loan
      Portfolio .





Loans
      receivable, net, decreased $954,000, or 0.65%, to $146,164,000 at September
      30,
      2007 from $147,118,000 at December 31, 2006. The commercial loan portfolio
      increased $5,572,000, or 65.15%, to $14,124,000 at September 30, 2007 from
      $8,552,000 at December 31, 2006. Acquisition and development loans increased
      $1,608,000, or 50.02%, to $4,823,000 at September 30, 2007 from $3,215,000
      at
      December 31, 2006. One-to-four family residential loans decreased $8,291,000,
      or
      7.04%, to $109,464,000 at September 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.










Real
      estate and other assets that we acquire as a result of foreclosure or by
      deed-in-lieu of foreclosure or repossession 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. We have one foreclosed real estate participation loan totaling
      $1,083,000 at September 30, 2007. This asset is an acquisition and development
      real estate participation that became delinquent in the fourth quarter of 2004
      and was placed on non-accrual status in the third quarter of 2005. Both the
      principal of the borrower and the entity that owns the collateral property
      filed
      for bankruptcy in the fourth quarter of 2006. An automatic stay that was imposed
      in connection with the bankruptcy filings and had prevented the sale of the
      property was lifted in the second quarter of 2007 and the property was sold
      at
      auction to the lead participating bank, requiring us to reclassify the
      participation as foreclosed real estate in the same quarter. Subsequently,
      a
      real estate developer made an offer to purchase the property and the lead
      participating bank accepted a letter of intent and executed a contract with
      a
      feasibility study period, currently scheduled to expire on November 15, 2007.
      Prior to the expiration of the feasibility period, the buyer may terminate
      this
      agreement at any time and for any reason in its sole discretion. With a
      settlement date currently scheduled in the fourth quarter of 2007, subject
      to
      satisfaction of outstanding conditions, we expect to recover the carrying amount
      of the real estate, although there can be no assurance that this will be the
      case. We did not have any real estate owned or other repossessed assets at
      December 31, 2006.




Non-accrual
      loans totaled $404,000, or 0.28%, $1,485,000, or 1.01%, and $1,137,000, or
      0.75%, of net loans receivable at September 30, 2007, December 31, 2006 and
      September 30, 2006, respectively. Of the non-accrual loans at September 30,
      2007, $304,000 consisted of two one-to-four residential mortgage loans at
      September 30, 2007 and $100,000 consisted of a commercial non-real estate loan.
      The decrease in the amount of non-accrual loans is due to the reclassification
      of the participation loan as foreclosed real estate during the second quarter
      of
      2007, as discussed above.




Under
      current accounting guidelines, a loan is defined as impaired when, based on
      current information and events, it is probable that a creditor will be unable
      to
      collect all amounts when due under the contractual terms of the loan
      agreement.  We consider one- to four-family mortgage loans and consumer
      installment loans to be homogeneous and, therefore, do not separately evaluate
      them for impairment.  All other loans are evaluated for impairment on an
      individual basis. We generally classify non-accrual loans as impaired.




As
      of
      September 30, 2007, we have classified a commercial non-real estate loan as
      impaired as was discussed in the “Provision for Loan Losses and Analysis of
      Allowance for Loan Losses” section of this report. At the end of the first nine
      months, in anticipation of a minimal recovery of principal on this loan, we
      charged a portion of the loan balances against our allowance for loan losses
      and
      we have reserved $100,000, or 100%, of the remaining balance of the loan to
      our
      allowance for loan losses. The remaining debt was restructured at the end of
      the
      third quarter of 2007.





Other
      than as disclosed in the paragraphs above, there are no other loans at September
      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 $2,852,000, or 1.88%, to $149,008,000 at September
      30,
      2007, from $151,860,000 at December 31, 2006. The decrease in total liabilities
      resulted from a $7,500,000, or 19.23% decrease in borrowings, offset by
      increases of $2,862,000, or 2.56%, in deposits, $1,055,000, or 274.74%, in
      checks outstanding in excess of bank balance, $417,000, or 137.62%, in other
      liabilities, and $314,000, or 89.71%, in advance payments by borrowers for
      taxes. The decrease in borrowings is the result of paying down the Federal
      Home
      Loan Bank advances when our liquidity is favorable. Advance payments by
      borrowers for taxes and insurance increased because of the increased property
      taxes of the loan portfolio. The balance in checks outstanding in excess of
      bank
      balance at the end of a period is dependent on the number and amounts of checks
      issued on the account at our correspondent’s bank and when such checks are
      presented for payment. Any excess funds are automatically transferred into
      an
      interest-earning federal funds account. Therefore, changes in checks outstanding
      in excess of bank balance as reflected on the balance sheet, generally, do
      not
      reflect any underlying changes in the Company’s financial condition. The other
      liabilities consist primarily of accrued federal and state income taxes and
      accrued interest on Federal Home Loan Bank borrowings.





Deposits .





Deposits
      increased $2,862,000, or 2.56%, to $114,685,000 at September 30, 2007 from
      $111,823,000 at December 31, 2006. Certificates  of
      deposits increased $4,563,000, or 5.31%, to $90,560,000 at September 30, 2007
      from $85,997,000 at December 31, 2006. NOW and money market demand accounts
      decreased by $666,000, or 3.98%, to $16,068,000 at September 30, 2007 from
      $16,734,000 at December 31, 2006 and savings deposits decreased $1,035,000,
      or
      11.38%, to $8,057,000 at September 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
      September 30, 2007, we were permitted to borrow up to $51,327,000 from the
      Federal Home Loan Bank of Atlanta. We had $31,500,000 and $39,000,000 of Federal
      Home Loan Bank advances outstanding as of September 30, 2007 and December 31,
      2006, respectively, and we averaged  $34,222,000
      and $39,250,000 of Federal Home Loan Bank advances during the nine months ended
      September 30, 2007 and the year ended December 31, 2006, respectively. The
      decrease in borrowings reflects $7,500,000 Federal Home Loan Bank advance pay
      downs and $33,500,000 in the rollover of advances, offset by maturing advances
      of $33,500,000 in the first nine months 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 September 30, 2007, cash and cash equivalents totaled $1,541,000.
      Securities classified as available-for-sale, which can provide additional
      sources of liquidity, totaled $8,819,000 at September 30, 2007. However, because
      all of these securities were in an unrealized loss position at September 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 September 30, 2007.  Also,
      at
      September 30, 2007, we had advances outstanding of $31,500,000 from the Federal
      Home Loan Bank of Atlanta. On that date, we had the ability to borrow an
      additional $19,827,000.





At
      September 30, 2007, we had outstanding commitments to originate loans of
      $1,470,000 (excluding the undisbursed portions of loans). These commitments
      do
      not necessarily represent future cash requirements since certain of these
      instruments may expire without being funded, although this is unusual. We also
      extend lines of credit to customers, primarily home equity lines of credit.
      The
      borrower is able to draw on these lines as needed, thus the funding is generally
      unpredictable. Unused home equity lines of credit amounted to $4,929,000 at
      September 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.





Certificate
      of deposit accounts scheduled to mature within one year totaled $58,226,000
      or
      50.77% of total deposits at September 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 September 30, 2008. We believe,
      however, based on past experience, a significant portion of our certificates
      of
      deposit will remain with us. We also believe we have the ability to attract
      and
      retain deposits by adjusting the interest rates offered.





Our
      borrowings are with the Federal Home Loan Bank of Atlanta and are secured by
      Federal Home Loan Bank of Atlanta stock that we own and a blanket lien on
      mortgages. Borrowings at September 30, 2007 consisted of  $5,000,000
      in  a
      short
      term fixed rate FHLB advance bearing an interest rate of 5.28% and $26,500,000
      long term convertible rate FHLB advances with fixed interest rates ranging
      from
      3.63% to 4.90%. If not repaid or converted to a different product, the
      convertible rate advances will convert from a fixed to a floating rate after
      the
      initial borrowing periods ranging from three to 60 months.










Our
      primary investing activity is the origination of loans, primarily one- to
      four-family residential mortgage loans and commercial loans, and the purchase
      of
      securities. Our primary financing activity consists of activity in deposit
      accounts and Federal Home Loan Bank of Atlanta advances. Deposit growth has
      continued to outpace asset growth over the past two-six 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 $281,000, or 1.26%, to $22,084,000 at September
      30, 2007 from $22,365,000 at December 31, 2006 primarily as a result of the
      purchase of $427,000 in additional Treasury stock and a net loss of $21,000.
      The
      net loss is primarily due to the increase in the allowance for loan losses
      in
      anticipation of a potential loan default and an increase in interest expenses
      as
      a result of increases in deposits yielding higher interest rates. We are
      considered “well capitalized” under the risk-based capital guidelines applicable
      to us.





***Off-balance
      Sheet Arrangements***





In
      the
      normal course of operations, we engage in a variety of financial transactions
      that, in accordance with generally accepted accounting principles, are not
      recorded in our financial statements. These transactions involve, to varying
      degrees, elements of credit, interest rate, and liquidity risk. Such
      transactions are used primarily to manage customers’ requests for funding and
      take the form of loan commitments and lines of credit. Our exposure to credit
      loss from non-performance by the other party to the above-mentioned financial
      instruments is represented by the contractual amount of those instruments.
      We
      use the same credit policies in making commitments and conditional obligations
      as we do for on-balance sheet instruments.


**Financial
                  Instruments Whose****Contract
                  Amount Represents******
              
              **Contract
                  Amount At****Credit
                  Risk**
              
              **September
                  30, 2007**
              
              **December
                  31, 2006**(Dollars
                  in thousands)Lines
                  of credit - commercial
              
              
              $  
                    1,812
              
              
              $  
                     1,210Lines
                  of credit - home equity
              
              
              4,929
              
              
              5,335Lines
                  of credit - overdraft checking
              
              
              120
              
              
              118Mortgage
                  loan commitments
              
              
              1,470
              
              
              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
      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 6.25%
      to 7.50% and 5.625 to 7.125% at September 30, 2007 and December 31, 2006,
      respectively. Loan commitments expire 60 days from the date of the
      commitment.





For
      the
      nine months ended September 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.





**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
      improved profitability, leaseable space in our headquarters building, our
      holdings of mortgage-backed securities, the mix of loans in our portfolio,
      retention of deposits, the allowance for loan losses, repayment of non-accrual
      loans, liquidity management, 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 September
      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 September 30, 2007, that have
      materially affected, or are reasonably likely to materially affect, SFSB, Inc.’s
      internal control over financial reporting.











**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 third 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)**July
                1 - 31, 2007
            
            0
            
            n/a
            
            0
            
            10,395August
                1 -31, 2007
            
            15,000
            
            $8.40
            
            15,000
            
            57,729September
                1 - 30, 2007
            
            1,000
            
            $8.10
            
            1,000
            
            56,729**Total
                Third Quarter**
            
            **16,000**
            
            **$8.38**
            
            **16,000**
            
            **56,729**




(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. As of September 30, 2007, SFSB, Inc. had repurchased 126,117 shares
      on the open market at an average cost of $9.42 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 56,729
      shares at September 30, 2007, as well as an aggregate of 56,729 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.




None.





Item
      5.  Other
      Information.





None.










Item
      6.  Exhibits.





31.1
            Rule
                13a-14(a) Certification of Chief Executive Officer




31.2
            Rule
                13a-14(a) Certification of Chief Financial Officer




32
            Section
                1350 Certification of Chief Executive Officer and Chief Financial
                Officer







**SIGNATURES**





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




SFSB,
                Inc.Date:
                November 5, 2007
            
            By:
            /s/
                Philip E. LoganPhilip
                E. Logan, President(Principal
                Executive Officer)Date:
                November 5, 2007
            
            By:
            /s/
                Sophie T. WittelsbergerSophie
                Torin Wittelsberger, Chief Financial Officer(Principal
                Accounting and Financial Officer)