10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2009

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File No. 0-28032

PATAPSCO BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland	52-1951797
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1301 Merritt Boulevard, Dundalk, Maryland	21222-2194
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (410) 285-1010

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common stock, par value $.01 per share

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	x

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

As of December 31, 2008, the aggregate market value of voting common stock held by nonaffiliates was approximately $5,735,447, computed by reference to the closing sales price on December 31, 2008 as reported on the OTC Electronic Bulletin Board.

Number of shares of Common Stock outstanding as of September 22, 2009: 1,874,734.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the 2009 Annual Report to Stockholders. (Part II)

2. Portions of the Proxy Statement for the 2009 Annual Meeting of Stockholders. (Part III)

INDEX

		PAGE
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	17
Item 1B.	Unresolved Staff Comments	20
Item 2.	Properties	21
Item 3.	Legal Proceedings	21
Item 4.	Submission of Matters to a Vote of Security Holders	21
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	22
Item 6.	Selected Financial Data	22
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	22
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 8.	Financial Statements and Supplementary Data	22
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	22
Item 9A(T).	Controls and Procedures	22
Item 9B.	Other Information	24
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	24
Item 11.	Executive Compensation	24
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	24
Item 13.	Certain Relationships and Related Transactions, and Director Independence	25
Item 14.	Principal Accountant Fees and Services	25
PART IV
Item 15.	Exhibits and Financial Statement Schedules	25
SIGNATURES

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PART I

Forward-Looking Statements

When used in this Annual Report, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area, competition and the other factors set forth in Item 1A in this Form 10-K that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Item 1. Business

General

Patapsco Bancorp, Inc. Patapsco Bancorp, Inc. (the “Company”) was incorporated under the laws of the State of Maryland in November 1995. On April 1, 1996, Patapsco Federal Savings and Loan Association (the “Association”), the predecessor of The Patapsco Bank (“the Bank”), converted from mutual to stock form and reorganized into the holding company form of ownership as a wholly owned subsidiary of the Company.

Other than the note receivable from Bradford Bancorp, Inc. resulting from a terminated merger agreement, the Company has no significant assets other than its investment in the Bank. This note receivable is guaranteed by the FDIC under the Temporary Liquidity Guarantee Program. The Company is primarily engaged in the business of directing, planning and coordinating the business activities of the Bank. Accordingly, the information set forth in this report, including financial statements and related data, focuses primarily on the Bank. In the future, the Company may become an operating company or acquire or organize other operating subsidiaries, including other financial institutions. Currently, the Company does not maintain offices separate from those of the Bank or employ any persons other than its officers who are not separately compensated for such service.

The Company’s and the Bank’s executive offices are located at 1301 Merritt Boulevard, Dundalk, Maryland 21222-2194, and the main telephone number is (410) 285-1010.

The Patapsco Bank. The Bank is a Maryland commercial bank operating through five full-service offices located in Dundalk, Parkville, Carney, Glen Arm and Baltimore City, Maryland. The primary business of the Bank is to attract deposits from individual and corporate customers and to originate residential and commercial mortgage loans, commercial loans and consumer loans, primarily in the Greater Baltimore Metropolitan area. The Bank is subject to competition from other financial and mortgage institutions in attracting and retaining deposits and in making loans. The Bank is subject to the regulations of certain agencies of the federal government and undergoes periodic examination by those agencies. The Bank has two active operating subsidiaries, Prime Business Leasing and Patapsco Financial Services. The primary business of Prime Leasing is the origination and servicing of commercial leases. Note that effective, October 2008, management made a strategic decision to cease origination of new leases. The primary business of Patapsco Financial Services is the sale of consumer investments.

At June 30, 2009, the Bank had $63.8 million, $54.2 million, $24.2 million, $49.2 million, $18.4 million and $12.6 million in residential mortgage loans, small business loans, construction loans, commercial real estate loans, home equity and other consumer loans, and equipment leases, respectively.

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Available Information

The Bank maintains a website at http://www.patapscobank.com, which makes available the Company’s Section 16 filings with the Securities and Exchange Commission (“SEC”). The SEC maintains a website at http://www.sec.gov that makes available the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, free of charge, on the site as soon as reasonably practicable after the Company has electronically filed these documents with, or otherwise furnished them to, the SEC. The Company’s Internet website and the information contained therein or connected thereto are not intended to be incorporated into this annual report on Form 10-K.

Market Area

The Bank’s market area for gathering deposits consists of the Hampden area of Baltimore City and eastern and northeastern Baltimore County, Maryland, while the Bank makes loans to customers in much of the Mid-Atlantic area with a strong emphasis on the Baltimore metropolitan area. The economy of the Bank’s market area has historically been based on industries such as steel, shipyards and automobile assembly. The economy in the Bank’s market area continues to be dependent, to some extent, on a small number of major industrial employers. A significant portion of eastern Baltimore County has been designated as an “Enterprise Zone.” As a result, employers relocating to this area are entitled to significant tax and other economic incentives. Based on 2004 United States Census data, the per capita personal income for Baltimore County ($42,852) is greater than that of Maryland as a whole ($39,631) and the United States ($33,050). The per capita personal income for Baltimore City ($29,153) is lower than both the Maryland and United States averages.

Lending Activities

General. The Company’s gross loan portfolio totaled $222.3 million at June 30, 2009, representing 83% of total assets at that date. At June 30, 2009, $63.8 million, or 29%, of the Company’s gross loan portfolio, consisted of residential mortgage loans. Other loans secured by real estate include construction and commercial real estate loans, which amounted to $73.4 million, or 33%, of the Company’s gross loan portfolio at June 30, 2009. In addition, the Company originates consumer and other loans, including home equity loans, home improvement loans and loans secured by deposits. At June 30, 2009, consumer and other loans totaled $18.4 million, or 8%, of the Company’s gross loan portfolio. The Company’s commercial loan portfolio, which consists of small business loans and commercial leases totaled $66.7 million, or 30%, of the Company’s gross loan portfolio.

Originations, Purchases and Sales of Loans. The Company generally has authority to originate and purchase loans throughout the United States. Consistent with its emphasis on being a community-oriented financial institution, the Company concentrates its lending activities in its Maryland market area with limited loan and equipment lease origination in Delaware, Pennsylvania and Northern Virginia and on rare occasions, outside these markets.

The Company’s loan originations are derived from a number of sources, including loan brokers, advertising and referrals by depositors and borrowers. The Company’s solicitation programs consist of advertisements in local media, in addition to participation in various community organizations and events. All of the Company’s loan personnel are salaried; however, one originator receives commissions on loans approved by officers of the Bank. With the exception of applications for home improvement loans, which loans may be originated on an indirect basis through a limited number of approved home improvement contractors, loan applications are accepted at the Company’s office. In addition, the Company’s salaried loan originators may travel to meet prospective borrowers and take applications. In all cases, the Company has final approval of the application.

In recent years, the Company has purchased whole loans and loan participation interests. During the year ended June 30, 2009, the Company purchased $3.5 million in participation interests and no consumer home improvement loans. In the future, management will continue to consider purchases of whole loans or participation interests in commercial business, residential and commercial real estate loans and consumer home improvement loans.

Loan Underwriting Policies. The Company’s lending activities are subject to the Company’s non-discriminatory underwriting standards and to loan origination procedures prescribed by the Company’s Board of

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Directors and management. Detailed loan applications are obtained to determine the borrower’s ability to repay, and the more significant items on these applications are verified through the use of credit reports, financial statements and confirmations. Certain officers and committees have been granted authority by the Board of Directors to approve residential and commercial real estate, commercial business loans and equipment leases in varying amounts depending upon whether the loan is secured or unsecured and, with respect to secured loans, whether the collateral is liquid or illiquid. Individual officers and certain committees of the Company have been granted authority by the Board of Directors to approve consumer loans up to varying specified dollar amounts, depending upon the type of loan.

Applications for single-family real estate loans are typically underwritten and closed in accordance with the standards of Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”). Generally, upon receipt of a loan application from a prospective borrower, a credit report and verifications are ordered to confirm specific information relating to the loan applicant’s employment, income and credit standing. If a proposed loan is to be secured by a mortgage on real estate, an appraisal of the real estate is undertaken, pursuant to the Company’s Appraisal Policy, by an appraiser approved by the Company and licensed by the State of Maryland. In the case of single-family residential mortgage loans, except when the Company becomes aware of a particular risk of environmental contamination, the Company generally does not obtain a formal environmental report on the real estate at the time a loan is made. A formal environmental report may be required in connection with nonresidential real estate loans.

It is the Company’s policy to record a lien on the real estate securing a loan and to obtain title insurance, which insures that the property is free of prior encumbrances and other possible title defects. Borrowers must also obtain hazard insurance policies prior to closing and, when the property is in a flood plain as designated by the Department of Housing and Urban Development, pay flood insurance policy premiums. Upon receipt of a loan application from a prospective borrower, a credit report generally is ordered to verify specific information relating to the loan applicant’s employment, income and credit standing.

With respect to single-family residential mortgage loans, the Company makes a loan commitment of between 30 and 60 days for each loan approved. If the borrower desires a longer commitment, the commitment may be extended for good cause and upon written approval. Typically, a $500 commitment fee is charged in connection with the issuance of a commitment letter; however, extension fees are usually charged. The interest rate is guaranteed for the commitment term.

It is the policy of the Company that appraisals be obtained in connection with all loans for the purchase of real estate or to refinance real estate loans where the existing mortgage is held by a party other than the Company. It is the Company’s policy that all appraisals be performed by appraisers approved by the Company’s Board of Directors and licensed by the State of Maryland, for properties located in the state of Maryland.

Under applicable law, with certain limited exceptions, loans and extensions of credit by a commercial bank to a person outstanding, including commitments, at one time shall not exceed 15% of the bank’s unimpaired capital and surplus. Under these limits, the Company’s loans to one borrower were limited to $3.7 million at June 30, 2009. At that date, the Company had no lending relationships in excess of the loans-to-one-borrower limit. At June 30, 2009, the Company’s largest lending relationship was represented by multiple loans totaling $2.9 million secured by commercial real estate, which were current and performing in accordance with their terms at June 30, 2009.

Interest rates charged by the Company on loans are affected principally by competitive factors, the demand for such loans and the supply of funds available for lending purposes. These factors are, in turn, affected by general economic conditions, monetary policies of the federal government, including the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), legislative tax policies and government budgetary matters.

Residential Real Estate Lending. The Company historically has been an originator of residential real estate loans in its market area. Residential real estate loans consist of both single-family and multi-family residential real estate loans. At June 30, 2009, residential mortgage loans totaled $63.8 million, or 29%, of the Company’s gross loan portfolio. Of such loans, $5.3 million were secured by nonowner-occupied investment properties.

The Company’s multi-family residential loan portfolio consists primarily of loans secured by small apartment buildings. Such loans generally range in size from $100,000 to $2.0 million. At June 30, 2009, the Company had $4.5 million of multi-family residential real estate loans, which amounted to 2.0% of the Company’s gross loan portfolio at

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such date. Multi-family real estate loans either are originated on an adjustable-rate basis with terms of up to 25 years or are amortized over a maximum of 25 years with a three or five-year note maturity, and are underwritten with loan-to-value ratios of up to 80% of the lesser of the appraised value or the purchase price of the property.

Multi-family residential real estate lending entails additional risks as compared with single-family residential property lending. Multi-family residential real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers. The payment experience on such loans typically is dependent on the successful operation of the real estate project. These risks can be significantly impacted by supply and demand conditions in the market for residential space, and, as such, may be subject to a greater extent to adverse conditions in the economy generally. To minimize these risks, the Company generally limits itself to its market area or to borrowers with which it has prior experience or who are otherwise known to the Company. It has been the Company’s policy to obtain annual financial statements of the business of the borrower or the project for which multi-family residential real estate loans are made. The Company seeks to expand multi-family residential real estate lending.

Construction Lending. The Bank also offers residential and commercial construction loans and land acquisition and development loans. Residential construction loans are offered to individuals who are having their primary or secondary residence built, as well as to local builders to construct single-family dwellings. Residential construction advances are made on a stage of completion basis. Generally, loans to owner/occupants for the construction of residential properties are originated in conjunction with the permanent mortgage on the property. The term of the construction loans is normally from 6 to 18 months and has a variable interest rate, which is normally up to 2% above the prime interest rate. Upon completion of construction, the permanent loan rate will be set at the interest rate offered by the Bank on that loan product not sooner than 60 days prior to completion. Interest rates on residential loans to builders are set at the prime interest rate plus a margin of 0.5% to 2.0% as may be adjusted from time to time. Interest rates on commercial construction loans and land acquisition and development loans are based on the prime rate plus a negotiated margin of between 0.5% and 2.0% and adjust from time to time, with construction terms generally not exceeding 18 months. Advances are made on a percentage of completion basis. At June 30, 2009, $24.2 million, or 11%, of the Company’s loan portfolio consisted of construction loans.

Prior to making a commitment to fund a loan, the Bank requires an appraisal of the property by appraisers approved by the Board of Directors and may require a study of the feasibility of the proposed project. The Bank also reviews and inspects each project at the commencement of construction and prior to payment of draw requests during the term of the construction loan. Dependent upon market forces, the Bank generally charges a loan fee between 1% and 2%.

Construction financing generally is considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate and the borrower is unable to meet the Bank’s requirements of putting up additional funds to cover extra costs or change orders, then the Bank will demand that the loan be paid off and, if necessary, institute foreclosure proceedings, or refinance the loan. If the estimate of value proves to be inaccurate, the Bank may be confronted, at or prior to the maturity of the loan, with collateral having a value that is insufficient to assure full repayment. The Bank has sought to minimize this risk by limiting construction lending to qualified borrowers (i.e., borrowers who satisfy all credit requirements and whose loans satisfy all other underwriting standards which would apply to the Bank’s permanent mortgage loan financing for the subject property) in the Bank’s market area. On loans to builders, the Bank works only with selected builders with whom it has experience and carefully monitors the creditworthiness of the builders.

Commercial Real Estate Lending. The Company’s commercial real estate loan portfolio consists of loans to finance the acquisition of small office buildings, shopping centers and commercial and industrial buildings. Such loans generally range in size from $100,000 to $2.0 million. At June 30, 2009, the Company had $49.2 million of commercial real estate loans, which amounted to 22% of the Company’s gross loan portfolio at such date. Commercial real estate loans are typically originated on an adjustable-rate basis with terms of up to 25 years or are amortized over a maximum of 25 years with a maturity generally of three to ten years, and are underwritten with loan-to-value ratios of up to 80% of the lesser of the appraised value or the purchase price of the property. Because of the inherently greater risk involved in this type of lending, the Company generally limits its commercial real estate lending to borrowers within its market area or with which it has had prior experience. The Company seeks to expand commercial real estate lending.

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Commercial real estate lending entails additional risks as compared with single-family residential property lending. Commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers. The payment experience on such loans typically is dependent on the successful operation of the real estate project, retail establishment or business. These risks can be significantly impacted by supply and demand conditions in the market for office, retail and residential space, and, as such, may be subject to a greater extent to adverse conditions in the economy generally. To minimize these risks, the Company generally limits itself to its market area or to borrowers with which it has prior experience or who are otherwise known to the Company. It has been the Company’s policy to obtain annual financial statements of the business of the borrower or the project for which commercial real estate loans are made. In addition, in the case of commercial mortgage loans made to a partnership or a corporation, the Company seeks, whenever possible, to obtain personal guarantees and annual financial statements of the principals of the partnership or corporation.

Consumer Lending. The consumer loans currently in the Company’s loan portfolio consist of home improvement loans, home equity loans, loans secured by savings deposits and overdraft protection for checking accounts and other consumer loans. At June 30, 2009, consumer and other loans totaled $18.4 million, or 8%, of the Company’s gross loan portfolio.

In July 1995, the Company instituted a home improvement loan program. Such loans are made to finance a variety of other home improvement projects, such as replacement windows, siding and room additions. The Company’s policy is to originate home improvement loans throughout Maryland, Virginia, Delaware, New Jersey and Southern Pennsylvania. While the Company originates some home improvement loans on a direct basis, most of the home improvement loans in the Company’s portfolio are originated on an indirect basis through the Company’s relationships with selected independent contractors. The Company’s underwriting policies apply to all home improvement loans whether or not directly originated by the Company. Home improvement loans generally have terms ranging from three to 10 years and have fixed interest rates. Home improvement loans are made on both secured and unsecured basis. However, the majority of home improvement loans with a principal loan amount over $10,000 or which have a term longer than 84 months are made on a secured basis with loan-to-value ratios up to 80% or 90%, depending on the type of project financed. At June 30, 2009, home improvement loans amounted to $10.1 million, or 5%, of the Company’s loan portfolio, with $1.0 million of such loans being secured by real estate.

Consumer lending affords the Company the opportunity to earn yields higher than those obtainable with other types of lending. However, consumer loans entail greater risk than do other loans, particularly in the case of loans that are unsecured or secured by rapidly depreciable assets. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by events such as job loss, divorce, illness or personal bankruptcy.

Commercial Lending. The Bank’s commercial loans consist of commercial business loans and the financing of lease transactions, which may not be secured by real estate.

At June 30, 2009, the Company’s commercial loans, excluding leases, totaled $54.2 million, or 24%, of the Company’s loan portfolio. This commercial lending program employs many of the alternative financing and guarantee programs available through the U.S. Small Business Administration and other state and local economic development agencies.

The Bank originates commercial business loans to small and medium-sized businesses in its market area. The Bank’s commercial business loans may be structured as term loans, lines of credit, or mortgages. The Bank’s commercial borrowers are generally small businesses engaged in manufacturing, distribution or retailing, or professionals in healthcare, accounting and law. Commercial business loans are generally made to finance the purchase of inventory, new or used commercial business assets or for short-term working capital, or the purchase of real estate to be occupied by the operating company. Such loans generally are secured by business assets and, when applicable, cross-collateralized by a real estate lien, although commercial business loans are sometimes granted on an unsecured basis. Such loans are generally made for terms of seven years or less, depending on the purpose of the loan and the

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collateral. Interest rates on commercial business loans and lines of credit are either fixed for the term of the loan or adjusted periodically. Generally, commercial business loans are made in amounts ranging between $10,000 and $2.0 million.

The Bank underwrites its commercial business loans on the basis of the borrower’s cash flow and ability to service the debt from earnings and the Bank seeks to structure such loans to have more than one source of repayment. The borrower is required to provide the Bank with sufficient information to allow the Bank to make its lending determination. In most instances, this information consists of at least two years of financial statements, a statement of projected cash flows, current financial information on any guarantor and any additional information on the collateral. For loans with maturities exceeding one year, the Bank requires that borrowers and guarantors provide updated financial information at least annually throughout the term of the loan.

Commercial business term loans are generally made to finance the purchase of assets and have maturities of five years or less. Commercial business lines of credit are typically made for the purpose of providing working capital and are usually approved with a term of 12 months and are reviewed at that time to determine if extension is warranted. The Bank also offers standby letters of credit for its commercial borrowers. The terms of standby letters of credit generally do not exceed one year but may contain a renewal option.

Commercial business loans are often larger and may involve greater risk than other types of lending. Because payments on such loans are often dependent on successful operation of the business involved, repayment of such loans may be subject to a greater extent to adverse conditions in the economy. The Bank seeks to minimize these risks through its underwriting guidelines, which require that the loan be supported by adequate cash flow of the borrower, profitability of the business, collateral and personal guarantees of the individuals in the business. In addition, the Bank generally limits this type of lending to its market area and to borrowers with which it has prior experience or who are otherwise well known to the Bank.

The Company offered loans to finance lease transactions, secured by the lease and the underlying equipment, to businesses of various size through its subsidiary, Prime Business Leasing. In extending the financing in a commercial lease transaction, the Company reviewed the borrower’s financial statements, credit reports, tax returns and other documentation. Generally, commercial lease financing were made in amounts ranging between $3,000 and $120,000 with terms of up to five years and carry fixed interest rates. Note that in October 2008, management made a strategic decision to cease origination of leases. At June 30, 2009, the remaining portfolio of commercial lease finance transaction loans totaled $12.6 million, or 6%, of the Company’s loan portfolio.

Loan Fees and Servicing. The Company receives fees in connection with late payments and for miscellaneous services related to its loans. The Company also charges fees in connection with loan originations typically up to two points (one point being equal to 1% of the loan amount) on real estate loan originations. The Company generally does not service loans for others. The Company has sold participating interests on residential, commercial real estate and commercial business loans to other local financial institutions. At June 30, 2009, the Company was servicing these participation interests for others totaling approximately $19.9 million.

Nonperforming Loans and Other Problem Assets. It is management’s policy to continually monitor its loan portfolio to anticipate and address potential and actual delinquencies. When a borrower fails to make a payment on a loan, the Company takes immediate steps to have the delinquency cured and the loan restored to current status. Loans, which are delinquent between ten and 15 days, depending on the type of loan, typically incur a late fee of 5% of principal and interest due. As a matter of policy, the Company will contact the borrower after the date the late payment is due. If payment is not promptly received, the borrower is contacted again, and efforts are made to formulate an affirmative plan to cure the delinquency. Generally, after any loan is delinquent 90 days or more, formal legal proceedings are commenced to collect amounts owed.

Loans generally are placed on nonaccrual status if the loan becomes past due more than 90 days, except in instances where in management’s judgment there is no doubt as to full collectibility of principal and interest. At June 30, 2009, all loans past due more than 90 days were on nonaccrual. Consumer loans are generally charged off after they become more than 90 days past due. All other loans are charged off when management concludes that they are uncollectible. See Notes 1 and 3 of the Notes to Consolidated Financial Statements.

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Real estate acquired by the Company as a result of foreclosure is classified as real estate acquired through foreclosure until such time as it is sold. When such property is acquired, it is initially recorded at the estimated fair value less costs to sell, establishing a new cost basis. Subsequent to acquisition, the property is carried at the lower of cost or fair value less estimated costs to sell. Fair value is defined as the amount in cash or cash-equivalent value or other consideration that a real estate parcel would yield in a current sale between a willing buyer and a willing seller, as measured by market transactions. If a market does not exist, fair value of the item is estimated based on selling prices of similar items in active markets or, if there are no active markets for similar items, by discounting a forecast of expected cash flows at a rate commensurate with the risk involved. Fair value is generally determined through an appraisal at the time of foreclosure. Any required write-down of the loan to its fair value upon foreclosure is charged against the allowance for loan losses, with subsequent write-downs reflected in other expense. See Note 1 of the Notes to Consolidated Financial Statements.

Investment Activities

General. The Company makes investments in order to maintain the levels of liquid assets preferred by regulatory authorities and manage cash flow, diversify its assets, obtain yield and to satisfy certain requirements for favorable tax treatment. The investment activities of the Company consist primarily of investments in mortgage-backed securities and other investment securities. Typical investments include federally sponsored agency mortgage pass-through, federally sponsored agency debt securities, U.S. treasury obligations and investment grade corporate securities. Investment and aggregate investment limitations and credit quality parameters of each class of investment are prescribed in the Company’s investment policy. The Company performs analyses on securities prior to purchase and on an ongoing basis to determine the impact on earnings and market value under various interest rate and prepayment conditions. Senior management and the Company’s Asset/Liability Management Committee have limited authority to sell investment securities and purchase comparable investment securities with similar characteristics. The Board of Directors reviews all securities transactions on a monthly basis.

Under applicable accounting rules, investment securities classified as held-to-maturity are recorded at amortized cost and those classified as available for sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity. At June 30, 2009, the Company’s entire portfolio of investment securities was classified as available for sale and had an aggregate carrying value of $16.1 million and an unrealized net loss after tax of $12,000. Management of the Company currently does not anticipate that the presence of unrealized losses in the Company’s portfolio of investment securities and mortgage-backed securities is likely to have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

Deposit Activity and Other Sources of Funds

General. Deposits are the primary source of the Company’s funds for lending, investment activities and general operational purposes. In addition to deposits, the Company derives funds from loan principal and interest repayments, maturities of investment securities and mortgage-backed securities and interest payments thereon. Although loan repayments are a relatively stable source of funds, deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds, or on a long-term basis for general operational purposes. The Bank may borrow from the Federal Home Loan Bank of Atlanta and Pacific Coast Bankers Bank.

Deposits. The Company attracts deposits principally from within its market area by offering a variety of deposit instruments, including checking accounts, Christmas Club accounts, money market accounts, statement and passbook savings accounts, Individual Retirement Accounts, and certificates of deposit which range in maturity from seven days to 66 months. Deposit terms vary according to the minimum balance required, the length of time the funds must remain on deposit, and the interest rate. Maturities, terms, service fees and withdrawal penalties for its deposit accounts are established by the Company on a periodic basis. The Company reviews its deposit mix and pricing on a weekly basis. In determining the characteristics of its deposit accounts, the Company considers the rates offered by competing institutions, lending and liquidity requirements, growth goals and federal regulations. Management believes it prices its deposits comparably to rates offered by its competitors.

The Company attempts to compete for deposits with other institutions in its market area by offering competitively priced deposit instruments that are tailored to the needs of its customers. Additionally, the Company

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seeks to meet customers’ needs by providing convenient customer service to the community, efficient staff and convenient hours of service. Substantially all of the Company’s depositors are Maryland residents. To provide additional convenience, the Company participates in the STAR Automatic Teller Machine network at locations throughout the United States, through which customers can gain access to their accounts at any time.

Borrowings. While deposits historically have been the primary source of funds for the Company’s lending, investments and general operating activities, the Bank utilizes advances from the Federal Home Loan Bank of Atlanta to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The Federal Home Loan Bank of Atlanta functions as a central reserve bank providing credit for member financial institutions. As a member of the Federal Home Loan Bank System, the Bank is required to own stock in the Federal Home Loan Bank of Atlanta and is authorized to apply for advances. Advances are pursuant to several different programs, each of which has its own interest rate and range of maturities. The Bank has a Blanket Agreement for advances with the Federal Home Loan Bank under which the Bank may borrow up to 25% of assets subject to normal collateral and underwriting requirements. As of August 1, 2008, this borrowing limit increased to 30% of assets. Advances from the Federal Home Loan Bank of Atlanta are secured by the Bank’s stock in the Federal Home Loan Bank of Atlanta and other eligible assets. At June 30, 2009, the Company had outstanding Federal Home Loan Bank of Atlanta advances of $34.3 million with an average rate of 3.56%.

Troubled Asset Relief Program Capital Purchase Program

On December 19, 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, the Company sold to the U.S. Department of the Treasury (“Treasury”) 6,000 shares of its Series A cumulative perpetual preferred stock and a warrant for the purchase of 300 shares of its Series B cumulative perpetual preferred stock, for an aggregate purchase price of $6.0 million in cash. Contemporaneously with that transaction, Treasury exercised its warrant and received 300 shares of Series B cumulative perpetual preferred stock. The TARP Capital Purchase Program is a voluntary program for healthy U.S. financial institutions designed to encourage these institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the weakened U.S. economy. Participation in this program provided an additional source of funds to the Bank during the fiscal year ended June 30, 2009.

Subsidiary Activities

The Bank has three subsidiaries, PFSL Holding Corp. (“PFSL”), which it formed in November 1995 to hold certain real estate owned at that time and which is currently inactive, Prime Business Leasing that was formed in October 1998 and is discussed under commercial lending and Patapsco Financial Services, Inc., which was formed in March 2000 in order to sell alternative investment products to the Company’s customers.

Competition

The Company faces strong competition both in originating loans and in attracting deposits. The Company competes for loans principally on the basis of interest rates, the types of loans it originates, the deposit products it offers and the quality of services it provides to borrowers. The Company also competes by offering products that are tailored to the local community. Its competition in originating loans comes primarily from other commercial banks, savings institutions and mortgage bankers, credit unions and finance companies. The regulatory environment in which the Company and the Bank operate is subject to change and such changes may adversely affect operating results.

Management considers its market area for gathering deposits to be eastern Baltimore County, Baltimore City, and Harford County in Maryland. The Company originates loans throughout much of the Mid-Atlantic area. The Company attracts its deposits through its offices in Dundalk, Parkville, Carney, Hampden and Glen Arm primarily from the local community. Consequently, competition for deposits is principally from other commercial banks, savings institutions, credit unions, mutual funds and brokers in the local community. The Company competes for deposits and loans by offering what it believes to be a variety of deposit accounts at competitive rates, convenient business hours, a commitment to outstanding customer service and a well-trained staff.

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Employees

As of June 30, 2009, the Company had 67 full-time and 14 part-time employees, none of who were represented by a collective bargaining agreement. Management considers the Company’s relationships with its employees to be good.

Depository Institution Regulation

General. The Bank is a Maryland commercial bank and its deposit accounts are insured by the Deposit Insurance Fund (“DIF”) administered by the Federal Deposit Insurance Corporation (“FDIC”). The Bank also is a member of the Federal Reserve System. The Bank is subject to supervision, examination and regulation by the State of Maryland Commissioner of Financial Regulation (“Commissioner”), the Federal Reserve Board, Maryland and federal statutory and regulatory provisions governing such matters as capital standards, mergers and establishment of branch offices, and it is subject to the FDIC’s authority to conduct special examinations. The Bank is required to file reports with the Commissioner and the Federal Reserve Board concerning its activities and financial condition and is required to obtain regulatory approvals prior to entering into certain transactions, including mergers with, or acquisitions of, other depository institutions.

The system of regulation and supervision applicable to the Bank establishes a comprehensive framework for the operations of the Bank and is intended primarily for the protection of the FDIC and the depositors of the Bank. Changes in the regulatory framework could have a material effect on the Bank and their respective operations that in turn, could have a material adverse effect on the Company.

Business Activities. The Commissioner regulates the Bank’s internal organization as well as its deposit, lending and investment activities. The basic authority for the Bank’s activities is specified by Maryland law. Additionally, Maryland law contains a parity statute by which Maryland commercial banks may, with the approval of the Commissioner, engage in any additional activity, service or practice permitted for national banks.

The Federal Reserve and FDIC also regulate many of the areas regulated by the Commissioner and federal law may limit some of the authority provided to the Bank by Maryland law. Approval of the Commissioner and the Federal Reserve is required for, among other things, business combinations and the establishment of branch offices.

Capital Requirements. The Bank is subject to Federal Reserve Board capital requirements, as well as statutory capital requirements imposed under Maryland law. Federal Reserve Board regulations establish two capital standards for state-chartered banks that are members of the Federal Reserve System (“state member banks”): a leverage requirement and a risk-based capital requirement. In addition, the Federal Reserve may, on a case-by-case basis, establish individual minimum capital requirements for a bank that vary from the requirements that would otherwise apply under Federal Reserve Board regulations. A bank that fails to satisfy the capital requirements established under the Federal Reserve Board’s regulations will be subject to such administrative action or sanctions as the Federal Reserve Board deems appropriate.

The leverage ratio adopted by the Federal Reserve Board requires a minimum ratio of “Tier 1 capital” to adjusted total assets of 3% for banks rated composite 1 under the CAMELS examination rating system for banks. Banks not rated composite 1 under the CAMELS rating system for banks are required to maintain a minimum ratio of Tier 1 capital to adjusted total assets of at least 4%. Additional capital may be necessary for institutions with supervisory, financial, operational or managerial weaknesses, as well as institutions experiencing significant growth. For purposes of the Federal Reserve Board’s leverage requirement, Tier 1 capital consists primarily of common stockholders’ equity, certain perpetual preferred stock (which must be noncumulative with respect to banks), and minority interests in the equity accounts of consolidated subsidiaries; less most intangible assets, except for specified servicing assets and purchased credit card receivables and other specified deductions.

The risk-based capital requirements established by the Federal Reserve Board’s regulations require state member banks to maintain “total capital” equal to at least 8% of total risk-weighted assets. For purposes of the risk-based capital requirement, “total capital” means Tier 1 capital (as described above) plus “Tier 2 capital” (as described below), provided that the amount of Tier 2 capital may not exceed the amount of Tier 1 capital, less certain assets. Tier 2 capital elements include, subject to certain limitations, the allowance for losses on loans and leases, perpetual preferred stock that does not qualify for Tier 1 and long-term preferred stock with an original maturity of at least 20

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years from issuance, hybrid capital instruments, including perpetual debt and mandatory convertible securities, and subordinated debt and intermediate-term preferred stock and up to 45% of unrealized gains on equity securities. Total risk-weighted assets are determined under the Federal Reserve Board’s regulations, which generally establish four risk categories, with general risk weights of 0%, 20%, 50% and 100%, based on the risk believed inherent to the type of loan involved.

In addition, the Bank is subject to the statutory capital requirements imposed by the State of Maryland. Under Maryland statutory law, if the surplus of a Maryland commercial bank at any time is less than 100% of its capital stock, then, until the surplus is 100% of the capital stock, the commercial bank: (i) must transfer to its surplus annually at least 10% of its net earnings; and (ii) may not declare or pay any cash dividends that exceed 90% of its net earnings.

The table below provides information with respect to the Bank’s compliance with its regulatory capital requirements at the dates indicated.

	Actual				Regulatory Requirements for Capital Adequacy Purposes			Regulatory Requirements to be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount	Ratio		Amount		Ratio
	(Dollars in thousands)
As of June 30, 2009:
Total Capital (to Risk Weighted Assets)	$	23,933	11.58	%	$16,536	8.00	%	$	20,670	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		21,359	10.33		8,268	4.00			12,402	6.00
Tier 1 Leverage		21,359	7.98		10,701	4.00			13,377	5.00
As of June 30, 2008:
Total Capital (to Risk Weighted Assets)	$	21,585	10.45	%	$16,532	8.00	%	$	20,665	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		19,572	9.56		8,266	4.00			12,399	6.00
Tier 1 Leverage		19,572	7.63		10,352	4.00			12,940	5.00

Prompt Corrective Regulatory Action. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), the federal banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy certain minimum capital requirements. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees if the institution would thereafter fail to satisfy the minimum levels for any of its capital requirements. An institution that fails to meet the minimum level for any relevant capital measure (an “undercapitalized institution”) may be, among other things, subject to increased monitoring by the appropriate federal banking regulator, required to submit an acceptable capital restoration plan within 45 days and are subject to asset growth limits. The capital restoration plan must include a guarantee by the institution’s holding company that the institution will comply with the plan until it has been adequately capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5% of the institution’s total assets or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan. A “significantly undercapitalized” institution, as well as any undercapitalized institution that did not submit an acceptable capital restoration plan, may be subject to regulatory demands for recapitalization, broader application of restrictions on transactions with affiliates, limitations on interest rates paid on deposits, asset growth and other activities, possible replacement of directors and officers, and restrictions on capital distributions by any bank holding company controlling the institution. Any company controlling the institution could also be required to divest the institution or the institution could be required to divest subsidiaries. In their discretion, the federal banking regulators may also impose the foregoing sanctions on an undercapitalized institution if the regulators determine that such actions are necessary to carry out the purposes of the prompt corrective action provisions. If an institution’s ratio of tangible capital to total assets falls below a “critical capital level,” the institution will be subject to conservatorship or receivership within 90 days unless periodic determinations are made that forbearance from such action would better protect the deposit insurance fund. Unless appropriate findings and certifications are made by the appropriate federal bank regulatory agencies, a critically undercapitalized institution must be placed in receivership if it remains critically undercapitalized on average during the calendar quarter beginning 270 days after the date it became critically undercapitalized.

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For purposes of these restrictions, an “undercapitalized institution” is a depository institution that has (i) a total risk-based capital ratio less than 8.0%; or (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0% (or less than 3.0% if the institution has a composite 1 CAMELS rating). A “significantly undercapitalized” institution is defined as a depository institution that has: (i) a total risk-based capital ratio of less than 6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage ratio of less than 3.0%. A “critically undercapitalized” institution is defined as a depository institution that has a ratio of “tangible equity” to total assets of less than 2.0%. The appropriate federal banking agency may reclassify a well capitalized depository institution as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with the supervisory actions applicable to institutions in the next lower capital category (but may not reclassify a significantly undercapitalized institution as critically under-capitalized) if it determines, after notice and an opportunity for a hearing, that the institution is in an unsafe or unsound condition or that the institution has received and not corrected a less-than-satisfactory rating for any examination rating category. At June 30, 2009, the Bank was classified as well capitalized under Federal Reserve regulations.

Safety and Soundness Guidelines. Under FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994, each federal banking agency was required to establish safety and soundness standards for institutions under its authority. The federal banking agencies, including the Federal Reserve Board, have released Interagency Guidelines Establishing Standards for Safety and Soundness. The guidelines require depository institutions to maintain internal controls and information systems and internal audit systems that are appropriate for the size, nature and scope of the institution’s business, establish certain basic standards for loan documentation, credit underwriting, asset quality, capital adequacy, earnings, interest rate risk exposure and asset growth, information security and further provide that depository institutions should maintain safeguards to prevent the payment of compensation, fees and benefits that are excessive or that could lead to material financial loss. If the appropriate federal banking agency determines that a depository institution is not in compliance with the safety and soundness guidelines, it may require the institution to submit an acceptable plan to achieve compliance with the guidelines. Failure to submit or implement a compliance plan may subject the institution to regulatory sanctions.

Federal Home Loan Bank System. The Federal Home Loan Bank System consists of 12 district Federal Home Loan Banks. The Federal Home Loan Banks provide a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of Atlanta, the Bank is required to acquire and hold specified amounts of capital stock in that Federal Home Loan Bank. The Bank was in compliance with this requirement with an investment in Federal Home Loan Bank of Atlanta stock at June 30, 2009 of $2.3 million.

Federal Reserve System. Pursuant to regulations of the Federal Reserve Board, a financial institution must maintain average daily reserves equal to 3% on transaction accounts of between $10.3 million and $44.4 million, plus 10% on the remainder. The first $10.3 million of transaction accounts are exempt. These percentages are subject to adjustment by the Federal Reserve Board. Because required reserves must be maintained in the form of vault cash or in a noninterest-bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution’s interest-earning assets. As of June 30, 2009, the Bank met its reserve requirements.

The monetary policies and regulations of the Federal Reserve Board have a significant effect on the operating results of commercial banks. The Federal Reserve Board’s policies affect the levels of bank loans, investments and deposits through its open market operation in United States government securities, its regulation of the interest rate on borrowings from Federal Reserve Banks and its imposition of nonearning reserve requirements on all depository institutions, such as the Bank, that maintain transaction accounts or non-personal time deposits.

Insurance of Deposit Accounts. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The Deposit Insurance Fund is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006. Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors with less risky institutions paying lower assessments. For 2008, assessments ranged from five to forty-three basis points of assessable deposits. Due to losses incurred by the Deposit Insurance Fund in 2008 from failed institutions, and anticipated future losses, the FDIC, pursuant to a Restoration Plan to replenish the fund, adopted an across the board seven basis point increase in the assessment range for the first quarter of 2009. The FDIC has adopted further refinements to its risk-based assessment that were effective April 1, 2009 and effectively make the range 7 to 77 ¹/2 basis points. The FDIC has imposed on all insured institutions a special emergency assessment of 5 basis points of total assets less Tier 1 capital as of June 30, 2009 (capped at 10 basis points of the institution’s deposit

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assessment base on the same date) in order to cover losses to the Deposit Insurance Fund and has alluded to the possibility of additional special assessments of up to 5 basis points of total assets less Tier 1 capital per quarter (subject to the same cap) for the remaining two quarters of 2009 if deemed necessary. The FDIC may adjust the assessment scale uniformly from one quarter to the next, except that no adjustment can deviate more than three basis points from the base scale without notice and comment rulemaking. No institution may pay a dividend if in default of the federal deposit insurance assessment.

Due to the recent difficult economic conditions, deposit insurance per account owner has been raised to $250,000 for all types of accounts until January 1, 2014. In addition, the FDIC adopted an optional Temporary Liquidity Guarantee Program by which, for a fee, noninterest-bearing transaction accounts would receive unlimited insurance coverage until December 31, 2009 and certain senior unsecured debt issued by institutions and their holding companies would be temporarily guaranteed by the FDIC. The Bank made the business decision to participate in the unlimited noninterest-bearing transaction account coverage and the Bank and the Company opted to not participate in the unsecured debt guarantee program.

The Reform Act also provided for the possibility that the FDIC may pay dividends to insured institutions once the Deposit Insurance Fund reserve ratio equals or exceeds 1.35% of estimated insured deposits.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. This payment is established quarterly and during the four quarters ended June 30, 2009 averaged 1.1 basis points of assessable deposits.

The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future although increases are likely given recent bank failures and increases in the numbers of problem institutions.

Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.

Dividend Restrictions. The Bank’s ability to pay dividends is governed by Maryland law and the regulations of the Federal Reserve Board. Maryland law provides that dividends may be paid out of individual profits or with approval of the Commissioner, surplus of 100% of capital stock. Under Maryland law relating to financial institutions, if the surplus of a commercial bank at any time is less than 100% of its capital stock, then, until the surplus is 100% of the capital stock, the commercial bank: (i) must transfer to its surplus annually at least 10% of its net earnings; and (ii) may not declare or pay any cash dividends that exceed 90% of its net earnings.

The Bank’s payment of dividends is also subject to the Federal Reserve Board’s Regulation H, which provides that a state member bank may not pay a dividend if the total of all dividends declared by the bank in any calendar year exceeds the total of its net profits for the year combined with its retained net profits for the preceding two calendar years, less any required transfers to surplus or to a fund for the retirement of preferred stock, unless the bank has received the prior approval of the Federal Reserve Board. The previously referenced prompt corrective action requirements prohibit dividends where the Bank would be “undercapitalized”, “significantly undercapitalized”, or “critically undercapitalized” after the dividend. Additionally, both the Commissioner and the Federal Reserve Board has the authority to prohibit the payment of dividends by a Maryland commercial bank when it determines such payment to be an unsafe and unsound banking practice. Finally, the Bank is not able to pay dividends on its capital stock if its regulatory capital would thereby be reduced below the remaining balance of the liquidation account established in connection with its conversion in April 1996 from mutual to stock form. See Note 9 of the Notes to Consolidated Financial Statements appearing in Item 7 of this Annual Report on Form 10-K.

In addition, under the terms of the TARP Capital Purchase Program, (1) prior to the earlier of (a) December 5, 2011, or (b) the date on which all of the Company’s preferred shares held by Treasury have been redeemed in full, the Company cannot increase its quarterly cash dividend above $0.07 per common share; (2) during the period beginning on December 6, 2011 and ending on the earlier of (a) December 5, 2018 or (b) the date on which the preferred shares held by Treasury have been redeemed in full or the Treasury has transferred all its preferred shares to non-affiliates,

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Treasury’s consent shall be required for any increase in aggregate common dividends per share greater than 3% per annum; and (3) during the period beginning on December 6, 2018 and ending on the date on which all of the preferred shares held by Treasury have been redeemed in full or the Treasury has transferred all of its preferred shares to non-affiliates, the Company, without the consent of the Treasury, cannot pay any cash dividends.

Uniform Lending Standards. Under Federal Reserve Board regulations, state member banks must adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards, including loan-to-value limits that are clear and measurable, loan administration procedures and documentation, approval and reporting requirements. The real estate lending policies of state member banks must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies (the “Interagency Guidelines”) that have been adopted by the federal banking agencies.

Management will periodically evaluate its lending policies to assure conformity to the Interagency Guidelines and does not anticipate that the Interagency Guidelines have a material effect on its lending activities.

Limits on Loans to One Borrower. The Bank has chosen to be subject to federal law with respect to limits on loans to one borrower. Generally, under federal law, the maximum amount that a commercial bank may loan to one borrower at one time may not exceed 15% of the unimpaired capital and surplus of the commercial bank, plus an additional 10% if secured by specified “readily marketable collateral.” The Bank’s lending limit to one borrower as of June 30, 2009 was $3.7 million.

Transactions with Related Parties. Transactions between a state member bank and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a state member bank is any company or entity, which controls, is controlled by or is under common control with the state member bank. In a holding company context, at a minimum, the parent holding company of a state member bank and any companies which are controlled by such parent holding company are affiliates of the state member bank. Generally, Sections 23A and 23B (i) limit the extent to which an institution or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus, and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a nonaffiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions. Certain types of covered transactions must be collateralized according to a schedule set forth in the statute based on the type of collateral.

State member banks are also subject to the restrictions contained in Section 22(h) of the Federal Reserve Act and the Federal Reserve’s Regulation O on loans to executive officers, directors and principal stockholders (“insiders”). Under Section 22(h), aggregate loans to directors, executive officers and greater than 10% stockholders may not exceed the institution’s unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans, above amounts prescribed by the appropriate federal banking agency, to insiders of a state member bank, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the institution with any “interested” director not participating in the voting. Regulation O prescribes the loan amount (which includes all other outstanding loans to such person) as to which prior board of director approval is required as being the greater of $25,000 or 5% of capital and surplus; however loans aggregating to $500,000 or more always require such approval. Further, Section 22(h) requires that loans to insiders be made on terms substantially the same as offered in comparable transactions to other persons with an exception for loans made to a bank-wide benefit or compensation program that does not give preference to insiders. Section 22(g) of the Federal Reserve Act places further restrictions on the types of loans that can be made to executive officers.

Additionally, Maryland statutory law imposes restrictions on certain transactions with affiliated persons of Maryland commercial banks. Generally, under Maryland law, a director, officer or employee of a commercial bank may not borrow, directly or indirectly, any money from the bank, unless the loan has been approved by a resolution adopted at and recorded in the minutes of the board of directors of the bank, or the executive committee of the bank, if that committee is authorized to make loans. If such a loan is approved by the executive committee, the loan approval must be reported to the board of directors at its next meeting. Certain commercial loans made to non-employee directors of a bank and certain consumer loans made to nonofficer and nondirector employees of the bank are exempt from the statute’s coverage.

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Enforcement. The Federal Reserve has primary federal enforcement responsibility over member banks and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution or receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The FDIC has the authority to recommend to the Federal Reserve Board that enforcement action to be taken with respect to a particular savings institution. If action is not taken by the Federal Reserve Board, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.

The Commissioner has extensive enforcement authority over Maryland banks. Such authority includes the ability to issue cease and desist orders and civil money penalties and to remove directors or officers. The Commissioner may also take possession of a Maryland bank whose capital is impaired and seek to have a receiver appointed by a court.

Regulation of the Company

General. The Company, as the sole shareholder of the Bank, is a bank holding company and is registered as such with the Federal Reserve Board. Bank holding companies are subject to comprehensive regulation and examination by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and the regulations of the Federal Reserve Board. The Federal Reserve Board also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices.

Under the BHCA, a bank holding company must obtain Federal Reserve Board approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company. In evaluating such applications, the Federal Reserve Board considers a variety of financial, managerial and competitive factors.

The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve Board regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks. The list of activities includes, among other things, operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers.

The Gramm-Leach-Bliley Act of 1999 authorized bank holding companies that meet certain management, capital and other criteria to choose to become a “financial holding company” and thereby engage in a broader array of financial activities including insurance underwriting and investment banking. The Company has not, up to now, opted to become a financial holding company.

Acquisitions of Bank Holding Companies and Banks. Under the BHCA, any company must obtain approval of the Federal Reserve Board prior to acquiring control of the Company or the Bank. For purposes of the BHCA, control is defined as ownership of more than 25% of any class of voting securities of the Company or the Bank, the ability to control the election of a majority of the directors, or the exercise of a controlling influence over management or policies of the Company or the Bank. Any bank holding company must secure Federal Reserve Board approval prior to acquiring 5% or more of the stock of the Company or the Bank.

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The Change in Bank Control Act and the related regulations of the Federal Reserve Board require any person or persons acting in concert (except for companies required to make application under the BHCA), to file a written notice with the Federal Reserve Board before such person or persons may acquire control of the Company or the Bank. The Change in Bank Control Act presumes control as the power, directly or indirectly, to vote 10% or more of any voting securities or to direct the management or policies of a bank holding company, such as the Company, that has securities registered under the Securities Exchange Act of 1934.

Under Maryland law, acquisitions of 25% or more of the voting stock of a commercial bank or a bank holding company and other acquisitions of voting stock of such entities which affect the power to direct or to cause the direction of the management or policy of a commercial bank or a bank holding company must be approved in advance by the Commissioner. Any person proposing to make such an acquisition must file an application with the Commissioner at least 60 days before the acquisition becomes effective. The Commissioner may deny approval of any such acquisition if the Commissioner determines that the acquisition is anticompetitive or threatens the safety or soundness of a banking institution. Any voting stock acquired without the approval required under the statute may not be voted for a period of five years. This restriction is not applicable to certain acquisitions by bank holding companies of 5% or more of the stock of Maryland banks or Maryland bank holding companies which are governed by Maryland’s holding company statute and also require prior approval of the Commissioner.

Dividends. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the company’s capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the Federal Reserve Board pursuant to FDICIA, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.” See “Depository Institution Regulation — Prompt Corrective Regulatory Action.”

In addition, under the terms of the TARP Capital Purchase Program, prior to the earlier of (1) December 5, 2011, or (ii) the date on which all of the Company’s preferred shares held by Treasury have been redeemed in full, the Company cannot increase its quarterly cash dividend above $0.07 per common share.

Capital Requirements. The Federal Reserve Board has established capital requirements generally similar to the capital requirements for state member banks described above, for bank holding companies. Formerly, these were applied to bank holding companies with total assets of $150 million or above, including the Company. However, in 2007, the Federal Reserve Board raised the threshold for the applicability of its capital requirements to a $500 million asset size except where the company (i) engages in significant non-banking activities; (ii) conducts significant off balance sheet activities or has a material amount of debt or equity securities outstanding registered with the Securities Exchange Commission. The Federal Reserve Board has reserved the right to apply its requirements to bank holding companies of any size when required for supervisory purposes.

Stock Repurchases. As a bank holding company, the Company is required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would violate any law, regulation, Federal Reserve Board order, directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. This requirement does not apply to bank holding companies that are “well-capitalized,” received one of the two highest examination ratings at their last examination and are not the subject of any unresolved supervisory issues.

15

Taxation

For fiscal year 2009, the Company’s maximum federal income tax rate was 34%. The Company and the Bank, together with the Bank’s subsidiary, to date have not filed a consolidated federal income tax return for the fiscal year ended June 30, 2009.

The Bank’s federal income tax returns have been audited through June 30, 1995. The Company’s tax returns have never been audited.

State Income Taxation. The State of Maryland imposes an income tax of approximately 7.00% on income measured substantially the same as federally taxable income, except that U.S. Government interest is not fully taxable. Effective July 1, 2008, the rate increased to 8.25%.

For additional information regarding taxation, see Note 8 of Notes to Consolidated Financial Statements.

Executive Officers Who Are Not Directors

The following sets forth information with respect to executive officers of the Bank who do not serve on the Board of Directors.

Name	Age at June 30, 2009	Title
Frank J. Duchacek, Jr.	65	Senior Vice President – Operations of the Bank
Laurence S. Mitchell	62	Senior Vice President – Lending of the Bank
William C. Wiedel, Jr.	49	Senior Vice President and Chief Financial Officer of the Company and the Bank

Frank J. Duchacek, Jr. is a Senior Vice President who joined the Company in February 1996 as its Vice President of Commercial Lending. Prior to that time, Mr. Duchacek was a credit underwriter and business development officer for First Union Bank, successor of First Fidelity Bank, N.A. From 1989 to 1993, Mr. Duchacek was a department manager for commercial lending at Provident Bank of Maryland. During the preceding 28 years, Mr. Duchacek occupied various lending and management positions with Union Trust Bank and its successor, Signet Bank, Maryland. Mr. Duchacek is a Director of Maryland Bank Services and served as a member of the Maryland Home Improvement Commission. He is active with the American Cancer Society—Relay for Life, St. John’s Episcopal Church in Kingsville, Maryland and St. John’s Chapel, Cornersville, Maryland.

Laurence S. Mitchell is a Senior Vice President who joined the Bank in November of 1999 as a commercial lending officer. Prior to joining Patapsco, Mr. Mitchell held positions in various banks relating to commercial lending and business development. He is an active member of the Harford County Chamber of Commerce, a Board member of the Baltimore County Chamber of Commerce, a member of the Leadership and Development Committee of the Maryland Bankers Association and an instructor for the Center for Financial Training Mid-Atlantic, formerly known as the American Institute of Banking. Formerly, Mr. Mitchell was a member of the Town of Bel Air Economic and Community Development Commission.

William C. Wiedel, Jr. was appointed Senior Vice President and Chief Financial Officer of the Company and the Bank in March 2008. From April 1986 to March 2008, Mr. Wiedel was employed by Provident Bank where he held a variety of financial positions. From January 2001 to March 2008, Mr. Wiedel was Senior Vice President of Financial Planning and Analysis. From January 1993 to December 2000, Mr. Wiedel was Chief Financial Officer of Provident Mortgage Corp., a wholly owned subsidiary of Provident Bank. From April 1986 to January 1993, Mr. Wiedel was Vice President and Assistant Controller of Provident Bank. From September 1981 to April 1986, Mr. Wiedel was employed by Ernst and Whinney (currently known as Ernst and Young), advancing to the level of audit manager. Mr. Wiedel is a Certified Public Accountant (“CPA”). He is a member of the American Institute of Certified Public Accountants and the Maryland Association of Certified Public Accountants.

16

Item 1A. Risk Factors

A continuation of recent turmoil in the financial markets could have an adverse effect on our financial position or results of operations.

Beginning in 2008, United States and global markets have experienced severe disruption and volatility, and general economic conditions have declined significantly. Adverse developments in credit quality, asset values and revenue opportunities throughout the financial services industry, as well as general uncertainty regarding the economic and regulatory environment, have had a marked negative impact on the industry. The United States and the governments of other countries have taken steps to try to stabilize the financial system, including investing in financial institutions, and have also been working to design and implement programs to improve general economic conditions. There can be no assurances that these efforts will be successful in restoring industry, economic or market conditions and that they will not result in adverse unintended consequences. Factors that could continue to pressure financial services companies, including the Company, are numerous and include: (1) worsening credit quality, leading among other things to increases in loan losses and reserves; (2) continued or worsening disruption and volatility in financial markets, leading among other things to continuing reductions in asset values; (3) capital and liquidity concerns regarding financial institutions generally; (4) limitations resulting from or imposed in connection with governmental actions intended to stabilize or provide additional regulation of the financial system; and/or (5) recessionary conditions that are deeper or last longer than currently anticipated.

Changes in interest rates may hurt our earnings.

Short-term market interest rates (which we use as a guide to price our deposits) have until recently risen from historically low levels, while longer-term market interest rates (which we use as a guide to price our longer-term loans) have not. This “flattening” of the market yield curve had a negative impact on our net interest margin, which reduced our profitability. Our net interest margin was 3.44% for the year ended June 30, 2009 compared to 3.51% for the year ended June 30, 2008. Over the last year, however, the U.S. Federal Reserve decreased its target for the federal funds rate from 2.00% to 0.25%. Decreases in interest rates can result in increased prepayments of loans, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such loan proceeds into lower-yielding assets, which might also negatively impact our income. Additionally, if short-term interest rates rise, and if rates on our deposits reprice upwards faster than the rates on our long-term loans and investments, we would experience compression of our net interest margin, which would have a negative effect on our profitability. For further discussion of how changes in interest rates could impact us, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Interest Rate Risk Management” in the 2009 Annual Report, filed as Exhibit 13 to this Form 10-K.

We may be more susceptible to increases in interest rates because of the relatively small amount of adjustable-rate loans currently in our portfolio and our heavy reliance on core deposits, especially our money market accounts, which reprice frequently. At June 30, 2009, $77.8 million, or 35.4% of our total loan portfolio, consisted of adjustable-rate loans. We attempt to limit our exposure to rises in interest rates through: offering adjustable-rate one-to-four family residential real estate loans; an increased focus on multi-family and commercial real estate lending, which emphasizes the origination of shorter-term adjustable-rate loans; and efforts to originate shorter-term fixed-rate loans. Our inability to successfully originate adjustable-rate multi-family and commercial real estate loans or shorter-term fixed-rate loans could result in further compression of our net interest margin in a rising interest rate environment, which could hurt our profits.

Future FDIC assessments will hurt our earnings.

In May 2009, the FDIC adopted a final rule imposing a special assessment on all insured institutions due to recent bank and savings association failures. The emergency assessment amounts to 5 basis points of total assets minus Tier 1 Capital as of June 30, 2009, and was accrued for as of June 30, 2009. Based on existing FDIC regulations the Company expects FDIC assessments in fiscal year 2010 to approximate $450,000, a $125,000 increase over fiscal year 2009. In addition, the final rule allows the FDIC to impose additional emergency special assessments of up to 5 basis points per quarter for the third and fourth quarters of calendar year 2009 if necessary to maintain public confidence in federal deposit insurance or as a result of deterioration in the deposit insurance fund reserve ratio due to institution failures. Any additional emergency special assessment imposed by the FDIC will further hurt the Company’s earnings.

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Our emphasis on multi-family and commercial lending may expose us to increased lending risks.

At June 30, 2009, $49.2 million, or 22%, of our loan portfolio consisted of multi-family and commercial real estate loans. We intend to continue our emphasis on these types of higher-yielding loans to provide us with the opportunity to increase profits. However, these types of loans generally expose a lender to greater risk of non-payment and loss than one- to- four-family residential real estate loans because repayment of the loans often depends on the successful operation of the property and the income stream of borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to- four-family residential real estate loans. Also, many of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to- four-family residential real estate loan.

Our level of nonperforming loans expose us to increased lending risks. Further, our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.

At June 30, 2009, our non-performing loans totaled $11.2 million, representing 5.1% of total loans. If these loans continue to not perform according to their terms and the collateral is insufficient to pay any remaining loan balance, we may experience loan losses, which could have a material effect on our operating results. Like all financial institutions, we maintain an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. We believe that our allowance for loan losses is maintained at a level adequate to absorb probable losses inherent in our loan portfolio as of the corresponding balance sheet date. However, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results.

In evaluating the adequacy of our allowance for loan losses, we consider numerous quantitative factors, including our historical charge-off experience, growth of our loan portfolio, changes in the composition of our loan portfolio and the volume of delinquent and classified loans. In addition, we use information about specific borrower situations, including their financial position and estimated collateral values, to estimate the risk and amount of loss for those borrowers. Finally, we also consider many qualitative factors, including general and economic business conditions, current general market collateral valuations, trends apparent in any of the factors we take into account and other matters, which are by nature more subjective and fluid. Our estimates of the risk of loss and amount of loss on any loan are complicated by the significant uncertainties surrounding our borrowers’ abilities to successfully execute their business models through changing economic environments, competitive challenges and other factors. Because of the degree of uncertainty and susceptibility of these factors to change, our actual losses may vary from our current estimates.

At June 30, 2009, our allowance for loan losses as a percentage of total loans was 1.37%. Our regulators, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to increase our allowance for loan losses by recognizing additional provisions for loan losses charged to expense, or to decrease our allowance for loan losses by recognizing loan charge-offs, net of recoveries. Any such additional provisions for loan losses or charge-offs, as required by these regulatory agencies, could have a material adverse effect on our financial condition and results of operations.

The Bank may be forced to accept administrative decisions with respect to certain participation loans that might not be in the Bank’s best interests and that could cause it to experience losses with respect to such loans that might be larger than it might otherwise incur on a similar portfolio of distressed loans where it was the lead lender.

At June 30, 2009, the Bank had approximately $4.9 million in participation loans originated by a bank that has since been placed into receivership, with the FDIC appointed as receiver. Approximately $3.2 million of these loans were classified as nonaccrual loans at June 30, 2009. The assets and liabilities of that bank, including the loan participations in which the Bank has participation interests, have been sold to a successor bank. That successor bank may have financial interests that differ from those of the Bank with respect to the participation loans, and in $429,000 of those loans has the sole right to administer the loan, which includes the right to make decisions with respect to the disposition of collateral securing the loans. As a result the Bank may be forced to accept administrative decisions with respect to such loans that might not be in the Bank’s best interests and that could cause it to experience losses with respect to such loans that might be larger than it might otherwise incur on a similar portfolio of distressed loans where it was the lead lender.

18

A downturn in the local economy or a decline in real estate values could hurt our profits.

Nearly all of our real estate loans are secured by real estate in the Baltimore metropolitan area. As a result of this concentration, a downturn in the local economy could cause significant increases in non-performing loans, which would hurt our profits. Additionally, a decrease in asset quality could require additions to our allowance for loan losses through increased provisions for loan losses, which would hurt our profits. In recent years, there were significant increases in real estate values in our market area. As a result of rising home prices, our loans have been well collateralized. However, in the past year or so, these real estate values have declined, in some cases dramatically, which could cause some of our mortgage loans to become inadequately collateralized, which would expose us to a greater risk of loss. For a discussion of our market area, see “Business—Market Area.”

Strong competition within our market area could hurt our profits and slow growth.

We face intense competition both in making loans and attracting deposits. This competition has made it more difficult for us to make new loans and has occasionally forced us to offer higher deposit rates. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which reduces net interest income. As of June 30, 2008, we held 0.41% of the deposits in the Baltimore-Towson, Maryland Metropolitan Statistical Area, which was the 27^th largest market share of deposits out of the 74 financial institutions in the metropolitan statistical area. Some of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our market area. For more information about our market area and the competition we face, see “Business—Market Area” and “Business—Competition.”

The limitations on executive compensation imposed through our participation in the TARP Capital Purchase Program may restrict our ability to attract, retain and motivate key employees, which could adversely affect our operations.

As part of our participation in the TARP Capital Purchase Program, we agreed to be bound by certain executive compensation restrictions, including limitations on severance payments and the clawback of any bonus and incentive compensation that were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria. Subsequent to the issuance of the preferred stock, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was enacted, which provides more stringent limitations on severance pay and the payment of bonuses. To the extent that any of these compensation restrictions do not permit us to provide a comprehensive compensation package to our key employees that is competitive in our market area, we have difficulty in attracting, retaining and motivating our key employees, which could have an adverse effect on our results of operations.

Future dividend payments and common stock repurchases are restricted by the terms of the U.S. Treasury’s equity investment in us.

Under the terms of the TARP Capital Purchase Program, until the earlier of the third anniversary of the date of issuance of the Company’s Series A Cumulative Perpetual Preferred Stock and the date on which the Series A Cumulative Perpetual Preferred Stock has been redeemed in whole or the U.S. Treasury has transferred all of the Series A Cumulative Perpetual Preferred Stock to third parties, we are prohibited from increasing dividends on our common stock from the last quarterly cash dividend per share ($0.07) declared on the common stock prior to December 5, 2008, as adjusted for subsequent stock dividends and other similar actions, and from making certain repurchases of equity securities, including our common stock, without the consent of the U.S. Treasury. Furthermore, as long as the Series A Cumulative Perpetual Preferred Stock is outstanding, dividend payments and repurchases or redemptions relating to certain equity securities, including our common stock, are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions.

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The terms governing the issuance of the preferred stock to the U.S. Treasury may be changed, the effect of which may have an adverse effect on our operations.

The terms of the Securities Purchase Agreement in which we entered into with U.S. Treasury pursuant to the TARP Capital Purchase Program provides that the U.S. Treasury may unilaterally amend any provision of the Purchase Agreement to the extent required to comply with any changes in applicable federal law that may occur in the future. We have no assurances that changes in the terms of the transaction will not occur in the future. Such changes may place restrictions on our business or results of operation, which may adversely affect the market price of our common stock.

Item 1B. Unresolved Staff Comments

Not applicable.

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Item 2. Properties

The following table sets forth the location and certain additional information regarding the Bank’s offices at June 30, 2009.

	Year Opened	Owned or Leased	Net Book Value at June 30, 2009	Approximate Square Footage
			(Dollars in thousands)
Headquarters and Branch Office
1301 Merritt Boulevard	1970	Owned	$   351	9,600
Dundalk, Maryland 21222
Branch Office
2028 Joppa Road
Baltimore, Maryland 21234	2007	Leased	2,882	7,000
Branch Office
7802 Harford Road
Baltimore, Maryland 21234	1979	Owned	212	2,000
Branch Office
821 W. 36th Street
Baltimore, Maryland 21211	1988	Owned	106	1,100
Branch Office
12128 Long Green Pike
Glen Arm, Maryland 21057	1988	Leased	19	1,400
Branch Office
11630 Glen Arm Road
Glen Arm, Maryland 21057	2006	Leased	—	400

The net book value of the Bank’s investment in premises and equipment totaled $4.0 million at June 30, 2009. See Note 4 of Notes to Consolidated Financial Statements.

Item 3. Legal Proceedings

From time to time, the Bank is a party to various legal proceedings incident to its business. At June 30, 2009, there were no legal proceedings to which the Company or the Bank was a party, or to which any of their property was subject, which were expected by management to result in a material loss to the Company or the Bank. There are no pending regulatory proceedings to which the Company, the Bank or its subsidiaries is a party or to which any of their properties is subject which are currently expected to result in a material loss.

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

None.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) The information contained under the section captioned “Market Information” in the Company’s Annual Report to Stockholders for the Fiscal Year Ended June 30, 2009 (the “Annual Report”) filed as Exhibit 13 hereto is incorporated herein by reference.

(b) Not applicable.

(c) The Company did not repurchase any shares of its common stock during the fourth quarter of the fiscal year ended June 30, 2009 and does not have any pending stock repurchase program.

Item 6. Selected Financial Data

This item is not applicable as the Company is a smaller reporting company.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report is incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

This item is not applicable as the Company is a smaller reporting company.

Item 8. Financial Statements and Supplementary Data

The financial statements contained in the Annual Report and listed in Item 15 hereof are incorporated herein by reference.

Item 9. Changes in and Disagreements With Accountants in Accounting and Financial Disclosure

None.

Item 9A(T). Controls and Procedures

(a) Disclosure Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

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(b) Internal Controls Over Financial Reporting

MANAGEMENT’S ANNUAL REPORT ON

INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Patapsco Bancorp, Inc. (the Company) is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual report. The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, as such, include some amounts that are based on the best estimates and judgments of management.

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system is designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of the Company’s financial reporting and the preparation and presentation of financial statements for external reporting purposes in conformity with accounting principles generally accepted in the United States of America, as well as to safeguard assets from unauthorized use or disposition. The system of internal control over financial reporting is evaluated for effectiveness by management and tested for reliability through a program of internal audit with actions taken to correct potential deficiencies as they are identified. Because of inherent limitations in any internal control system, no matter how well designed, misstatements due to error or fraud may occur and not be detected, including the possibility of the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further because of changes in conditions, internal control effectiveness may vary over time.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2009 based upon criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on this assessment and on the forgoing criteria, management has concluded that, as of June 30, 2009, the Company’s internal control over financial reporting is effective.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

/s/ Michael J. Dee	/s/ William C. Wiedel, Jr.
Michael J. Dee	William C. Wiedel, Jr.
President and Chief Executive Officer	Senior Vice President and Chief Financial Officer

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(c) Changes to Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the year ended June 30, 2009 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

Not applicable.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Directors

The information relating to the directors of the Company is incorporated herein by reference to the section captioned “Items to be Voted on by Stockholders – Item 1 – Election of Directors” in the Company’s Proxy Statement for the 2009 Annual Meeting of Stockholders (the “Proxy Statement”).

Executive Officers

The information relating to executive officers of the Company is incorporated herein by reference to Item 1. “Business – Executive Officers Who Are Not Directors” in the Proxy Statement.

Corporate Governance

Information regarding the Company’s Audit Committee and audit committee financial expert is incorporated herein by reference to the section captioned “Corporate Governance and Board Matters – Audit Committee” in the Proxy Statement.

Compliance with Section 16(a) of the Exchange Act

Information regarding compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to the section captioned “Other Information Relating to Directors and Executive Officers - “Section 16(a) Beneficial Ownership Compliance” in the Proxy Statement.

Code of Ethics

The Company has adopted a written code of ethics, which applies to all employees and Directors. The Company intends to disclose any amendments to or waivers from our Code of Ethics applicable to any senior financial officers on our website at http://www.patapscobank.com or in a report on Form 8-K. A copy of the Code of Ethics is available, without charge, upon written request to Secretary, Patapsco Bancorp, Inc., 1301 Merritt Boulevard, Dundalk, Maryland 21222-2194.

Item 11. Executive Compensation

The information required by this item is incorporated herein by reference to the sections captioned “Corporate Governance and Board Matters – Director Compensation” and “Executive Compensation” in the Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

(a) Security Ownership of Certain Beneficial Owners. Information with respect to security ownership of certain beneficial owners required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.

(b) Security Ownership of Management. Information with respect to security ownership of management required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.

24

(c) Changes in Control. Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.

(d) Equity Compensation Plans. The following table sets forth certain information with respect to the Company’s equity compensation plans.

	(a)	(b)		(c)
	Number of securities to be issued upon exercise of outstanding options, warrants & rights	Weighted- average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	65,181	$	6.29	58,124
Equity compensation plans not approved by security holders	—		—	—
Total	65,181	$	6.29	58,124

Item 13. Certain Relationships and Related Transactions, and Director Independence

Certain Relationships and Related Transactions

The information required by this item is incorporated herein by reference to the section captioned “Other Information Relating to Directors and Executive Officers – Transactions with Related Persons” in the Proxy Statement.

Corporate Governance

With respect to the information regarding director independence, the section captioned “Corporate Governance and Board Matters – Director Independence” is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

The information required by this item is incorporated herein by reference to the section captioned “Audit Related Matters – Auditor Fees” in the Proxy Statement.

PART IV

Item 15. Exhibits

(a) List of Documents Filed as Part of this Report

(1) Financial Statements. The following consolidated financial statements are incorporated by reference from Item  7 hereof (see Exhibit 13 to this Annual Report on Form 10-K):

25

(2) Exhibits. The following is a list of exhibits filed as part of this Annual Report on Form 10-K and also constitutes the Exhibit Index.

No.	Description
3.1	Articles of Incorporation of Patapsco Bancorp, Inc. and Articles Supplementary (1)
3.2	Bylaws of Patapsco Bancorp, Inc., as amended (2)
4.1	Form of Common Stock Certificate of Patapsco Bancorp, Inc. (3)
4.2	Articles Supplementary establishing Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of Patapsco Bancorp, Inc. (4)
4.3	Form of stock certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A (4)
4.4	Form of warrant to purchase 300.003 shares of common stock of Patapsco Bancorp, Inc. (4)
4.5	Articles Supplementary establishing Fixed Rate Cumulative Perpetual Preferred Stock, Series B, of Patapsco Bancorp, Inc. (4)
4.6	Form of stock certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series B (4)
10.1	Letter Agreement and related Securities Purchase Agreement – Standard Terms, dated December 19, 2008, between Patapsco Bancorp, Inc. and United States Department of the Treasury (4)
10.2	Form of Waiver executed by each of Michael J. Dee, William C. Wiedel, Jr., Frank J. Duchacek, Jr. and Laurence S. Mitchell (4)
10.3	Form of Letter Agreement between Patapsco Bancorp, Inc. and each of Michael J. Dee, William C. Wiedel, Jr., Frank J. Duchacek, Jr. and Laurence S. Mitchell (4)
10.4	Patapsco Bancorp, Inc. 1996 Stock Option and Incentive Plan† (5)
10.5	Form of Severance Agreement by and between The Patapsco Bank and John McClean, Francis Broccolino and William Peters† (6)
10.6	Form of Amended and Restated Severance Agreement by and between The Patapsco Bank and Laurence S. Mitchell and Frank J. Duchacek, Jr.† (7)
10.7	Patapsco Bancorp, Inc. 2000 Stock Option and Incentive Plan† (8)
10.8	Patapsco Bancorp, Inc. 2004 Stock Incentive Plan† (9)
10.9	Employment Agreement by and between The Patapsco Bank and Michael J. Dee† (9)
10.10	Severance Agreement by and between The Patapsco Bank and William C. Wiedel, Jr.† (9)
10.11	Form of Amendment No. 1 to the Amended and Restated Severance Agreement by and between The Patapsco Bank and Laurence S. Mitchell and Frank J. Duchacek, Jr. † (10)
13	Annual Report to Stockholders for the Fiscal Year Ended June 30, 2009
21	Subsidiaries of the Registrant
23	Consent of Beard Miller Company LLP
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32	Section 1350 Certifications

† Management contract or compensatory plan or arrangement.

(1) Incorporated herein by reference from the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2000 (File No. 0-28032).

(2) Incorporated herein by reference from the Company’s Current Report on Form 8-K for the event on July 23, 2008, filed with the SEC on July 25, 2008 (File No. 0-28032).

(3) Incorporated herein by reference from the Company’s Registration Statement on Form 8-A (File No. 0-28032).

(4) Incorporated by reference from the Company’s Current Report on Form 8-K for the event on December 18, 2008, filed with the SEC on December 23, 2008 (File No. 0-28032).

(5) Incorporated herein by reference from the Company’s Annual Report on Form 10-KSB for the year ended June 30, 1996 (File No. 0-28032).

(6) Incorporated herein by reference from the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2005 (File No. 0-28032).

(7) Incorporated herein by reference from the Company’s Annual Report on Form 10-KSB/A for the year ended June 30, 2006 filed on December 6, 2006 (File No. 0-28032).

(8) Incorporated herein by reference from the Company’s Registration Statement on Form S-8 (File No. 333-122300).

(9) Incorporated herein by reference from the Company’s Quarterly Report on Form 10-QSB for the quarter ended March 31, 2008 (File No. 0-28032).

(10) Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2008 (File No. 0-28032).

26

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PATAPSCO BANCORP, INC.
September 25, 2009
	By:	/s/ Michael J. Dee
		Michael J. Dee
		President and Chief Executive Officer
		(Duly Authorized Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Michael J. Dee	September 25, 2009
Michael J. Dee
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ William C. Wiedel, Jr.	September 25, 2009
William C.Wiedel, Jr.
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Thomas P. O’Neill	September 25, 2009
Thomas P. O’Neill
Chairman of the Board
/s/ Douglas H. Ludwig	September 25, 2009
Douglas H. Ludwig
Director and Secretary
/s/ Nicole N. Glaeser	September 25, 2009
Nicole N. Glaeser
Director
/s/ William R. Waters	September 25, 2009
William R. Waters
Director
/s/ Gary R. Bozel	September 25, 2009
Gary R. Bozel
Director
/s/ J. Thomas Hoffman	September 25, 2009
J. Thomas Hoffman
Director

EX-13

Exhibit 13

PATAPSCO BANCORP, INC.

[LOGO]

2009 ANNUAL REPORT

TABLE OF CONTENTS

Patapsco Bancorp, Inc.	(i	)
Market Information	(i	)
Letter to Stockholders	1
Selected Consolidated Financial and Other Data	2
Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
Consolidated Financial Statements	22
Corporate Information	Inside Back Cover

PATAPSCO BANCORP, INC.

Patapsco Bancorp, Inc. (the “Company”) is the holding company for The Patapsco Bank (the “Bank”). The Bank is a Maryland commercial bank operating through five offices located in Dundalk, Parkville, Carney and Glen Arm, Maryland and serving eastern Baltimore County. The principal business of the Bank consists of attracting deposits from the general public and investing these deposits in loans secured by residential and commercial real estate, construction loans, commercial business loans and consumer loans. The Bank derives its income principally from interest earned on loans and, to a lesser extent, interest earned on mortgage-backed securities and investment securities and noninterest income. Principally operating revenues, deposits and repayments of outstanding loans and investment securities and mortgage-backed securities provide funds for these activities.

MARKET INFORMATION

The Company’s common stock trades under the symbol “PATD” on the OTC Electronic Bulletin Board. There were 1,864,974 shares of common stock outstanding and approximately 377 holders of record at June 30, 2009. Following are the high and low closing sale prices, by fiscal quarter, as reported on the OTC Electronic Bulletin Board during the periods indicated, as well as the dividends declared during each quarter.

	High		Low		Dividends Per Share
Fiscal 2009:
First Quarter	$	8.90	$	6.74	$	.07
Second Quarter		7.00		3.55		.00
Third Quarter		4.80		3.00		.02
Fourth Quarter		3.75		2.75		.02
Fiscal 2008:
First Quarter	$	22.75	$	19.00	$	.07
Second Quarter		21.00		12.75		.00
Third Quarter		13.82		10.75		.14
Fourth Quarter		10.75		7.20		.07

The stated high and low closing sale prices reflect inter-dealer prices, without retail markup, markdown or commission, and may not represent actual transactions.

(i)

[Patapsco Bancorp Letter]

Dear Shareholder,

The directors, officers and staff of Patapsco Bancorp, Inc. and The Patapsco Bank respectfully present this 2009 Annual Report to shareholders.

The fiscal year ended June 30, 2009 was the most disappointing in the Company’s history. The net loss of $5.5 million resulted from problems in the loan portfolio and the write-off of goodwill.

The most significant issues in the loan portfolio were encountered in acquisition, development and construction loans to residential real estate developers. Net charge-offs in this area totaled $3.6 million and all were loans that had been purchased from our former merger partner. The consumer loan portfolio suffered with the increase in the unemployment rate and Chapter 7 bankruptcies. Problems with the commercial lease portfolio are attributable to the stress felt by the small business customer due to the prolonged recession.

The goodwill that was written off in the fourth quarter was created when the Company purchased Northfield Bancorp in November 2000 and Parkville Savings Bank in April of 2003. Accounting rules require that goodwill be analyzed at least annually for impairment. This year, due primarily to the depressed stock price of the Company and its peers, the $3.0 million in goodwill was determined to be impaired.

The Chairman of the Board of Governors of the Federal Reserve System has opined that the recession is over but that the unemployment rate will remain elevated. We have seen a leveling off of non-performing assets, however, demand for new loans remains weak. Our priorities for the coming year are to manage non-performing assets and return the Company to profitability.

Director Douglas Ludwig will be retiring from the Board of Directors upon the conclusion of the upcoming annual meeting. Doug has served the Bank and the Company since 1992. We thank him for his years of service and wish him well in the future.

The Board of Directors and management thank you for your continued support.

/s/ Thomas P. O’Neill	/s/ Michael J. Dee
Thomas P. O’Neill	Michael J. Dee
Chairman of the	President and
Board of Directors	Chief Executive Officer

1

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

PATAPSCO BANCORP, INC.

Selected Consolidated Financial Condition Data

	At June 30,
	2009		2008
	(In thousands)
Total assets	$	268,367	$	261,294
Loans receivable, net		216,927		227,514
Cash, federal funds sold and other interest bearing deposits		19,794		9,193
Investment securities		16,084		9,601
Deposits		207,795		197,886
Borrowings		39,300		42,300
Stockholders’ equity		19,692		19,391

Selected Consolidated Operating Data

	Year Ended June 30,
	2009			2008
	(In thousands, except for per share amounts)
Interest income	$	15,697		$	17,191
Interest expense		7,059			8,565
Net interest income before provision for loan losses		8,638			8,626
Provision for loan losses		5,902			1,920
Net interest income after provision for loan losses		2,736			6,706
Noninterest income		841			2,819
Noninterest expenses:
Compensation and employee benefits		4,400			4,206
Professional fees		423			646
Federal deposit insurance expense		347			22
Equipment expenses		306			325
Net occupancy costs		603			565
Advertising		66			33
Data processing		372			318
Amortization of intangible asset		51			51
Telephone, postage and delivery		297			252
Goodwill impairment charge		2,954			—
Other		869			955
Total noninterest expenses		10,688			7,373
Income (loss) before (benefit) provision for income taxes		(7,111	)		2,152
Income tax (benefit) provision		(1,645	)		775
Net (loss) income		(5,466	)		1,377
Preferred stock dividends		173			—
Net (loss) income available for common shareholders	$	(5,639	)	$	1,377
Net (loss) income per share of common stock
Basic	$	(2.93	)	$	0.72
Diluted	$	(2.93	)	$	0.71

2

KEY OPERATING RATIOS

PATAPSCO BANCORP, INC.

	At or For the Year Ended June 30,
	2009		2008		2007
Performance Ratios:
Return on average assets (net (loss) income divided by average total assets)	(2.05	)%	0.53	%	0.48	%
Return on average stockholders’ equity (net (loss) income divided by average stockholders’ equity	(24.45	)	7.13		6.22
Interest rate spread (weighted average interest rate earned less weighted average interest rate cost)	3.20		3.23		3.58
Net interest margin (net interest income divided by average interest-earning assets)	3.44		3.51		3.87
Ratio of average interest-earning assets to average interest-bearing liabilities	108.61		107.91		108.91
Ratio of noninterest expense to average total assets	4.00		2.83		3.04
Asset Quality Ratios:
Non-accrual loans to loans receivable	5.11	%	1.10	%	0.22	%
Allowance for loan losses to total loans	1.37		0.80		0.50
Allowance for loan losses to nonperforming loans	26.89		72.40		230.34
Net charge-offs to average loans outstanding	2.03		0.53		0.15
Capital Ratios:
Stockholders’ equity to total assets at end of period	7.34	%	7.42	%	7.40	%
Average stockholders’ equity to average assets	8.37		7.41		7.78
Dividends declared per common share to diluted net income per common share	nm	2	39.44		43.55
Tier one leverage ratio (1)	7.98		7.63		7.57
Tier one capital to risk-weighted assets (1)	10.33		9.56		9.69
Total regulatory capital to risk-weighted assets (1)	11.58		10.45		10.26

(1) Bank level ratios.

(2) nm=not meaningful.

3

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

General

The Company’s results of operations depend primarily on its level of net interest income, which is the difference between interest earned on interest-earning assets, consisting primarily of loans, investment securities, and other investments, and the interest paid on interest-bearing liabilities, consisting primarily of deposits and advances from the Federal Home Loan Bank of Atlanta. The net interest income earned on interest-earning assets (“net interest margin”) and the ratio of interest-earning assets to interest-bearing liabilities have a significant impact on net interest income. The Company’s net interest margin is affected by regulatory, economic and competitive factors that influence interest rates, loan and deposit flows. The Company, like other financial institutions, is subject to interest rate risk to the degree that its interest-earning assets mature or reprice at different times, or on a different basis than its interest-bearing liabilities. To a lesser extent, the Company’s results of operations are also affected by the amount of its noninterest income, including loan fees and service charges, and levels of noninterest expense, which consists principally of compensation and employee benefits, insurance premiums, professional fees, equipment expense, occupancy costs, advertising, data processing and other operating expenses.

The Company’s operating results are significantly affected by general economic and competitive conditions, in particular, changes in market interest rates, government policies and actions taken by regulatory authorities. Lending activities are influenced by general economic conditions, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities and the level of personal income and savings in the Company’s market area.

Forward-Looking Statements

When used in this Annual Report, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area, competition and the Risk Factors set forth in Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2009 that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the consolidated 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. These estimates, assumptions

4

and judgments are necessary when financial instruments are required to be recorded at fair value or when the decline in the value of an asset carried on the balance sheet at historic cost requires an impairment write-down or a valuation reserve to be established.

The allowance for loan losses (“allowance”) represents an amount, that in the judgment of management, will be adequate to absorb probable losses on outstanding loans and leases that may become uncollectible. The allowance represents an estimate made based upon two principles of accounting: (1) Statement of Financial Accounting Standards (“SFAS”) No. 5 “Accounting for Contingencies”, that requires losses to be accrued when their occurrence is probable and estimable, and (2) SFAS No. 114 “Accounting by Creditors for Impairment of a Loan”, that requires losses be accrued when it is probable that the lender will not collect all principal and interest when due under the original terms of the loan. The adequacy of the allowance is determined through careful evaluation of the loan portfolio. This determination is inherently subjective and requires significant estimates, including estimated losses on pools of homogeneous loans based on historical loss experience and consideration of the current economic environment and other qualitative factors that may be subject to change. Loans and leases deemed uncollectible are charged against the allowance and recoveries of previously charged-off amounts are credited to it. The level of the allowance is adjusted through the provision for loan losses that is recorded as a current period expense.

The methodology for assessing the appropriateness of the allowance includes a specific allowance, a formula allowance and a nonspecific allowance. The specific allowance is for risk rated credits on an individual basis. The formula allowance reflects historical losses by credit category. The nonspecific allowance captures losses whose impact on the portfolio have occurred but have yet to be recognized in either the specific allowance or the formula allowance. The factors used in determining the nonspecific allowance include trends in delinquencies, trends in volumes and terms of loans, the size of loans relative to the allowance, concentration of credits, the quality of the risk identification system and credit administration and local and national economic trends.

In accordance with the provisions of Statement of Financial Accounting Standards No. 114, the Company determines and recognizes impairment of certain loans. A loan is determined to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is not considered impaired during a period of insignificant delay in payment if the Company expects to collect all amounts due, including past-due interest. The Company generally considers a period of insignificant delay in payment to include delinquency up to and including 90 days. SFAS 114 requires that impairment be measured through a comparison of the loan’s carrying amount to the present value of its expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

SFAS 114 is generally applicable for all loans except large groups of smaller-balance homogeneous loans that are evaluated collectively for impairment, including residential first and second mortgage loans and consumer installment loans. Impaired loans are therefore generally comprised of commercial mortgage, real estate development, and commercial business loans. In addition, impaired loans are generally loans which management has placed in non-accrual status since loans are placed in non-accrual status on the earlier of the date that management determines that the collection of principal and/or interest is in doubt or the date that principal or interest is 90 days or more past due.

Management believes that the allowance is adequate. However, its determination requires significant judgment, and estimates of the probable losses in the loan and lease portfolio can vary significantly from losses that actually occur.

Marketable equity securities and debt securities not classified as held to maturity or trading are classified as available for sale. Securities available for sale are acquired as part of the Company’s asset/liability management strategy and may be sold in response to changes in interest rates, loan demand, changes in prepayment risk and other factors. Securities available for sale are carried at fair value, with unrealized gains or losses based on the difference between amortized cost and fair value, reported net of deferred tax, as accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Realized gains and losses, using the specific identification method, are included as a separate component of non-interest income. Related interest and dividends are included in interest income. Declines in the fair value of individual securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value through either a charge to earnings or recognized in other comprehensive income depending upon the nature of the loss. Management must assess whether (a) it has the intent to sell the security and (b) it is more

5

likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Other factors affecting the determination of whether an other-than-temporary impairment has occurred include a downgrading of the security by a rating agency or a significant deterioration in the financial condition of the issuer. See Note 1 of the Consolidated Financial Statements for a further explanation.

Effective July 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 revised the accounting for purchased intangible assets and, in general, requires that goodwill no longer be amortized, but rather that it be tested for impairment on an annual basis at the reporting unit level, which is either at the same level or one level below an operating segment. Other acquired intangible assets with finite lives, such as purchased customer accounts, are required to be amortized over their estimated lives. Prior to July 1, 2002, substantially all of the Company’s goodwill was amortized using the straight-line method over 15 years. Other intangible assets are amortized using the straight-line method over estimated useful lives of 10 years. The Company periodically assesses whether events or changes in circumstances indicate that the carrying amounts of goodwill and other intangible assets may be impaired.

6

Average Balance, Interest and Average Yields and Rates

The following table sets forth certain information relating to the Company’s average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods indicated. Dividing income or expense by the average daily balance of assets or liabilities, respectively, derives such yields and costs for the periods presented. Average balances are derived from daily balances.

The table also presents information for the periods indicated with respect to the institution’s net interest margin, which is net interest income divided by the average balance of interest earning assets. This is an important indicator of commercial bank profitability. The net interest margin is affected by yields on interest earning assets, the costs of interest bearing liabilities and the relative amounts of interest earning assets and interest bearing liabilities. Another indicator of an institution’s net interest income is the interest rate spread or the difference between the average yield on interest earning assets and the average rate paid on interest-bearing liabilities.

	Year Ended June 30,
	2009						2008						2007
	Average Balance		Interest		Average Yield/ Cost		Average Balance		Interest		Average Yield/ Cost		Average Balance		Interest		Average Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Loans receivable (1)	$	231,910	$	15,104	6.51	%	$	225,164	$	16,320	7.25	%	$	209,228	$	15,461	7.39	%
Investment securities (2)		13,490		554	4.11			13,821		662	4.79			17,866		802	4.49
Short-term investments and other interest-earning assets		5,834		39	0.67			7,004		209	2.98			3,283		163	4.98
Total interest-earning assets		251,234		15,697	6.25			245,989		17,191	6.99			230,377		16,426	7.13
Noninterest-earning assets		15,925						14,524						14,581
Total assets	$	267,159					$	260,513					$	244,958
Interest-bearing liabilities:
Deposits (3)	$	186,948		5,277	2.82		$	182,388		6,285	3.45		$	169,324		5,458	3.22
Short-term borrowings		3,693		95	2.57			3,565		188	5.27			661		37	5.61
Long-term borrowings		40,670		1,687	4.15			42,004		2,092	4.98			41,538		2,008	4.83
Total interest-bearing liabilities		231,311		7,059	3.05			227,957		8,565	3.76			211,523		7,503	3.55
Noninterest-bearing liabilities		13,490						13,252						14,369
Total liabilities		244,801						241,209						225,892
Total equity		22,358						19,304						19,066
Total liabilities and equity	$	267,159					$	260,513					$	244,958
Net interest income			$	8,638					$	8,626					$	8,923
Interest rate margin					3.44	%					3.51	%					3.87	%
Net interest spread					3.20	%					3.23	%					3.58	%
Ratio of average interest-earning assets to average interest-bearing liabilities					108.6	%					107.9	%					108.9	%

(1) Includes nonaccrual loans.

(2) Includes investments required by law.

(3) Includes escrow accounts.

7

Rate/Volume Analysis

The following table sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by the prior year’s rate); and (ii) changes in rate (changes in rate multiplied by the prior year’s volume). Combined rate/volume variances, a third element of the calculation, are allocated to the volume and rate variances based on their relative size.

	Year Ended June 30,									Year Ended June 30,
	2009 vs. 2008									2008 vs. 2007
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume			Rate			Total			Volume			Rate			Total
	(In thousands)									(In thousands)
Interest income:
Loans receivable (1)	$	510		$	(1,726	)	$	(1,216	)	$	1,149		$	(290	)	$	859
Investment securities		(16	)		(92	)		(108	)		(199	)		59			(140	)
Short-term investments and other interest-earning assets		(30	)		(140	)		(170	)		72			(26	)		46
Total change in interest income		376			(1,870	)		(1,494	)		1,082			(317	)		765
Interest expense:
Deposits (2)		162			(1,170	)		(1,008	)		436			391			827
Short-term borrowings		7			(100	)		(93	)		153			(2	)		151
Long-term borrowings		(65	)		(340	)		(405	)		23			61			84
Total change in interest expense		128			(1,634	)		(1,506	)		603			459			1,062
Change in net interest income	$	248		$	(236	)	$	12		$	479		$	(776	)	$	(297	)

(1) Includes impact of non-accrual loans.

(2) Includes interest-bearing escrow accounts.

(3) The subtotals of the volume and rate columns do not foot due to the change in mix of the respective components.

Comparison of Financial Condition at June 30, 2009 and 2008

General. Total assets increased by $7.1 million or 2.7% to $268.4 million at June 30, 2009 from $261.3 million at June 30, 2008. Growth was funded principally with interest-bearing deposits, primarily money market accounts.

Loans Receivable. Gross loans receivable decreased by $9.4 million, or 4.1%, to $222.3 million at June 30, 2009 from $233.2 million at June 30, 2008.

8

Residential mortgages decreased by $6.2 million, or 8.8%, construction loans decreased by $5.7 million, or 18.9% and consumer loans decreased $2.5 million or 12.2%. The decline in residential mortgages reflects a high level of early pay-offs during the year. The lower level of construction loans was impacted by $3.6 million in charge-offs in 2009. In addition, commercial leases decreased by $5.2 million, or 29.1% as management made a strategic decision to cease origination of this product in October, 2008. Commercial real estate loans grew $7.9 million, or 19.1% while commercial business loans increased by $0.7 million, or 1.3%. The overall decline in the loan portfolio also reflects lower loan demand in the second half of the year.

The following table sets forth selected data relating to the composition of the Company’s loan portfolio by type of loan at the dates indicated. At June 30, 2009, the Company had no concentrations of loans exceeding 10% of gross loans other than as disclosed below:

	At June 30,
	2009					2008					2007					2006					2005
(Dollars in thousands)	Amount			% Total		Amount			% Total		Amount			% Total		Amount			% Total		Amount			% Total
Real Estate Loans:
Residential	$	63,788		28.69	%	$	69,953		30.00	%	$	74,332		33.03	%	$	80,693		40.58	%	$	74,600		44.46	%
Commercial		49,188		22.13			41,316		17.71			36,302		16.13			29,712		14.94			25,109		14.96
Construction		24,223		10.90			29,878		12.81			23,907		10.62			13,913		7.00			5,520		3.29
Consumer Loans:
Home Improvement		10,138		4.56			12,688		5.44			12,481		5.55			11,442		5.75			7,910		4.71
Home Equity		5,795		2.61			5,341		2.29			4,964		2.21			4,400		2.21			5,205		3.10
Other Consumer		2,445		1.10			2,893		1.24			2,955		1.31			2,483		1.25			2,401		1.43
Commercial Loans:
Commercial Loans		54,170		24.36			53,453		22.92			52,711		23.43			34,827		17.51			28,102		16.75
Commercial Leases		12,554		5.65			17,714		7.59			17,366		7.72			21,409		10.76			18,969		11.30
Gross Loans		222,301		100.00	%		233,236		100.00	%		225,018		100.00	%		198,879		100.00	%		167,816		100.00	%
Less:
Deferred Origination Fees, net of costs		191					201					240					178					99
Unearned Interest Consumer Loans		761					1,068					1,147					1,245					503
Unearned Interest Commercial Leases		1,530					2,779					2,480					6,091					5,446
Purchase Accounting (Premium) discount, net		(131	)				(160	)				(198	)				(224	)				(271	)
Allowance for Loan Losses		3,023					1,834					1,110					1,000					945
Net Loans	$	216,927				$	227,514				$	220,239				$	190,589				$	161,094

9

The following table sets forth certain information at June 30, 2009 regarding the dollar amount of selected loan types maturing or repricing in the Company’s portfolio. The table does not include any estimate of prepayments that may significantly shorten the average life of all loans and cause the Company’s repayment experience to differ from that shown below.

(In thousands)	Due during the year ending June 30, 2010		Due after 1 through 5 years after June 30, 2009		Due after 5 years after June 30, 2009		Total
Construction loans	$	17,259	$	6,964	$	—	$	24,223
Commercial loans		7,819		9,007		37,344		54,170
Total	$	25,078	$	15,971	$	37,344	$	78,393

The following table sets forth at June 30, 2009 the dollar amount of the above loans which may reprice or are due one year or more after June 30, 2009 which have predetermined interest rates and have floating or adjustable interest rates.

(In thousands)	Predetermined Rates		Floating or Adjustable Rates		Total
Construction	$	6,964	$	—	$	6,964
Commercial		18,651		27,700		46,351
Total	$	25,615	$	27,700	$	53,315

Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is substantially less than their contractual terms because of prepayments.

Investment Securities. Total investment securities increased $6.5 million or 67.5% as the lower level of loan demand led to a higher level of securities purchases during the year. U.S. government agency securities increased by $5.1 million, or 338.1%, to $6.6 million at June 30, 2009 from $1.5 million at June 30, 2008. Mortgage-backed securities increased by $1.5 million, or 29.1% in the year ended June 30, 2009. Corporate bonds were relatively flat decreasing by $101,000 to $2.8 million at June 30, 2009. Stock in the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank of Richmond increased by $168,000 due to the membership requirements of these organizations. The Company does not own U.S. Agency common or preferred stock as of June 30, 2009.

The following table sets forth the carrying value of the Company’s investments at the dates indicated.

	At June 30 ,
(In thousands)	2009		2008		2007
Securities available for sale, at fair value:
U.S. Government and agency securities	$	6,576	$	1,501	$	4,676
Corporate bonds		2,818		2,917		1,913
Mortgage-backed securities		6,690		5,183		6,558
Total securities available for sale		16,084		9,601		13,147
Investments required by law, at cost:
Federal Home Loan Bank of Atlanta stock		2,295		2,239		2,190
Federal Reserve Bank of Richmond stock		522		410		409
Total investments required by law, at cost		2,817		2,649		2,599
Total investments	$	18,901	$	12,250	$	15,746

10

The following table sets forth the scheduled maturities, amortized cost, fair values and average yields for the Company’s investment portfolio at June 30, 2009:

	One Year or Less				One to Five Years				Five to Ten Years				More than Ten Years				Total Investment Portfolio
(Dollars in thousands)	Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Fair Value		Average Yield
Securities available for sale:
Mortgage-backed securities	$	—	—	%	$	1,081	4.36	%	$	2,233	4.17	%	$	3,225	5.64	%	$	6,539	$	6,690	4.71	%
U.S. Government & agency		—	—			1,000	2.25			2,008	2.00			3,578	1.54			6,586		6,576	1.79
Corporate securities		500	0.60			502	7.71			1,978	7.71			—	—			2,980		2,818	6.52
Investments required by law		—	—			—	—			—	—			2,817	1.11			2,817		2,817	1.11
Total	$	500	0.60	%	$	2,583	4.19	%	$	6,219	4.60	%	$	9,620	2.79	%	$	18,922	$	18,901	3.44	%

11

Deposits. Total deposits increased by $9.9 million, or 5.0% to $207.8 million at June 30, 2009 from $197.9 million at June 30, 2008. A decrease in certificates of deposit of $14.1 million was more than offset by an increase in money market accounts of $24.5 million. Intense competition in the first of half of the year accounted for the decline in certificates of deposits, while a successful money market promotion was responsible for the strong growth in money market deposits. Competition for deposits in the Company’s market area has moderated in the second half of the year. The $14.1 million decrease in certificates of deposit included a $6.7 million decline in brokered deposits.

The following table sets forth deposit balances by type as of the dates indicated.

	At June 30,
	(Dollars in thousands)
	2009				2008				2007
	Balance		% Total		Balance		% Total		Balance		% Total
Savings accounts	$	16,597	7.99	%	$	16,464	8.32	%	$	20,228	10.58	%
NOW checking		16,036	7.72			14,817	7.49			13,157	6.89
Money market		59,465	28.62			34,988	17.68			32,235	16.87
Certificates of deposits		104,410	50.25			118,504	59.88			112,751	59.01
Interest-bearing deposits		196,508	94.57			184,773	93.37			178,371	93.35
Noninterest-bearing checking		11,287	5.43			13,113	6.63			12,703	6.65
Total	$	207,795	100.00	%	$	197,886	100.00	%	$	191,074	100.00	%

The following table sets forth the average balances based on daily balances and interest rates for various types of deposits for the years ended June 30:

	Year Ended June 30,
	(Dollars in thousands)
	2009				2008				2007
	Average Balance		Rate		Average Balance		Rate		Average Balance		Rate
Savings accounts	$	16,070	0.39	%	$	17,483	0.44	%	$	22,512	0.43	%
NOW checking		14,658	0.33			13,975	0.43			13,133	0.24
Money market		40,381	1.99			33,265	2.30			29,561	2.49
Certificates of deposits		115,840	3.77			117,665	4.58			104,118	4.41
Noninterest-bearing checking		11,755	—			12,525	—			15,598	—
Total	$	198,704			$	194,913			$	184,922

The following table indicates the amount of the Company’s certificates of deposit of $100,000 or more by time remaining until maturity as of June 30, 2009. At such date, these deposits represented 13.01% of total deposits and had a weighted average rate of 3.87%.

Maturity Period	Certificates of Deposit
	(In thousands)
Three months or less	$	9,279
Over three through 6 months		5,893
Over six through 12 months		4,883
Over 12 months		6,987
Total	$	27,042

Borrowings. The Company’s long-term borrowings decreased by $3.0 million, or 8.0%, to $34.3 million at June 30, 2009 from $37.3 million at June 30, 2008. Strong deposit growth during the year mitigated the need for wholesale funds.

12

The following table sets forth certain information regarding borrowings, excluding junior subordinated debt, as of or for the year ended June 30:

(Dollars in thousands)	2009			2008			2007
Amounts outstanding at end of period:
Federal Home Loan Bank advances	$	34,300		$	37,300		$	38,800
Other borrowings		—			—			—
Weighted average rate paid on:
Federal Home Loan Bank advances		3.56	%		4.46	%		4.65	%
Other borrowings		—			—			—
Maximum amount of borrowings outstanding at any month end:
Federal Home Loan Bank advances	$	43,800		$	42,300		$	38,800
Other borrowings	$	1,958		$	11			—
Approximate average borrowings outstanding with respect to:
Federal Home Loan Bank advances	$	39,230		$	40,514		$	37,044
Other borrowings	$	133		$	54		$	155
Weighted average rate for the year ended June 30, on:
Federal Home Loan Bank advances		3.71	%		4.82	%		4.65	%
Other borrowings		2.56	%		5.65	%		5.95	%

Comparison of Operating Results for the Years Ended June 30, 2009 and 2008

The Company recorded a net loss available to common shareholders of $5.6 million for the year ended June 30, 2009 compared to net income of $1.4 million for the year ended June 30, 2008. The net loss available to common shareholders in the current year resulted from a $5.9 million provision for loan losses reflecting a significant increase in charge-offs as well as an increase in the allowance for loan losses which reflects higher losses expected in the loan portfolio as a result of the deterioration in the economy during the year. In addition, the Company recorded a $3.0 million goodwill impairment charge during the current year.

Net Interest Income. The Company’s net interest income increased $12,000 from $8.63 million in the year ended June 30, 2008 to $8.64 million in the current year as average interest-bearing assets increased $5.2 million or 2.1% to $251.2 million. The growth in earning assets offset the 7 basis point decline in the net interest margin from 3.51% in the year ended June 30, 2008 to 3.44% in 2009.

The decline in the net interest margin was caused primarily by the yield on earning assets declining at a slightly faster rate than the cost of funds. The decline in market interest rates was the primary driver of the declines in yields/rates on interest- earning/bearing assets and liabilities. In addition, the impact of non-accrual loans also lowered the yield on earning assets.

Interest Income. Total interest income decreased by $1.5 million or 8.7% to $15.7 million for the year ended June 30, 2009 compared to $17.2 million in the year ended June 30, 2008. This decrease was due to a 74 basis point decline in yield, primarily the result of a dramatic drop in market interest rates in addition to the impact of non-accrual loans. The average prime rate declined 286 basis points in fiscal year 2009 versus 2008. The drop in yield more than offset the favorable impact of the $5.2 million increase in interest earning assets which was driven by the $6.7 million rise in average loan balances. The average balance of loans was $232 million in 2009, a 3.0% increase over an average balance of $225 million in 2008 with the majority of the growth occurring in the first half of fiscal year 2009. Loan demand moderated considerably in the second half of 2009. Management’s decision to exit the lease origination business also contributed to this moderation of loan growth.

13

Interest income generated by the investment portfolio declined $108,000 in 2009 due to a 68 basis point decrease in portfolio yield. The primary reason for the decrease was the decision by the Federal Home Loan Bank of Atlanta to suspend dividends effective in the second quarter of fiscal year 2009 which lowered income by $120,000 in 2009.

Interest Expense. Total interest expense decreased $1.5 million from $8.6 million in the year ended June 30, 2008 to $7.1 million in the current year as the average rate paid on interest bearing liabilities decreased 71 basis points from 3.76% in 2008 to 3.05% in 2009. Total average interest bearing liabilities increased $3.4 million or 1.5% from $228.0 million in the year ended June 30, 2008 to $231.3 million in the current year.

The decline in the rate paid on interest bearing liabilities was due to the decrease in market rates as maturing certificates of deposit and FHLB advances were replaced with lower cost funds. The average rate paid on certificates of deposit was 82 basis points lower while the average rate on borrowings was 96 basis points lower. In addition, the rate paid on money market accounts was 31 basis points lower. The Company ran a money market promotion offering customers a temporarily higher interest rate for a limited period of time. This promotion lead to a $24.5 million, or 70%, increase in the balance of money market accounts at June 30, 2009 versus June 30, 2008. Based on the relative spread between promotional rates and standard rates, the Company expects the rate on money market accounts to continue to decline through the first six months of fiscal year 2010.

Deposits averaged $198.7 million in 2009 versus $194.6 million in 2008. While the year-end deposits grew 5.0% at June 30, 2009, average deposits for the current year only increased by 2.7% as a result of fierce deposit competition early in the fiscal year as several competitors were experiencing liquidity issues that were addressed by offering very attractive deposit rates. Management chose not to match its competitors’ aggressive pricing and experienced modest deposit run-off in the first quarter of fiscal year 2009. By the second half of 2009, the competitive environment had moderated considerably allowing normal deposit strategies to be effective. Accordingly, more deposit growth occurred in the second half of 2009. As the certificates of deposit opened in early 2009 reprice over the next twelve to eighteen months, the Company expects a decline in average rate paid over that time frame subject to the normal market factors affecting rates.

Interest expense on borrowings decreased $498,000 to $1.8 million in 2009 compared to $2.3 million in 2008 as balances were $1.2 million lower in 2009. In addition, the average rate paid on borrowings decreased 96 basis points in 2009 impacted by the decline in market interest rates during the year.

Provision for Loan Losses. Provisions for loan losses are charged to earnings to maintain the total allowance for loan losses at a level considered adequate by management to provide for probable loan losses. The method utilized for the determination of the allowance is described in “Critical Accounting Policies” above and in Note 1 of the Consolidated Financial Statements.

The provision for loan losses was $5.9 million in fiscal year 2009, an increase of $4.0 million, or 207%, from the 2008 provision of $1.9 million. The increase in the provision was due to a $3.5 million, or 294%, increase in net charge-offs to $4.7 million in 2009 from $1.2 million in 2008. Of the $4.7 million in net charge-offs, $3.6 million or 61%, represents residential construction related loans and reflects the severe correction in the residential real estate market that took place in the past 12 months. Commercial lease and consumer charge-offs were also dramatically higher in 2009 and reflect the severe recession experienced in the U.S. economy that officially began in December, 2007. The provision for loan losses ($5.9 million) in excess of net charge-offs ($4.7 million) amounted to $1.2 million and was the primary factor in the Company’s decision to increase its allowance for loan losses as a percentage of total loans to 1.37% at June 30, 2009 from 0.80% at June 30, 2008. The increase in this percentage reflects the $10.0 million, or 392%, increase in non-accrual loans from $2.5 million at June 30, 2008, to $11.2 million at June 30, 2009 and takes into consideration the deterioration in the housing market as well as recessionary environment at year-end. The Company’s allowance for loan losses as a percentage of non-performing loans was 26.9% at June 30, 2009 as compared to 72.4% at June 30, 2008. While this percentage, at first glance seems low, a strong compensating factor is that 93% of non-accrual loans are collateralized by real estate or guaranteed by the SBA at June 30, 2009. In consideration of the appropriate level for the allowance for loan losses, adjustments were made to real estate appraisals taking into consideration the age of the appraisal and the nature of the collateral. These lowered appraisal values, which required management’s judgment, were used to develop estimated losses and related specific loss reserves within the allowance for loan losses.

14

The primary driver of the level of the allowance for loan losses is the Company’s determination of the level of risk in the loan portfolio. Residential mortgages remain the largest component of the portfolio at 28.7% of the total. The Company has determined that there is minimal risk in the residential loan portfolio. It consists of conventionally underwritten mortgages that generally conform to Fannie Mae and Freddie Mac guidelines. The Company has not participated in the sub-prime mortgage market. The two riskiest portions of the portfolio, in management’s estimation, real estate construction and commercial leases, have declined in absolute terms and as a percentage of the total portfolio at 10.9% and 5.7%, respectively. Management made a strategic decision to cease origination of commercial leases in October, 2008. In addition, management decided to de-emphasize residential construction originations. Nonetheless, the Company conservatively underwrites all commercial real estate loans with multiple sources of repayment. Commercial business and commercial mortgage loans have increased in absolute terms and as a percentage of the portfolio at 24.4% and 22.1%, respectively. Accordingly, the overall risk profile of the portfolio has improved slightly over the past year. Like commercial real estate loans, commercial business loans granted must cash-flow on their own and be backed by substantial collateral. Additionally, $4.4 million of the commercial business loan portfolio, including $1.2 million on nonaccrual status, are guaranteed by the Small Business Administration with an average guarantee percentage of 74% or $3.2 million at June 30, 2009.

In response to the challenging real estate and general economic environment, the Company has established an unallocated portion of the allowance for loan losses amounting to $604,000 at June 30, 2009. Beyond the amounts allocated based on historical experience and risk rated loans requiring a specific reserve, the unallocated portion of the allowance is intended to reflect uncertainty created by the local housing market and the recessionary economic environment. The unallocated portion of the allowance has been developed based on the grading of qualitative factors of each segment of the loan portfolio. These factors are weighted to arrive at a severity factor that determines the level of the unallocated allowance as a percentage of the allocated allowance. If circumstances differ materially from the assumptions used in determining the allowance, future adjustments to the allowance may be necessary and results of operations could be affected. Because events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above.

The following table shows the activity in the allowance for loan losses in the periods indicated:

	Year Ended June 30,
	2009			2008			2007			2006			2005
	(Dollars in thousands)
Balance at beginning of period	$	1,834		$	1,110		$	1,000		$	945		$	936
Loans charged off:
Real estate mortgage		3,585			740			—			—			—
Commercial loan		171			37			9			—			5
Commercial leases		561			250			265			40			184
Consumer		587			262			202			146			143
Total charge-offs		4,904			1,289			476			186			332
Recoveries:
Real estate mortgage		—			—			—			41			—
Commercial loan		51			6			33			16			5
Commercial leases		65			47			48			78			54
Consumer		75			40			75			41			57
Total recoveries		191			93			156			176			116
Net loans charged off		4,713			1,196			320			10			216
Provision for loan losses		5,902			1,920			430			65			225
Balance at end of period	$	3,023		$	1,834		$	1,110		$	1,000		$	945
Ratio of net charge-offs to average loans outstanding during the period		2.03	%		0.53	%		0.15	%		0.01	%		0.14	%
Ratio of allowance to non-performing loans		26.89	%		72.40	%		230.34	%		409.84	%		2,487.45	%

15

The following table allocates the allowance for loan losses by loan category at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.

	As of June 30, 2009				As of June 30, 2008				As of June 30, 2007				As of June 30, 2006				As of June 30, 2005
	Amount		% of Loans to Total Loans		Amount		% of Loans to Total Loans		Amount		% of Loans to Total Loans		Amount		% of Loans to Total Loans		Amount		% of Loans to Total Loans
	(Dollars in thousands)
Real estate mortgage:
Residential	$	64	28.7	%	$	70	30.0	%	$	45	33.1	%	$	61	40.6	%	$	60	44.5	%
Commercial		205	22.1			41	17.7			144	16.1			67	14.9			79	15.0
Construction		362	10.9			381	12.8			146	10.6			64	7.0			55	3.3
Consumer and other		526	8.3			191	9.0			137	9.1			67	9.2			99	9.2
Commercial Business		549	24.4			94	22.9			413	23.4			558	17.5			494	16.7
Commercial Leases		713	5.6			237	7.6			225	7.7			183	10.8			158	11.3
Unallocated		604	—			820	—			—	—			—	—			—	—
Total allowance for loan Losses	$	3,023	100.00	%	$	1,834	100.00	%	$	1,110	100.0	%	$	1,000	100.0	%	$	945	100.0	%

The following table sets forth information with respect to the Company’s nonperforming assets at the dates indicated.

	At June 30,
	2009			2008			2007			2006			2005
	(Dollars in thousands)
Loans accounted for on a non-accrual basis: (1)
Real estate:
Residential	$	134		$	81		$	168		$	13		$	—
Commercial		2,302			—			—			146			—
Construction		3,232			1,989			—			—			—
Consumer		146			6			14			7			16
Commercial Loan/Lease		5,427			457			300			78			22
Total		11,241			2,533			482			244			38
Accruing loans which are contractually past due 90 days or more		—			—			—			—			—
Total nonperforming loans		11,241			2,533			482			244			38
Other nonperforming assets (2)		1,265			7			5			—			60
Total nonperforming assets	$	12,506		$	2,540		$	487		$	244		$	98
Nonperforming loans to total loans		5.11	%		1.10	%		0.21	%		0.12	%		0.02	%
Nonperforming assets to total assets		4.66	%		0.97	%		0.19	%		0.11	%		0.05	%
Troubled debt restructurings (3)	$	4,112		$	1,550			—			—			—

(1) Nonaccrual status denotes loans on which, in the opinion of management, the collection of additional interest is unlikely. Payments received on a nonaccrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the collectability of the loan.

(2) Other nonperforming assets represents property and equipment acquired by the Company through foreclosure or repossession.

(3) Certain troubled debt restructurings are accounted for on a non-accrual basis and included in total non-performing loans above.

At June 30, 2009, nonaccrual construction loans totaled $3.2 million and consisted of $845,000 in residential construction and development loans and a $2.4 million loan collateralized by commercial and residential lots. Commercial real estate includes $1.4 million in mixed use properties and an $866,000 hotel property. All commercial real estate and construction loans are considered well securitized. Commercial loans/leases include a $2.5 million loan supporting a borrower’s various business interests including commercial properties. In addition, this category includes two loans amounting to $1.2 million to borrowers operating retail businesses. Of the $4.8 million in commercial business non-accrual loans, $1.3 million have an SBA guarantee.

16

During the twelve months ended June 30, 2009, the Company modified the terms of four loans in the amount of $4.1 million in troubled debt restructurings. The Company recorded $349,000 in interest income on these loans in the year ended June 30, 2009. The Company currently expects to collect all principal and interest of these loans based on the modified loan terms. The Company is not committed to lend any additional monies pertaining to these loans.

Subsequent to June 30, 2009, the Company was notified by a borrower, who was previously current on their payments, that they were requesting a modification of terms of their loan in the amount of $1.5 million, which, if granted, would represent a troubled debt restructuring. The Company is currently in negotiations with this borrower, who is now delinquent.

During the year ended June 30, 2009 the amount of interest that would have been recorded on non-accrual and restructured loans at June 30, 2009 had the loans performed in accordance with their original terms was approximately $750,000. The amount of interest actually recorded during fiscal year 2009 was $423,000.

At June 30, 2009, the Company had no loans not classified as nonaccrual, 90 days past due or restructured where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and may subsequently result in disclosure as nonaccrual, 90 days past due or restructured.

The Company accepted a $2 million note receivable from Bradford Mid-Tier Company as payment for the merger termination fee. See Note 1, “Termination of Merger Agreement,” to the consolidated financial statements. Effective December 31, 2008, Bradford Mid-Tier Company renewed the note payable to the Company. The renewed promissory note matures on December 31, 2011 and provides for interest equal to the prime rate but no less than 3.25%. In the event Bradford Mid-Tier Company elects to defer interest payments in 2010 or 2011, the interest rate will be increased to the prime rate plus 0.70%. Repayment of this debt is guaranteed by the FDIC under the FDIC’s Temporary Liquidity Guarantee Program.

On August 28, 2009, Bradford Bank, a wholly owned subsidiary of Bradford Mid-Tier Company, was closed by the Office of Thrift Supervision (“OTS”) and the FDIC was appointed receiver. As a result of Bradford Bank being placed into receivership, the OTS was appointed statutory trustee of Bradford Mid-Tier Company. The $2 million note matures on December 31, 2011 and the Company expects to pursue collection from the FDIC at that time or earlier if an event of a default occurs prior to this date.

Noninterest Income. The Company’s noninterest income generally consists of deposit fees, service charges, fees on the sale of annuities and investment products, and gains and losses on sales of securities, loans and repossessed and other assets. Total non-interest income decreased by $2.0 million or 70% to $841,000 during the year ended June 30, 2009 from $2.8 million during the year ended June 30, 2008. This decrease was due to the $2.0 million fee recognized in the previous year in the mutual agreement to terminate the agreement and Plan of Merger with Bradford Bancorp, Inc. Refer to the section above regarding the collectability of this note.

Noninterest Expense. The Company’s total noninterest expense increased by $3.3 million or 45.0%, to $10.7 million during fiscal 2009, as compared to $7.4 million in fiscal 2008. This increase in fiscal year 2009 resulted from the write-off of goodwill associated with previous bank acquisitions. During the year, the Company engaged an independent third party to perform an evaluation of goodwill, and based primarily on the depressed stock prices of the Company and its peers, the entire amount of goodwill on the balance sheet in the amount of $2,954,000 was determined to be impaired. Excluding the impact of the goodwill charge, noninterest expense increased $360,000 or 4.9% over the prior year. Compensation and benefit expense increased $194,000 or 4.6% as open positions, created in anticipation of the merger with Bradford Bancorp, were filled. FDIC deposit insurance costs increased $325,000 or 1,477% to $347,000 in 2009 versus $22,000 in 2008. These costs in 2009 included a $122,000 special assessment on June 30, 2009. In addition, higher ongoing premium rates and the expiration of credits also contributed to the increase. FDIC deposit insurance is expected to cost approximately $450,000 in fiscal year 2010 excluding further special assessments. Professional fees and other operating expenses declined 34.5% and 9.1%, respectively as these costs were inflated in 2008 due to the planned merger with Bradford Bancorp. Conversely, advertising costs doubled to $66,000 as the Company ramped up advertising subsequent to the merger effort. Data processing costs were $372,000, $54,000 or 17.0% higher than in 2008 when they totaled $318,000. This increase was due to a conversion of the Company’s primary operating systems in 2009.

17

Income Tax Provision. The Company had an income tax benefit of $1.6 million (or 23.1% of pre-tax loss) in 2009, compared to expense of $775,000 (or 36.0% of pre-tax income) in 2008. There was no tax benefit recorded associated with the $2.96 million goodwill impairment charge in 2009 due to the non-deductible nature of this item for tax purposes. A valuation allowance is established against deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. Management has determined that there was no need for a valuation allowance for deferred taxes as of June 30, 2009 and 2008.

Asset/Liability Management

The Company’s net income is largely dependent on the Bank’s net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. Net interest income is also affected by changes in the portion of interest-earning assets that are funded by interest-bearing liabilities rather than by other sources of funds, such as noninterest-bearing deposits, other liabilities and stockholders’ equity.

The Company has established an Asset/Liability Management Committee (“ALCO”) that currently is comprised of four non-employee directors, the President, the Chief Financial Officer and the Senior Vice Presidents of Lending and Operations. This Committee meets on a monthly basis and reviews the maturities of the Company’s assets and liabilities and establishes policies and strategies designed to regulate the Company’s flow of funds and to coordinate the sources, uses and pricing of such funds. The first priority in structuring and pricing the Company’s assets and liabilities is to maintain an acceptable net interest margin while reducing the net effects of changes in interest rates.

Management’s principal strategy in managing the Company’s interest rate risk has been to maintain short and intermediate-term assets in the portfolio, including locally originated adjustable-rate commercial real estate and commercial business loans. In addition, the Company has investment securities available for sale, carried at fair value, totaling $16.1 million as of June 30, 2009. The Company is holding these investment securities as available for sale because it may sell these securities prior to maturity should it need to do so for liquidity or asset and liability management purposes.

The Company’s Board of Directors is responsible for reviewing the Company’s asset and liability management policies. The Asset/Liability Management Committee reports to the Board monthly on interest rate risk and trends, as well as, liquidity and capital ratios and requirements. The Company’s management is responsible for administering the policies of the Board of Directors with respect to the Company’s asset and liability goals and strategies.

The Bank’s interest rate sensitivity, as measured by the re-pricing of its interest sensitive assets and liabilities at June 30, 2009, is presented in the following table. The table was derived using assumptions which management believes to be reasonable.

18

The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at June 30, 2009 that are expected to mature or reprice in each of the time periods shown.

	Three Months or Less			Over Three Months Through One Year			Over One Through Five Years			Over Five Through Ten Years			Over Ten Through Twenty Years			Over Twenty Years			Total
	(Dollars in thousands)
Rate sensitive assets:
Loans receivable	$	59,765		$	39,160		$	78,376		$	31,863		$	9,378		$	1,408		$	219,950
Investment securities		3,253			4,871			5,474			1,586			693			207			16,084
Short-term investments and other interest-earning assets		13,651			—			—			—			—			—			13,651
Total		76,669			44,031			83,850			33,449			10,071			1,615			249,685
Rate sensitive liabilities:
Deposits		30,115			67,694			80,417			14,132			3,253			897			196,508
Borrowings		12,200			11,000			11.100			5,000			—			—			39,300
Total		42,315			78,694			91,517			19,132			3,253			897			235,808
Interest sensitivity gap	$	34,354		$	(34,663	)	$	(7,667	)	$	14,317		$	6,818		$	718		$	13,877
Cumulative interest sensitivity gap	$	34,354		$	(309	)	$	(7,976	)	$	6,341		$	13,159		$	13,877
Ratio of cumulative gap to total assets		12.80	%		(0.12	)%		(2.97	)%		2.36	%		4.90	%		5.17	%

The interest rate-sensitivity of the Company’s assets and liabilities illustrated in the table above could vary substantially if different assumptions were used or actual experience differs from the assumptions used. If passbook and NOW accounts were assumed to mature in one year or less, the Company’s one-year positive gap would be negative.

19

Certain shortcomings are inherent in the method of analysis presented in the above table. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. The ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.

The Company utilizes two additional measures of risk. These are quantitative measures of the percentage change in net interest income and equity capital resulting from a hypothetical change of plus or minus 200 basis points in market interest rates for maturities from one day to thirty years. As of June 30, 2009, the Bank had the following estimated sensitivity profile for net interest income and fair value of equity:

	+ 200 basis points		-200 basis points		Policy Limit
% Change in Net Interest Income	3.0	%	-8.9	%	+10.0	%
% Change in Fair Value of Equity	-11.1	%	15.1	%	+25.0	%

Liquidity and Capital Resources

An important component of the Company’s asset/liability structure is the level of liquidity available to meet the needs of customers and creditors. The Company’s Asset/Liability Management Committee has established general guidelines for the maintenance of prudent levels of liquidity. The Committee continually monitors the amount and source of available liquidity, the time to acquire it and its cost.

The Company’s most liquid assets are cash on hand, interest-bearing deposits in other financial institutions and Federal funds sold, which are short-term, highly liquid investments with original maturities of less than three months that are readily convertible to known amounts of cash. The levels of these assets are dependent on the Company’s operating, financing and investing activities during any given period. At June 30, 2009, the Company’s cash on hand, interest-bearing deposits and Federal funds sold totaled $19.8 million.

The Company anticipates that it will have sufficient funds available to meet its current loan origination, and unused lines-of-credit commitments of approximately $26.1 million at June 30, 2009. Certificates of deposit that are scheduled to mature in less than one year at June 30, 2009 totaled $75.9 million. Historically, a high percentage of maturing deposits have remained with the Company.

The Company’s primary sources of funds are deposits, borrowings and proceeds from maturing investment securities and mortgage-backed securities and principal and interest payments on loans. While maturities and scheduled amortization of mortgage-backed securities and loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, competition and other factors.

The Company, as the holding company for the Bank, has an annual cash requirement of approximately $655,000 for the payment of preferred stock dividends and debt service on the subordinated debentures. The only source of internal funds for the holding company is dividends from the Bank. The amount of dividends that can be paid to the Company from the Bank is limited by the earnings of the Bank.

20

At June 30, 2009, the Bank exceeded all regulatory minimum capital requirements. The table below presents certain information relating to the Bank’s regulatory capital compliance at June 30, 2009.

	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Total Regulatory Capital (to Risk Weighted Assets)	$	23,933	11.58	%	$	16,536	8.00	%	$	20,670	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		21,359	10.33			8,268	4.00			12,402	6.00
Tier 1 Leverage Ratio		21,359	7.98			10,701	4.00			13,377	5.00

Contingencies and Off-Balance Sheet Items

The Company is a party to financial instruments with off-balance sheet risk including commitments to extend credit under both new facilities and under existing lines of credit. Commitments to fund loans typically expire after 60 days, commercial lines of credit are subject to annual reviews and home equity lines of credit are generally for a term of 20 years. These instruments contain, to varying degrees, credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

Off-balance sheet financial instruments whose contract amounts represent credit and interest rate risk are summarized as follows at June 30:

(In thousands)	2009		2008
Commitments to originate new loans	$	19,516	$	20,087
Undisbursed lines of credit		6,564		11,787
Financial standby letters of credit		1,392		2,055

Impact of Inflation and Changing Prices

The Consolidated Financial Statements and Notes thereto presented in this Annual Report have been prepared in accordance with accounting principles generally accepted in The United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

21

Report of Independent Registered Public Accounting Firm

To the Board of Directors and

Stockholders of Patapsco Bancorp, Inc.

Dundalk, Maryland

We have audited the accompanying consolidated statements of financial condition of Patapsco Bancorp, Inc. and subsidiaries as of June 30, 2009 and 2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for the years then ended. Patapsco Bancorp, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Patapsco Bancorp, Inc. and subsidiaries as of June 30, 2009 and 2008 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Beard Miller Company LLP

Baltimore, Maryland

September 25, 2009

22

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

June 30, 2009 and 2008

(dollars in thousands except for per share data)	2009			2008
Assets
Cash on hand and due from banks	$	6,143		$	4,617
Interest bearing deposits in other financial institutions		13,651			2,103
Federal funds sold		—			2,473
Total Cash and Cash Equivalents		19,794			9,193
Securities available for sale		16,084			9,601
Loans receivable, net of allowance for loan losses of $3,023 and $1,834, respectively		216,927			227,514
Investment securities required by law, at cost		2,817			2,649
Real estate acquired through foreclosure		1,265			—
Property and equipment, net		3,965			4,178
Intangible assets		246			3,251
Accrued interest and other assets		7,269			4,908
Total Assets	$	268,367		$	261,294
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing deposits	$	11,287		$	13,113
Interest bearing deposits		196,508			184,773
Total Deposits		207,795			197,886
Junior subordinated debentures		5,000			5,000
Long-term debt		34,300			37,300
Accrued expenses and other liabilities		1,580			1,717
Total liabilities		248,675			241,903
					—
Stockholders’ equity
Preferred Stock - Series A Cumulative Perpetual; $0.01 par value; authorized 1,000,000 shares with a liquidation preference of $1,000 per share; 6,000 and -0- outstanding, respectively		5,698			—
Warrant preferred stock – Series B Cumulative Perpetual; $0.01 par value; authorized 1,000,000 shares with a liquidation preference of $1,000 per share; 300 and -0- outstanding, respectively		334			—
Common stock $0.01 par value; authorized 4,000,000 shares; issued and outstanding 1,864,974 and 1,861,855, respectively		19			18
Additional paid-in capital		7,411			7,346
Obligation under deferred compensation		454			442
Deferred compensation contra		(78	)		(78	)
Retained earnings, substantially restricted		5,866			11,851
Accumulated other comprehensive loss, net of taxes		(12	)		(188	)
Total Stockholders’ Equity		19,692			19,391
Total Liabilities and Stockholders’ Equity	$	268,367		$	261,294

See accompanying notes to consolidated financial statements.

23

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

Years Ended June 30, 2009 and 2008

(in thousands except for per share data)	2009			2008
Interest Income:
Loans receivable, including fees	$	15,104		$	16,320
Investment securities		554			662
Federal funds sold and other investments		39			209
Total Interest Income		15,697			17,191
Interest Expense:
Deposits		5,277			6,285
Interest on short-term debt		95			188
Interest on long-term debt and junior subordinated debentures		1,687			2,092
Total Interest Expense		7,059			8,565
Net interest income		8,638			8,626
Provision for loan losses		5,902			1,920
Net interest income after provision for loan losses		2,736			6,706
Non-Interest Income:
Fees and service charges		730			706
Merger termination fee		—			2,000
Other		111			113
Total Non-Interest Income		841			2,819
Non-Interest Expense:
Compensation and employee benefits		4,400			4,206
Professional fees		423			646
Federal deposit insurance assessments		347			22
Equipment expenses		306			325
Net occupancy costs		603			565
Advertising		66			33
Data processing		372			318
Amortization of core deposit intangible		51			51
Telephone, postage and delivery		297			252
Goodwill impairment charge		2,954			—
Other		869			955
Total Non-Interest Expense		10,688			7,373
(Loss) Income Before (benefit) provision for Income Taxes		(7,111	)		2,152
(Benefit) Provision for income taxes		(1,645	)		775
Net (Loss) Income	$	(5,466	)	$	1,377
Preferred Stock Dividends and Accretion		173			—
Net (Loss) Income Available for Common Shareholders	$	(5,639	)	$	1,377
Basic (loss) earnings per common share	$	(2.93	)	$	0.72
Diluted (loss) earnings per common share	$	(2.93	)	$	0.71
Cash dividends declared per common share	$	0.11		$	0.28

See accompanying notes to consolidated financial statements.

24

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

Years Ended June 30, 2009 and 2008

(dollars in thousands except for per share data)	Preferred Stock		Warrant Preferred Stock			Common Stock		Additional Paid-In Capital			Temp. Equity ESOP Shares Subject to Put			Obligation Under Deferred Compensation		Retained Earnings			Accumulated Other Comprehensive Loss, Net of Taxes			Total Stockholders’ Equity
Balance at June 30, 2007	$	—	$	—		$	18	$	6,937		$	935		$	345	$	10,994		$	(313	)	$	18,916
Comprehensive income:
Net income		—		—			—		—			—			—		1,377			—			1,377
Change in unrealized losses on Securities available-for-sale, net of taxes of $76		—		—			—		—			—			—		—			125			125
Comprehensive income		—		—			—		—			—			—		—			—			1,502
Common stock dividends declared, ($0.28 per share)		—		—			—		—			—			—		(520	)		—			(520	)
Common stock issued (391 shares)		—		—			—		9			—			—		—			—			9
Amortization of deferred compensation-restricted stock awards		—		—			—		57			—			—		—			—			57
Options exercised and related tax benefit, 27,040 shares		—		—			—		225			—			—		—			—			225
Shares surrendered in exercise of stock options, 6,942 shares		—		—			—		(158	)		—			—		—			—			(158	)
Purchase of shares under ESOP put option, 28,676 shares		—		—			—		(659	)		—			—		—			—			(659	)
Transfer from temporary equity		—		—			—		935			(935	)		—		—			—			—
Obligation under deferred compensation		—		—			—		—			—			19		—			—			19
Balance at June 30, 2008		—		—			18		7,346			—			364		11,851			(188	)		19,391
Cumulative effect adjustment for adoption of EITF Issue No. 06-4		—		—			—		—			—			—		(149	)		—			(149	)
Comprehensive loss:
Net loss		—		—			—		—			—			—		(5,466	)		—			(5,466	)
Change in unrealized losses on Securities available-for-sale, net of taxes of $114		—		—			—		—			—			—		—			176			176
Comprehensive loss		—		—			—		—			—			—					—			(5,290	)
Common stock cash dividends declared, ($0.11 per share)		—		—			—		—			—			—		(205	)		—			(205	)
Common stock issued (704 shares)		—		—			1		4			—			—		—			—			5
Issuance of preferred & warrant preferred stock		5,661		339			—		—			—			—					—			6,000
Dividends declared – preferred & warrant preferred stock		—		—			—		—			—			—		(133	)		—			(133	)
Accretion of net discount on preferred & warrant preferred stock		37		(5	)		—		—			—			—		(32	)		—			—
Amortization of deferred compensation- restricted stock awards		—		—			—		61			—			—					—			61
Obligation under deferred compensation		—		—			—		—			—			12					—			12
Balance at June 30, 2009	$	5,698	$	334		$	19	$	7,411		$	0		$	376	$	5,866		$	(12	)	$	19,692

See accompanying notes to consolidated financial statements.

25

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended June 30, 2009 and 2008

(in thousands)	2009			2008
Cash flows from operating activities:
Net (loss) income	$	(5,466	)	$	1,377
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation		327			352
Provision for losses on loans		5,902			1,920
Non-cash compensation under stock-based benefit plans		87			63
Income tax benefit from exercise of stock options		—			(47	)
Amortization of core deposit intangible		51			51
Amortization of premiums and discounts, net		111			47
Goodwill impairment charge		2,954			—
Increase in cash value of bank-owned life insurance		(77	)		(75	)
Amortization of deferred loan origination fees, net of costs		(2	)		(21	)
Increase in accrued interest and other assets		(1,925	)		(660	)
Merger termination fee earned, not collected		—			(2,000	)
(Decrease) increase in accrued expenses and other liabilities		(173	)		50
Net cash provided by operating activities		1,789			1,057
Cash flows from investing activities:
Purchase of securities available for sale		(10,621	)		(977	)
Proceeds from maturing securities available for sale and principal payments on mortgage-backed securities available for sale		4,341			4,695
Loan principal (disbursements), net of repayments		2,927			(6,632	)
Purchase of consumer loans		—			(577	)
Increase in investment required by law		(168	)		(50	)
Purchases of property and equipment		(114	)		(56	)
Net cash used in investing activities		(3,635	)		(3,597	)
Cash flows from financing activities:
Net increase in deposits		9,823			6,796
Net increase in advance payments by borrowers		92			32
Proceeds from long-term borrowings		17,500			19,200
Repayments of long-term borrowings		(20,500	)		(20,700	)
Cash received from the issuance of preferred stock		5,661			—
Cash received from the issuance of warrant preferred stock		339			—
Cash received in exercise of common stock options		—			114
Repurchase of common stock due to ESOP put options		—			(659	)
Dividends paid		(468	)		(520	)
Net cash provided by financing activities		12,447			4,263
Net increase in cash and cash equivalents		10,601			1,723
Cash and cash equivalents at beginning of year		9,193			7,470
Cash and cash equivalents at end of year	$	19,794		$	9,193
Supplemental information:
Interest paid	$	7,289		$	8,371
Income taxes paid		386			1,535
Real estate acquired through foreclosure		1,265			-0-

See accompanying notes to consolidated financial statements.

26

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(1) Basis of Presentation and Summary of Significant Accounting Policies

Description of Business

Patapsco Bancorp, Inc. (the Company) is the holding company of The Patapsco Bank (Patapsco). Patapsco owns 100% of Prime Business Leasing, Inc. (Prime Leasing) and Patapsco Financial Services, Inc. (Patapsco Financial). The primary business of Patapsco is to attract deposits from individual and corporate customers and to originate residential and commercial mortgage loans, commercial loans and consumer loans, primarily in the Greater Baltimore Metropolitan area. Patapsco is subject to competition from other financial and mortgage institutions in attracting and retaining deposits and in making loans. Patapsco is subject to the regulations of certain agencies of the federal government and undergoes periodic examination by those agencies. The primary business of Prime Leasing is the servicing of commercial finance leases. In October, 2008 management made a strategic decision to cease the origination of leases. The primary business of Patapsco Financial is the sale of consumer investment products.

Termination of Merger Agreement

On January 3, 2008, Patapsco Bancorp, Inc. and Bradford Bancorp, Inc. announced that they mutually terminated the Agreement and Plan of Merger that the parties previously executed on March 19, 2007. Pursuant to the termination agreement, Bradford Mid-Tier Company agreed to pay the Company a termination fee of $2.0 million payable in the form of a promissory note. This $2.0 million was recognized as income in the quarter ended March 31, 2008. The promissory note matured on December 31, 2008, at which point Bradford Mid-Tier Company renewed the note. The renewed promissory note matures on December 31, 2011 and provides for interest equal to the prime rate but no less than 3.25%. Bradford Mid-Tier Company prepaid the first year’s interest payments. In the event Bradford Mid-Tier Company elects to defer interest payments in 2010 or 2011, the interest rate will be increased to the prime rate plus 0.70%. Repayment of this debt is guaranteed by the FDIC under the FDIC’s Temporary Liquidity Guarantee Program.

On August 28, 2009, Bradford Bank, a wholly owned subsidiary of Bradford Mid-Tier Company, was closed by the Office of Thrift Supervision (“OTS”) and the FDIC was appointed receiver. As a result of Bradford Bank being placed into receivership, the OTS was appointed statutory trustee of Bradford Mid-Tier Company. The $2 million note matures on December 31, 2011 and the Company expects to pursue collection from the FDIC at that time or earlier if an event of a default occurs prior to this date.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Patapsco, Prime Leasing and Patapsco Financial. All significant intercompany accounts and transactions have been eliminated in consolidation.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the statements of financial condition and income and expenses for the periods then ended. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, the valuation of financial instruments, the valuation of real estate acquired through foreclosure and the valuation of deferred tax assets.

Management believes that the allowance for loan losses is adequate. While management uses and considers available information in making the required estimates, additional provisions for losses may be necessary based on changes in economic conditions, particularly in Baltimore and the State of Maryland. In addition, various regulatory agencies, as an integral part of their examination process, periodically review Patapsco’s allowance for loan losses. Such agencies may require Patapsco to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

27

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Effective April 1, 2009, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events.” SFAS No. 165 established general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. SFAS No. 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which a company should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that should be made about events or transactions that occur after the balance sheet date. In preparing these financial statements, the Company evaluated the events and transactions that occurred between June 30, 2009 and September 25, 2009, the date these financial statements were issued.

Significant Concentrations of Credit Risk

Most of the Company’s activities are with customers in the Greater Baltimore Metropolitan Area. Note 2 discusses the types of securities the Company invests in. Note 3 discuses the types of lending that the Company engages in. The Company’s largest lending relationship is $2.9 million.

The Company’s residential lending operations are focused in the State of Maryland, primarily the Baltimore Metropolitan area. While residential lending is generally considered to involve less risk than other forms of lending, payment experience on these loans is dependent to some extent on economic and market conditions in the Company’s primary lending area.

The Company has money market investments with one institution, the total of which exceeds the FDIC insurance limitations. This constitutes a concentration of credit risk.

Cash and Cash Equivalents

Cash equivalents include short-term investments, with an original maturity of 90 days or less, which consist of federal funds sold and interest-bearing deposits in other financial institutions.

Securities

Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. As the Company does not engage in securities trading, the balance of its debt and equity securities are classified as available-for-sale and recorded at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of tax effects. All of the Company’s securities are classified as available for sale at June 30, 2009 and 2008.

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

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

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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

comprehensive income. This FSP is effective for the Company for interim and annual reporting periods ending June 30, 2009 and after. The adoption of this FSP for the year ended June 30, 2009 did not have a material impact on the Company’s financial condition or results of operations.

For purposes of computing realized gains or losses on the sales of securities, cost is determined using the specific identification method. Premiums and discounts on securities are amortized over the term of the security using the interest method.

Investments Securities Required by Law

Investment securities required by law represent Federal Reserve Bank of Richmond and Federal Home Loan Bank of Atlanta stock, which are considered restricted as to marketability. Management evaluates the Company’s restricted stock in the FHLB for impairment in accordance with Statement of Position (“SOP”) 01-6, “Accounting by Certain Entities (Including With Trade Receivables) That Lend to or Finance The Activities of Others.” Management’s determination of whether this investment is impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB. The Company has concluded that the restricted stock investment is not impaired as of June 30, 2009.

Loans Held For Sale

Loans held for sale are carried at the lower of aggregate cost or fair value. Fair value is determined based on outstanding investor commitments or, in the absence of such commitments, based on current investor yield requirements. Gains and losses on loan sales are determined using the specific identification method. There were no loans held for sale at June 30, 2009 and 2008.

Loans Receivable

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

The Company accounts for loans in accordance with SFAS No. 15, “Accounting by Debtor and Creditors for Troubled Debt Restructurings,” when due to a deterioration in a borrower’s financial position, the Company grants concessions that would not otherwise be considered. Troubled debt restructured loans are tested for impairment under SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”. Interest income is recognized on these loans using the accrual method of accounting, provided they are performing in accordance with their restructured terms and are considered collectible.

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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Loan Fees

Loan origination fees are deferred and amortized to income over the contractual lives of the related loans using the interest method. Certain incremental direct loan origination costs are deferred and recognized over the contractual lives of the related loans using the interest method as a reduction of the loan yield. Deferred fees and costs are combined where applicable and the net amount is amortized.

Allowance for Loan Losses

The allowance for loan losses (“allowance”) represents an amount, that in the judgment of management, will be adequate to absorb probable losses on outstanding loans and leases that may become uncollectible. The allowance represents an estimate made based upon two principles of accounting: (1) Statement of Financial Accounting Standards (“SFAS”) No.5 “Accounting for Contingencies”, that requires losses to be accrued when their occurrence is probable and estimable, and (2) SFAS No. 114 “Accounting by Creditors for Impairment of a Loan”, that requires losses be accrued when it is probable that the lender will not collect all principal and interest due under the original terms of the loan. The adequacy of the allowance is determined through careful evaluation of the loan portfolio. This determination is inherently subjective and requires significant estimates, including estimated losses on pools of homogeneous loans based on historical loss experience and consideration of the current economic environment and other qualitative factors that may be subject to change. Loans and leases deemed uncollectible are charged against the allowance and recoveries of previously charged-off amounts are credited to it. The level of the allowance is adjusted through the provision for loan losses that is recorded as a current period expense.

The methodology for assessing the appropriateness of the allowance includes a specific allowance, a formula allowance and a nonspecific allowance. The specific allowance is for risk rated credits on an individual basis. The formula allowance reflects historical losses by credit category. The nonspecific allowance captures losses whose impact on the portfolio have occurred but have yet to be recognized in either the specific allowance or the formula allowance. The factors used in determining the nonspecific allowance include trends in delinquencies, trends in volumes and terms of loans, the size of loans relative to the allowance, concentration of credits, the quality of the risk identification system and credit administration and local and national economic trends.

A loan is determined to be impaired when, based on current information and events, it is probable that Patapsco will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is not considered impaired during a period of insignificant delay in payment if Patapsco expects to collect all amounts due, including past-due interest. Patapsco generally considers a period of insignificant delay in payment to include delinquency up to and including 90 days. Impairment is measured through a comparison of the loan’s carrying amount to the present value of its expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller-balance homogeneous loans are evaluated collectively for impairment. Accordingly, the Company does not separately identify individual residential first and second mortgage loans and consumer installment loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

Impaired loans are therefore generally comprised of commercial mortgage, real estate development, and certain restructured residential loans. In addition, impaired loans are generally loans which management has placed in nonaccrual status since loans are placed in nonaccrual status on the earlier of the date that management determines that the collection of principal and/or interest is in doubt or the date that principal or interest is 90 days or more past-due.

Patapsco recognized interest income for impaired loans consistent with its method for nonaccrual loans. Specifically, interest payments received are recognized as interest income or, if the ultimate collectibility of principal is in doubt, are applied to principal.

Property and Equipment

Land is carried at cost. Property and equipment are stated at cost less accumulated depreciation computed by use of the straight-line method over the estimated useful lives of the related assets. Additions and betterments are

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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

capitalized and costs of repairs and maintenance are expensed when incurred. The related costs and accumulated depreciation are eliminated from the accounts when an asset is sold or retired and the resultant gain or loss is credited or charged to income.

Real Estate Acquired Through Foreclosure and Other Repossessed Assets

Real estate acquired through foreclosure and other repossessed assets are initially recorded at the estimated fair value, net of estimated selling costs, and subsequently at the lower of carrying cost or fair value less estimated costs to sell. Costs relating to holding such property are charged against income in the current period, while costs relating to improving such real estate are capitalized until a salable condition is reached. At June 30, 2009 and 2008, the Company had other repossessed assets of $1,265,000 and $7,000, respectively. Operating expenses, net of rental income was $14,000 and $16,000 for the years ended June 30, 2009 and June 30, 2008, respectively.

Deferred Income Taxes

Deferred income taxes are recognized, with certain exceptions, for temporary differences between the financial reporting basis and income tax basis of assets and liabilities based on enacted tax rates expected to be in effect when such amounts are realized or settled. Deferred tax assets are recognized only to the extent that it is more likely than not that such amounts will be realized based on consideration of available evidence, including tax planning strategies and other factors. The effects of changes in tax laws or rates on deferred tax assets and liabilities are recognized in the period that includes the enactment date.

Earnings per Share of Common Stock

Basic earnings per common share amounts are based on the weighted average shares of common stock outstanding. Diluted earnings per share assume the conversion, exercise or issuance of all potential common stock instruments such as options, warrants and convertible securities, unless the effect is to reduce a loss or increase earnings per share. Net income (loss) (numerator) was adjusted for preferred stock dividends for all affected periods presented.

	Year Ended
	June 30, 2009						June 30, 2008
(in thousands, except per share data)	Basic			Diluted			Basic		Diluted
Net income (loss) available for common shareholders	$	(5,639	)	$	(5,639	)	$	1,377	$	1,377
Weighted average common shares outstanding		1,922			1,922			1,914		1,914
Diluted securities:
Stock options		0			0			0		16
Adjusted weighted average shares		1,922			1,922			1,914		1,930
Per share amount	$	(2.93	)	$	(2.93	)	$	0.72	$	0.71

Approximately 21,000 stock options were excluded from the earnings per share computation above due to their anti-dilutive impact.

Stock-Based Compensation

In December 2004, the FASB issued SFAS No. 123 (revised), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). SFAS 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides services in exchange for the award. The Company adopted effective July 1, 2006, the new standard using the modified prospective method. Under the modified prospective method, companies are required to record compensation cost for new and modified awards over the related vesting period of such awards prospectively, and to record compensation cost prospectively on the non-vested portion, at the date of adoption, of previously issued and outstanding awards over the remaining vesting period of such awards. No change to prior periods presented is permitted under the modified prospective method. The impact of adopting the new accounting standard will be determined by share-based payments granted in future periods.

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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Comprehensive Income

Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the statement of financial condition, such items, along with net income are components of comprehensive income.

Goodwill and Intangible Assets

Goodwill is not amortized, but rather is tested for impairment on an annual basis at the reporting unit level, which is either at the same level or one level below an operating segment. Other acquired intangible assets with finite lives, such as purchased customer accounts, are required to be amortized over their estimated lives, which for the Company is 10 years. The Company periodically assesses whether events or changes in circumstances indicate that the carrying amounts of goodwill and other intangible assets may be impaired.

Intangible assets were composed of the following:

(In thousands)	June 30, 2009				June 30, 2008
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Goodwill	$	—	$	—	$	2,954	$	—
Amortizable intangible assets, acquisition of deposit accounts	$	516	$	270	$	516	$	219

During the current fiscal year, the Company engaged an independent third party to perform an evaluation of goodwill, and based primarily on the depressed stock prices of the Company and its peers, the entire amount of goodwill on the balance sheet was determined to be impaired. Accordingly, earnings for the year ended June 30, 2009 include a goodwill impairment charge of $2,954,000.

Amortization expense was $51,000 for the years presented and is expected to remain at $51,000 until the year ended June 30, 2014 when the amortization expense will be $42,000.

Advertising Costs

The Company expenses advertising costs as they are incurred.

Segment Reporting

The Company acts as an independent community financial services provider, and offers traditional banking and related financial services to individual, business and government customers. Through its branch and automated teller machine networks, the Bank offers a full array of commercial and retail financial services, including taking of time, savings and demand deposits; the making of commercial, consumer and mortgage loans; and the providing of other financial services.

Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial, retail, and mortgage operations of the Bank. As such, discrete financial information is not available and segment reporting would not be meaningful.

32

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Reclassification

Certain prior year’s amounts have been reclassified to conform to the current year’s presentation.

Guarantees

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Company, generally, holds collateral and/or personal guarantees supporting these commitments. The Company had $1,392,000 and $2,055,000 of standby letters of credit as of June 30, 2009 and June 30, 2008, respectively. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The amount of the liability as of June 30, 2009 and June 30, 2008 for guarantees under standby letters of credit issued is not material.

Off Balance Sheet Arrangements

In the ordinary course of business, the Company has entered into commitments to extend credit, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when funded.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

New Accounting Pronouncements

FSP FAS 107-1 and APB 28-1

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

This FSP is effective for the Company for interim reporting periods June 30, 2009 and after. The adoption of this FSP will not have a material impact on the Company’s financial condition or results of operations.

FASB Statement No. 141(R)

FASB Statement No. 141 (R) “Business Combinations” was issued in December of 2007. This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. The impact to the Company is dependent upon acquisitions consummated after the effective date.

33

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

FSP FAS 142-3

In April 2008, the FASB issues FASB Staff Position (“FSP”) FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (SFAS 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R), and other GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

International Financial Reporting Standards

In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (IFRS). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”). Under the proposed roadmap, the Company may be required to prepare financial statements in accordance with IFRS as early as 2014. The SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. The Company is currently assessing the impact that this potential change would have on its consolidated financial statements, and it will continue to monitor the development of the potential implementation of IFRS.

EITF 08-6

In November 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 08-6, “Equity Method Investment Accounting Considerations”. EITF 08-6 clarifies the accounting for certain transactions and impairment considerations involving equity method investments. EITF 08-6 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.

EITF 08-7

In November 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-7, “Accounting for Defensive Intangible Assets”. EITF 08-7 clarifies the accounting for certain separately identifiable intangible assets which an acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. EITF 08-7 requires an acquirer in a business combination to account for a defensive intangible asset as a separate unit of accounting which should be amortized to expense over the period the asset diminishes in value. EITF 08-7 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. This new pronouncement will impact the Company’s accounting for any defensive intangible assets acquired in a business combination completed beginning July 1, 2009.

FASB Statement No. 166

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140.” This statement prescribes the information that a reporting entity must provide in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor’s continuing involvement in transferred financial assets. Specifically, among other aspects, SFAS 166 amends Statement of Financial Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” or SFAS 140, by removing the concept of a qualifying special-purpose entity from SFAS 140 and removes the exception from applying FIN 46(R) to variable interest entities that are qualifying special-purpose entities. It also modifies the financial-components approach used in SFAS 140. SFAS 166 is effective for fiscal years beginning after November 15, 2009. We have not determined the effect that the adoption of SFAS 166 will have on our financial position or results of operations.

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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

FASB Statement No. 167

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” This statement amends FASB Interpretation No. 46, “Consolidation of Variable Interest Entities (revised December 2003) — an interpretation of ARB No. 51,” or FIN 46(R), to require an enterprise to determine whether it’s variable interest or interests give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise that has both (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. SFAS 167 also amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS 167 is effective for fiscal years beginning after November 15, 2009. We have not determined the effect that the adoption of SFAS 167 will have on our financial position or results of operations.

FASB Statement No. 168

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.” SFAS 168 replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. We do not expect the adoption of this standard to have an impact on our financial position or results of operations.

(2) Securities Available for Sale

Investment securities, classified as available for sale, are summarized as follows as of June 30:

	2009
(In thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Corporate Bonds	$	2,980	$	5	$	(167	)	$	2,818
U.S. Government agencies		6,586		3		(13	)		6,576
Mortgage-backed securities		6,539		155		(4	)		6,690
	$	16,105	$	163	$	(184	)	$	16,084
	2008
Corporate Bonds	$	2,977	$	—	$	(60	)	$	2,917
U.S. Government agencies		1,500		1		(—	)		1,501
Mortgage-backed securities		5,434		9		(260	)		5,183
	$	9,911	$	10	$	(320	)	$	9,601

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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The scheduled maturities of investments available for sale at June 30, 2009 are as follows:

	2009
(In thousands)	Amortized Cost		Fair Value
Due in less than one year	$	500	$	489
Due in one to five years		2,583		2,584
Due after five through ten years		6,219		6,122
Due after ten years		6,803		6,889
	$	16,105	$	16,084

There were no sales of securities in fiscal 2009 or 2008.

The following table shows the Company’s investment securities’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2009.

	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In Thousands)
U.S. Government agencies	$	3,565	$	(13	)	$	—	$	—		$	3,565	$	(13	)
Corporate Bonds		—		—			2,311		(167	)		2,311		(167	)
Mortgage-backed securities		—		—			1,077		(4	)		1,077		(4	)
Total Temporarily Impaired Securities	$	3,565	$	(13	)	$	3,388	$	(171	)	$	6,953	$	(184	)

At June 30, 2009, the Company had 7 securities in an unrealized loss position. Unrealized losses detailed above relate primarily to corporate bonds. The decline in fair value is considered temporary and is primarily due to interest rate fluctuations and the reduced liquidity in the corporate bond market. The Company does not have the intent to sell these securities, and it is more likely than not that it will not be required to sell the securities prior to their recovery. None of the individual unrealized losses are significant.

The following table shows the Company’s investment securities’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2008.

	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In Thousands)
Corporate Bonds	$	974	$	(3	)	$	1,943	$	(57	)	$	2,917	$	(60	)
Mortgage-backed securities		790		(12	)		3,697		(248	)		4,487		(260	)
Total Temporarily Impaired Securities	$	1,764	$	(15	)	$	5,640	$	(305	)	$	7,404	$	(320	)

36

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(3) Loans Receivable

Loans receivable are summarized as follows as of June 30:

(In thousands)	2009			2008
Real estate secured by first mortgage:
Residential	$	63,788		$	69,953
Commercial		49,188			41,316
Construction, net of loans in process		24,223			29,878
		137,199			141,147
Home improvement loans		10,138			12,688
Home equity loans		5,795			5,341
Other consumer loans		2,445			2,893
Commercial loans		54,170			53,453
Commercial leases		12,554			17,714
		222,301			233,236
Less:
Deferred loan origination fees, net of costs		191			201
Unearned interest-consumer loans		761			1,068
Unearned interest-commercial leases		1,530			2,779
Purchase accounting premium, net		(131	)		(160	)
Allowance for loan losses		3,023			1,834
Loans receivable, net	$	216,927		$	227,514

The purchase accounting premium results from the April 2004 acquisition of Parkville Federal Savings Bank. The purchase premium was determined by comparing the fair values of the loans purchased to their carrying values on the books of the acquired entity, before consideration of uncollectibility. Fair values were determined through the use of a discounted cash-flow analysis. The premium is being amortized against interest income using the level-yield method.

Impaired loans are summarized as follows as of June 30:

(in thousands)	2009		2008
Impaired loans without a related allowance	$	8,626	$	3,917
Impaired loans with a related allowance		3,085		166
Total impaired loans	$	11,711	$	4,083
Allowance for impaired loans	$	382	$	66
Average investment in impaired loans		7,380		1,749
Interest income recognized on impaired loans:
Accrual basis		—		—
Cash basis		529		43

The Company is not obligated to lend additional monies pertaining to the aforementioned impaired and non-accrual loans at June 30, 2009.

Loans on which the accrual of interest has been discontinued amounted to $11,241,000 and $2,533,000 at June 30, 2009 and 2008, respectively. The amount of interest that would have been recorded on non-accrual loans at June 30, 2009 and 2008, respectively, had the loans performed in accordance with their terms was approximately $730,000 and $197,000, respectively. The Company had no loan balances past due 90 days or more accruing interest at June 30, 2009 and 2008.

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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The activity in the allowance for loan losses is summarized as follows for the years ended June 30:

(In thousands)	2009			2008
Balance at beginning of year	$	1,834		$	1,110
Provision for losses on loans		5,902			1,920
Charge-offs		(4,904	)		(1,289	)
Recoveries		191			93
Balance at end of year	$	3,023		$	1,834

Commitments to extend credit are agreements to lend to customers, provided that terms and conditions of the commitment are met. Commitments are generally funded from loan principal repayments, excess liquidity and deposits. Since certain of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Substantially all of the Company’s outstanding commitments at June 30, 2009 and 2008 are for loans, which would be secured by various forms of collateral with values in excess of the commitment amounts. The Company’s exposure to credit loss under these contracts in the event of non-performance by the other parties, assuming that the collateral proves to be of no value, is represented by the commitment amounts.

Outstanding commitments to extend credit are as follows:

	June 30, 2009
(In thousands)	Fixed rate		Floating rate
Commercial business and lease loans	$	4,624	$	—
Real estate loans		2,405		12,487
Undisbursed lines of credit		1,609		4,955
	$	8,638	$	17,442
	June 30, 2008
Commercial business and lease loans	$	6,222	$	—
Real estate loans		2,356		11,509
Undisbursed lines of credit		1,524		10,263
	$	10,102	$	21,772

Standby letters of credit are conditional commitments issued by Patapsco to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Patapsco holds collateral supporting those commitments for which collateral is deemed necessary.

As of June 30, 2009 and June 30, 2008, Patapsco had outstanding letters of credit of $1,392,000 and $2,055,000, respectively.

As of June 30, 2009 and 2008, Patapsco was servicing loans for the benefit of others in the amount of $19,901,000 and $20,668,000, respectively. These balances represent commercial and commercial real estate participations sold. No servicing assets or liabilities have been recognized on these transactions as the Company has determined that the benefits of servicing are just adequate to compensate the servicer for its servicing responsibilities.

38

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Bank has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, officers, their immediate families and affiliated companies (commonly referred to as related parties), on the same terms including interest rates and collateral, as those prevailing at the time for comparable transactions with others. The following table presents a summary of the activity of loans receivable from related parties:

	At June 30,
(in thousands)	2009			2008
Beginning balance	$	323		$	123
New loans or draws on existing loans		443			325
Loan repayments		(257	)		(125	)
Ending balance	$	509		$	323

Subsequent to June 30, 2009, the Company was notified by a borrower, who was previously current on their payments, that they were requesting a modification of terms of their loan in the amount of $1.5 million, which, if granted, would represent a troubled debt restructuring. The Company is currently in negotiations with this borrower, who is now delinquent.

(4) Property and Equipment

Property and equipment are summarized as follows at June 30:

(In thousands)	2009		2008		Estimated Useful lives
Land	$	152	$	152	—
Building and improvements		4,508		4,507	30 - 40 years
Leasehold improvements		238		238	3 - 10 years
Furniture, fixtures and equipment		3,152		3,038	3 - 10 years
Total, at cost		8,050		7,935
Less accumulated depreciation		4,085		3,757
Property and equipment, net	$	3,965	$	4,178

Rent expense was $227,000 and $219,000 in the years ended June 30, 2009 and June 30, 2008, respectively.

At June 30, 2009, the minimal rental commitments under noncancellable operating leases relating to branch facilities are as follows:

Year ending June 30,
2010	$	182,160
2011		182,160
2012		176,830
2013		168,844
2014		155,004
Thereafter		1,705,044
	$	2,570,042

(5) Deposits

The aggregate amount of jumbo certificates of deposit, each with a minimum denomination of $100,000, was approximately $27,042,000 and $27,922,000 at June 30, 2009 and 2008, respectively.

39

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

At June 30, 2009, the scheduled maturities of certificates of deposit are as follows:

(In thousands)
Twelve months ending June 30,
2010	$	75,914
2011		16,630
2012		8,002
2013		1,157
2014		2,509
Thereafter		198
	$	104,410

(6) Borrowings

At June 30, 2009 and 2008, the Company had an agreement under a blanket-floating lien with the Federal Home Loan Bank of Atlanta providing the Company a line of credit of $60.9 million and $50.5 million, respectively. Borrowings totaled $34.3 million and $37.3 million at June 30, 2009 and 2008, respectively. The Company is required to maintain as collateral for its FHLB borrowings qualified mortgage loans in an amount equal to 133% of the outstanding advances. At June 30, 2008 the Bank had a Federal Funds accommodation with the Silverton Bank of Atlanta, GA of $5.1 million. At June 30, 2008, there were no balances outstanding on this line. At June 30, 2009 and 2008, all borrowings are at fixed rates.

At June 30, the scheduled maturities of borrowings are as follows:

	2009				2008
(In thousands)	Balance		Weighted Average Rate		Balance		Weighted Average Rate
Under 12 months	$	17,200	2.93	%	$	17,500	4.95	%
12 months to 24 months		5,100	5.57			5,700	2.53
24 months to 36 months		3,000	3.41			5,100	5.57
36 months to 48 months		—	—			—	—
48 months to 60 months		—	—			—	—
60 months to 120 months		9,000	3.69			9,000	4.09
	$	34,300	3.56	%	$	37,300	4.46	%

The borrowings from the Federal Home Loan Bank of Atlanta with conversion or call features at June 30, 2009 are detailed below:

Balance		Rate		Maturity	Call\Conversion feature
$	3,000,000	2.59	%	10/09/2018	Callable on 10/12/2010 and every three months thereafter
	5,100,000	5.57		11/17/2010	Callable every three months

(7) Junior Subordinated Debentures

On October 31, 2005, Patapsco Statutory Trust I, a Connecticut statutory business trust and an unconsolidated wholly-owned subsidiary of the Company, issued $5 million of capital trust pass-through securities to investors. The interest rate is fixed for the first seven years at 6.465%. Thereafter, the interest rate adjusts on a quarterly basis at the rate of the three month LIBOR plus 1.48%. Patapsco Statutory Trust I purchased $5,155,000 of junior subordinated deferrable interest debentures from the Company. The debentures are the sole asset of the Trust. The terms of the junior subordinated debentures are the same as the terms of the capital securities. The Company has also fully and unconditionally guaranteed the obligations of the Trust under the capital securities. The capital securities are redeemable by the Company on or after October 31, 2010, at par. The capital securities must be redeemed upon final maturity of the subordinated debentures on December 31, 2035.

40

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(8) Income Taxes

The provision for income taxes is composed of the following for the years ended June 30:

(In thousands)	2009			2008
Current:
Federal	$	(815	)	$	1,012
State		(225	)		195
Total Current Income Tax (Benefit) Expense		(1,040	)		1,207
Deferred:
Federal		(478	)		(342	)
State		(127	)		(90	)
Total Deferred Income Tax Benefit		(605	)		(432	)
Total Income Tax (Benefit) Expense	$	(1,645	)	$	775

The net deferred tax assets consist of the following at June 30:

(In thousands)	2009			2008
Unrealized losses on securities available for sale	$	8		$	122
Allowance for losses on loans and leases		1,192			723
Reserve for uncollectable interest		165			66
Deferred compensation		319			288
Other		28			8
Total deferred tax assets		1,712			1,207
Purchase accounting adjustment		(172	)		(198	)
Federal Home Loan Bank stock dividends		(168	)		(168	)
Depreciation		(76	)		(37	)
Total deferred tax liabilities		(416	)		(403	)
Net deferred tax assets	$	1,296		$	804

A reconciliation of the income tax provision (benefit) and the amount computed by multiplying income (loss) before income taxes (benefit) by the statutory Federal income tax rate of 34% is as follows for the years ended June 30:

(In thousands)	2009			2008
Tax at statutory rate	$	(2,418	)	$	732
State income taxes (benefit), net of Federal income tax benefit		(232	)		69
Non-taxable goodwill impairment charge		1,005			0
Other		—			(26	)
Income tax provision (benefit)	$	(1,645	)	$	775
Effective tax rate		23.1	%		36.0	%

The Company has qualified under provisions of the Internal Revenue Code which permit it to deduct from taxable income a provision for bad debts based on actual bad debt experience. Therefore, the provision for bad debts deducted from taxable income for Federal income tax purposes was based on the experience method.

Effective July 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). The Interpretation provides clarification on accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB No. 109, “Accounting for Income Taxes.” The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on

41

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. As a result of the Company’s evaluation of the implementation of FIN 48, no significant income tax uncertainties were identified. Therefore, the Company recognized no adjustment for unrecognized income tax benefits for the years ended June 30, 2009 and June 30, 2008. Our policy is to recognize interest and penalties on unrecognized tax benefits in income taxes expense in the Consolidated Statement of Income. The Company did not recognize any interest and penalties for the years ended June 30, 2009 and June 30, 2008. The tax years subject to examination by the taxing authorities are the years ended June 30, 2008, 2007 and 2006.

In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 “Definition of Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to July 1, 2007 for the Company. The implementation of this standard did not have a material impact on our consolidated financial position or results of operation.

(9) Regulatory Matters

The Federal Deposit Insurance Corporation (FDIC) insures deposits of account holders up to $250,000. Patapsco pays an annual premium to provide for this insurance. Patapsco is also a member of the Federal Home Loan Bank System and is required to maintain an investment in the stock of the Federal Home Loan Bank of Atlanta (FHLBA) equal to at least 4.50% of the outstanding borrowings from the FHLBA plus the lesser of 0.20% of total assets or $25 million. The investment in the FHLBA stock is reported in the balance sheet as investment securities required by law. Purchases and sales of stock are made directly with Patapsco at par value.

Pursuant to regulations of the Federal Reserve Board, all FDIC-insured depository institutions must maintain average daily reserves against their transaction accounts. No reserves are required to be maintained on the first $10.3 million of transaction accounts, reserves equal to 3% must be maintained on the next $34.1 million of transaction accounts, and a reserve of 10% must be maintained against all remaining transaction accounts. These reserve requirements are subject to adjustments by the Federal Reserve Board. Because required reserves must be maintained in the form of vault cash or in a non-interest bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution’s interest-earning assets. At June 30, 2009 and 2008, the Bank met its reserve requirements of $490,000 and $461,000, respectively.

The Company, as the holding company for the Bank, has an annual cash requirement of approximately $655,000 for the payment of preferred stock dividends and debt service on the subordinated debentures. The only source of internal funds for the holding company is dividends from the Bank. The amount of dividends that can be paid to the Company from the Bank is limited by the retained earnings of the Bank in the current calendar year and the prior two calendar years. However, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

Patapsco is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Patapsco must meet specific capital guidelines that involve quantitative measures of Patapsco’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Patapsco’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. In addition, the Bank must maintain minimum capital and other requirements of regulatory authorities when declaring or paying dividends. The Bank has complied with such capital requirements.

Quantitative measures established by regulation to ensure capital adequacy require Patapsco to maintain minimum amounts and ratios (as defined in the regulations and as set forth in the table below, as defined) of total and Tier I capital (as defined) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of June 30, 2009 and 2008, that Patapsco meets all capital adequacy requirements to which it is subject.

42

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As of June 30, 2009, the most recent notification from banking regulators categorized Patapsco as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well or adequately capitalized Patapsco must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in tables below. There are no conditions or events since that notification that management believes have changed the institution’s category.

At June 30, 2009, the Bank exceeded all regulatory minimum capital requirements. The table below presents certain information relating to the Bank’s regulatory compliance at June 30, 2009.

	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Total Capital (to Risk Weighted Assets)	$	23,933	11.58	%	$	16,536	8.00	%	$	20,670	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		21,359	10.33	%		8,268	4.00	%		12,402	6.00	%
Tier 1 Leverage Ratio		21,359	7.98	%		10,701	4.00	%		13,377	5.00	%

At June 30, 2008, the Bank exceeded all regulatory minimum capital requirements. The table below presents certain information relating to the Bank’s regulatory compliance at June 30, 2008.

	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Total Capital (to Risk Weighted Assets)	$	21,585	10.45	%	$	16,532	8.00	%	$	20,665	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		19,752	9.56	%		8,266	4.00	%		12,399	6.00	%
Tier 1 Leverage Ratio		19,752	7.63	%		10,352	4.00	%		12,940	5.00	%

(10) Stockholders’ Equity and Related Matters

In 1995, the Bank converted from a federally chartered mutual savings association to a capital stock savings bank.

Simultaneously, the Bank consummated the formation of a holding company, Patapsco Bancorp, Inc., of which the Bank is a wholly-owned subsidiary. In connection with the conversion, the Company publicly issued 362,553 shares of its common stock.

Federal regulations required that, upon conversion from mutual to stock form of ownership, a “liquidation account” be established by restricting a portion of net worth for the benefit of eligible savings account holders who maintain their savings accounts with Patapsco after conversion. In the event of complete liquidation (and only in such event), each savings account holder who continues to maintain his savings account shall be entitled to receive a distribution from the liquidation account after payment to all creditors, but before any liquidation distribution with respect to capital stock. This account will be proportionately reduced for any subsequent reduction in the eligible holders’ savings accounts. At conversion the liquidation account totaled approximately $6,088,000. In addition to the foregoing, certain bad debt reserves of approximately $2,561,000 deducted from income for federal income tax purposes and included in retained earnings of Patapsco, are not available for the payment of cash dividends or other distributions to stockholders without payment of taxes at the then-current tax rate by Patapsco, on the amount removed from the reserves for such distributions. The unrecorded deferred income tax liability on the above amount was approximately $989,000.

43

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(11) Preferred Stock

On December 19, 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, the Company entered into a Letter Agreement, and the related Securities Purchase Agreement – Standard Terms (collectively, the “Purchase Agreement”), with the United States Department of the Treasury (“Treasury”), pursuant to which the Company issued (i) 6,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation preference of $1,000 per share (“Series A preferred stock”), and (ii) a warrant to purchase an additional $300,000 in preferred stock (“Series B preferred stock”), for an aggregate purchase price of $6.0 million.

The Series A preferred stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum until February 15, 2014. Beginning February 15, 2014, the dividend rate will increase to 9% per annum. On and after February 15, 2012, the Company may, at its option, redeem shares of Series A preferred stock, in whole or in part, at any time and from time to time, for cash at a per share amount equal to the sum of the liquidation preference per share plus any accrued and unpaid dividends to but excluding the redemption date. Prior to February 15, 2012, the Company may redeem shares of Series A preferred stock only if it has received aggregate gross proceeds of not less than $1,500,000 from one or more qualified equity offerings, and the aggregate redemption price may not exceed the net proceeds received by the Company form such offerings. The redemption of the Series A preferred stock requires prior regulatory approval.

On December 19, 2008, Treasury exercised all of the warrants on the Series B preferred stock at the exercise price of $0.01 per share. The Series B preferred stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 9% per annum. The Series B preferred stock may not be redeemed until all the Series A preferred stock has been redeemed.

The Series A preferred stock and Series B preferred stock were issued in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Neither the Series A preferred stock nor the Series B preferred stock will be subject to any contractual restrictions on transfer.

(12) Benefit Plans

Employee Stock Ownership Plan

Patapsco had previously established an Employee Stock Ownership Plan (ESOP) for its employees. All ESOP shares contained a “Put Option” which required the Company to repurchase the share at the then fair market value subject to the availability of retained earnings.

The ESOP shares have been fully allocated, the Plan terminated and as of June 30, 2009 all shares subject to put option have been repurchased.

For the years ended June 30, 2009 and 2008 there was no compensation expense recognized related to the ESOP.

2004 Stock Incentive Plan

In October 2004, the shareholders of the Company approved the 2004 Stock Incentive Plan. Under this plan, 90,000 shares of common stock are available for issuance under a variety of awards. An additional 40,146 shares were made available for issuance to settle past deferred compensation obligations. This new plan replaced the Director’s retirement plan that became effective in September 1995. At the time of adoption, the directors had the option to reallocate their deferred compensation assets.

As of June 30, 2009, there are 57,255 deferred shares under this plan of which 12,906 are issued and outstanding. These deferred shares are allocated in lieu of cash compensation to Directors of the Company. These shares are included in shares outstanding for the purposes of computing earnings per share. Additionally, as of June 30, 2009 there are 13,484 non-vested shares outstanding under this plan.

Compensation expense recognized in connection with these plans during the years ended June 30, 2009 and 2008 was $63,000 and $60,000, respectively.

44

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

A summary of the status of the Company’s non-vested shares as of June 30, 2009 is presented below:

	Common Shares		Weighted Average Grant-Date Fair Value
Non-Vested as of June 30, 2008	12,649		$	13.71
Vested	(2,415	)	$	13.71
Issued	3,250		$	7.10
Forfeited	—		$	13.71
Non-vested at June 30, 2009	13,484		$	12.12

As of June 30, 2009, there was $32,000 of total unrecognized compensation costs related to non-vested share-based compensation. The cost is expected to be recognized over a weighted average period of seven months. At grant date, vesting of the shares was “cliff” vesting at the end of either a two or three year period.

Stock Options

The Company’s 1996 Stock Options and Incentive Plan (Plan) was approved by the stockholders at the 1996 annual meeting. The Plan provides for the granting of options to acquire common stock to directors and key employees. Option prices are equal or greater than the estimated fair market value of the common stock at the date of the grant. In October 1996, the Company granted options to purchase 137,862 shares at $4.60 per share. There are no remaining options to be issued under this plan.

The Company’s 2000 Stock Option and Incentive Plan was approved by the stockholders at the 2000 annual meeting. The Plan provides for the granting of options to acquire common stock to directors and key employees. Option prices are equal or greater than the estimated fair market value of the common stock at the date of the grant. The Plan provides for one-fifth of the options granted to be exercisable on each of the first five anniversaries of the date of grant. Under this plan, in August 2001 the Company granted options to purchase 99,975 shares at $6.29 per share. There are 8,971 options eligible to be issued under this plan.

The following table summarizes the status of and changes in the Company’s stock option plans during the past two years.

	Options		Weighted Average Exercise Price		Options Exercisable	Weighted Average Exercise Price		Aggregate Intrinsic Value(000s)
Outstanding, June 30, 2007	47,872		$	6.02	47,872	$	6.02	$	801
Granted	—			—
Exercised	(27,040	)		5.82
Cancelled	—			—
Outstanding, June 30, 2008	20,832		$	6.29	20,832	$	6.29	$	19
Granted	—			—
Exercised	—			—
Cancelled	—			—
Outstanding, June 30, 2009	20,832		$	6.29	20,832	$	6.29	$	0

The following table summarizes information about stock options outstanding at June 30, 2009.

Exercise Price of All Options		Number Outstanding	Remaining Contractual Life	Number Exercisable
$	6.29	20,832	2.12 years	20,832

45

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

401(K) Retirement Savings Plan

The Company has a 401(k) Retirement Savings Plan. Employees may contribute a percentage of their salary subject to limitations established by the Internal Revenue Service. The Company is obligated to contribute 3% of each employee’s salary, whether or not the employee contributes their own money. All employees who have completed six months of service with the Company in which they have worked more than 500 hours, and are at least 21 years old, are eligible to participate. The Company’s contribution to this plan was $87,000 and $88,000 for the years ended June 30, 2009 and 2008, respectively. Additionally, there is a discretionary profit sharing component to the 401(K) plan. The accrual for this component of the plan for the years ended June 30, 2009 and 2008 was $-0- and $108,000, respectively.

(13) Fair Value of Financial Instruments and Fair Value Measurements

Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments (SFAS 107) requires the Company to disclose estimated fair values for certain on- and off-balance sheet financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company’s financial instruments as of June 30, 2009 and 2008.

Fair value estimates are made at a specific point in time, based on relevant market information and information about financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect estimates.

The carrying amount and estimated fair value of financial instruments is summarized as follows at June 30:

	2009				2008
(In thousands)	Carrying amount		Fair value		Carrying amount		Fair value
Assets:
Cash and cash equivalents	$	19,794	$	19,794	$	9,193	$	9,193
Investment securities available for sale		16,084		16,084		9,601		9,601
Loans receivable		216,927		223,991		227,514		231,277
Investment securities required by law		2,817		2,817		2,649		2,649
Accrued interest receivable		1,596		1,596		1,198		1,198
Liabilities:
Deposits		207,795		208,571		197,886		198,623
Long-term debt		39,300		40,539		42,300		42,750
Accrued interest payable		436		436		666		666
Off balance sheet instruments:
Commitments to extend credit		—		—		—		—

Cash and Cash Equivalents - Due from Banks, Interest Bearings Deposits with Banks and Federal Funds Sold

The statement of financial condition carrying amounts for cash and due from banks, interest bearing deposits with banks and federal funds sold approximate the estimated fair values of such assets.

Securities Available for Sale

The fair value of securities available for sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.

46

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Loans Receivable

Loans receivable were segmented into portfolios with similar financial characteristics. Loans were also segmented by type such as residential and nonresidential, construction and land, second mortgage loans, commercial, and consumer. Each loan category was further segmented by fixed and adjustable rate interest terms.

The fair value of loans was calculated by discounting anticipated cash flows based on weighted average contractual maturity, weighted average coupon and market rates.

Impaired Loans

The Company considers loans to be impaired when it becomes probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement. All non-accrual loans are considered impaired. The measurement of impaired loans is based on the present value of the expected cash flows discounted at the historical effective interest rate, the market price of the loan, or the fair value of the underlying collateral. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances of $3.1 million less their specific valuation allowances of $382,000 as determined under SFAS 114. The increase in the allowance of $382,000 in the year ended June 30, 2009 resulted in an impairment charge of $382,000, which was included in earnings.

Securities required by Law

The carrying amount of securities required by law approximates its fair value.

Accrued Interest Receivable

The carrying amount of accrued interest receivable approximates its fair value.

Deposits

Under SFAS 107, the fair value of deposits with no stated maturity, such as non-interest bearing deposits, interest bearing NOW accounts and statement savings accounts, is equal to the carrying amounts. The fair value of certificates of deposit was based on the discounted value of contractual cash flows. The discount rate for certificates of deposit was estimated using market rates.

Long-Term Debt

The fair value of long-term debt was based on the discounted value of contractual cash flows, using market rates.

Accrued Interest Payable

The carrying amount of accrued interest payable approximates its fair value.

Off-Balance Sheet Financial Instruments and Standby Letters of Credit

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business, including mortgage loan commitments, undisbursed lines of credit on commercial business loans and standby letters of credit. These instruments involve, to various degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The fair values of such commitments are immaterial.

The disclosure of fair value amounts does not include the fair values of any intangibles, including core deposit intangibles. Core deposit intangibles represent the value attributable to total deposits based on an expected duration of customer relationships.

Effective July 1, 2008, the Company adopted SFAS No. 157 – “Fair Value Measurements” (“SFAS No. 157”). This statement defined the concept of fair value, established a framework for measuring fair value in GAAP, and expands disclosure about fair value measurements. SFAS No. 157 applies only to fair value measurements required or permitted under current accounting pronouncements, but does not require any new fair value measurements. Fair value is defined as the price to sell an asset or to transfer a liability in an orderly transaction between willing market participants as of the measurement date. The statement also expands disclosures about financial instruments that are measured at fair value and eliminates the use of large position discounts for financial instruments quoted in active markets. The disclosure’s emphasis is on the inputs used to measure fair value and the effect of the measurement on earnings for the period. The adoption of SFAS No. 157 did not have any effect on the Company’s consolidated financial position or results of operations.

47

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In December 2007, the FASB issued FASB Staff Position (FSP) 157-2, “Effective Date of FASB Statement No. 157,” that permits a one-year deferral in applying the measurement provisions of Statement No. 157 to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date of application of FASB Statement No. 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The Company has elected to defer in accordance with FSP 157-2 with regards to other real estate owned and intangible assets.

In October 2008, the FASB issued FSP SFAS No. 157-3, “Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active” (FSP 157-3), to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 is effective immediately. The application of the provisions of FSP 157-3 did not materially affect our results of consolidated financial condition or operations as of and for the fiscal years ended June 30, 2009.

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

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

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

This FSP is effective for interim and annual reporting periods for the Company for the fiscal year ended June 30, 2009 and after. The adoption of this FSP for the fiscal year ended June 30, 2009 did not have a material impact on the Company’s financial condition or results of operations.

The Company has an established and documented process for determining fair values. Fair value is based on quoted market prices, when available. If listed prices or quotes are not available, fair value is based on fair value models that use market participant or independently sourced market data, which include discount rate, interest rate yield curves, prepayment speeds, bond ratings, credit risk, loss severities, default rates, and expected cash flow assumptions. In addition, valuation adjustments may be made in the determination of fair value. These fair value adjustments may include amounts to reflect counterparty credit quality, creditworthiness, liquidity, and other unobservable inputs that are applied consistently over time. These adjustments are estimated and therefore, subject to managements’ judgment, and at times, may be necessary to mitigate the possibility of error or revision in the estimate of the fair value provided by the model. The Company has various controls in place to ensure that the valuations are appropriate, including review and approval of the valuation models, benchmarking, comparison to similar products, and reviews of actual cash settlements. The methods described above may produce fair value calculations that may not be indicative of the net realizable value or reflective of future fair values. While the Company believes its valuation methods are consistent with other financial institutions, the use of different methods or assumptions to determine fair values could result in different estimates of fair value.

48

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

SFAS No. 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based on the inputs used to value the particular asset or liability at the measurement date. The three levels are defined as follows:

• Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

• Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

• Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Each financial instrument’s level assignment within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement for that particular category.

For financial assets measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2009 are as follows:

	At June 30, 2009
(In thousands)	Total		Level 1		Level 2		Level 3
Measured at fair value on a recurring basis:
Securities available for sale	$	16,084	$	—	$	16,084	$	—
Measured at fair value on a nonrecurring basis:
Impaired Loans	$	2,703	$	—	$	—	$	2,703

(14) Condensed Financial Information (Parent Company Only)

Summarized financial information for the Company is as follows as of and for the years ended June 30:

(In thousands) Statements of Financial Condition	2009		2008
Cash	$	1,905	$	327
Loans		1,000		1,375
Equity in net assets of the bank		21,592		22,815
Other assets		421		209
Total Assets	$	24,918	$	24,726
Accrued expenses and other liabilities	$	226	$	335
Subordinated Debentures		5,000		5,000
Stockholders’ equity		19,692		19,391
Total Liabilities & Stockholders Equity	$	24,918	$	24,726

49

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(In thousands) Statements of Income	2009			2008
Total Interest Income	$	84		$	67
Total Interest Expense		323			324
Non-interest Income		0			2,000
Non-interest Expense		6			14
Income (loss) before equity in net income of subsidiary and income taxes		(245	)		1,729
Net (loss) income of subsidiary		(5,323	)		292
Income (loss) before income tax (benefit) provision		(5,568	)		2,021
Income tax (benefit) provision		(102	)		644
Net (loss) income	$	(5,466	)	$	1,377

(In thousands) Statements of Cash Flows	2009			2008
Operating activities:
Net income (loss)	$	(5,466	)	$	1,377
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in net (income) loss of subsidiary		5,323			(292	)
Termination fee earned, not collected		—			(2,000	)
Increase in other assets		(136	)		(34	)
Increase (decrease) in accrued expenses and other liabilities		(55	)		45
Net cash used in operating activities		(334	)		(904	)
Investing activities:
Additional investment in subsidiary stock		(4,000	)		—
Net reduction in loan receivable		375			—
Dividend received from subsidiary		—			625
Net cash provided by (used in) investing activities		(3,625	)		625
Financing activities:
Proceeds from issuance of preferred and warrant preferred stock		6,000			—
Issuance of common stock		5			—
Payment to purchase common stock		—			(659	)
Cash received in exercise of stock options		—			114
Cash dividends paid		(468	)		(520	)
Net cash provided by (used in) financing activities		5,537			(1,065	)
Net increase (decrease) in cash and cash equivalents		1,578			(1,344	)
Cash and cash equivalents, beginning of year		327			1,671
Cash and cash equivalents, end of year	$	1,905		$	327

Non-cash Transaction: A portion of a loan in the amount of $1,000,000 and $625,000 was contributed to a subsidiary in 2009 and 2008, respectively.

50

BOARD OF DIRECTORS

Thomas P. O’Neill Chairman of the Board Managing Director RSM McGladrey, Inc.	Nicole N. Glaeser Budget Director for Baltimore County Police Department	William R. Waters Retired Automobile Dealer Owner Bel Air Medicine, Inc.
Michael J. Dee President and Chief Executive Officer of the Company and the Bank	Douglas H. Ludwig Retired Principal of the Baltimore County Public School System Secretary of the Company Gary R. Bozel Managing Principal Gary R. Bozel & Associates, P.A.	J. Thomas Hoffman Self-employed financial consultant
MANAGEMENT
Michael J. Dee President and Chief Executive Officer	Frank J. Duchacek, Jr. Senior Vice President – Branch & Deposit Administration	William C. Wiedel, Jr. Senior Vice President – Treasurer Chief Financial Officer
John W. McClean Senior Vice President – Loan Administration	Alan H. Herbst Vice President – Consumer Lending	Laurence S. Mitchell Senior Vice President – Lending
	Francis C. Broccolino Vice-President – Real Estate Lending	Keith Zickar Vice-President – Commercial Lending

CORPORATE INFORMATION

Independent Registered Public Accounting Firm Beard Miller Company LLP 100 West Road, Suite 404 Towson, Maryland 21204-2368   General Counsel Nolan Plumhoff & Williams Suite 700, Nottingham Centre 502 Washington Avenue Towson, Maryland 21204-4528   Transfer Agent and Registrar Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016-3572 1-(800) 368-5948 Special Counsel Kilpatrick Stockton LLP 607 14^th Street, NW, Suite 900 Washington, DC 20005   Annual Meeting The 2009 Annual Meeting of Stockholders will be held on November 5, 2009 at 5:00 p.m. at the office of The Patapsco Bank located at 1301 Merritt Boulevard, Dundalk, Maryland 21222. Annual Report on Form 10-K A copy of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2009 as filed with the Securities and Exchange Commission, will be furnished without charge to stockholders as of the record date for the 2009 Annual Meeting upon written request to: Secretary, Patapsco Bancorp, Inc., 1301 Merritt Boulevard, Dundalk, Maryland 21222-2194.

EX-21

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

	State or Other Jurisdiction of Incorporation	Percentage Ownership
Parent
Patapsco Bancorp, Inc.	Maryland	—
Subsidiary (1)
The Patapsco Bank	Maryland	100	%
Subsidiaries of The Patapsco Bank (1)
PFSL Holding Corp.	Maryland	100	%
Prime Business Leasing	Maryland	100	%
Patapsco Financial Services, Inc.	Maryland	100	%

(1) The assets, liabilities and operations of the subsidiaries are included in the consolidated financial statements appearing in Item 7 to this Annual Report on Form 10-K.

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-122300, No. 333-68260, No. 333-49908 and No. 333-13975) of Patapsco Bancorp, Inc. of our report dated September 25, 2009, relating to the consolidated financial statements, which appears in the Annual Report to Stockholders, which is incorporated by reference in this Annual Report on Form 10-K.

/s/ Beard Miller Company LLP

Beard Miller Company LLP

Baltimore, Maryland

September 25, 2009

EX-31.1

EXHIBIT 31.1

Certification

I, Michael J. Dee, certify that:

1. I have reviewed this Annual Report on Form 10-K of Patapsco Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 25, 2009

/s/ Michael J. Dee

Michael J. Dee

President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

Certification

I, William C. Wiedel, Jr., certify that:

1. I have reviewed this Annual Report on Form 10-K of Patapsco Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 25, 2009

/s/ William C. Wiedel, Jr.

William C. Wiedel, Jr.

Senior Vice President and Chief Financial Officer

EX-32

EXHIBIT 32

CERTIFICATION PURSUANT TO 18. U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Patapsco Bancorp, Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2009 as filed with the Securities and Exchange Commission (the “Report”), the undersigned certify, pursuant to 18 U.S.C. § 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

By:	/s/ Michael J. Dee
Name:	Michael J. Dee
Title:	President and Chief Executive Officer
By:	/s/ William C. Wiedel, Jr.
Name:	William C. Wiedel, Jr.
Title:	Senior Vice President and Chief Financial Officer

Date: September 25, 2009