The Company

The Company is a savings and loan holding company chartered as a corporation in the state of Maryland, and is headquartered in Annapolis, Maryland. It conducts business through three subsidiaries: the Bank, a federal savings bank, which is the Company's principal subsidiary; Louis Hyatt, Inc., doing business as Hyatt Commercial, a commercial real estate brokerage and property management company; and SBI Mortgage Company, which holds mortgages that do not meet the underwriting criteria of the Bank, and is the parent company of Crownsville Development Corporation, doing business as Annapolis Equity Group, which acquires real estate for syndication and investment purposes. The Bank has four branches in Anne Arundel County, Maryland, which offer a full range of deposit products. The Bank originates mortgages in its primary market of Anne Arundel County, Maryland and, to a lesser extent, in other parts of Maryland, Delaware and Virginia. The Company's common stock trades under the symbol "SVBI" on the Nasdaq Capital Market.

Bank Strategy

The Bank has expanded its customer focus and product offerings while narrowing its focus in real estate related mortgage lending to maintaining and developing relationships with existing customers. It is also strengthening its brand positioning and selectively seeking opportunities to expand its branch network. Each of these is discussed in turn:

· Expand customer focus and product offerings. The Bank is expanding beyond a core savings and real estate related mortgage lending focus to provide a full array of consumer and commercial banking products and services such as asset-based lending, cash management, and demand deposit services. For instance, the Bank has expanded its commercial lending activities to include asset-based financing for small and medium-sized businesses where collateral for such loans may include borrower assets such as accounts receivable, inventory, machinery, equipment, and other forms of security as well as real estate. As of September 30, 2008, $6.8 million, or 0.8%, of the Bank's loan portfolio consisted of commercial loans for business purposes. The Bank has also begun penetrating the commercial deposit-taking market including efforts to provide cash management services and related commercial deposit products to small and medium-sized businesses in its target geographic market.

· Deepen its relationship-based approach to real estate related mortgage lending. During the current period of weakening real estate markets, the Bank is pursuing an intensified relationship-based lending approach focused on strengthening ties to existing and past customers and is not aggressively pursuing new customers for its real estate related mortgage lending products.

· Strengthen brand visibility and leadership. The Bank has launched a new brand-building campaign designed to differentiate it in the marketplace, emphasizing a full set of financial services offerings as the leading independent, locally oriented bank.

· Selectively branch out within the target market. The Bank is pursuing a branch acquisition "fill-in" market distribution and service coverage strategy designed to ensure convenience of branch locations for its customers. With four existing branches, the Bank provides significant market coverage. However, with the continued growth and increasing geographic dispersion of its customer base within its target market, the opportunity exists to further increase the convenience and accessibility of its full service branches to its customer base.

Bank Competition

The Annapolis, Maryland area has a high density of financial institutions, many of which are significantly larger and have greater financial resources than the Bank, and all of which are competitors of the Bank to varying degrees. The Bank's competition for loans comes primarily from savings and loan associations, savings banks, mortgage banking companies, insurance companies and commercial banks. Its most direct competition for deposits has historically come from savings and loan associations, savings banks, commercial banks and credit unions. The Bank faces additional competition for deposits from money market mutual funds and corporate and government securities funds and investments. The Bank also faces increased competition for deposits from other financial institutions such as brokerage firms and insurance companies. The Bank is a community-oriented financial institution serving its market area with a wide selection of mortgage loan products. Management considers the Bank's reputation for financial strength and customer service to be a major competitive advantage in attracting and retaining customers in its market area. The Bank also believes it benefits from its community orientation.

Forward Looking Statements

In addition to the historical information contained herein, the discussion in this report contains forward-looking statements that involve risks and uncertainties and may be affected by various factors that may cause actual results to differ materially from those in the forward-looking statements. The forward-looking statements contained herein include, but are not limited to, those with respect to the Bank's strategy; management's determination of the amount of the loan loss allowance; the effect of changes in interest rates; and changes in deposit insurance premiums. The words "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "will," "would," "could," "should," "guidance," "potential," "continue," "project," "forecast," "confident," and similar expressions are typically used to identify forward-looking statements. The Company's operations and actual results could differ significantly from those discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences include, but are not limited to, the success of the Bank's strategy; changes in the economy and interest rates both in the nation and Company's general market area; federal and state regulation; and competition and other factors detailed from time to time in the Company's filings with the Securities and Exchange Commission (the "SEC"), including "Item 1A. Risk Factors" contained in this Report and in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Critical Accounting Policies

The Company's significant accounting policies are set forth in Note 1 of the audited consolidated financial statements as of December 31, 2007 which were included in the Company's Annual Report on Form 10-K. Of these significant accounting policies, the Company considers its policy regarding the allowance for loan losses to be its most critical accounting policy, because it requires management's most subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and therefore on the provision for loan losses and results of operations. The Company has developed policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Company's assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers that is not known to management at the time of the issuance of the consolidated financial statements.

Overview

The Company provides a wide range of retail and commercial banking services. Deposit services include checking, individual retirement accounts, money market, savings and time deposit accounts. Loan services include various types of commercial, consumer, and real estate lending. The Company also provides ATMs, corporate cash management services, debit cards, Internet banking including on-line bill pay, mortgage lending, safe deposit boxes, and telephone banking, among other products and services.

The Company continues to experience challenges similarly faced by many financial institutions resulting from the slowdown in the real estate markets, including increased loan delinquencies and a decrease in the demand for certain loan products including construction, development, and land acquisition loans. Continued declines in real estate values, home sales volumes and financial stress on borrowers as a result of the uncertain economic environment, including job losses and other factors, have adversely affected our borrowers. This economic deterioration has caused loan delinquencies and impaired loans to increase. In addition, strong competition for new loans and deposits has caused the interest rate spread between the Company's cost of funds and what it earns on loans to decrease from 2007 levels. This was primarily due to an increase in non-accrual loans, and to decreases in interest rates earned on loans outpacing the decreases in interest paid on deposits and other borrowings. The Company's loan portfolio has decreased $6,694,000, or 0.8%, to $885,219,000 at September 30, 2008, compared to $891,913,000 at December 31, 2007.

The Company has experienced an increase in delinquent loans and has increased its provision for loan losses from 2007 levels accordingly. The Company believes that the allowance for loan losses is adequate at September 30, 2008.

During the quarter ended June 30, 2008, the Company was the victim of an external fraud scheme involving falsified line of credit advance requests that totaled approximately $2.26 million. Of that amount, $260 thousand was not covered under the Company's insurance policy, was written-off during the quarter ended June 30, 2008 and was included in non-interest expenses. The remaining $2.0 million was recorded as a receivable at June 30, 2008, and was received from the Company's insurance provider during the quarter ended September 30, 2008.

The Company expects to experience difficult market conditions as it seeks to grow its loan portfolio in a comparatively slower market. If interest rates increase, there may be less demand for borrowing. The Company will continue to manage loan and deposit pricing against the risks of rising costs of its deposits and borrowings.

The Company's success continues to be dependent on the strength of the markets in which it operates, including the Company's ability to originate and grow its mortgage loans, as well as its continuing ability to maintain comparatively low overhead costs.

Results of Operations

Net income decreased by $1,845,000, or 75.9%, to $587,000 for the third quarter of 2008, compared to $2,432,000 for the third quarter of 2007. Basic and diluted earnings per share decreased by $.18, or 75.0%, to $.06 for the third quarter of 2008, compared to $.24 for the third quarter of 2007. Net income for the nine months ended September 30, 2008 decreased by $4,470,000, or 50.7%, to $4,343,000, compared to $8,813,000 for the same period in 2007. The decrease in net income and basic and diluted earnings per share over last year was a result of the Company's lower interest rate spread, lower real estate commissions, and a higher provision for loan losses. The interest rate spread is the difference between the Company's cost of funds and yield on earning assets. The Company's interest rate spread decreased by .67%, to 2.95% for the nine months ended September 30, 2008, compared to 3.62% for the same period in 2007.

Net interest income, which is interest earned net of interest expense, decreased by $1,205,000, or 14.5%, to $7,124,000 for the third quarter of 2008, compared to $8,329,000 for the third quarter of 2007. Net interest income for the nine months ended September 30, 2008 decreased by $3,505,000, or 13.5%, to $22,419,000, compared to $25,924,000 for the same period in 2007. The primary reason for the decrease in net interest income was an increase in non-accrual loans, and because the interest rates earned on the Company's loan portfolio have decreased faster than the decrease in interest rates paid on the Company's interest bearing liabilities. Net yield on interest earning assets for the nine months ended September 30, 2008 was 3.27%, compared to 3.96% for the same period in 2007.

The provision for loan losses increased by $2,115,000, or 282.0%, to $2,865,000 for the third quarter of 2008, compared to $750,000 for the third quarter of 2007. The provision for loan losses for the nine months ended September 30, 2008 increased by $2,653,000, or 155.0%, to $4,365,000, compared to $1,712,000 for the same period in 2007. The provision for loan losses and allowance for loan losses are based on management's judgment and evaluation of the loan portfolio. Management assesses the adequacy of the allowance for loan losses and the need for any addition thereto, by considering the nature and size of the loan portfolio, overall portfolio quality, review of specific problem loans, economic conditions that may affect the borrowers' ability to pay or the value of property securing loans, and other relevant factors. While management believes the current allowance for loan losses is adequate, changing economic and other conditions may require future adjustments to the allowance for loan losses. For additional discussion, see "Asset Quality" below.

Total other income increased by $64,000, or 9.5%, to $737,000 for the third quarter of 2008, compared to $673,000 for the third quarter of 2007. The primary reason for the increase in other income was an increase in fees and service charges. Total other income for the nine months ended September 30, 2008 decreased $1,545,000, or 42.3%, to $2,109,000 compared to $3,654,000 for the same period in 2007. The primary reasons for the decrease during the first nine months of 2008, compared to the first nine months of 2007 was a decrease in real estate commissions earned during the first quarter of 2008 compared to the first quarter of 2007 and the gain realized on property sold by Hyatt Commercial in the first quarter of 2007. Real estate commissions increased $30,000, or 10.0%, to $329,000 for the third quarter of 2008, compared to $299,000 for the third quarter of 2007. Total real estate commissions for the nine months ended September 30, 2008 decreased $1,196,000, or 62.8%, to $707,000, compared to $1,903,000 for the same period in 2007. This decrease was primarily the result of higher commissions earned in 2007 on the sale of two large commercial properties. Mortgage banking activities decreased $74,000, or 73.3%, to $27,000 for the third quarter of 2008 compared to $101,000 for the third quarter of 2007. Mortgage banking activities decreased $153,000, or 32.6%, to $316,000 for the nine months ended September 30, 2008 compared to $469,000 for the same period in 2007. The primary reason for this decline was the decision to close Homeowners' Title in August 2008, which resulted in fewer fees earned by the Company. Other income for the nine months ended September 30, 2008 decreased $210,000, or 26.6%, to $580,000 compared to $790,000 for the same period in 2007. This decrease was primarily the result of a $322,000 gain recognized on the sale of property owned by Hyatt Commercial in 2007.

Total non-interest expenses decreased by $26,000, or 0.6%, to $3,988,000 for the third quarter of 2008, compared to $4,014,000 for the third quarter of 2007. Total non-interest expenses for the nine months ended September 30, 2008 increased $59,000, or 0.5%, to $12,808,000, compared to $12,749,000 for the same period in 2007. Compensation and related expenses decreased by $480,000, or 18.8%, to $2,076,000 for the third quarter of 2008, compared to $2,556,000 for the same period in 2007. Total compensation and related expenses for the nine months ended September 30, 2008 decreased $1,726,000, or 20.2%, to $6,829,000, compared to $8,555,000 for the same period in 2007. This decrease was primarily because of lower salaries paid in 2008 due to staff vacancies not being refilled until needed, and lower commissions paid by Hyatt Commercial to commercial real estate agents. Net occupancy costs increased by $21,000, or 5.0%, to $437,000 for the third quarter of 2008, compared to $416,000 for the third quarter of 2007. Total net occupancy for the nine months ended September 30, 2008 decreased $20,000, or 1.6%, to $1,253,000, compared to $1,273,000 for the same period in 2007. This decrease was the result of costs and depreciation incurred on the Company's new headquarters partially offset by a full nine month's rental income in 2008 compared to a partial nine month's rental income in 2007 on space leased out in the Company's headquarters. Other non-interest expenses increased $433,000, or 41.6%, to $1,475,000 for the third quarter of 2008, compared to $1,042,000 for the third quarter of 2007. Other non-interest expense for the nine months ended September 30, 2008 increased by $1,805,000, or 61.8%, to $4,726,000, compared to $2,921,000 for the same period in 2007. This increase was primarily due to a charge off taken in June 2008 for losses incurred relating to a fraudulent wire scheme, additional legal fees and costs relating to loan delinquencies, and increased deposit insurance premiums.

Income Taxes

The income tax provision decreased by $1,385,000, or 76.7%, to $421,000 for the third quarter of 2008, compared to $1,806,000 for the third quarter of 2007. The income tax provision for the nine months ended September 30, 2008 decreased by $3,292,000, or 52.2%, to $3,012,000, compared to $6,304,000 for the same period in 2007. Both decreases are consistent with the decrease in pretax income. The effective tax rate for the nine months ended September 30, 2008 was 41.0% compared to 41.7% for the same period in 2007.

Analysis of Financial Condition

Total assets increased $2,045,000, or 0.2%, to $964,279,000 at September 30, 2008, compared to $962,234,000 at December 31, 2007. Cash and cash equivalents increased by $7,183,000, or 63.8%, to $18,449,000 at September 30, 2008, compared to $11,266,000 at December 31, 2007. This increase was primarily due to increased cash and due from banks and federal funds sold. The loan portfolio decreased during 2008, as net loans receivable decreased $6,694,000, or 0.8%, to $885,219,000 at September 30, 2008, compared to $891,913,000 at December 31, 2007. This decrease was the result of the continued general slowdown in loan demand during the third quarter of 2008. Loans held for sale decreased $1,101,000, or 100.0%, to $0 at September 30, 2008, compared to $1,101,000 at December 31, 2007. This decrease was primarily due to the timing of loans pending sale as of September 30, 2008. Total deposits increased $36,889,000, or 5.7%, to $689,662,000 at September 30, 2008 compared to $652,773,000 at December 31, 2007. This increase was primarily attributable to an ongoing campaign by the Company to attract money market deposit accounts and promotions to obtain shorter-term certificates of deposit. FHLB Atlanta borrowings decreased $37,000,000, or 19.5%, to $153,000,000 at September 30, 2008, compared to $190,000,000 as of December 31, 2007. This was a result of paying off short term and long term FHLB Atlanta advances with deposit growth.

Stockholders' Equity

Total stockholders' equity increased $2,627,000, or 2.8%, to $97,903,000 at September 30, 2008 compared to $95,276,000 as of December 31, 2007. This increase was primarily a result of net earnings, partially offset by dividends declared.

Asset Quality

Non-performing assets consist of non-accrual loans, restructured loans, and other real estate owned (foreclosed properties). Loans are placed in non-accrual status, when in the opinion of management, the collection of additional interest is unlikely or a specific loan meets the criteria for non-accrual status established by regulatory authorities (those loans 90 or more days in arrears). No interest is taken into income on non-accrual loans. A loan remains on non-accrual status until the loan is current as to both principal and interest.

Foreclosed real estate includes properties that have been repossessed or acquired in complete or partial satisfaction of debt. Such properties, which are held for resale, are carried at the lower of cost or fair value, including a reduction for the estimated selling expenses.

The following table presents the Company's non-performing assets as of September 30, 2008 and December 31, 2007 (dollars in thousands):

                             September                              December
                              30, 2008        Number of loans       31, 2007       Number of loans

Loans accounted for on a
non-accrual basis:
Mortgage loans:
  Residential - consumer    $     19,628                    54     $     3,975                   11
  Residential - builder           23,258                    40           3,389                    6
  Commercial                         882                     5             336                    2
Non-mortgage loans:
  Consumer                             1                     2               -
  Commercial loans                     -                                     -
Total non-accrual loans     $     43,769                   101     $     7,700                   19
Accruing loans greater
than 90 days past due       $          -                           $         -
Foreclosed real-estate      $      8,506                           $     2,993
Total non-performing
assets                      $     52,275                           $    10,693
Total non-accrual loans
to net loans                         4.9 %                                 0.9 %
Allowance for loan losses   $     12,155                           $    10,781
Allowance to total loans             1.4 %                                 1.2 %
Allowance for loan losses
to total non-performing
loans,
  including loans
contractually past due 90
days or more                        27.8 %                               140.0 %
Total non-accrual and
accruing loans greater
than
  90 days past due to
total assets                         4.5 %                                 0.8 %
Total non-performing
assets to total assets               5.4 %                                 1.1 %

The allowance for loan losses is based on management's judgment and evaluation of the loan portfolio. Management assesses the adequacy of the allowance for loan losses and the need for any addition thereto, by considering the nature and size of the loan portfolio, overall portfolio quality, review of specific problem loans, economic conditions that may affect the borrowers' ability to pay or the value of property securing loans, and other relevant factors. While management believes the current allowance is adequate, changing economic and market conditions may require future adjustments to the allowance for loan losses.

The following table summarizes the change in impaired loans for the nine months ended September 30, 2008 (dollars in thousands):

          Impaired loans at December 31, 2007                  $  17,960
           Added to impaired loans                                60,974
           Gross loans transferred to foreclosed real estate     (13,494 )
           Paid off prior to foreclosure                          (8,139 )
          Impaired loans at September 30, 2008                 $  57,301

Included in the above impaired loans amount at September 30, 2008 is $13,532,000 of loans that are not in non-accrual status. In addition, there was a total of $52,862,000 of residential real estate loans included in impaired loans at September 30, 2008, of which $28,802,000 were to consumers and $24,060,000 to builders. Impaired loans are individually reviewed by management to determine their estimated fair market value, and a specific reserve is established, if necessary, for the difference between the original carrying value of any loan and its estimated fair market value.

As of September 30, 2008, the Company had foreclosed real estate consisting of 23 residential properties with a carrying value of $8,506,000. During the nine month period ended September 30, 2008, the Company sold a total of 11 properties previously included in foreclosed real estate. The properties had a combined net book value of $4,663,000 after total write-downs of $108,000, and were sold at a combined net gain of $259,000. In addition, the Company incurred $84,000 in expenses related to the sale of the properties. The following table summarizes the changes in foreclosed real estate for the nine months ended September 30, 2008, (dollars in thousands):

 Foreclosed real estate at December 31, 2007                            $  2,993
  Transferred from impaired loans, net of specific reserves of $2,799     10,695
  Property improvements                                                       92
  Property sold                                                           (4,663 )
  Additional write downs                                                    (611 )
 Foreclosed real estate at September 30, 2008                           $  8,506

Liquidity

The Company's liquidity is determined by its ability to raise funds through several sources including borrowed funds, capital, deposits, loan repayments, maturing investments, and the sale of loans. Based on the internal and external sources available, the Company's liquidity position exceeded anticipated short-term and long-term needs as of September 30, 2008. Additionally, loan payments, maturities, deposit growth and earnings contribute a flow of funds available to meet liquidity requirements.

In assessing its liquidity, the management of the Company considers operating requirements, anticipated deposit flows, expected funding of loans, deposit maturities and borrowing availability, so that sufficient funds may be available on short notice to meet obligations as they arise so that the Company may take advantage of business opportunities.

Management believes it has sufficient cash flow and liquidity to meet its current commitments through the next 12 months. Certificates of deposit, which are scheduled to mature in less than one year, totaled $464,857,000 at September 30, 2008. Based on past experience, management believes that a significant portion of such deposits will remain with the Company. At September 30, 2008, the Company had commitments to originate loans of $36,527,000, unused lines of credit of $34,409,000, and commitments under standby letters of credit of $11,623,000. The Company has the ability to reduce its commitments for new loan originations, adjust other cash outflows, and borrow from FHLB Atlanta should the need arise. As of September 30, 2008, outstanding FHLB Atlanta borrowings totaled $153,000,000, and the Company had available to it an additional $132,470,000 in borrowing availability from FHLB Atlanta.

Net cash provided by operating activities decreased $864,000 to $8,084,000 for the nine months ended September 30, 2008, compared to $8,948,000 for the same period in 2007. This decrease was primarily the result of lower net income and lower proceeds from loans sold to others in 2008. Net cash provided by investing activities increased $38,753,000 to $1,022,000 for the nine months ended September 30, 2008, compared to net cash used of $37,731,000 for the same period in 2007. This increase was primarily due to less cash used to fund loan growth and higher proceeds from the sale of foreclosed property during the nine months . . .