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 March 31, 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
              incorporation
                  or organization)
            
            (I.R.S.
                Employer
              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:





As
      of May
      10, 2007, there were 2,907,759 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**




**March
                  31, 2007**
              
              **December
                  31, 2006**(Dollars
                  in thousands, except share data)**ASSETS**Cash
                  and due from banks
              
              $
              676
              
              $
              881Federal
                  funds sold
              
              
              3,288
              
              
              1,970Cash
                  and cash equivalents
              
              
              3,964
              
              
              2,851Investment
                  securities - available for sale
              
              
              8,643
              
              
              8,526Investment
                  securities - held to maturity
              
              
              4,000
              
              
              4,000Mortgage
                  backed securities - held to maturity
              
              
              2,986
              
              
              3,200Loans
                    receivable - net of allowance for loan losses of2007
                    $764; 2006 $850
              
              
              145,841
              
              
              147,118Federal
                  Home Loan Bank of Atlanta stock, at cost
              
              
              1,956
              
              
              2,098Premises
                  and equipment, net
              
              
              5,268
              
              
              5,265Accrued
                  interest receivable
              
              
              489
              
              
              560Other
                  assets
              
              
              634
              
              
              607**Total
                  assets**
              
              $
              173,781
              
              $
              174,225**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY****Liabilities**Deposits
              
              $
              113,796
              
              $
              111,823Checks
                  outstanding in excess of bank balance
              
              
              676
              
              
              384Borrowings
              
              
              35,500
              
              
              39,000Advance
                  payments by borrowers for taxes and insurance
              
              
              1,072
              
              
              350Other
                  liabilities
              
              
              334
              
              
              303**Total
                  liabilities**
              
              
              151,378
              
              
              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 March 31, 2007 and
                  December 31, 2006 and 2,907,759 and 2,975,623 shares
                  outstanding at March 31, 2007 and December
                  31, 2006, respectively
              
              
              30
              
              
              30Additional
                  paid-in capital
              
              
              12,817
              
              
              12,788Retained
                  earnings (substantially restricted)
              
              
              11,382
              
              
              11,393Unearned
                  Employee Stock Ownership Plan shares
              
              
              (1,035
              )
              
              (1,050
              )Treasury
                    Stock at cost,March
                    31, 2007 and December 31, 2006, 67,866 shares
              
              
              (660
              )
              
              (660
              )Accumulated
                  other comprehensive loss
              
              
              (131
              )
              
              (136
              )**Total
                  stockholders’ equity**
              
              
              22,403
              
              
              22,365**Total
                  liabilities and stockholders’ equity**
              
              $
              173,781
              
              $
              174,225




See
      notes
      to consolidated financial statements.




2




**SFSB,
      Inc.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**




**Three
                  Months Ended**
                **March
                  31,**
              ********
              ****
              **2007**
              ****
              **2006**(Dollars
                  in thousands, except for per share data)Interest
                  and fees on loans
              
              $
              2,042
              
              $
              1,974Interest
                  and dividends on investment securities
              
              
              146
              
              
              123Interest
                  on mortgage backed securities
              
              
              34
              
              
              43Other
                  interest income
              
              
              80
              
              
              56**Total
                  interest income**
              
              
              2,302
              
              
              2,196Interest
                  on deposits
              
              
              1,114
              
              
              853Interest
                  on short-term borrowings
              
              
              149
              
              
              75Interest
                  on long-term borrowings
              
              
              261
              
              
              288**Total
                  interest expense**
              
              
              1,524
              
              
              1,216**Net
                  interest income**
              
              
              778
              
              
              980Provision
                  for loan losses
              
              
              33
              
              
              14**Net
                  interest income after provision for loanlosses**
              
              
              745
              
              
              966**Other
                  Income**Rental
                  income
              
              
              39
              
              
              39Other
                  income
              
              
              20
              
              
              19Gain
                  on sale of loans
              
              
              8
              
              
              5**Total
                  other income**
              
              
              67
              
              
              63**Non-Interest
                  Expenses**Compensation
                  and other related expenses
              
              
              434
              
              
              458Occupancy
                  expense
              
              
              95
              
              
              206Advertising
                  expense
              
              
              44
              
              
              26Service
                  bureau expense
              
              
              43
              
              
              41Furniture,
                  fixtures and equipment
              
              
              34
              
              
              56Telephone,
                  postage and delivery
              
              
              19
              
              
              24Other
                  expenses
              
              
              149
              
              
              154**Total
                  non-interest expenses**
              
              
              818
              
              
              965**(Loss)
                  Income before income tax provision**
              
              
              (6
              )
              
              64Income
                  tax provision
              
              
              4
              
              
              28Net
                  (loss) income
              
              $
              (10
              )
              $
              36**Basic
                  Earnings (Loss) per Share**
              
              $
              **0.00**
              ****
              **$**
              **0.01****Diluted
                  Earnings (Loss) Per Share**
              
              **$**
              **0.00**
              
              **$**
              **0.01**




See
      notes
      to consolidated financial statements.




3




**SFSB,
      Inc.**


**CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME**




**Three
                  Months Ended**
                **March
                  31,**
              ********
              ****
              **2007**
              
              **2006**(Dollars
                  in thousands)Net
                  (loss) income
              
              $
              (10
              )
              $
              36Net
                  unrealized gain (loss) on securities available for sale during
                  the period
                  (net of taxes of $3 and $(7))
              
              
              5
              
              
              (10
              )Total
                  Comprehensive (Loss) Income
              
              $
              (5
              )
              $
              26




See
      notes
      to consolidated financial statements.




4




**SFSB,
      Inc.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**




**Three
                  Months Ended March 31,****2007**
              
              **2006**(Dollars
                  in thousands)**Cash
                  Flows From Operating Activities**Net
                  (loss) income
              
              $
              (10
              )
              $
              36Adjustments
                  to Reconcile Net (Loss) Income to Net CashProvided
                  by Operating Activities:Non-cash
                  compensation under stock based compensation plans and
                  Employee Stock Ownership Plan
              
              
              44
              
              
              46Net
                  amortization of premiums and discounts of investment
                  securities
              
              
              4
              
              
              (4
              )Amortization
                  of deferred loan fees
              
              
              (11
              )
              
              (15
              )Provision
                  for loan losses
              
              
              33
              
              
              14Gain
                  on sale of loans
              
              
              (8
              )
              
              (5
              )Loans
                  originated for sale
              
              
              (3,313
              )
              
              (452
              )Proceeds
                  from loans sold
              
              
              3,321
              
              
              457Provision
                  for depreciation
              
              
              59
              
              
              187Decrease
                    in accrued interest receivableand other assets
              
              
              44
              
              
              19Increase
                  (decrease) in other liabilities
              
              
              31
              
              
              (56
              )**Net
                  Cash Provided by Operating Activities**
              
              
              194
              
              
              227**Cash
                  Flows from Investing Activities**Purchase
                  of available for sale securities
              
              
              (109
              )
              
              (78
              )Net
                  decrease (increase) in loans
              
              
              1,250
              
              
              (713
              )Principal
                  collected on mortgage backed securities
              
              
              211
              
              
              337Purchase
                  of Federal Home Loan Bank of Atlanta stock
              
              
              -
              
              
              (98
              )Redemption
                  of Federal Home Loan Bank of Atlanta stock
              
              
              142
              
              
              -Purchases
                  of premises and equipment
              
              
              (62
              )
              
              (20
              )**Net
                  Cash Provided by (Used in) Investing Activities**
              
              
              1,432
              
              
              (572
              )**Cash
                  Flows from Financing Activities**Net
                  increase in deposits
              
              
              1,973
              
              
              1,585Increase
                  (decrease) in checks outstanding in excess of bank balance
              
              
              292
              
              
              (932
              )Proceeds
                  from long-term borrowings
              
              
              5,000
              
              
              5,000Repayment
                  of long-term borrowings
              
              
              (5,000
              )
              
              (5,000
              )Net
                  change of short term borrowings
              
              
              (3,500
              )
              
              2,000Increase
                  in advance payments by borrowers for taxes and
                  insurance
              
              
              722
              
              
              703Purchase
                  of treasury stock
              
              
              -
              
              
              (422
              )**Net
                  Cash (Used in) Provided by Financing Activities**
              
              
              (513
              )
              
              2,934Increase
                  in cash and cash equivalents
              
              
              1,113
              
              
              2,589Cash
                  and cash equivalents at beginning of period
              
              
              2,851
              
              
              1,342**Cash
                  and cash equivalents at end of period**
              
              $
              3,964
              
              $
              3,931**Supplemental
                  Disclosures of Cash Flows Information:****Cash
                  paid during the period for:**Income
                  taxes
              
              $
              -
              
              $
              35Interest
                  expense
              
              $
              1,524
              
              $
              1,215




See
      notes
      to consolidated financial statements.




5




**SFSB,
      Inc.**


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





**Note
      1 - Principles of Consolidation**





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





Slavie
      Bancorp, MHC, a mutual holding company whose activity is not included in the
      accompanying consolidated financial statements, owns 56.3% of the outstanding
      common stock of the Company as of March 31, 2007.




**Note
      2 - Business**





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





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





**Note
      3 - Basis of** **Presentation**





The
      accompanying consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America
      (GAAP) for interim financial information and with the instructions to SEC Form
      10-QSB. Accordingly, they do not include all the information and footnotes
      required by GAAP for complete financial statements.





The
      foregoing consolidated financial statements in the opinion of management include
      all adjustments (consisting only of normal recurring adjustments) necessary
      for
      a fair presentation thereof. These consolidated financial statements should
      be
      read in conjunction with the consolidated financial statements and notes thereto
      included in the Company’s Annual Report on Form 10-KSB. The results of
      operations for the three months ended March 31, 2007 are not necessarily
      indicative of the results that may be expected for the full year.




6




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





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





**March
                31, 2007**(In
                thousands, except per share data)
            
            Basic
            
            DilutedNet
                loss
            
            $
            (10
            )
            $
            (10
            )Weighted
                average common shares outstanding
            
            
            2,793
            
            
            2,797Diluted
                securities:Stock
                options
            
            
            **-**
            
            
            **-**Unvested
                Stock Awards
            
            
            **-**
            
            
            **-**Adjusted
                weighted average shares
            
            
            2,793
            
            
            2,797Per
                share amount
            
            $
            0.00
            
            $
            0.00




**March
                31, 2006**(In
                thousands, except per share data)
            
            Basic
            
            DilutedNet
                income
            
            $
            36
            
            $
            36Weighted
                average common shares outstanding
            
            
            2,831
            
            
            2,836Diluted
                securities:Stock
                options
            
            
            **-**
            
            
            1Unvested
                Stock Awards
            
            
            **-**
            
            
            **-**Adjusted
                weighted average shares
            
            
            2,831
            
            
            2,837Per
                share amount
            
            $
            0.01
            
            $
            0.01




7




**Note
      5 - Regulatory Capital Requirements**





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




**Actual**
              
              **For
                  Capital Adequacy Purposes**
              
              **To
                  Be Well Capitalized Under Prompt Corrective Action
                  Provision****Amount**
              
              **%**
              
              **Amount**
              
              **%**
              
              **Amount**
              
              **%**March
                  31, 2007
              
              (Dollars
                  in thousands)Tangible
                  (1)
              
              $
              16,801
              
              
              9.65
              %
              $
              2,610
              
              
              1.50
              %
              
              N/A
              
              
              N/ATier
                  I capital (2)
              
              
              16,801
              
              
              16.98
              %
              
              N/A
              
              
              N/A
              
              $
              5,935
              
              
              6.00
              %Core
                  (leverage) (1)
              
              
              16,801
              
              
              9.65
              %
              
              6,961
              
              
              4.00
              %
              
              8,701
              
              
              5.00
              %Risk-weighted
                  (2)
              
              
              17,565
              
              
              17.76
              %
              
              7,914
              
              
              8.00
              %
              
              9,892
              
              
              10.00
              %December
                  31, 2006Tangible
                  (1)
              
              $
              16,775
              
              
              9.62
              %
              $
              2,617
              
              
              1.50
              %
              
              N/A
              
              
              N/ATier
                  I risk-based (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
              %Total
                  risk-based (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 $32,000 for the three months ended March 31,
      2007 and 2006. The total income tax benefit recognized was $8,000 and $9,000
      for
      the three months ended March 31, 2007 and 2006.




**Note
      7 - Recent Accounting Pronouncements**





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





In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities-Including an Amendment of FASB
      Statement No. 115." SFAS No. 159 permits entities to choose to measure many
      financial instruments and certain other items at fair value. Unrealized gains
      and losses on items for which the fair value option has been elected will be
      recognized in earnings at each subsequent reporting date. The effective date
      for
      the Bank will be January 1, 2008. Management is currently analyzing the effect,
      if any, on consolidated financial position or results of operations.




8




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





**Introduction**





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





**Overview**





Earnings
      declined to a net loss of $10,000 for the three months ended March 31, 2007
      as
      compared to net income of $36,000 for the same period in 2006. This decrease
      was
      primarily due to an increase of 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, as well as the
      continued impact of a decision made in 2006 to place a non-performing commercial
      land acquisition and development participation loan on non-accrual status and,
      therefore, not accruing interest on that loan. Interest income increased
      $106,000, or 4.83%, non-interest income increased $4,000, or 6.35%, and
      non-interest expenses decreased $147,000, or 15.23%. These improvements were
      offset by a $308,000, or 25.33%, increase in interest expenses.





Assets
      decreased during the first three months of 2007 primarily because we decreased
      our loan portfolio by $1,277,000, or 0.87%, to $145,841,000 at March 31, 2007
      from $147,118,000 at December 31, 2006. The decrease is also the result of
      a
      decrease in mortgage backed securities held to maturity of $214,000, or 6.69%,
      to $2,986,000 at March 31, 2007 from $3,200,000 at December 31, 2006 and a
      decrease in Federal Home Loan Bank of Atlanta stock of $142,000, or 6.77%,
      to
      $1,956,000 at March 31, 2007 from $2,098,000 at December 31, 2006. These
      decreases were partially offset by an increase in cash and cash equivalents
      of
      $1,113,000, or 39.04%, to $3,964,000 at March 31, 2007 from $2,851,000 at
      December 31, 2006 and an increase in investment securities available for sale
      of
      $117,000, or 1.37%, to $8,643,000 at March 31, 2007 from $8,526,000 at December
      31, 2006.





As
      discussed in detail in the Asset Quality section of this report, we hold a
      19%
      participation (approximately $1,080,000 in unpaid principal balance) in an
      acquisition and development loan. This loan became delinquent in late 2004
      and
      was placed on non-accrual status in late 2005. A national builder had contracted
      to purchase the property and pay off the subject loan upon the borrower
      developing it to the “record plat” stage. This was to occur in late 2005. To
      date, the borrower has been unable to do so.  In November 2005, the
      national homebuilder released the borrower from their contract, and the
      participating lenders entered into a forbearance agreement with the borrower
      so
      that the borrower could attempt to sell the property.  In February 2006,
      the national homebuilder agreed to purchase the property “as is” subject to a
      feasibility study, which uncovered road access and storm water management
      issues.  As of the date of this report, the borrower has been unable to
      resolve these issues with the controlling municipality preventing the sale
      of
      the property to the national homebuilder.  In May 2006, upon the expiration
      of the forbearance agreement, the participating banks sent a notice of default
      to the borrower. In addition, the collateral property has been docketed for
      foreclosure. The principal of the borrower filed for personal (Chapter 11)
      bankruptcy in September 2006, and a meeting of creditors was held on November
      8,
      2006. Later that same day, the entity that owns the collateral property filed
      for Chapter 11 bankruptcy, which caused the cancellation of the foreclosure
      auction that had been scheduled for November 9, 2006.  On February 9, 2007,
      the participating lenders’ counsel filed a motion with the bankruptcy judge to
      lift stay so that the lenders could proceed to sell the property at foreclosure.
      The automatic stay was lifted on April 10, 2007 and the participating lenders
      are proceeding with the sale of the property with an auction scheduled for
      May
      30, 2007.  As
      of the
      date of this filing, the loan continues to be on non-accrual status.  We
      believe the above-mentioned issues regarding the property will eventually be
      resolved, that our collateral position is adequate and that we will recover
      all
      principal on this loan, although there can be no assurance that this will be
      the
      case.




9




In
      addition to the non-accrual acquisition and development loan mentioned above,
      we
      classified two commercial non-real estate loans as impaired in 2006. One of
      these commercial loans is a business line of credit to a company that ceased
      operations as of July 31, 2006; the other is an unsecured term loan to the
      principal of the same company. The company filed for Chapter 7 bankruptcy on
      September 26, 2006. At the end of the first quarter of 2007, in anticipation
      of
      a minimal recovery of principal on these loans, we charged down $119,000 of
      the
      original loan balances of $260,000, which were in default and fully reserved,
      against our provision for loan losses. A specific reserve of $140,000, or 100%,
      of the remaining loan balances continues to remain in our allowance for loan
      losses.





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.




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 the first quarter of 2007, Executive Vice-President and Chief
      Lending Officer, Charles E. Wagner, Jr., assumed the duties of commercial loan
      originator to further our goal of increasing the average outstanding balance
      of
      our commercial loan portfolio. In February 2007, we hired an experienced
      acquisition and renovation loan specialist to further our goal of increasing
      the
      overall yield of our 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-month period ended March 31, 2007 include
      the following:





·
            Total
                assets at March 31, 2007 decreased by 0.25% to $173,781,000 as compared
                to
                $174,225,000 as of December 31, 2006.





·
            Net
                loans outstanding decreased by 0.89% from $147,118,000 as of December
                31,
                2006 to $145,841,000 as of March 31,
                2007.





·
            Nonperforming
                loans at March 31, 2007 totaled $1,279,000 compared with a total
                of
                $1,486,000 at December 31, 2006. We believe an appropriate allowance
                for
                loan losses continues to be
                maintained.





·
            Deposits
                at March 31, 2007 were $113,796,000, an increase of $1,973,000 or
                1.76%
                from $111,823,000 at December 31, 2006.





·
            We
                realized a net loss of $10,000 for the three-month period ended March
                31,
                2007. This compares to net income of $36,000 for the three-month
                period
                ended March 31, 2006.





·
            Net
                interest income, our main source of income, was $778,000 during the
                three-month period ended March 31, 2007 compared to $980,000 for
                the same
                period in 2006. This represents a decrease of 20.61% for the three
                months
                ended March 31, 2007 as compared to the same period in 2006.




10




·
            We
                had a commercial non-real estate loan charge-off of $119,000 during
                the
                three month period ending March 31, 2007. We had no loan charge-offs
                during the three-month period ending March 31,
                2006.





·
            Non-interest
                income increased by $4,000, or 6.35%, for the three-month period
                ended
                March 31, 2007, as compared to the three-month period ended March
                31,
                2006.





·
            Non-interest
                expenses decreased by $147,000 or 15.23%, for the three-month period
                ended
                March 31, 2007, as compared to the period ended March 31, 2006. The
                decrease between the three-month periods is the result of no longer
                carrying the occupancy expenses associated with the closing of the
                Edgewood branch and the decision not to increase the salary compensation
                of the executive officers and not to award year end bonuses to all
                employees.





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





**Critical
      Accounting Policies**





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





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





Management’s
      judgment is inherent in the determination of the provision and allowance for
      loan losses, including in connection with the valuation of collateral and the
      financial condition of the borrower. The establishment of allowance factors
      is a
      continuing exercise and allowance factors may change over time, resulting in
      an
      increase or decrease in the amount of the provision or allowance based upon
      the
      same volume and classification of loans. Changes in allowance factors or in
      management’s interpretation of those factors will have a direct impact on the
      amount of the provision, and a corresponding effect on income and assets. Also,
      errors in management’s perception and assessment of the allowance factors could
      result in the allowance not being adequate to cover losses in the portfolio,
      and
      may result in additional provisions or charge-offs, which would adversely affect
      income and capital. For additional information regarding the allowance for
      loan
      losses, see “Results of Operations for the Three Months Ended March 31, 2007 and
      2006 - Provision for Loan Losses and Analysis of Allowance for Loan
      Losses.”




11




**Results
      of Operations for the Three Months Ended March 31, 2007 and
      2006**





*General* .
      Net
      income decreased $46,000 to a net loss of $10,000 for the three months ended
      March 31, 2007 compared to net income of $36,000 for the same period in the
      prior year. The decrease was due primarily to a $308,000 increase in interest
      expense, offset by a $106,000 increase in interest income and a $147,000
      decrease in non-interest expenses.





*Average
      Balances, Net Interest Income, Yields Earned and Rates Paid.* The
      following table presents for the periods indicated the total dollar amount
      of
      interest income from average interest-earning assets and the resultant yields,
      as well as the interest expense on average interest-bearing liabilities,
      expressed both in dollars and rates. No tax equivalent adjustments were made
      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**
              **March
                31, 2007**
            
            **Three
                Months Ended**
              **March
                31, 2006****Average**
              **Outstanding**
              **Balance**
            
            **Interest**
              **Earned/**
              **Paid**
            
            **Yield/**
              **Rate**
            
            **Average**
              **Outstanding**
              **Balance**
            
            **Interest**
              **Earned/**
              **Paid**
            
            **Yield/**
              **Rate**(Dollars
                in thousands)Interest-earning
                assets:Loans
                receivable(1)
            
            $
            146,033
            
            $
            2,042
            
            
            5.59
            %
            $
            144,463
            
            $
            1,974
            
            
            5.47
            %Mortgage-backed
                securities
            
            
            3,050
            
            
            34
            
            
            4.46
            
            
            4,287
            
            
            43
            
            
            4.01Investment
                securities (available for sale)
            
            
            8,607
            
            
            109
            
            
            5.07
            
            
            8,198
            
            
            85
            
            
            4.15Investment
                securities (held to maturity)
            
            
            4,000
            
            
            37
            
            
            3.70
            
            
            3,999
            
            
            38
            
            
            3.80Other
                interest-earning assets
            
            
            5,290
            
            
            80
            
            
            6.05
            
            
            4,944
            
            
            56
            
            
            4.53Total
                interest-earning assets
            
            
            166,980
            
            
            2,302
            
            
            5.51
            %
            
            165,891
            
            
            2,196
            
            
            5.30
            %Non-interest
                earning assets
            
            
            7,082
            
            
            
            
            
            
            
            
            7,085Total
                assets
            
            $
            174,062
            
            
            
            
            
            
            
            $
            172,976Interest-bearing
                liabilities:Savings
                deposits
            
            $
            17,350
            
            
            47
            
            
            1.08
            %
            $
            27,817
            
            
            91
            
            
            1.31
            %Demand
                and NOW accounts
            
            
            7,213
            
            
            42
            
            
            2.33
            
            
            2,797
            
            
            4
            
            
            0.57Certificates
                of deposit
            
            
            86,783
            
            
            1,025
            
            
            4.72
            
            
            78,980
            
            
            758
            
            
            3.84Escrows
            
            
            5
            
            
            -
            
            
            -
            
            
            10
            
            
            -
            
            
            -Borrowings
            
            
            36,666
            
            
            410
            
            
            4.47
            
            
            38,000
            
            
            363
            
            
            3.82Total
                interest-bearing liabilities
            
            
            148,017
            
            
            1,524
            
            
            4.12
            %
            
            147,604
            
            
            1,216
            
            
            3.30
            %Non-interest
                bearing liabilities
            
            
            3,636
            
            
            
            
            
            
            
            
            2,742Total
                liabilities
            
            
            151,653
            
            
            
            
            
            
            
            
            150,346Total
                equity(2)
            
            
            22,409
            
            
            
            
            
            
            
            
            22,630Total
                liabilities and equity
            
            $
            174,062
            
            
            
            
            
            
            
            $
            172,976Net
                interest income
            
            
            
            
            $
            778
            
            
            
            
            
            
            
            $
            980Interest
                rate spread(3)
            
            
            
            
            
            
            
            
            1.39
            %
            
            
            
            
            
            
            
            2.00
            %Net
                interest-earning assets
            
            $
            18,963
            
            
            
            
            
            
            
            $
            18,287Net
                interest margin(4)
            
            
            
            
            
            
            
            
            1.86
            %
            
            
            
            
            
            
            
            2.36
            %Ratio
                of interest earning assets to interest bearing liabilities
            
            
            
            
            
            1.13x
            
            
            
            
            
            
            
            
            1.12x







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


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


(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.




12




*Net
      Interest Income* .





Net
      interest income decreased $202,000, or 20.61%, to $778,000 for the three months
      ended March 31, 2007 from $980,000 for the three months ended March 31, 2006.
      The decrease was due primarily to a $413,000, or 0.28%, increase in average
      interest-bearing liabilities to $148,017,000 from $147,604,000, partially offset
      by an increase of $1,089,000, or 0.66%, in average interest-earning assets
      to
      $166,980,000 from $165,891,000. The decrease was also a result of an 82 basis
      point increase in the cost of average interest-bearing liabilities, from 3.30%
      to 4.12%, while the yield on average interest-earning assets only increased
      21
      basis points from 5.30% to 5.51%.





Our
      interest rate spread decreased to 1.39% for the quarter ended March 31, 2007
      from 2.00% for the quarter ended March 31, 2006, reflecting the more rapid
      increase in the cost of our average interest-bearing liabilities as compared
      to
      the increase in the yield of our interest-earning assets. Our net interest
      margin decreased to 1.86% from 2.36%, because the growth in average
      interest-earning assets was not enough to offset the increase in the cost of
      interest-bearing liabilities. The ratio of interest-earning assets to
      interest-bearing liabilities remained relatively steady at 1.13 times for the
      three months ended March 31, 2007 and 1.12 times for the same period in
      2006.




*Interest
      Income* .





Interest
      income increased by $106,000, or 4.83%, to $2,302,000 for the three months
      ended
      March 31, 2007, from $2,196,000 for the three months ended March 31, 2006.
      The
      increase in interest income resulted primarily from increases of $68,000, or
      3.44%, in interest and fee income from loans, $23,000, or 18.70%, in interest
      income from investment securities and $24,000, or 42.86%, in interest income
      from other interest-earning assets (primarily consisting of interest earned
      on
      federal funds sold and Federal Home Loan Bank stock), partially offset by a
      decrease of $9,000, or 20.93%, in interest income from mortgage backed
      securities.





The
      increase in interest income reflected a $1,089,000, or 0.66% increase in the
      average balance of interest-earning assets to $166,980,000 from $165,891,000,
      and a 21 basis point increase in the yield on average interest-earning assets
      to
      5.51% for the three months ended March 31, 2007 from 5.30% for the three months
      ended March 31, 2006, reflecting an increase in market interest rates.





The
      increase in interest income and fees on loans was due to a $1,570,000, or 1.09%
      increase in average net loans receivable, from $144,463,000 to $146,033,000,
      and
      a 12 basis point increase in the average yield on net loans receivable. The
      increase in interest income from investment securities was primarily reflective
      of a 92 basis point increase in the average yield and a $409,000 or 4.99%
      increase in the average balance of available for sale investment securities.





The
      increase in interest income from other interest-earning assets (primarily
      federal funds sold) was due to an $346,000, or 7.00%, increase in average other
      interest-earning assets, from $4,944,000 during the quarter ended March 31,
      2006
      to $5,290,000 during the quarter ended March 31, 2007, and a 152 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 $1,237,000 or 28.85% decline in the average balance of
      mortgage-backed securities, which was partially offset by a 45 basis point
      increase in the yield on these securities.





*Interest
      Expense* .





Interest
      expense, which consists of interest paid on deposits and borrowings, increased
      by $308,000, or 25.33%, to $1,524,000 for the three months ended March 31,
      2007
      from $1,216,000 for the three months ended March 31, 2006. The increase in
      interest expense resulted from an increase in the average balance and average
      cost of interest-bearing liabilities. The average balance of interest-bearing
      deposits increased to $111,346,000 from $109,594,000 and the average cost of
      deposits increased by 89 basis points as a result of a rising interest rate
      market. The average balance of borrowings decreased to $36,666,000 from
      $38,000,000, and was partially offset by a 65 basis point increase in the
      average cost of borrowings as a result of borrowing at higher interest
      rates.




13




*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 $33,000 and $14,000 for the three months ended March 31, 2007
      and
      March 31, 2006, respectively. There was one commercial non-real estate loan
      charge-off during the three-month period ended March 31, 2007 for $119,000
      which
      is discussed below under “General Valuation Allowance on the Remainder of the
      Loan Portfolio.” There were no loan charge-offs during the three-month period
      ended March 31, 2006. We used the same methodology and generally similar
      assumptions in assessing the allowance for these periods.





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




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




·
            loans
                90 or more days delinquent;





·
            loans
                with anticipated losses;





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





·
            non-accrual
                loans;





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





·
            troubled
                debt restructurings and other non-performing
                loans.





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




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




14




*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 $764,000, or 0.52%, of gross loans outstanding
      of $146,793,000 at March 31, 2007, compared to an allowance for loan losses
      of
      $488,000, or 0.33%, of gross loans outstanding of $146,305,000 at March 31,
      2006. The increase to the loan loss reserve is due to the increased balance
      of
      impaired loans. As of March 31, 2007, we have specific reserves of $140,000
      within the allowance for loan losses because we believe there is a substantial
      likelihood that we will not collect the total amount of the outstanding
      principal balance on two commercial non-real estate loans that are classified
      as
      impaired. In mid-July 2006, a corporate commercial loan borrower informed the
      Bank that it was contemplating ceasing business operations, which it did as
      of
      July 31, 2006. The principal of this company also borrowed additional funds
      from
      the Bank directly. Both of these loans were cross-guaranteed, cross-defaulted
      and cross-collateralized. Once the company ceased operations, the borrower
      and
      guarantor were in non-financial default on these loans, even though the loans
      were current as of that date. On September 11, 2006, the Bank gave written
      notice to the borrower and the guarantor that they had defaulted on their loan
      agreements. Subsequently, the company filed for Chapter 7 bankruptcy on
      September 26, 2006. The borrower has made a partial settlement offer, to which
      the Bank made a counter offer. Final disposition of this matter is still pending
      as of the date of this report.




15




The
      following table summarizes the activity in the provision for loan
      losses:





**Three
                  Months Ended****March
                31,****2007**
            
            **2006**(Dollars
                in thousands)Balance
                at beginning of period
            
            $
            850
            
            $
            474Charge-offs
            
            
            (119
            )
            
            -Recoveries
            
            
            -
            
            
            -Net
                charge-offs
            
            
            (119
            )
            
            -Provision
                for loan losses
            
            
            33
            
            
            14Ending
                balance
            
            $
            764
            
            $
            488Ratio
                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
            
            
            0.52
            %
            
            0.33
            %Allowance
                for loan losses as a percent of total non-performing loans
            
            
            59.73
            %
            
            39.23
            %




*Other
      Income* .





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 $4,000, or 6.35%, to $67,000 for the three months ended March 31,
      2007, as compared to $63,000 for the three months ended March 31, 2006. The
      primary reason for the increase in non-interest income is a $3,000, or 60.00%,
      increase in gain on sale of loans to $8,000 for the three months ended March
      31,
      2007, as compared to $5,000 for the three months ended March 31, 2006. Rental
      income from our headquarters building has remained the same. While we have
      experienced the loss of a small tenant, rental income has remained constant
      due
      to increases in rental rates provided for in the applicable lease agreements
      of
      the remaining tenants. As of March 31, 2007, we leased 100% of the total
      leaseable space in our headquarters building. We expect this figure to remain
      constant for the second quarter of 2007 as we do not anticipate any vacant
      leaseable space in our headquarters building.





*Non-interest
      Expense* .





Non-interest
      expense was $818,000 for the three months ended March 31, 2007 as compared
      to
      $965,000 for the three months ended March 31, 2006, a decrease of $147,000,
      or
      15.23%. The decrease was due primarily to an $111,000, or 53.88%, decease in
      occupancy expenses, a $24,000, or 5.24%, decrease in compensation and related
      expenses and a $22,000, or 39.29%, decrease in furniture, fixtures and equipment
      expenses, partially offset by increases of $18,000, or 69.23%, in advertising
      expenses and $2,000, or 4.88%, in service bureau expenses. The decrease in
      occupancy expenses is the result of no longer carrying the costs associated
      with
      the operation of the Edgewood branch, which we closed in 2006. The decrease
      in
      compensation expense is the result of not increasing executive officers’
salaries and of replacing departing full-time salaried employees with part-time
      hourly employees in the quarter ending March 31, 2007.





*Income
      Tax Expense* .





The
      provision for income taxes decreased to $4,000 for the three months ended March
      31, 2007 from $28,000 for the three months ended March 31, 2006, representing
      a
      $24,000, or 85.71%, decrease. The decrease in the provision for income taxes
      was
      primarily due to our loss before taxes of $6,000 for the three months ended
      March 31, 2007, as compared to income of $64,000 for the three months ended
      March 31, 2006. Although the Company recorded a pre-tax loss for the three
      months ended March 31, 2007, a tax expense of $4,000 was recorded due to
      non-deductible stock based compensation.




16




**Analysis
      of Financial Condition**





***Assets.***





General .





Our
      total
      assets decreased by $444,000 or 0.25%, to $173,781,000 at March 31, 2007, from
      $174,225,000 at December 31, 2006. The decrease in total assets resulted
      primarily from a $1,277,000, or 0.87% decrease in net loans receivable, from
      $147,118,000 at December 31, 2006 to $145,841,000 at March 31, 2007, a $214,000,
      or 6.69%, decrease in mortgage backed securities-held to maturity, from
      $3,200,000 at December 31, 2006 to $2,986,000 at March 31, 2007, and a $142,000,
      or 6.77%, decrease in Federal Home Loan Bank stock, from $2,098,000 at December
      31, 2006 to $1,956,000 at March 31, 2007. These decreases were offset by a
      $1,113,000, or 39.04% increase in cash and cash equivalents, from $2,851,000
      at
      December 31, 2006 to $3,964,000 at March 31, 2007 and a $117,000, or 1.37%
      increase in investment securities - available for sale, from $8,526,000 at
      December 31, 2006 to $8,643,000 at March 31, 2007.





Investment
      Securities .





The
      investment portfolio at March 31, 2007 amounted to $15,629,000, a decrease
      of
      $97,000, or 0.62%, from $15,726,000 at December 31, 2006. Investment securities
      - available for sale, increased $117,000, or 1.37%, to $8,643,000 at March
      31,
      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 $214,000, or 6.69%, to $2,986,000 at March 31, 2007 from $3,200,000
      at
      December 31, 2006, as a result of principal repayments. As we are not continuing
      to purchase mortgage-backed securities, we expect continued decreases in this
      asset both in amount and as a percentage of our assets .




The
      carrying value of available for sale securities includes a net unrealized loss
      of $213,000 at March 31, 2007 (reflected as accumulated other comprehensive
      loss
      of $131,000 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, this
      decrease in unrealized loss was a result of a slightly favorable interest rate
      yield curve.





Loan
      Portfolio .





Loans
      receivable, net, decreased $1,277,000, or 0.87%, to $145,841,000 at March 31,
      2007 from $147,118,000 at December 31, 2006. The commercial loan portfolio
      increased $3,232,000, or 37.79%, to $11,784,000 at March 31, 2007 from
      $8,552,000 at December 31, 2006. One-to-four family residential loans decreased
      $2,411,000, or 2.05% to $115,344,000 at March 31, 2007 from $117,755,000 at
      December 31, 2006. Our loan customers are generally located in the Baltimore
      Metropolitan area and its surrounding counties in Maryland.





Asset
      Quality .





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





We
      hold a
      19% participation (approximately $1,083,000 in unpaid principal balance) in
      an
      acquisition and development loan. Although this loan became delinquent in the
      fourth quarter of 2004, we had continued to accrue interest on the loan because
      we believed that collection of all principal and interest on the loan was
      probable. In the third quarter of 2005, we placed the loan on non-accrual
      status. Previously, we reported that we expected a national homebuilder would
      purchase the property to build residential units as soon as the borrower
      developed the property to the “record plat” stage, at which time the loan would
      be paid in full, and that we expected that to occur prior to the end of 2005.




17




In
      early
      November 2005, the national homebuilder agreed to release the borrower from
      its
      purchase agreement with the national homebuilder. On November 18, 2005, the
      participating banks successfully negotiated a 90-day Forbearance Agreement
      with
      the borrower for the purpose of allowing the borrower to negotiate the sale
      of
      the property. On February 7, 2006, the borrower executed a Letter Agreement
      with
      the national homebuilder to purchase the property in “as is” condition. The
      Letter Agreement was contingent upon completion of a feasibility study within
      45
      days of its execution. The national homebuilder completed its feasibility study
      and, on March 27, 2006, approved the purchase of the property, subject to the
      approval of road access plans. The national homebuilder had until May 14, 2006
      to resolve the road access issues, which included resolution of storm water
      management matters for the property as well. The national homebuilder was unable
      to resolve these issues by the May 14, 2006 deadline. On May 22, 2006, the
      participating lenders sent the borrower and the guarantors a notice of default
      requiring payment in full of their indebtedness by June 1, 2006. The Letter
      Agreement between the national homebuilder and the borrower, which originally
      expired on May 14, 2006, was extended to July 5, 2006. To date, an extension
      agreement with a new expiration date has not been executed. The participating
      lenders have not extended their forbearance agreement, which also expired on
      May
      14, 2006.





Progress
      on resolving the road access and storm water management issue slowed in mid-late
      August 2006 due to a revision of the criteria for their resolution by the
      controlling municipality.  These new criteria have thus far been
      unacceptable to the national home builder.  In addition, the preliminary
      site plan for the property expired on November 21, 2006, and the special zoning
      exception granted for the age restricted portion (165 condominiums) of the
      project also expired.  Pursuant to a request made by the borrower’s
      bankruptcy attorney, the controlling municipality extended the preliminary
      site
      plan for the property, which expired on February 20, 2007.





With
      negotiations between the national homebuilder and the borrower stalled, the
      participating lenders instructed their counsel to docket the collateral property
      for foreclosure.  This was done on September 13, 2006. In addition, the
      principal of the borrower filed for personal (Chapter 11) bankruptcy on
      September 26, 2006 and a meeting of creditors was held on November 8, 2006.
      Later that same day, the entity that owns the collateral property filed for
      Chapter 11 bankruptcy, which caused the cancellation of the foreclosure auction
      that had been scheduled for November 9, 2006. On February 9, 2007, the
      participating lenders’ counsel filed a motion with the bankruptcy judge to lift
      stay so that the lenders could proceed to sell the property at foreclosure.
      A
      hearing on this matter was scheduled in mid April 2007. The automatic stay
      was
      lifted on April 10, 2007 and the participating lenders are proceeding with
      the
      sale of the property with an auction scheduled for May 30, 2007.





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





Of
      the
      non-accrual loans, $1,083,000 consisted of the commercial land acquisition
      and
      development participation loan discussed above, $140,000 consisted of two
      commercial non-real estate loans, and $56,000 consisted of a one-to-four
      residential mortgage loan at March 31, 2007.




18




Non-accrual
      loans totaled 0.88%, 0.85% and 0.92% of net loans receivable at March 31, 2007,
      December 31, 2006 and March 31, 2006, respectively.




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





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





As
      of
      March 31, 2007, in addition to the non-accrual acquisition and development
      loan
      mentioned above, we have classified two commercial non-real estate loans as
      impaired as was discussed in detail in the “Provision for Loan Losses and
      Analysis of Allowance for Loan Losses” section of this report. At the end of the
      first quarter, in anticipation of a minimal recovery of principal on these
      loans, we charged a portion of the loan balances against our allowance for
      loan
      losses and we have reserved $140,000, or 100%, of the remaining balance of
      the
      loans to our allowance for loan losses. Final disposition of this matter is
      still pending as of the date of this report.





**** Other
      than as disclosed in the paragraphs above, there are no other loans at March
      31,
      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 $482,000, or 0.32%, to $151,378,000 at March 31, 2007,
      from $151,860,000 at December 31, 2006. The decrease in total liabilities
      resulted from a $3,500,000, or 8.97% decrease in borrowings, offset by increases
      of $1,973,000, or 1.76% in deposits, $722,000, or 206.29% increase in advance
      payments by borrowers for taxes and insurance and $292,000, or 76.04% in checks
      outstanding in excess of bank balance. The decrease in borrowings is the result
      of paying down the Federal Home Loan Bank advances when our liquidity is
      favorable. The other liabilities consist primarily of accrued federal and state
      income taxes and accrued interest on Federal Home Loan Bank
      borrowings.





Deposits .





Deposits
      increased $1,973,000, or 1.76%, to $113,796,000 at March 31, 2007 from
      $111,823,000 at December 31, 2006. Certificates of deposits increased $623,000
      to $86,619,000 at March 31, 2007 from $85,996,000 at December 31, 2006, and
      NOW
      and money market demand deposit accounts increased by $1,489,000 to $18,224,000
      at March 31, 2007 from $16,735,000 at December 31, 2006. Savings deposits
      decreased by $139,000 to $8,953,000 at March 31, 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.




19




Borrowings .





At
      March
      31, 2007, we were permitted to borrow up to $52,134,000 from the Federal Home
      Loan Bank of Atlanta. We had $35,500,000 and $39,000,000 of Federal Home Loan
      Bank advances outstanding as of March 31, 2007 and December 31, 2006,
      respectively, and we averaged $36,666,000 and $39,250,000 of Federal Home Loan
      Bank advances during the three months ended March 31, 2007 and the year ended
      December 31, 2006, respectively. The decrease in borrowings reflects $3,500,000
      Federal Home Loan Bank advance pay downs and $20,500,000 in the rollover of
      advances, offset by maturing advances of $20,500,000 in the first quarter 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 competition.





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





Our
      most
      liquid assets are cash and cash equivalents. The levels of these assets depend
      on our operating, financing, lending and investing activities during any given
      period. At March 31, 2007, cash and cash equivalents totaled $3,964,000.
      Securities classified as available-for-sale, which can provide additional
      sources of liquidity, totaled $8,643,000 at March 31, 2007. However, because
      all
      of these securities were in an unrealized loss position at March 31, 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 March 31, 2007.  Also,
      at
      March 31, 2007, we had advances outstanding of $35,500,000 from the Federal
      Home
      Loan Bank of Atlanta. On that date, we had the ability to borrow an additional
      $16,634,000.





At
      March
      31, 2007, we had outstanding commitments to originate loans of $2,927,000
      (excluding the undisbursed portions of loans). These commitments do not
      necessarily represent future cash requirements since certain of these
      instruments may expire without being funded. We also extend lines of credit
      to
      customers, primarily home equity lines of credit. The borrower is able to draw
      on these lines as needed, thus the funding is generally unpredictable. Unused
      home equity lines of credit amounted to $5,347,000 and unused commercial lines
      of credit amounted to $963,000 at March 31, 2007. Since the majority of unused
      lines of credit expire without being funded, it is anticipated that our
      obligation to fund the above commitment amounts will be substantially less
      than
      the amounts reported.





Certificate
      of deposit accounts scheduled to mature within one year totaled $55,133,000
      or
      48.45% of total deposits at March 31, 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 March 31, 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.




20




Our
      borrowings are with the Federal Home Loan Bank of Atlanta and are secured by
      Federal Home Loan Bank of Atlanta stock that we own and a blanket lien on
      mortgages. Borrowings at March 31, 2007 consisted of $9,000,000 short term
      fixed
      rate FHLB advances bearing interest at rates ranging from 5.28% to 5.41% and
      $26,500,000 long term convertible rate FHLB advances with fixed interest rates
      ranging from 3.63% to 4.90%. If not repaid or converted to a different product,
      the convertible rate advances will convert from a fixed to a floating rate
      after
      the initial borrowing periods ranging from three months to five years.





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





We
      are
      not aware of any known trends, events or uncertainties that will have or are
      reasonably likely to have a material effect on our liquidity, capital or
      operations, nor are we aware of any current recommendation by regulatory
      authorities, which if implemented, would have a material effect on liquidity,
      capital or operations.




***Stockholders’
      Equity***





Total
      stockholders’ equity increased $38,000, or 0.17%, to $22,403,000 at March 31,
      2007 from $22,365,000 at December 31, 2006 as a result of stock based
      compensation of $44,000, partially offset by a net loss of $10,000. We are
      considered “well capitalized” under the risk-based capital guidelines applicable
      to us.





***Off-Balance
      Sheet Arrangements***





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




****
              **Contract
                  Amount At**
              ******Financial
                  Instruments Whose Contract Amount Represents Credit
                  Risk**
              ****
              **March
                  31, 2007**
              ****
              **December
                  31, 2006**(Dollars
                  in thousands)Lines
                  of credit - commercial
              
              $
              963
              
              $
              1,210Lines
                  of credit - home equity
              
              
              5,220
              
              
              5,335Lines
                  of credit - overdraft checking
              
              
              127
              
              
              118Mortgage
                  loan commitments
              
              
              2,927
              
              
              830




21




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





Equipment
      lines of credit are secured by equipment being purchased and sometimes by a
      blanket lien on assets of the borrower as well. Each advance is repaid over
      a
      three to five year period 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 6.00%
      to 7.875% and 5.625% to 7.125% at March 31, 2007 and December 31, 2006,
      respectively. Loan commitments expire 60 days from the date of the
      commitment.





For
      the
      three months ended March 31, 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 Act of 1933, as amended, and Section 21E of the Securities
      Exchange Act of 1934, as amended. Forward-looking statements often use words
      such as “believe,” “expect,” “plan,” “may,” “will,” “should,” “project,”
“contemplate,” “anticipate,” “forecast,” “intend” or other words of similar
      meaning. You can also identify them by the fact that they do not relate strictly
      to historical or current facts.





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




22




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


March
      31,
      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 March 31, 2007, that have materially
      affected, or are reasonably likely to materially affect, SFSB, Inc.’s internal
      control over financial reporting.




23


**PART
      II - OTHER INFORMATION**





Item
      1.Legal
      Proceedings.





None.





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





None.





Item
      3.Defaults
      Upon Senior Securities.





Not
      applicable.





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





Not
      applicable.





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




24




**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: May
              10,
              2007
            By:
            /s/ Philip
              E.
              LoganPhilip
                E. Logan, President
              (Principal
                  Executive Officer)




Date:May
                10,
                2007
            By:
            /s/ Sophie
              T. WittelsbergerSophie
                T. Wittelsberger, Chief Financial Officer
              (Principal
                  Accounting and Financial
                  Officer)


25