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, 2010

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 number. 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 $0.01 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, 2009, the aggregate market value of voting common stock held by nonaffiliates was approximately $4,155,065, computed by reference to the closing sales price on December 31, 2009 as reported on the OTC Electronic Bulletin Board.

Number of shares of Common Stock outstanding as of September 28, 2010: 1,939,593.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the 2010 Annual Report to Stockholders. (Part II)

2. Portions of the Proxy Statement for the 2010 Annual Meeting of Stockholders. (Part III)

INDEX

		PAGE
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	18
Item 1B.	Unresolved Staff Comments	21
Item 2.	Properties	22
Item 3.	Legal Proceedings	22
Item 4.	(Removed and Reserved)	22
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23
Item 6.	Selected Financial Data	23
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	23
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 8.	Financial Statements and Supplementary Data	23
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	23
Item 9A.	Controls and Procedures	23
Item 9B.	Other Information	24
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	25
Item 11.	Executive Compensation	25
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	25
Item 13.	Certain Relationships and Related Transactions, and Director Independence	26
Item 14.	Principal Accountant Fees and Services	26
PART IV
Item 15.	Exhibits and Financial Statement Schedules	26
SIGNATURES

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PART I

Forward-Looking Statements

When used in this Annual Report on Form 10-K, 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.

Company has no significant assets other than its investment in the Bank. 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 four full-service offices located in Dundalk, 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 and state governments 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 Business Leasing is the servicing of commercial leases. The primary business of Patapsco Financial Services is the sale of consumer investments.

At June 30, 2010, the Bank had $65.1 million, $51.3 million, $17.2 million, $46.9 million, $15.7 million and $5.8 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 $202.0 million at June 30, 2010, representing 75% of total assets at that date. At June 30, 2010, $65.1 million, or 32%, 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 $64.2 million, or 32%, of the Company’s gross loan portfolio at June 30, 2010. In addition, the Company originates consumer and other loans, including home equity loans, home improvement loans and loans secured by deposits. At June 30, 2010, consumer and other loans totaled $15.7 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 $57.1 million, or 28%, 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 originations 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 offices. 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, 2010, the Company purchased $5.0 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.

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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 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.

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, 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, 2010. At that date, the Company had no lending relationships in excess of the loans-to-one-borrower limit. At June 30, 2010, the Company’s largest lending relationship was represented by multiple loans totaling $3.3 million secured by commercial real estate and business assets, which were current and performing in accordance with their terms at June 30, 2010.

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, 2010, residential mortgage loans totaled $65.1 million, or 32%, of the Company’s gross loan portfolio. Of such loans, $33.8 million were secured by nonowner-occupied investment properties.

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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, 2010, the Company had $5.7 million of multi-family residential real estate loans, which amounted to 3% of the Company’s gross loan portfolio at 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 in general. 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, 2010, $17.2 million, or 9%, 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, 2010, the Company had $46.9 million of commercial real estate loans, which amounted to 23% of the Company’s gross loan portfolio at such date. Commercial

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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.

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, 2010, consumer and other loans totaled $15.7 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, 2010, home improvement loans amounted to $9.6 million, or 5%, of the Company’s loan portfolio, with $746,000 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, 2010, the Company’s commercial loans, excluding leases, totaled $51.3 million, or 25%, 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

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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 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.

Prior to October 2008, 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, 2010, the remaining portfolio of commercial lease finance transaction loans totaled $5.8 million, or 3%, 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, 2010, the Company was servicing these participation interests for others totaling approximately $18.7 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.

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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, 2010, 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.

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, 2010, the Company’s entire portfolio of investment securities was classified as available for sale and had an aggregate carrying value of $25.5 million and an unrealized net gain after tax of $331,000. 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

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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 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. 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, 2010, the Company had outstanding Federal Home Loan Bank of Atlanta advances of $17.1 million with an average rate of 4.20%.

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 capital for the Company and the Bank.

Subsidiary Activities

The Bank has three subsidiaries, PFSL Holding Corp. (“PFSL”), which it formed to hold certain real estate owned 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 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, Carney, Hampden and Glen Arm which are primarily from

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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 products at competitive rates, convenient business hours, a commitment to outstanding customer service and a well-trained staff.

Employees

As of June 30, 2010, the Company had 61 full-time and 12 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 its respective operations that in turn, could have a material adverse effect on the Company.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) transferred responsibility for the implementation of financial consumer protection laws to a new independent agency in the Federal Reserve Board. The new agency, the Consumer Financial Protection Bureau, will issue rules and regulations governing consumer financial protection. However, depository institutions of less than $10 billion in assets, such as the Bank, will continue to be examined for compliance with consumer protection laws by the prudential regulations which will also have enforcement authority.

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.

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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 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 asset 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, 2010:
Total Capital (to Risk Weighted Assets)	$	23,009	12.35	%	$	15,000	8.00	%	$	18,750	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		20,663	11.09			7,500	4.00			11,250	6.00
Tier 1 Leverage		20,663	7.76			10,649	4.00			13,311	5.00
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

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

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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.

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, 2010, 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, 2010 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 $10.7 million and $55.2 million, plus 10% on the remainder. The first $10.7 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, 2010, the Bank met its reserve requirements.

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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 existing 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. An institution’s assessment rate depends upon the category to which it is assigned, and certain potential adjustments established by FDIC regulations. Effective April 1, 2009, assessment rates range from seven to 77.5 basis points of assessable deposits. The FDIC may adjust the 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. No institution may pay a dividend if in default of the federal deposit insurance assessment.

Due to stress on the Deposit Insurance Fund caused by bank failures, the FDIC imposed on all insured institutions a special emergency assessment of five basis points of total assets minus Tier 1 capital, as of June 30, 2009 (capped at ten basis points of an institution’s deposit assessment base), in order to cover losses to the Deposit Insurance Fund. That special assessment was collected on September 30, 2009. The FDIC provided for similar assessments during the final two quarters of 2009, if deemed necessary. However, in lieu of further special assessments, the FDIC required insured institutions to prepay estimated quarterly risk-based assessments for the fourth quarter of 2009 through the fourth quarter of 2012. The estimated assessments, which include an assumed annual assessment base increase of 5%, were recorded as a prepaid expense asset as of December 30, 2009. As of December 31, 2009, and each quarter thereafter, a charge to earnings will be recorded for each regular assessment with an offsetting credit to the prepaid asset.

Because of the recent difficult economic conditions, deposit insurance per account owner had been raised to $250,000 for all types of accounts until January 1, 2014. That level was made permanent by the newly enacted Dodd-Frank Act. In addition, the FDIC adopted an optional Temporary Liquidity Guarantee Program (“TLGP”) under which, for a fee, noninterest-bearing transaction accounts would receive unlimited insurance coverage until June 30, 2010, subsequently extended to December 31, 2010. The Dodd-Frank Act extends the unlimited coverage of noninterest-bearing transaction accounts until December 31, 2012 without providing an opt out. The TLGP also included a debt component under which certain senior unsecured debt issued by institutions and their holding companies between October 13, 2008 and October 31, 2009 would be guaranteed by the FDIC through June 30, 2012, or in some cases, December 31, 2012. The Bank opted to participate in the unlimited noninterest-bearing transaction account coverage and the Bank and Company opted not to participate in the unsecured debt guarantee program.

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, 2010 averaged 1.04 basis points of assessable deposits.

The FDIC has authority to increase insurance assessments. In addition, the Dodd-Frank Act requires that the FDIC amend its assessment system to base it on total assets less tangible equity rather than deposits. 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.

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.

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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 10 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, 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 will 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, 2010 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

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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.

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 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.

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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.

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

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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.”

Under the terms of its trust preferred securities, the Company may not declare or pay dividends on its common stock while it has deferred interest payments on its debentures. Under the terms of the Articles Supplementary establishing the preferred shares issued to the US Treasury, the Company may not pay dividends on its common stock unless it has paid all accrued and unpaid dividends on the preferred shares. As a result, the Company currently is not permitted to pay dividends on its common stock.

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. The Dodd-Frank Act requires the Federal Reserve Board to issue consolidated regulatory capital requirements for holding companies that are at least as stringent as those applicable to the bank. However, the Act appears to allow the Federal Reserve Board to continue to exempt bank holding companies of less than $500 million in consolidated assets from the holding company capital requirements.

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.

Financial Regulatory Legislation

The previously referenced Dodd-Frank Act contains a wide variety of provisions affecting the regulation of depository institutions in addition to those already mentioned. Those include restrictions related to mortgage originations, risk retention requirements as to securitized loans and the noted newly created consumer protection agency. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations.

Taxation

For fiscal year 2010, 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, 2010.

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

16

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

For additional information regarding taxation, see Note 9 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, 2010	Title
Linda Linz	50	Senior Vice President – Branch & Deposit Administration
Laurence S. Mitchell	63	Senior Vice President – Lending of the Bank
Phillip P. Phillips	54	Senior Vice President – Loan Administration
William C. Wiedel, Jr.	50	Senior Vice President and Chief Financial Officer of the Company and the Bank

Linda Linz is a Senior Vice President who joined the Bank in April of 2010. After a 25-year career with MBNA America where she held management positions across multiple business lines and prior to joining The Patapsco Bank, Ms. Linz served as a Senior Vice President for 1^st Mariner Bank, with responsibility for numerous departments and targeted initiatives. In her capacity with The Patapsco Bank, Ms. Linz’ focus is on Retail Branch Administration, Operations, IT, Risk Management, Marketing/Advertising, Security and Facility Management. Ms. Linz is also an experienced Consultant with primary focus on Marketing, Business Development, Business Process Reengineering and Project Management. Ms. Linz is also a member of the National Association of Professional Women.

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.

Phillip P. Phillips was appointed Senior Vice President upon joining the Bank in March 2010. Prior to that, Mr. Phillips was a Senior Vice President and Manager of Special Assets at Provident Bank, and M&T Bank through merger, from July 2008 to March 2010. From January 2007 until rejoining Provident Bank, he was a Senior Vice President and Regional Senior Credit Officer for Wells Fargo Bank where he assisted in establishing the Maryland Commercial Lending Office. Mr. Phillips’ banking experience spans 32 years and a variety of Credit and Lending positions at Maryland National Bank, NationsBank, Signet Bank and Provident Bank. Mr. Phillips is also an Adjunct Professor at Towson University.

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.

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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 3.40% for the year ended June 30, 2010 compared to 3.44% for the year ended June 30, 2009. Over the last two years, the U.S. Federal Reserve has 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 2010 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, 2010, $61.8 million, or 31% 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.

Recently enacted regulatory reform legislation may have a material impact on our operations.

On July 21, 2010, the President signed into law The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act restructures the regulation of depository institutions and contains various provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as that which occurred in 2008-2009. Included is the creation of a new federal agency to administer and

18

enforce consumer and fair lending laws, a function that is now performed by the depository institution regulators. The federal preemption of state laws currently accorded federally chartered depository institutions will be reduced as well. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations.

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

At June 30, 2010, $46.9 million, or 23%, 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, 2010, our non-performing loans totaled $9.7 million, representing 4.85% 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, 2010, our allowance for loan losses as a percentage of total loans was 1.76%. 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, 2010, the Bank had approximately $1.6 million in participation loans originated by a bank that has since been placed into receivership, with the FDIC appointed as receiver. Approximately $131,000 of these loans were

19

classified as nonaccrual loans at June 30, 2010. 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 $415,000 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.

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. Several years ago, there had been 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 next few years, 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, 2010, we held 0.43% of the deposits in the Baltimore-Towson, Maryland Metropolitan Statistical Area, which was the 24 largest market share of deposits out of the 75 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

20

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.

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, 2010.

	Year Opened	Owned or Leased	Net Book Value at June 30, 2010		Approximate Square Footage
		(Dollars in thousands)
Headquarters and Branch Office
1301 Merritt Boulevard	1970	Owned	$	332	9,600
Dundalk, Maryland 21222
Branch Office
2028 Joppa Road
Baltimore, Maryland 21234	2007	Leased		2,785	7,000
Branch Office
821 W. 36th Street
Baltimore, Maryland 21211	1988	Owned		103	1,100
Branch Office
12128 Long Green Pike
Glen Arm, Maryland 21057	1988	Leased		17	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 $3.8 million at June 30, 2010. See Note 5 of Notes to Consolidated Financial Statements. The branch office located at 7802 Harford Rd, Baltimore, Maryland 21234 was closed in December, 2009 and is included in other assets at June 30, 2010.

Item 3. Legal Proceedings

From time to time, the Bank is a party to various legal proceedings incident to its business. At June 30, 2010, 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. Removed and Reserved

Not applicable.

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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, 2010 (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, 2010 and does not have any pending stock repurchase programs.

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 on Accounting and Financial Disclosure

None.

Item 9A. 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, 2010 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, 2010, 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 the exemption provided to issuers that are not “large accelerated filers” or “accelerated filers” under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

/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

(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, 2010 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.

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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 2010 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.

(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.

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

	(a) Number of securities to  be issued upon exercise of outstanding options, warrants & rights	(b) Weighted-average  exercise price of outstanding options, warrants and rights	(c) 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	20,832	$6.29	44,349
Equity compensation plans not approved by security holders	—	—	—
Total	20,832	$6.29	44,349

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” in the Proxy Statement 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 “Items to be Voted on by Stockholders – Item 3 – Ratification of the Independent Registered Public Accounting Firm – Audit Fees” in the Proxy Statement.

PART IV

Item 15. Exhibits and Financial Statement Schedules

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

(1) Financial Statements. The following consolidated financial statements are incorporated by reference from Item 8 hereof (see Exhibit 13 to this Annual Report on Form 10-K):

Report of Registered Independent Accounting Firm

Consolidated Statements of Financial Condition as of June 30, 2010 and 2009

Consolidated Statements of Operations for the Years Ended June 30, 2010 and 2009

Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2010 and 2009

Consolidated Statements of Cash Flows for the Years Ended June 30, 2010 and 2009

Notes to Consolidated Financial Statements

(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.

26

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. 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. 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 Francis Broccolino † (6)
10.6	Form of Amended and Restated Severance Agreement by and between The Patapsco Bank and Laurence S. Mitchell † (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 † (10)
10.12	Severance Agreement between The Patapsco Bank and Phillip P. Phillips †
13	Annual Report to Stockholders for the Fiscal Year Ended June 30, 2010
21	Subsidiaries of the Registrant
23	Consent of ParenteBeard LLC
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
99.1	31 C.F.R. § 30.15 Certification of Chief Executive Officer
99.2	31 C.F.R. § 30.15 Certification of Chief Financial Officer

† 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).

27

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 28, 2010
	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 28, 2010
Michael J. Dee
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ William C. Wiedel, Jr.	September 28, 2010
William C. Wiedel, Jr.
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Thomas P. O’Neill	September 28, 2010
Thomas P. O’Neill
Chairman of the Board
/s/ Nicole N. Glaeser	September 28, 2010
Nicole N. Glaeser
Director
/s/ William R. Waters	September 28, 2010
William R. Waters
Director
/s/ Gary R. Bozel	September 28, 2010
Gary R. Bozel
Director
/s/ J. Thomas Hoffman	September 28, 2010
J. Thomas Hoffman
Director

EX-10.12

Exhibit 10.12

SEVERANCE AGREEMENT

THIS SEVERANCE AGREEMENT entered into this 11^th day of May, 2010 (the “Effective Date”) by and between The Patapsco Bank (the “Bank”) and Philip Phillips (the “Employee”).

WHEREAS, the Employee has heretofore been employed by the Bank as an officer; and

WHEREAS, the Bank deems it to be in its best interest to enter into this Agreement as additional incentive to the Employee to continue as an officer of the Bank; and

WHEREAS, the parties desire by this writing to set forth their understanding as to their respective rights and obligations in the event of termination of Employee’s employment under the circumstances set forth in this Agreement.

NOW, THEREFORE, it is AGREED as follows:

1. Change in Control

(a)        Payment in the Event of Change in Control. (1) If the Employee’s employment is terminated by the Bank, without the Employee’s prior written consent and for a reason other than Just Cause (as defined in Section 2(a) hereof), in connection with or within twelve (12) months after any change in control of the Bank or Patapsco Bancorp, Inc. (the “Company”), the Employee shall, subject to paragraph (2) of this Section 1(a), be paid an amount equal to two times his base salary and bonus paid in the prior calendar year, but in no event greater than the difference between (i) the product of 2.99 times his “base amount” as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the “Code”) and regulations promulgated thereunder (the “Maximum Amount”), and (ii) the sum of any other parachute payments (as defined under Section 280G(b)(2) of the Code) that the Employee receives on account of the change in control. Said sum shall be paid in one lump sum within ten (10) days of such termination.

(2)        In the event that the Employee and the Bank jointly determine and agree that the total parachute payments receivable under clauses (i) and (ii) of Section l(a)(1) hereof exceed the Maximum Amount, notwithstanding the payment procedure set forth in Section l(a)(1) hereof, the Employee shall determine which and how much, if any, of the parachute payments to which he is entitled shall be eliminated or reduced so that the total parachute payments to be received by the Employee do not exceed the Maximum Amount. If the Employee does not make his determination within ten business days after receiving a written request from the Bank, the Bank may make such determination, and shall notify the Employee promptly thereof. Within five business days of the earlier of the Bank’s receipt of the Employee’s determination pursuant to this paragraph or the Bank’s determination in lieu of a determination by the Employee, the Bank shall pay to or distribute to or for the benefit of the Employee such amounts as are then due the Employee under this Agreement.

(3)        As a result of uncertainty in application of Section 280G of the Code at the time of payment hereunder, it is possible that such payments will have been made by the Bank which should not have been made (“Overpayment”) or that additional payments will not have been made by the Bank which should have been made (“Underpayment”), in each case, consistent with the calculations required to be made under Section 1(a)(1) hereof. In the event that the Employee, based upon the assertion by the Internal Revenue Service against the Employee of a deficiency which the Employee believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Bank to or for the benefit of Employee shall be treated for all purposes as a loan ab initio, which the Employee shall repay to the Bank together with interest at the applicable federal rate provided for in Section 7872(f)(2)(B) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by the Employee to the Bank if and to the extent such deemed loan and payment would not either reduce the amount on which the Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Employee and the Bank determine, based upon controlling precedent or other substantial authority, that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Bank to or for the benefit of the Employee together with interest at the applicable federal rate provided for in Section 7872(f)(2)(B) of the Code.

(4)        “Change in Control” shall mean any one of the following events: (1) the acquisition of ownership, holding or power to vote more than 25% of the Bank’s or the Company’s voting stock, (2) the acquisition of the ability to control the election of a majority of the Bank’s or the Company’s directors, (3) the acquisition of a

controlling influence over the management or policies of the Bank or the Company by any person or by persons acting as a “group” (within the meaning of Section 13(d) of the Securities Exchange Act of 1934) (provided that in the case of (1), (2) and (3) hereof, ownership or control of the Bank by the Company itself shall not constitute a “change in control”), or (4) during any period of two consecutive years, individuals (the “Continuing Directors”) who at the beginning of such period constitute the Board of Directors of the Company or the Bank (the “Existing Board”) cease for any reason to constitute at least two-thirds thereof, provided that any individual whose election or nomination for election as a member of the Existing Board was approved by a vote of at least two-thirds of the Continuing Directors then in office shall be considered a Continuing Director. For purposes of this subparagraph only, the term “person” refers to an individual or a corporation, partnership, trust, Bank, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. The decision of the Bank’s non-employee directors as to whether a change in control has occurred shall be conclusive and binding.

(b) Change in Control; Termination for Good Reason. Notwithstanding any other provision of this Agreement to the contrary, with advance written notice to the Bank as provided for below, the Employee may terminate his employment under this Agreement for Good Reason within twelve (12) months of a Change in Control (as defined in paragraph (a)(4) of this Section 1, and the Employee shall thereupon be entitled to receive the payment described in Sections 1(a)(1) and 1(a)(2) of this Agreement. For purposes of this Agreement, a voluntary termination by the Employee shall be considered a termination with Good Reason if the conditions stated in both clauses (1) and (2) are satisfied –

(1)        a voluntary termination by the Employee shall be considered a voluntary termination with Good Reason if any of the following occur without the Employee’s advance written consent, and the term Good Reason shall mean the occurrence of any of the following without the Employee’s advance written consent –

(i)        a material diminution of the Employee’s base compensation,

(ii)        a material diminution of the Employee’s authority, duties, or responsibilities,

(iii)        a material diminution in the authority, duties, or responsibilities of the supervisor to whom the Employee is required to report, or

(iv)        a requirement that the Employee move his personal residence of or perform his principal executive functions by more than fifteen (15) linear miles from his primary office.

(2)        the Employee must give notice to the Bank of the existence of one or more of the conditions described in clause (1) within ninety (90) days after the initial existence of the condition, and the Bank shall have thirty (30) days thereafter to remedy the condition.

(c)        Compliance with 12 U.S.C. Section 1828(k). Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.

(d)        Term. This Agreement shall remain in effect for the period commencing on the Effective Date and ending on the earlier of (i) the date twelve (12) months after the Effective Date, and (ii) the date on which the Employee terminates employment with the Bank; provided that the Employee’s rights hereunder shall continue following the termination of this employment with the Bank under any of the circumstances described in Section 1(a) or (b) hereof. Additionally, on each anniversary date from the Effective Date, the term of this Agreement shall be extended for an additional one-year period beyond the then effective expiration date, provided that the Employee is elected an officer of the Bank at the meeting of the Bank’s Board of Directors held on the date of the Company’s annual meeting of stockholders called for the purpose of electing the officer position which the Employee holds.

2. Termination or Suspension Under Federal Law.

(a)        Termination for “Just Cause” shall mean termination because of, in the good faith determination of the Bank’s Board of Directors, the Employee’s personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule

2

or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. The Employee shall have no right to receive compensation or other benefits for any period after termination for Just Cause. No act, or failure to act, on the Employee’s part shall be considered “willful” unless he has acted, or failed to act, with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of the Bank.

(b)        If the Employee is removed and/or permanently prohibited from participating in the conduct of the Bank’s affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (“FDIA”) (12 U.S.C. 1818(e)(4) or (g)(1)), all obligations of the Bank under this Agreement shall terminate, as of the effective date of the order, but the vested rights of the parties shall not be affected.

(c)        If the Bank is in default (as defined in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall terminate as of the date of default; however, this Paragraph shall not affect the vested rights of the parties.

(d)        All obligations under this Agreement shall terminate, except to the extent that continuation of this Agreement is necessary for the continued operation of the Bank as determined by: (i) the appropriate federal banking agency at the time that the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the FDIA; or (ii) by the appropriate federal banking agency at the time it approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the appropriate federal banking agency to be in an unsafe or unsound condition. Such action shall not affect any vested rights of the parties.

(e)        If a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)) suspends and/or temporarily prohibits the Employee from participating in the conduct of the Bank’s affairs, the Bank’s obligations under this Agreement shall be suspended as of the date of such service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank shall (i) pay the Employee all or part of the compensation withheld while its contract obligations were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended.

(f)        The terms of this Section 2 shall prevail over any other provisions of this Agreement.

3. Expense Reimbursement.

In the event that any dispute arises between the Employee and the Bank as to the terms or interpretation of this Agreement, whether instituted by formal legal proceedings or otherwise, including any action that the Employee takes to enforce the terms of this Agreement or to defend against any action taken by the Bank or the Company, the Employee shall be reimbursed for all costs and expenses, including reasonable attorneys’ fees, arising from such dispute, proceedings or actions, provided that the Employee shall obtain a final judgment in favor of the Employee in a court of competent jurisdiction or in binding arbitration under the rules of the American Arbitration Bank. Such reimbursement shall be paid within ten (10) days of Employee’s furnishing to the Bank and the Company written evidence, which may be in the form, among other things, of a cancelled check or receipt, of any costs or expenses incurred by the Employee.

4. Successors and Assigns.

(a)        This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Bank or Company which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Bank or Company.

(b)        Since the Bank is contracting for the unique and personal skills of the Employee, the Employee shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Bank.

5.      Amendments. No amendments or additions to this Agreement shall be binding unless made in writing and signed by all of the parties, except as herein otherwise specifically provided.

6.      Applicable Law. Except to the extent preempted by Federal law, the laws of the State of Maryland shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise.

3

7.      Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

8.      Entire Agreement. This Agreement, together with any understanding or modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto.

9.      Internal Revenue Code Section 409A. The Bank and the Employee intend that their exercise of authority or discretion under this Agreement shall comply with Section 409A of the Code. If any provision of this Agreement does not satisfy the requirements of Section 409A of the Code, the provision shall be applied in a manner consistent with those requirements, despite any contrary provision of this Agreement. If any provision of this Agreement would subject the Employee to additional tax or interest under Section 409A of the Code, the Bank shall reform the provision. However, the Bank shall maintain to the maximum extent practicable the original intent of the applicable provision without subjecting the Employee to additional tax or interest, and the Bank shall not be required to incur any additional compensation expense as a result of the reformed provision. References in this Agreement to Section 409A of the Code include rules, regulations, and guidance of general application issued by the Department of the Treasury under Section 409A of the Code.

IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first hereinabove written.

ATTEST:	THE PATAPSCO BANK
/s/ Nicole N. Glaeser	By:	/s/ Thomas P. O’Neill
Secretary		Its Chairman of the Board
WITNESS:	EMPLOYEE
	/s/ Philip Phillips
	Philip Phillips

4

EX-13

Exhibit 13

PATAPSCO BANCORP, INC.

[LOGO]

2010 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	23
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 1,930,317 shares of common stock outstanding and approximately 361 holders of record at June 30, 2010. 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 2010:
First Quarter	$	3.40	$	2.50	$	.00
Second Quarter		3.50		2.15		.00
Third Quarter		3.15		2.50		.00
Fourth Quarter		3.00		1.80		.00
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

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)

[LETTERHEAD OF PATAPSCO BANCORP, INC.]

Dear Shareholder,

The directors, officers and staff of Patapsco Bancorp, Inc. and The Patapsco Bank respectfully present this 2010 Annual Report to shareholders.

The loss incurred in the fiscal year ended June 30, 2010 resulted from the costs associated with non-performing assets, both loans and foreclosed real estate. These costs include lost interest income, legal fees, write-downs, and costs of acquiring and maintaining foreclosed real estate. Non-performing assets are essentially unchanged from June 30, 2009 to June 30, 2010 however they have decreased by $3.7 million from their March 31, 2010 balance.

Although the Government has determined that the recession ended in June 2009, low economic growth and high unemployment have reduced demand for new loans. As evidenced by our deposit growth, both consumers and small businesses are building liquidity as they wait for more evidence that the economy has turned. In the meantime, our priorities are to manage non-performing assets and return the Company to profitability.

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 Chairman of the Board of Directors	Michael J. Dee President and Chief Executive Officer

1

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

PATAPSCO BANCORP, INC.

Selected Consolidated Financial Condition Data

	At June 30,
	2010		2009
	(In thousands)
Total assets	$	269,723	$	268,367
Loans receivable, net		197,169		216,927
Cash and other interest bearing deposits		28,043		19,794
Securities available for sale		25,482		16,084
Deposits		228,789		207,795
Borrowings		22,100		39,300
Stockholders’ equity		17,370		19,692

Selected Consolidated Operating Data

	Year Ended June 30,
	2010			2009
	(In thousands, except for per share amounts)
Interest income	$	13,840		$	15,697
Interest expense		5,382			7,059
Net interest income before provision for loan losses		8,458			8,638
Provision for loan losses		3,701			5,902
Net interest income after provision     for loan losses		4,757			2,736
Non-interest income		771			841
Non-interest expense:
Compensation and employee benefits		4,390			4,400
Professional fees		727			423
Federal deposit insurance assessments		509			347
Equipment expenses		210			306
Net occupancy costs		580			603
Advertising		42			66
Data processing		428			468
Amortization of core deposit intangible		52			51
Telephone, postage and delivery		289			297
Provision for losses on and cost of real estate acquired through foreclosure		1,358			9
Goodwill impairment charge		—			2,954
Other		802			764
Total noninterest expenses		9,387			10,688
Loss before benefit for income taxes		(3,859	)		(7,111	)
Income tax benefit		(1,510	)		(1,645	)
Net loss		(2,349	)		(5,466	)
Preferred stock dividends		327			173
Net loss available for common shareholders	$	(2,676	)	$	(5,639	)
Net loss per share of common stock
Basic	$	(1.39	)	$	(2.93	)
Diluted	$	(1.39	)	$	(2.93	)

2

KEY OPERATING RATIOS

PATAPSCO BANCORP, INC.

	At or For the Year Ended June 30,
	2010		2009		2008
Performance Ratios:
Return on average assets (net (loss) income divided by average total assets)	(0.89	)%	(2.05	)%	0.53	%
Return on average stockholders’ equity (net (loss) income divided by average stockholders’ equity)	(11.98	)	(24.45	)	7.13
Interest rate spread (weighted average interest rate earned less weighted average interest rate cost)	3.26		3.20		3.23
Net interest margin (net interest income divided by average interest-earning assets)	3.40		3.44		3.51
Ratio of average interest-earning assets to average interest-bearing liabilities	106.27		108.61		107.91
Ratio of noninterest expense to average total assets	3.54		4.00		2.83
Asset Quality Ratios:
Non-accrual loans to loans receivable	4.85	%	5.11	%	1.10	%
Allowance for loan losses to total loans	1.76		1.37		0.80
Allowance for loan losses to nonperforming loans	36.26		26.89		72.40
Net charge-offs to average loans outstanding	1.49		2.03		0.53
Capital Ratios:
Stockholders’ equity to total assets at end of period	6.44	%	7.34	%	7.42	%
Average stockholders’ equity to average assets	7.39		8.37		7.41
Dividends declared per common share to diluted net income per common share	nm	(2)	nm	(2)	39.44
Tier one leverage ratio (1)	7.76		7.98		7.63
Tier one capital to risk-weighted assets (1)	11.09		10.33		9.56
Total regulatory capital to risk-weighted assets (1)	12.35		11.58		10.45

(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, advances from the Federal Home Loan Bank of Atlanta and junior subordinated debentures. The net interest income earned on average 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, 2010 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) ASC 450, “Contingencies”, that requires losses to be accrued when their occurrence is probable and estimable, and (2) ASC 310, “Receivables”, 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 non-homogeneous 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 ASC 310, 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. ASC 310 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.

ASC 310 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.

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. Fair value is determined utilizing third party appraisals, broker price opinions or other similar methods. Fair value is updated at least annually and more often if circumstances dictate. 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.

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

5

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 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 ASC 350, “Intangibles - Goodwill and Other.” ASC 350 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. During fiscal year 2009, 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 included a goodwill impairment charge of $2,954,000.

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.

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,
	2010						2009						2008
	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, including fees (1)	$	214,081	$	13,162	6.15	%	$	231,910	$	15,104	6.51	%	$	225,164	$	16,320	7.25	%
Investment securities (2)		19,790		645	3.26			13,490		554	4.11			13,821		662	4.79
Short-term investments and other interest-earning assets		14,838		33	0.22			5,834		39	0.67			7,004		209	2.98
Total interest-earning assets		248,709		13,840	5.56			251,234		15,697	6.25			245,989		17,191	6.99
Noninterest-earning assets		16,644						15,925						14,524
Total assets	$	265,353					$	267,159					$	260,513
Interest-bearing liabilities:
Deposits (3)	$	206,197		4,192	2.03		$	186,948		5,277	2.82		$	182,388		6,285	3.45
Short-term borrowings		1,480		6	0.41			3,693		95	2.57			3,565		188	5.27
Long-term borrowings		26,363		1,184	4.49			40,670		1,687	4.15			42,004		2,092	4.98
Total interest-bearing liabilities		234,040		5,382	2.30			231,311		7,059	3.05			227,957		8,565	3.76
Noninterest-bearing liabilities		11,707						13,490						13,252
Total liabilities		245,747						244,801						241,209
Total equity		19,606						22,358						19,304
Total liabilities and equity	$	265,353					$	267,159					$	260,513
Net interest income			$	8,458					$	8,638					$	8,626
Interest rate margin					3.40	%					3.44	%					3.51	%
Net interest spread					3.26	%					3.20	%					3.23	%
Ratio of average interest-earning assets to average interest-bearing liabilities					106.27	%					108.6	%					107.9	%

(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,
	2010 vs. 2009									2009 vs. 2008
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume			Rate			Total			Volume			Rate			Total
	(In thousands)									(In thousands)
Interest income:
Loans receivable, including fees (1)		($1,124	)		($818	)		($1,942	)		$510			($1,726	)		($1,216	)
Investment securities		163			(72	)		91			(16	)		(92	)		(108	)
Short-term investments and other interest-earning assets		(11	)		5			(6	)		(30	)		(140	)		(170	)
Total change in interest income		(156	)		(1,701	)		(1,857	)		376			(1,870	)		(1,494	)
Interest expense:
Deposits (2)		632			(1,717	)		(1,085	)		162			(1,170	)		(1,008	)
Short-term borrowings		(37	)		(51	)		(89	)		7			(100	)		(93	)
Long-term borrowings		(657	)		153			(503	)		(65	)		(340	)		(405	)
Total change in interest expense		84			(1,761	)		(1,677	)		128			(1,634	)		(1,506	)
Change in net interest income	$	(240	)	$	60		$	(180	)	$	248		$	(236	)	$	12

(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, 2010 and 2009

General. Total assets increased by $1.3 million or 0.5% to $269.7 million at June 30, 2010 from $268.4 million at June 30, 2009. Growth was funded principally with interest-bearing deposits, primarily money market accounts.

Loans Receivable. Gross loans receivable decreased by $20.3 million, or 9.1%, to $202.0 million at June 30, 2010 from $222.3 million at June 30, 2009. Construction loans decreased by $7.0 million, or 28.9%, commercial real estate loans decreased $2.2 million, or 4.6%, while commercial business loans decreased by $2.9 million, or 5.3%. The lower level of construction loans was impacted by $1.0 million in charge-offs, paydowns exceeding $2.8 million and transfers to real estate owned of $2.9 million. In addition, commercial leases decreased by $6.8 million, or 53.8% as management made a strategic decision to cease origination of this product in October, 2008. Residential mortgages increased by $1.3 million, or 2.1% and consumer loans decreased $2.7 million or 14.8%. The overall decline in the loan portfolio also reflects lower loan demand during the year.

8

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, 2010, the Company had no concentrations of loans exceeding 10% of gross loans other than as disclosed below:

	At June 30,
	2010					2009					2008					2007					2006
(Dollars in thousands)	Amount			% Total		Amount			% Total		Amount			% Total		Amount			% Total		Amount			% Total
Real Estate Loans:
Residential	$	65,106		32.23	%	$	63,788		28.69	%	$	69,953		30.00	%	$	74,332		33.03	%	$	80,693		40.58	%
Commercial		46,940		23.23			49,188		22.13			41,316		17.71			36,302		16.13			29,712		14.94
Construction		17,216		8.52			24,223		10.90			29,878		12.81			23,907		10.62			13,913		7.00
Consumer Loans:
Home Improvement		9,616		4.76			10,138		4.56			12,688		5.44			12,481		5.55			11,442		5.75
Home Equity		5,767		2.85			5,795		2.61			5,341		2.29			4,964		2.21			4,400		2.21
Other Consumer		274		0.14			2,445		1.10			2,893		1.24			2,955		1.31			2,483		1.25
Commercial Loans:
Commercial Loans		51,311		25.40			54,170		24.36			53,453		22.92			52,711		23.43			34,827		17.51
Commercial Leases		5,794		2.87			12,554		5.65			17,714		7.59			17,366		7.72			21,409		10.76
Gross Loans		202,024		100.00	%		222,301		100.00	%		233,236		100.00	%		225,018		100.00	%		198,879		100.00	%
Less:
Deferred Origination Fees, net of costs		266					191					201					240					178
Unearned Interest Consumer Loans		567					761					1,068					1,147					1,245
Unearned Interest Commercial Leases		667					1,530					2,779					2,480					6,091
Purchase Accounting (premium) discount, net		(172	)				(131	)				(160	)				(198	)				(224	)
Allowance for Loan Losses		3,527					3,023					1,834					1,110					1,000
Net Loans	$	197,169				$	216,927				$	227,514				$	220,239				$	190,589

9

The following table sets forth certain information at June 30, 2010 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 in one year or less		Due after 1 through 5 years		Due after 5 years		Total
Construction loans	$	15,536	$	1,680	$	—	$	17,216
Commercial loans		9,166		6,603		35,542		51,311
Total	$	24,702	$	8,283	$	35,542	$	68,527

The following table sets forth at June 30, 2010 the dollar amount of the above loans which may reprice or are due one year or more after June 30, 2010 which have predetermined interest rates and have floating or adjustable interest rates.

(In thousands)	Predetermined Rates		Floating or Adjustable Rates		Total
Construction	$	1,681	$	—	$	1,681
Commercial		18,025		24,119		42,144
Total	$	19,706	$	24,119	$	43,825

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 $9.4 million or 58.4% 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 $7.1 million, or 107.4%, to $13.6 million at June 30, 2010 from $6.6 million at June 30, 2009. Mortgage-backed securities, all of which are issued by U.S. Government agencies, increased by $3.6 million, or 54.5% in the year ended June 30, 2010. Corporate bonds decreased by $1.3 million, or 46.4%, to $1.5 million at June 30, 2010. Stock in the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank of Richmond increased by $31,000 due to the membership requirements of these organizations. The Company does not own U.S. Agency common or preferred stock as of June 30, 2010.

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

	At June 30 ,
(In thousands)	2010		2009		2008
Securities available for sale, at fair value:
U.S. Government agencies	$	13,637	$	6,576	$	1,501
Corporate bonds		1,511		2,818		2,917
Mortgage-backed securities, residential		7,024		6,690		5,183
Collateralized mortgage obligations		3,310		—		—
Total securities available for sale		25,482		16,084		9,601
Investments required by law, at cost:
Federal Home Loan Bank of Atlanta stock		2,295		2,295		2,239
Federal Reserve Bank of Richmond stock		553		522		410
Total investments required by law, at cost		2,848		2,817		2,649
Total investments	$	28,330	$	18,901	$	12,250

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, 2010:

	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, residential	$	—	—	%	$	666	2.56	%	$	1,764	4.21	%	$	4,307	4.89	%	$	6,737	$	7,024	4.48	%
Collateralized mortgage obligations		—	—			—	—			—	—			3,314	2.04			3,314		3,310	2.04
U.S. Government agencies		2,000	0.30			1,000	1.00			5,511	2.44			5,089	2.96			13,600		13,637	2.22
Corporate bonds		500	7.68			—	—			1,000	5.60			—	—			1,500		1,511	6.29
Investments required by law		—	—			—	—			—	—			2,848	1.53			2,848		2,848	1.53
Total	$	2,500	1.78	%	$	1,666	1.62	%	$	8,275	3.20	%	$	15,558	3.04	%	$	27,999	$	28,330	2.89	%

11

Deposits. Total deposits increased by $21.0 million, or 10.1% to $228.8 million at June 30, 2010 from $207.8 million at June 30, 2009. A decrease in certificates of deposit of $5.3 million was more than offset by an increase in money market accounts of $23.7 million. Our customers’ preference for more liquid deposit products in the face of declining rates caused the decline in certificates of deposit, while a successful money market promotion was responsible for the strong growth in money market deposits. The $5.3 million decrease in certificates of deposit included a $1.5 million decline in brokered deposits. The balance of brokered deposits at June 30, 2010 was $484,000 versus $2.0 million at June 30, 2009.

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

	At June 30,
	2010				2009				2008
(Dollars in thousands)	Balance		% Total		Balance		% Total		Balance		% Total
Savings accounts	$	16,828	7.36	%	$	16,597	7.99	%	$	16,464	8.32	%
NOW checking		18,094	7.91			16,036	7.72			14,817	7.49
Money market		83,240	36.38			59,465	28.62			34,988	17.68
Certificates of deposits		99,073	43.30			104,410	50.25			118,504	59.88
Interest-bearing deposits		217,235	94.95			196,508	94.57			184,773	93.37
Noninterest-bearing checking		11,554	5.05			11,287	5.43			13,113	6.63
Total	$	228,789	100.00	%	$	207,795	100.00	%	$	197,886	100.00	%

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

	Year Ended June 30,
	2010				2009				2008
(Dollars in thousands)	Average Balance		Rate		Average Balance		Rate		Average Balance		Rate
Savings accounts	$	16,192	0.40	%	$	16,070	0.39	%	$	17,483	0.44	%
NOW checking		17,026	0.26			14,658	0.33			13,975	0.43
Money market		71,648	1.64			40,381	1.99			33,265	2.30
Certificates of deposits		101,331	2.87			115,840	3.77			117,665	4.58
Noninterest-bearing checking		10,370	—			11,755	—			12,525	—
Total	$	216,567			$	198,704			$	194,913

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, 2010. At such date, these deposits represented 12.1% of total deposits and had a weighted average rate of 2.73%.

Maturity Period	Certificates of Deposit
	(In thousands)
Three months or less	$	3,655
Over three through 6 months		6,669
Over six through 12 months		3,562
Over 12 months		13,765
Total	$	27,651

Borrowings. The Company’s long-term borrowings decreased by $17.2 million, or 50.1%, to $17.1 million at June 30, 2010 from $34.3 million at June 30, 2009. 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)	2010			2009			2008
Amounts outstanding at end of period:
Federal Home Loan Bank advances	$	17,100		$	34,300		$	37,300
Other borrowings		—			—			—
Weighted average rate paid on:
Federal Home Loan Bank advances		4.20	%		3.56	%		4.46	%
Other borrowings		—			—			—
Maximum amount of borrowings outstanding at any month end:
Federal Home Loan Bank advances	$	34,300		$	43,800		$	42,300
Other borrowings		—		$	1,958		$	11
Approximate average borrowings outstanding with respect to:
Federal Home Loan Bank advances	$	22,843		$	39,230		$	40,514
Other borrowings		—		$	133		$	54
Weighted average rate for the year ended June 30, on:
Federal Home Loan Bank advances		3.79	%		3.71	%		4.82	%
Other borrowings		—	%		2.56	%		5.65	%

Comparison of Operating Results for the Years Ended June 30, 2010 and 2009

The Company recorded a net loss available to common shareholders of $2.7 million for the year ended June 30, 2010 compared to net loss of $5.6 million for the year ended June 30, 2009. The net loss available to common shareholders in the current year resulted from $5.1 million in credit costs as the provision for loan losses totaled $3.7 million, reflecting $3.2 million in net charge-offs, as well as $1.4 million in costs associated with foreclosed real estate.

Net Interest Income. The Company’s net interest income decreased $180,000 from $8.64 million in the year ended June 30, 2009 to $8.46 million in the current year as average interest-earning assets decreased $2.5 million or 1.0% to $248.7 million. In addition, the net interest margin declined 4 basis points from 3.44% in the year ended June 30, 2009 to 3.40% in 2010.

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 a primary driver of the declines in yields/rates on interest- earning/bearing assets and liabilities. In addition, the impact of the shift in asset mix also lowered the yield on earning assets.

Interest Income. Total interest income decreased by $1.9 million or 11.8% to $13.8 million for the year ended June 30, 2010 compared to $15.7 million in the year ended June 30, 2009. This decrease was due to a 69 basis point decline in yield and a decline in average interest-earning assets. The lower yield is primarily the result of a dramatic drop in market interest rates in addition to the above mentioned shift in asset mix from loans to investments. The average prime rate declined 65 basis points in fiscal year 2010 versus 2009. Average interest earning assets declined $2.5 million, or 1.0%, and was driven by the $17.8 million, or 7.7%, decrease in average loan balances. Loan demand diminished considerably in the second half of fiscal year 2009 and continued throughout 2010. Management’s decision to exit the lease origination business in October, 2008 also contributed to this decline in loan balances.

13

Interest income generated by the investment portfolio increased $91,000 in 2010 due to a $6.3 million, or 46.7%, increase in average balances which more than offset the 85 basis point decline in portfolio yield. Interest on short-term investments and other interest-earning assets declined $6,000, or 15.4%, to $33,000 in fiscal year 2010 despite a $9.0 million increase in average balances as the yield fell 45 basis points during this period. The increase in investment securities as well as short-term investment balances is a function of lower loan demand and strong deposit growth.

Interest Expense. Total interest expense decreased $1.7 million from $7.1 million in the year ended June 30, 2009 to $5.4 million in the current year as the average rate paid on interest bearing liabilities decreased 75 basis points from 3.05% in 2009 to 2.30% in 2010. Total average interest-bearing liabilities increased $2.7 million or 1.2% from $231.3 million in the year ended June 30, 2009 to $234.0 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 were replaced with lower cost funds and money market deposit rates reset lower as competition for deposits moderated during fiscal year 2010. The average rate paid on certificates of deposit was 90 basis points lower while the average rate on money market deposits was 35 basis points lower. The Company continues to run a money market promotion offering customers a temporarily higher interest rate for a limited period of time. This promotion lead to a $31.3 million increase in the average balance of money market accounts for the year ended June 30, 2010 versus the prior year. Based on the relative spread between promotional rates and standard rates, the Company expects the rate on money market accounts to decline somewhat through the first six months of fiscal year 2011.

Deposits averaged $216.6 million in 2010, a $17.9 million, or 9.0%, increase versus $198.7 million in 2009. The primary driver of this growth was money market deposits which grew $31.3 million, or 77.4%, due to the promotion mentioned above. Certificates of deposits declined $14.5 million on average, or 12.5%, as customers exhibited a preference for more liquid deposits.

Interest expense on borrowings decreased $592,000 to $1.2 million in 2010 compared to $1.8 million in 2009 as balances were $16.5 million lower in 2010. The average rate paid on borrowings increased 25 basis points in 2010 as shorter-term borrowings matured leaving higher rate longer term borrowings. No new long-term borrowings were issued during the current 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 $3.7 million in fiscal year 2010, a decrease of $2.2 million, or 37%, from the 2009 provision of $5.9 million. The decrease in the provision was due to a $1.5 million, or 31.9%, decline in net charge-offs to $3.2 million in 2010 from $4.7 million in 2009. In addition, non-performing loans decreased $1.5 million to $9.7 million at June 30, 2010 compared to $11.2 million at the end of June 30, 2009. Of the $1.5 million decline in net charge-offs, commercial real estate charge-offs were $1.9 million lower – residential construction loan related charge-offs were $2.4 million lower and residential mortgage charge-offs were $589,000 higher. Total residential construction loans charged off were $1.0 million in fiscal year 2010 and reflects the continued correction in the residential real estate market that has taken place in the past 2 years. Commercial lease charge-offs were $298,000 higher in 2010 and reflect the continuing recession experienced in the U.S. economy that officially began in December, 2007.

The provision for loan losses ($3.7 million) in excess of net charge-offs ($3.2 million) amounted to $504,000 and was the primary factor in the increase of its allowance for loan losses as a percentage of total loans to 1.76% at June 30, 2010 from 1.37% at June 30, 2009. The primary reason for the increase in this percentage reflects a $504,000, or 17%, increase in the allowance for loan losses in combination with a $20.2 million, or 9%, decline in loans outstanding. The Company’s allowance for loan losses as a percentage of non-performing loans was 36.3% at June 30, 2010 as compared to 26.9% at June 30, 2009. While this percentage, at first glance seems low, a strong compensating factor is that 97% of non-accrual loan balances are collateralized by real estate or guaranteed by the SBA at June 30, 2010. In considering the appropriate level for the allowance for loan losses, in some cases when the age of the real estate appraisal was more than one year old, adjustments were made to the appraisals taking into consideration the age of the appraisal and the nature of the collateral. These adjusted appraisal values, which required management’s judgment, were used to develop estimated losses and related specific loss reserves within the allowance for loan losses. In other cases, brokers’ price opinions or firm purchase offers

14

were used to obtain more current indications of the value of collateral. The valuation method used differs based on the individual circumstances involved for each loan. Another factor in the level of the allowance for loan losses to non-performing loans was $1.1 million in partial charge-offs on loans in the portfolio as of June 30, 2010. If specific reserves had been set up as opposed to taking partial charge-offs, the ratio of the allowance for loan losses to non-performing loans would have been 42.9% and the allowance for loan losses to total loans would have been 2.29%.

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 32.2% of the total – up from 28.7% at June 30, 2009. The Company has determined that there is a lower level of 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 8.5% and 2.9%, respectively – down from 10.9% and 5.6%, respectively at June 30, 2009. 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 underwrites all commercial real estate loans with multiple sources of repayment. Commercial business and commercial mortgage loans have decreased in absolute terms but have increased as a percentage of the portfolio at 25.4% and 23.2%, 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, $3.3 million of the commercial business loan portfolio, including $895,000 on nonaccrual status, are guaranteed by the Small Business Administration with an average guarantee percentage of 75.8% or $2.5 million at June 30, 2010.

In response to comments received by our regulators during the most recent examination the Company has integrated the unallocated portion of the allowance for loan losses into each individual loan category. 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.

15

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

	Year Ended June 30,
	2010			2009			2008			2007			2006
	(Dollars in thousands)
Balance at beginning of period	$	3,023		$	1,834		$	1,110		$	1,000		$	945
Loans charged off:
Real estate mortgage		1,725			3,585			740			—			—
Commercial loan		195			171			37			9			—
Commercial leases		859			561			250			265			40
Consumer		583			587			262			202			146
Total charge-offs		3,362			4,904			1,289			476			186
Recoveries:
Real estate mortgage		—			—			—			—			41
Commercial loan		30			51			6			33			16
Commercial leases		58			65			47			48			78
Consumer		77			75			40			75			41
Total recoveries		165			191			93			156			176
Net loans charged off		3,197			4,713			1,196			320			10
Provision for loan losses		3,701			5,902			1,920			430			65
Balance at end of period	$	3,527		$	3,023		$	1,834		$	1,110		$	1,000
Ratio of net charge-offs to average loans outstanding during the period		1.49	%		2.03	%		0.53	%		0.15	%		0.01	%
Ratio of allowance to non-performing loans		36.26	%		26.89	%		72.40	%		230.34	%		409.84	%

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, 2010				As of June 30, 2009				As of June 30, 2008				As of June 30, 2007				As of June 30, 2006
	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	$	76	32.2	%	$	64	28.7	%	$	70	30.0	%	$	45	33.1	%	$	61	40.6	%
Commercial		385	23.2			205	22.1			41	17.7			144	16.1			67	14.9
Construction		1,044	8.5			362	10.9			381	12.8			146	10.6			64	7.0
Consumer and other		550	7.8			526	8.3			191	9.0			137	9.1			67	9.2
Commercial Business		794	25.4			549	24.4			94	22.9			413	23.4			558	17.5
Commercial Leases		678	2.9			713	5.6			237	7.6			225	7.7			183	10.8
Unallocated		—	—			604	—			820	—			—	—			—	—
Total allowance for loan losses	$	3,527	100.00	%	$	3,023	100.00	%	$	1,834	100.00	%	$	1,110	100.0	%	$	1,000	100.0	%

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

	At June 30,
	2010			2009			2008			2007			2006
	(Dollars in thousands)
Loans accounted for on a non-accrual basis: (1)
Real estate:
Residential	$	116		$	134		$	81		$	168		$	13
Commercial		2,737			2,302			—			—			146
Construction		1,763			3,232			1,989			—			—
Consumer		46			146			6			14			7
Commercial loan/lease		5,066			5,427			457			300			78
Total		9,728			11,241			2,533			482			244
Accruing loans which are contractually past due 90 days or more		—			—			—			—			—
Total nonperforming loans		9,728			11,241			2,533			482			244
Other nonperforming assets (2)		2,875			1,265			7			5			—
Total nonperforming assets	$	12,603		$	12,506		$	2,540		$	487		$	244
Nonperforming loans to total loans		4.85	%		5.11	%		1.10	%		0.21	%		0.12	%
Nonperforming assets to total assets		4.67	%		4.66	%		0.97	%		0.19	%		0.11	%
Troubled debt restructurings (3)	$	2,171		$	1,124		$	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 and excluded here.

The following table reflects the activity in non-performing loans for the year ended June 30, 2010:

Balance June 30, 2009, in thousands	$	11,241
Added to non-accrual during the year		9,327
Paid off/down		(4,229	)
Brought to accrual status		(898	)
Transferred to real estate acquired through foreclosure		(3,450	)
Charged-Off		(1,608	)
Net change in non-accrual Leases, Consumer & Residential Mortgages, and all other		(655	)
Balance June 30, 2010	$	9,728

At June 30, 2010, nonaccrual residential construction loans totaled $1.8 million and consisted of $770,000 in residential construction and development loans and a $992,000 condominium conversion project. Commercial real estate includes a $857,000 warehouse building loan, and $1.2 million in office/retail building loans and $371,000 in investor residential property loans. All commercial real estate and construction loans are considered well collateralized. Commercial loans/leases include a $3.3 million loan supporting a borrower’s various business interests including commercial properties. In addition, this category includes two loans amounting to $908,000 to borrowers operating retail businesses. Of the $5.0 million in commercial business non-accrual loans, $895,000 have an SBA guarantee.

During the twelve months ended June 30, 2010, the Company modified the terms of two loans in the amount of $3.2 million in troubled debt restructurings. The Company recorded $157,000 in interest income on these loans in the year ended June 30, 2010. While the Company currently expects to collect all principal on these loans based on the modified loan terms, there is doubt as whether all interest will be collected on one of the loans totaling $992,000. The Company is not committed to lend any additional monies pertaining to these loans.

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In addition, the Company has modified other loans that were not considered troubled debt restructurings. In many cases, these restructurings involved adding a limited number of delinquent payments to the principal balance of the loan and either re-amortizing the loan or extending the term by a like number of payments with no change in the interest rate. In most cases these restructurings were caused by temporary events that have since passed and the restructuring has allowed the borrower to meet the monthly payment, whereas they would have had difficulty making up the delinquent payments. These types of restructurings have increased moderately in the current year versus last year. The Company has had no loans restructured into multiple new loans.

During the year ended June 30, 2010 the amount of interest that would have been recorded on non-accrual and restructured loans at June 30, 2010 had the loans performed in accordance with their original terms was approximately $693,000. The amount of interest actually recorded during fiscal year 2010 was $106,000.

At June 30, 2010, 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.

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 $70,000 or 8.3% to $771,000 during the year ended June 30, 2010 from $841,000 during the year ended June 30, 2009. Fees and service charges declined $96,000 or 13.2% to $634,000 during the current year from $730,000 in the previous year continuing a trend seen in the past two years. During fiscal year 2010, one security, which saw its credit profile improve considerably during the year, was sold for a $71,000 gain. In addition, a foreclosed real estate property was sold at a $67,000 loss during fiscal year 2010.

Noninterest Expense. The Company’s total noninterest expense decreased $1.3 million or 12.2%, to $9.4 million during fiscal 2010, as compared to $10.7 million in fiscal 2009. This decrease in fiscal year 2010 resulted from the $3.0 million write-off, in the previous year, of goodwill associated with previous bank acquisitions. Excluding this factor, noninterest expense increased $1.7 million or 21.4% due primarily to credit related costs. The provision for losses on and cost of real estate acquired through foreclosure totaled $1.4 million in fiscal year 2010 compared to $9,000 in 2009. In addition, professional fees increased $304,000, or 71.9%, to $727,000 from $423,000 due primarily to legal costs associated with working on troubled credits. Higher consulting costs associated with the Sarbanes-Oxley Act of 2002 also contributed to the higher level of professional fees. Federal deposit insurance assessments were $162,000, or 46.7%, higher in fiscal year 2010 due to significantly higher FDIC deposit insurance premiums due to the higher premium rates prevalent in the banking industry. Compensation and benefit expense were essentially flat as lower commissions and incentives offset severance costs associated with staff reductions. Conversely, equipment costs were $96,000, or 31.4%, lower to $210,000 in the current year versus $306,000 last year due to a lower level of purchasing activity.

Income Tax Provision. The Company had an income tax benefit of $1.5 million (or 39.1% of pre-tax loss) in fiscal year 2010, compared to a benefit of $1.6 million (or 23.1% of pre-tax loss) in 2009. There was no tax benefit recorded for the $2.95 million goodwill impairment charge in fiscal year 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, 2010 and 2009. Refer to Note 9 of the Consolidated Financial Statements for a further discussion.

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

18

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 $25.5 million as of June 30, 2010. 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, 2010, is presented in the following table. The table was derived using assumptions which management believes to be reasonable.

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The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at June 30, 2010 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	$	35,490		$	45,440		$	62,500		$	43,655		$	13,611		$	—		$	200,696
Securities available for sale		9,545			3,025			10,296			1,545			855			216			25,482
Short-term investments and other interest-earning assets		21,232			—			—			—			—			—			21,232
Total		66,267			48,465			72,796			45,200			14,466			216			247,410
Rate sensitive liabilities:
Deposits		24,348			66,397			106,663			15,878			3,144			805			217,235
Borrowings		—			11,100			6,000			5,000			—			—			22,100
Total		24,348			77,497			112,663			20,878			3,144			805			239,335
Interest sensitivity gap	$	41,919		$	(29,032	)	$	(39,867	)	$	24,322		$	11,322		$	(589	)	$	8,075
Cumulative interest sensitivity gap	$	41,919		$	12,887		$	(26,980	)	$	(2,658	)	$	8,664		$	8,075
Ratio of cumulative gap to total assets		15.54	%		4.78	%		(10.00	)%		(0.99	)%		3.21	%		2.99	%

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.

20

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, 2010, 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	1.6%	-4.2%	+ or -10.0	%
% Change in Fair Value of Equity	-10%	25%	+ or -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, 2010, the Company’s cash on hand and interest-bearing deposits totaled $28.0 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 $22.0 million at June 30, 2010. Certificates of deposit that are scheduled to mature in less than one year at June 30, 2010 totaled $59.2 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.

On May 6, 2010, the Company’s Board of Directors determined to suspend regular quarterly cash dividends on the $6.0 million in Series A Preferred Stock and $300,000 in Series B Preferred Stock. The Company’s Board of Directors took this action in consultation with the Federal Reserve Bank of Richmond as required by recent regulatory policy guidance. The Company currently has sufficient capital and liquidity to pay the scheduled dividends on the preferred stock; however, the Company believes this decision will better support the capital position of The Patapsco Bank, a wholly owned subsidiary of the Company.

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On May 6, 2010, the Company’s Board of Directors determined to suspend interest payments on the trust preferred securities. The Company’s Board of Directors took this action in consultation with the Federal Reserve Bank of Richmond as required by recent regulatory policy guidance. The Company currently has sufficient capital and liquidity to pay the scheduled interest payments; however, the Company believes this decision will better support the capital position of The Patapsco Bank, a wholly owned subsidiary of the Company.

At June 30, 2010, 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, 2010.

	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)	$	23,009	12.35	%	$	15,000	8.00	%	$	18,750	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		20,663	11.09			7,500	4.00			11,250	6.00
Tier 1 Leverage Ratio		20,663	7.76			10,649	4.00			13,311	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)	2010		2009
Commitments to originate new loans	$	11,911	$	19,516
Undisbursed lines of credit		10,132		6,564
Financial standby letters of credit		1,349		1,392

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.

22

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 (“the Company”) as of June 30, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended June 30, 2010. 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes 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, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the two-year period ended June 30, 2010 in conformity with accounting principles generally accepted in the United States of America.

Baltimore, Maryland

September 28, 2010

23

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

June 30, 2010 and 2009

(dollars in thousands except for share and per share data)	2010		2009
Assets
Cash on hand and due from banks	$	6,811	$	6,143
Interest bearing deposits in other financial institutions		21,232		13,651
Total Cash and Cash Equivalents		28,043		19,794
Securities available for sale		25,482		16,084
Loans receivable, net of allowance for loan losses of $3,527 and $3,023, respectively		197,169		216,927
Investment securities required by law, at cost		2,848		2,817
Real estate acquired through foreclosure and other repossessed assets		2,875		1,265
Property and equipment, net		3,759		3,965
Intangible assets		193		246
Accrued interest and other assets		9,354		7,269
Total Assets	$	269,723	$	268,367
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing deposits	$	11,554	$	11,287
Interest bearing deposits		217,235		196,508
Total Deposits		228,789		207,795
Junior subordinated debentures		5,000		5,000
Long-term debt		17,100		34,300
Accrued expenses and other liabilities		1,464		1,580
Total liabilities		252,353		248,675
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 issued and outstanding		5,766		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 issued and outstanding		326		334
Common stock; $0.01 par value; authorized 4,000,000 shares; issued and outstanding 1,930,317 and 1,864,974, respectively		19		19
Additional paid-in capital		7,847		7,411
Obligation under deferred compensation		—		454
Deferred compensation contra		—		(78	)
Retained earnings, substantially restricted		3,212		5,866
Accumulated other comprehensive income (loss), net of taxes		200		(12	)
Total Stockholders’ Equity		17,370		19,692
Total Liabilities and Stockholders’ Equity	$	269,723	$	268,367

See accompanying notes to consolidated financial statements.

24

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Years Ended June 30, 2010 and 2009

(dollars in thousands except for per share data)	2010			2009
Interest Income:
Loans receivable, including fees	$	13,162		$	15,104
Investment securities		645			554
Federal funds sold and other investments		33			39
Total Interest Income		13,840			15,697
Interest Expense:
Deposits		4,192			5,277
Interest on short-term debt		6			95
Interest on junior subordinated debentures and long-term debt		1,184			1,687
Total Interest Expense		5,382			7,059
Net interest income		8,458			8,638
Provision for loan losses		3,701			5,902
Net interest income after provision for loan losses		4,757			2,736
Non-Interest Income:
Fees and service charges		634			730
Gain on sale of securities available for sale		71			—
Gain (Loss) on sale of other repossessed assets		(67	)		10
Other		133			101
Total Non-Interest Income		771			841
Non-Interest Expense:
Compensation and employee benefits		4,390			4,400
Professional fees		727			423
Federal deposit insurance assessments		509			347
Equipment expenses		210			306
Net occupancy costs		580			603
Advertising		42			66
Data processing		428			468
Amortization of core deposit intangible		52			51
Telephone, postage and delivery		289			297
Provision for losses on and cost of real estate acquired through foreclosure		1,358			9
Goodwill impairment charge		—			2,954
Other		802			764
Total Non-Interest Expense		9,387			10,688
Loss Before Benefit for Income Taxes		(3,859	)		(7,111	)
Benefit for income taxes		(1,510	)		(1,645	)
Net Loss	$	(2,349	)	$	(5,466	)
Preferred stock dividends and accretion		327			173
Net Loss Available for Common Shareholders	$	(2,676	)	$	(5,639	)
Basic loss per common share	$	(1.39	)	$	(2.93	)
Diluted loss per common share	$	(1.39	)	$	(2.93	)
Cash dividends declared per common share	$	—		$	0.11

See accompanying notes to consolidated financial statements.

25

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

Years Ended June 30, 2010 and 2009

(dollars in thousands except for share and per share data)	Preferred Stock		Warrant Preferred Stock			Common Stock		Additional Paid-In Capital		Obligation Under Deferred Compensation			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Taxes			Total Stockholders’ Equity
Balance at June 30, 2008	$	—	$	—		$	18	$	7,346	$	364		$	11,851		$	(188	)	$	19,391
Cumulative effect adjustment for adoption of ASC Topic 715		—		—			—		—		—			(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		376			5,866			(12	)		19,692
Comprehensive loss:
Net loss		—		—			—		—		—			(2,349	)		—			(2,349	)
Change in unrealized gains on securities available-for-sale portfolio, net of taxes of $119		—		—			—		—		—						212			212
Comprehensive Loss		—		—			—		—		—									(2,137	)
Common stock issued (65,343 shares)		—		—			—		34		—			—			—			34
Dividends declared – preferred & warrant preferred stock		—		—			—		—		—			(245	)		—			(245	)
Accretion of net discount on preferred & warrant preferred stock		68		(8	)		—		—		—			(60	)		—			—
Amortization of deferred compensation- restricted stock awards		—		—			—		26		—						—			26
Termination of deferred compensation plan									376		(376	)								—
Balance at June 30, 2010	$	5,766	$	326		$	19	$	7,847	$	—		$	3,212		$	200		$	17,370

See accompanying notes to consolidated financial statements.

26

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years Ended June 30, 2010 and 2009

(dollars in thousands)	2010			2009
Cash flows from operating activities:
Net loss	$	(2,349	)	$	(5,466	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		272			327
Provision for losses on loans		3,701			5,902
Provision for loss on real estate owned		1,080			—
Non-cash compensation under stock-based benefit plans		39			87
(Gain) loss on sale of other repossessed assets		67			(10	)
Amortization of core deposit intangible		52			51
Amortization of premiums and discounts, net		273			111
Gain on sale of securities available for sale		(71	)		—
Goodwill impairment charge		—			2,954
Increase in cash value of bank-owned life insurance		(92	)		(77	)
Amortization of deferred loan origination fees, net of costs		9			(2	)
Increase in accrued interest and other assets		(2,098	)		(1,915	)
Decrease in accrued expenses and other liabilities		(128	)		(173	)
Net cash provided by operating activities		755			1,789
Cash flows from investing activities:
Purchase of securities available for sale		(20,560	)		(10,621	)
Proceeds from maturing securities available for sale and principal payments on mortgage-backed securities available for sale		10,293			4,341
Proceeds from sale of securities available for sale		1,050			—
Loan principal repayments, net of disbursements		12,467			2,927
Proceeds from sale of real estate owned		792			—
Increase in investment required by law		(31	)		(168	)
Purchases of property and equipment		(66	)		(114	)
Net cash provided by (used in) investing activities		3,945			(3,635	)
Cash flows from financing activities:
Net increase in deposits		20,985			9,823
Net increase in advance payments by borrowers		9			92
Proceeds from long-term borrowings		—			17,500
Repayments of long-term borrowings		(17,200	)		(20,500	)
Proceeds from the issuance of preferred stock		—			5,661
Proceeds from the issuance of warrant preferred stock		—			339
Dividends paid		(245	)		(468	)
Net cash provided by financing activities		3,549			12,447
Net increase in cash and cash equivalents		8,249			10,601
Cash and cash equivalents at beginning of year		19,794			9,193
Cash and cash equivalents at end of year	$	28,043		$	19,794
Supplemental information:
Interest paid	$	5,440		$	7,289
Income taxes paid		206			386
Real estate acquired through foreclosure and other repossessed assets		3,549			1,265

See accompanying notes to consolidated financial statements.

27

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.

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 in accordance with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the statement 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 fair value 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 changes to the allowance based on their judgments about information available to them at the time of their examination.

Subsequent Events Financial Accounting Standards Board (“FASB”) Accounting Standards Codification™ (“Codification” or “ASC”) (Topic 855) established general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. Topic 855 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 from June 30, 2010 through the date these financial statements were issued.

FASB Launched Accounting Standards Codification

The Financial Accounting Standards Board (“FASB”) has issued the “FASB Accounting Standards Codification™” (“Codification” or “ASC”). The Codification establishes the single source of authoritative U.S. generally accepted accounting principles (“GAAP”) to be applied by nongovernmental entities. All other nongrandfathered accounting literature not included in the Codification will become nonauthoritative. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it issues Accounting Standards Updates (“ASU”), which display an issue date expressed as the year with a sequential number for each update and serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification. GAAP is not intended to be changed as a result

28

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

of the FASB’s Codification project, but it changed the way the guidance is organized and presented. As a result, these changes have a significant impact on how companies reference GAAP in their financial statements and in their accounting policies for financial statements issued for interim and annual periods ending after September 15, 2009.

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 $3.3 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 Equivalents

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

Securities

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, 2010 and 2009.

In April 2009, the FASB issued ASC 320, “Investments – Debt and Equity Securities” which 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, ASC 320 changes the presentation and amount of the other-than-temporary impairment recognized in the statement of operations. 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 comprehensive income. ASC 320 was effective for the Company for interim and annual reporting periods ended June 30, 2009 and after.

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.

29

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Investment Securities Required by Law

Investment securities required by law represent Federal Reserve Bank of Richmond (“FRB”) and Federal Home Loan Bank of Atlanta stock (“FHLB”), which are considered restricted as to marketability. Management evaluates the Company’s restricted stock in the FHLB and FRB for impairment in accordance with ASC Topic 942, “Financial Services – Depository and Lending.” 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, 2010.

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, 2010 and 2009.

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. 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.

The Company accounts for loans in accordance with ASC 310, “Receivables,” when due to a deterioration in a borrower’s financial position, the Company grants concessions that would not otherwise be considered. 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.

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) ASC 450 “Contingencies”, that requires

30

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

losses to be accrued when their occurrence is probable and estimable, and (2) ASC 310, “Receivables,” 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 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. Fair value is determined utilizing third party appraisals, broker price opinions or other similar methods. Fair value is updated at least annually and more often if circumstances dictate. 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.

31

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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.

Loss 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 loss (numerator) was adjusted for preferred stock dividends for all affected periods presented.

	Year Ended
	June 30, 2010						June 30, 2009
(in thousands, except per share data)	Basic			Diluted			Basic			Diluted
Net loss available for common shareholders	($	2,676	)	($	2,676	)	($	5,639	)	($	5,639	)
Weighted average common shares outstanding		1,932			1,932			1,922			1,922
Diluted securities:
Stock options		—			—			—			—
Adjusted weighted average shares		1,932			1,932			1,922			1,922
Per share amount	($	1.39	)	($	1.39	)	($	2.93	)	($	2.93	)

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

Stock-Based Compensation

In accordance with ASC 718 “Compensation – Stock Compensation,” the Company records compensation costs related to share-based payment transactions in the financial statements over the period that an employee provides services in exchange for the award 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 ASC 718, 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.

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 (loss) 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.

32

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Intangible assets were composed of the following:

(In thousands)	June 30, 2010				June 30, 2009
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Amortizable intangible assets, acquisition of deposit accounts	$	516	$	323	$	516	$	271

During the previous 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 included a goodwill impairment charge of $2,954,000.

Amortization expense was $52,000 and $51,000 for the years presented and is expected to be $52,000 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.

Reclassification

Certain prior year’s amounts have been reclassified to conform to the current year’s presentation. Such reclassifications had no impact on the Company’s stockholders’ equity or net loss.

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 $1,349,000 and $1,392,000 of standby letters of credit as of June 30, 2010 and June 30, 2009, 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, 2010 and June 30, 2009 for guarantees under standby letters of credit issued is not material.

33

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

ASC Topic 860

In October 2009, the FASB issued Topic 860, “Accounting for Transfers of Financial Assets.” The amendments in this Update improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting.

This Update is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. Early application is not permitted. Adoption of this ASC will not have a material impact on the Company’s financial condition or results of operations.

ASC Topic 810

In October 2009, the FASB issued Topic 810, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” This Update amends the Codification for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R).

The amendments in this Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this Update also require additional disclosures about a reporting entity’s involvement in variable interest entities, which will enhance the information provided to users of financial statements.

This Update is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. Early application is not permitted. Adoption of this ASC will not have a material impact on the Company’s financial condition or results of operations.

ASC Topic 820

The FASB has issued Topic 820, “Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements.” This ASC requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, ASC 820 amends

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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Codification Subtopic 820-10 to now require:

• A reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and

• In the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements.

In addition, Topic 820 clarifies the requirements of the following existing disclosures:

• For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and

• A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.

Topic 820 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASC will not have a material impact on the Company’s financial condition or results of operations.

ASU 2010-18

Topic 310, “Receivables”, codifies the consensus reached in EITF Issue No. 09-I, “Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset.” The amendments to the Codification provide that modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. ASU 2010-18 does not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40.

Topic 310 is effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. Early application is permitted. Upon initial adoption of Topic 310, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. Adoption of this ASC will not have a material impact on the Company’s financial condition or results of operations.

ASU 2010-20

ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, will help investors assess the credit risk of a company’s receivables portfolio and the adequacy of its allowance for credit losses held against the portfolios by expanding credit risk disclosures.

This ASU requires more information about the credit quality of financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure.

The amendments in this Update apply to all public and nonpublic entities with financing receivables. Financing receivables include loans and trade account receivables. However, short-term trade accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure amendments.

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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The effective date of ASU 2010-20 differs for public and nonpublic companies. For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. For nonpublic companies, the amendments are effective for annual reporting periods ending on or after December 15, 2011.

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.

(2) Securities Available for Sale

Securities available for sale are summarized as follows as of June 30:

	2010
(In thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Corporate bonds	$	1,500	$	11	($—	)	$	1,511
U.S. Government agencies		13,600		40	(3	)		13,637
Mortgage-backed securities, residential		6,737		291	(4	)		7,024
Collateralized mortgage obligations		3,314		—	(4	)		3,310
	$	25,151	$	342	($11	)	$	25,482
	2009
Corporate bonds	$	2,980	$	5	($167	)	$	2,818
U.S. Government agencies		6,586		3	(13	)		6,576
Mortgage-backed securities, residential		6,539		155	(4	)		6,690
	$	16,105	$	163	($184	)	$	16,084

The scheduled maturities of securities available for sale at June 30, 2010 are as follows:

	2010
(In thousands)	Amortized Cost		Fair Value
Due in less than one year	$	2,500	$	2,507
Due in one to five years		1,000		1,001
Due after five through ten years		6,511		6,537
Due after ten years		5,089		5,103
Mortgage-backed securities, residential		6,737		7,024
Collateralized mortgage obligations		3,314		3,310
	$	25,151	$	25,482

During the years ended June 30, 2010 and 2009, $1.1 million and $0 in gross proceeds were received on securities sold at a gross gain of $71,000 and $0, respectively, using the specific identification method. Securities, issued by agencies of the federal government, with a carrying value of $5.1 million and $0 on June 30, 2010 and 2009, respectively, were pledged to secure the Bank’s federal funds accommodation.

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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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, 2010.

	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	$	1,586	$	(3	)	$	—	$	—	$	1,586	$	(3	)
Mortgage-backed securities, residential		662		(4	)		—		—		662		(4	)
Collateralized mortgage obligations		3,310		(4	)		—		—		3,310		(4	)
Total Temporarily Impaired Securities	$	5,558	$	(11	)	$	—	$	—	$	5,558	$	(11	)

At June 30, 2010, the Company had 3 securities in an unrealized loss position. Unrealized losses detailed above relate primarily to U.S. Government agency bonds and mortgage-backed securities guaranteed by U.S. Government agencies. The decline in fair value is considered temporary and is primarily due to interest rate fluctuations. 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, 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, residential		—		—			1,077		(4	)		1,077		(4	)
Total Temporarily Impaired Securities	$	3,565	$	(13	)	$	3,388	$	(171	)	$	6,953	$	(184	)

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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)	2010			2009
Real estate secured by first mortgage:
Residential	$	65,106		$	63,788
Commercial		46,940			49,188
Construction, net of loans in process		17,216			24,223
		129,262			137,199
Home improvement loans		9,616			10,138
Home equity loans		5,767			5,795
Other consumer loans		274			2,445
Commercial loans		51,311			54,170
Commercial leases		5,794			12,554
		202,024			222,301
Less:
Deferred loan origination fees, net of costs		266			280
Unearned interest-consumer loans		567			761
Unearned interest-commercial leases		667			1,530
Purchase accounting premium, net		(172	)		(220	)
Allowance for loan losses		3,527			3,023
Loans receivable, net	$	197,169		$	216,927

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)	2010		2009
Impaired loans without a related allowance	$	7,622	$	8,626
Impaired loans with a related allowance		4,021		3,085
Total impaired loans	$	11,643	$	11,711
Allowance for impaired loans	$	668	$	382
Average investment in impaired loans		11,236		7,380
Interest income recognized on impaired loans:
Accrual basis		—		—
Cash basis		106		529

The Company is not obligated to lend additional monies pertaining to the aforementioned impaired and non-accrual loans at June 30, 2010.

Loans on which the accrual of interest has been discontinued amounted to $9,728,000 and $11,241,000 at June 30, 2010 and 2009, respectively. The amount of interest that would have been recorded on non-accrual loans at June 30, 2010 and 2009, respectively, had the loans performed in accordance with their terms was approximately $693,000 and $730,000, respectively. The Company had no loan balances past due 90 days or more accruing interest at June 30, 2010 and 2009.

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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)	2010			2009
Balance at beginning of year	$	3,023		$	1,834
Provision for losses on loans		3,701			5,902
Charge-offs		(3,362	)		(4,904	)
Recoveries		165			191
Balance at end of year	$	3,527		$	3,023

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, 2010 and 2009 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, 2010
(In thousands)	Fixed rate		Floating rate
Commercial business loans	$	140	$	—
Real estate loans		3,714		8,057
Undisbursed lines of credit		5,881		4,251
	$	9,735	$	12,308
	June 30, 2009
Commercial business loans	$	4,624	$	—
Real estate loans		2,405		12,487
Undisbursed lines of credit		1,609		4,955
	$	8,638	$	17,442

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, 2010 and 2009, Patapsco had outstanding letters of credit of $1,349,000 and $1,392,000, respectively.

As of June 30, 2010 and 2009, Patapsco was servicing loans for the benefit of others in the amount of $18,656,000 and $19,901,000, 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.

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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)	2010			2009
Beginning balance	$	509		$	323
New loans or draws on existing loans		37			443
Loan repayments		(258	)		(257	)
Change in related party classification		(26	)		—
Ending balance	$	262		$	509

(4) Real Estate Acquired Through Foreclosure and Other Repossessed Assets

At June 30, 2010 and 2009, the Company had real estate acquired through foreclosure and other repossessed assets of $2,875,000 and $1,265,000, respectively. Operating expenses, net of rental income was $260,000 and $9,000 for the years ended June 30, 2010 and June 30, 2009, respectively.

Real estate acquired through foreclosure is presented net of allowance for losses. An analysis of the allowance for losses on real estate acquired through foreclosure is as follows:

	Years Ended June 30,
(in thousands)	2010			2009
Balance at beginning of year	$	—		$	—
Provision for losses		1,098			—
Charge-offs		(1,079	)		—
Recoveries		—			—
Balance at end of year	$	19		$	—

Expenses applicable to real estate acquired through foreclosure include the following:

	Years Ended June 30,
(in thousands)	2010		2009
Provision for losses	$	1,098	$	—
Operating expenses, net of rental income		260		9
Total	$	1,358	$	9

(5) Property and Equipment

Property and equipment are summarized as follows at June 30:

(In thousands)	2010		2009		Estimated Useful lives
Land	$	152	$	152	—
Building and improvements		4,508		4,508	30 - 40 years
Leasehold improvements		238		238	3 - 10 years
Furniture, fixtures and equipment		3,219		3,152	3 - 10 years
Total, at cost		8,117		8,050
Less accumulated depreciation		4,358		4,085
Property and equipment, net	$	3,759	$	3,965

Rent expense was $229,000 and $227,000 in the years ended June 30, 2010 and 2009, respectively.

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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

At June 30, 2010, the minimal rental commitments under non-cancellable operating leases relating to branch facilities are as follows:

Year ending June 30,
2011	$	182,160
2012		176,830
2013		167,114
2014		155,004
2015		155,004
Thereafter		1,550,040
	$	2,386,152

(6) Deposits

The aggregate amount of jumbo certificates of deposit, each with a minimum denomination of $100,000, was approximately $27,651,000 and $27,042,000 at June 30, 2010 and 2009, respectively.

At June 30, 2010, the scheduled maturities of certificates of deposit are as follows:

(In thousands)
Twelve months ending June 30,
2011	$	59,242
2012		17,545
2013		2,695
2014		3,203
2015		15,886
Thereafter		458
	$	99,029

(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.

(8) Borrowings

At June 30, 2010 and 2009, 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 $50.7 million and $60.9 million, respectively. Borrowings totaled $17.1 million and $34.3 million at June 30, 2010 and 2009, respectively. The Company is required to maintain as collateral for its FHLB borrowings qualified mortgage loans in an amount greater than 100% of the outstanding advances. At June 30, 2010 the Bank had a Federal Funds accommodation with the Pacific Coast Bankers’ Bank of $4 million. At June 30, 2010, there were no balances outstanding on this line. At June 30, 2010 and 2009, all borrowings are at fixed rates.

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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

	2010				2009
(In thousands)	Balance		Weighted Average Rate		Balance		Weighted Average Rate
Under 12 months	$	5,100	5.57	%	$	17,200	2.93	%
12 months to 24 months		3,000	3.41			5,100	5.57
24 months to 36 months		—	—			3,000	3.41
36 months to 48 months		—	—			—	—
48 months to 60 months		—	—			—	—
60 months to 120 months		9,000	3.69			9,000	3.69
	$	17,100	4.20	%	$	34,300	3.56	%

The borrowings from the Federal Home Loan Bank of Atlanta with conversion or call features at June 30, 2010 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

(9) Income Taxes

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

(In thousands)	2010		2009
Current:
Federal	($919	)	($815	)
State	(126	)	(225	)
Total Current Income Tax Benefit	(1,045	)	(1,040	)
Deferred:
Federal	(274	)	(478	)
State	(191	)	(127	)
Total Deferred Income Tax (Benefit) Expense	(465	)	(605	)
Total Income Tax Benefit	($1,510	)	($1,645	)

The net deferred tax asset consists of the following at June 30:

(In thousands)	2010			2009
Unrealized losses on securities available for sale	$	—		$	8
Allowance for losses on loans and leases		1,458			1,192
Net operating loss carryforward		481			—
Reserve for uncollectable interest		252			165
Deferred compensation		50			319
Other		15			28
Total deferred tax assets		2,256			1,712
Unrealized gains on securities available for sale		(130	)		—
Purchase accounting adjustment		(139	)		(172	)
Federal Home Loan Bank stock dividends		(168	)		(168	)
Depreciation		(196	)		(76	)
Total deferred tax liabilities		(633	)		(416	)
Net deferred tax asset	$	1,623		$	1,296

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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

A reconciliation of the income tax benefit and the amount computed by multiplying 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)	2010			2009
Tax at statutory rate	($	1,312	)	($	2,418	)
State income tax benefit, net of Federal income tax benefit		(209	)		(232	)
Non-taxable goodwill impairment charge		—			1,005
Other		11			—
Income tax benefit	($	1,510	)	($	1,645	)
Effective tax rate		39.1	%		23.1	%

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.

We have net operating loss carryforwards for state and federal income tax purposes of approximately $2.3 million and $1.0 million, respectively, which are available to offset future taxable income and which expire in the fiscal year ending June 30, 2030. Management expects to fully realize the benefits of these tax loss carryforwards before their expiration.

The Company adopted the provisions of ASC Topic 740, “Income Taxes” which provides clarification on accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The ASC 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 derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. As a result of the Company’s evaluation of the implementation of Topic 740, no significant income tax uncertainties were identified. Therefore, the Company recognized no adjustment for unrecognized income tax benefits for the years ended June 30, 2010 and June 30, 2009. Our policy is to recognize interest and penalties on unrecognized tax benefits in income taxes expense in the Consolidated Statement of Operations. The Company did not recognize any interest and penalties for the years ended June 30, 2010 and June 30, 2009. The tax years subject to examination by the taxing authorities are the years ended June 30, 2009, 2008 and 2007.

(10) 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 statement of financial condition 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 $10.7 million of transaction accounts, reserves equal to 3% must be maintained on the next $44.5 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, 2010 and 2009, the Bank met its reserve requirements of $545,000 and $490,000, 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.

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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

On May 6, 2010, the Company’s Board of Directors determined to suspend regular quarterly cash dividends on the $6.0 million in Series A Preferred Stock and $300,000 in Series B Preferred Stock. On the same date, the Company’s Board of Directors determined to suspend interest payments on the junior subordinated debentures. The Company’s Board of Directors took these actions in consultation with the Federal Reserve Bank of Richmond as required by recent regulatory policy guidance. The Company currently has sufficient capital and liquidity to pay the scheduled dividends on the preferred stock and interest on the junior subordinated debentures; however, the Company believes these decisions will better support the capital position of The Patapsco Bank, a wholly owned subsidiary of the Company. As of June 30, 2010, a total of $82,000 in dividends on the Series A and B Preferred Stock and $82,000 in interest on the junior subordinated debentures had been deferred.

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, 2010 and 2009, that Patapsco meets all capital adequacy requirements to which it is subject.

As of June 30, 2010, 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, 2010, the Bank exceeded all regulatory minimum capital requirements. The table below presents certain information relating to the Bank’s regulatory compliance at June 30, 2010.

	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)	$	23,009	12.35	%	$	15,000	8.00	%	$	18,750	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		20,663	11.09	%		7,500	4.00	%		11,250	6.00	%
Tier 1 Leverage Ratio		20,663	7.76	%		10,649	4.00	%		13,311	5.00	%

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	%

44

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(11) 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.

(12) 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 from 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.

(13) 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.

45

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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, 2010 and 2009 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 was effective since September 1995. At the time of adoption, the directors had the option to reallocate their deferred compensation assets.

In May 2009, the Board of Directors voted to terminate the directors deferred compensation portion of the Plan. Accordingly, 57,255 deferred shares were distributed to the respective directors in May 2010, and are now included as issued shares. The remaining portion of the Plan continues to remain in effect. As of June 30, 2010 there are 2,250 non-vested shares outstanding under this plan.

Compensation expense recognized in connection with these plans during the years ended June 30, 2010 and 2009 was $26,000 and $63,000, respectively.

A summary of the status of the Company’s non-vested shares as of June 30, 2010 is presented below:

	Common Shares		Weighted Average Grant-Date Fair Value
Non-Vested as of June 30, 2009	13,484		$12.12
Vested	(11,234	)	$13.12
Issued	—		$—
Forfeited	—		$—
Non-vested at June 30, 2010	2,250		$7.10

As of June 30, 2010, there was $5,000 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 twelve 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.

46

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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, 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	$	—
Granted	—		—
Exercised	—		—
Cancelled	—		—
Outstanding, June 30, 2010	20,832	$	6.29	20,832	$	6.29	$	—

The following table summarizes information about stock options outstanding at June 30, 2010.

Exercise Price of All Options		Number Outstanding	Remaining Contractual Life	Number Exercisable
$	6.29	20,832	1.11 years	20,832

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 $91,000 and $87,000 for the years ended June 30, 2010 and 2009, respectively. Additionally, there is a discretionary profit sharing component to the 401K plan. There were no discretionary contributions for the plan for the years ended June 30, 2010 and 2009.

(14) Comprehensive Loss

Comprehensive loss consists of net loss and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale.

The components of comprehensive loss and related tax effects are as follows:

	For the Year Ended June 30
($ in thousands)	2010			2009
Net loss	$	(2,349	)	$	(5,466	)
Reclassification adjustment for gains realized in income		(71	)		—
Change in unrealized gains on securities available-for-sale		421			291
Tax effect		(138	)		(115	)
Comprehensive loss	$	(2,137	)	$	(5,290	)

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

ASC 825, “Financial Instruments” 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, 2010 and 2009.

47

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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:

	2010				2009
(In thousands)	Carrying Amount		Fair value		Carrying Amount		Fair value
Assets:
Cash and cash equivalents	$	28,043	$	28,043	$	19,794	$	19,794
Investment securities available for sale		25,482		25,482		16,084		16,084
Loans receivable		197,169		205,092		216,927		223,991
Securities required by law		2,848		2,848		2,817		2,817
Accrued interest receivable		1,482		1,482		1,596		1,596
Liabilities:
Deposits		228,789		228,846		207,795		208,571
Long-term debt		22,100		21,084		39,300		40,539
Accrued interest payable		392		392		450		450
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.

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 $4.0 million and $3.1 million less their specific valuation allowances of $668,000 and $382,000 at June 30, 2010 and 2009, respectively as determined under ASC 310, “Receivables”. The increase in the allowance of $286,000 and $382,000 in the years ended June 30, 2010 and 2009 resulted in impairment charges of $286,000 and $382,000, which were included in earnings.

48

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Real Estate Acquired Through Foreclosure

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. Fair value is determined utilizing third party appraisals, broker price opinions or other similar methods. Fair value is updated at least annually and more often if circumstances dictate.

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 Topic 825, 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.

The Company complies with ASC 820, “Fair Value Measurements and Disclosures,” which defines the concept of fair value, establishes a framework for measuring fair value in GAAP, and expands disclosure about fair value measurements. ASC 820 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.

ASC 820 permitted 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 ASC 820 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.

ASC 820 clarifies the how an entity would determine fair value in an inactive market and 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. ASC 820 provides additional guidance in determining when the volume and level of activity for the asset or liability

49

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

has significantly decreased. It also includes guidance on identifying circumstances when a transaction may not be considered orderly. ASC 820 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. This ASC 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 ASC 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.

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.

ASC 820 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.

50

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 are as follows:

	At June 30, 2010
(In thousands)	Total		Level 1		Level 2		Level 3
Measured at fair value on a recurring basis:
Securities available for sale	$	25,482	$	—	$	25,482	$	—
Real estate acquired through foreclosure	$	2,875	$	—	$	—	$	2,875
Measured at fair value on a nonrecurring basis:
Impaired Loans	$	3,353	$	—	$	—	$	3,353
	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

(16) 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	2010			2009
Cash	$	1,585		$	1,905
Loans		—			1,000
Equity in net assets of the bank		21,056			21,592
Other assets		379			421
Total Assets	$	23,020		$	24,918
Accrued expenses and other liabilities	$	650		$	226
Subordinated Debentures		5,000			5,000
Stockholders’ equity		17,370			19,692
Total Liabilities & Stockholders’ Equity	$	23,020		$	24,918
(In thousands) Statements of Operations	2010			2009
Total Interest Income	$	24		$	84
Total Interest Expense		323			323
Non-interest Income		16			—
Non-interest Expense		1			6
Loss before equity in net loss of subsidiary and income tax benefit		(284	)		(245	)
Net loss of subsidiary		(2,175	)		(5,323	)
Loss before income tax benefit		(2,459	)		(5,568	)
Income tax benefit		(110	)		(102	)
Net loss		($2,349	)		($5,466	)

51

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(In thousands) Statements of Cash Flows	2010			2009
Operating activities:
Net loss		($2,349	)		($5,466	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Equity in net loss of subsidiary		2,175			5,323
(Increase) decrease in other assets		15			(136	)
Increase (decrease) in accrued expenses and other liabilities		484			(55	)
Net cash provided by (used in) operating activities		325			(334	)
Investing activities:
Additional investment in subsidiary stock		(1,400	)		(4,000	)
Net reduction in loan receivable		1,000			375
Net cash used in investing activities		(400	)		(3,625	)
Financing activities:
Proceeds from issuance of preferred and warrant preferred stock		—			6,000
Issuance of common stock		—			5
Cash dividends paid		(245	)		(468	)
Net cash provided by (used in) financing activities		(245	)		5,537
Net increase (decrease) in cash and cash equivalents		(320	)		1,578
Cash and cash equivalents, beginning of year		1,905			327
Cash and cash equivalents, end of year	$	1,585		$	1,905

Non-cash Transaction: A portion of a loan in the amount of $0 and $1,000,000 was contributed to a subsidiary in 2010 and 2009, respectively.

52

BOARD OF DIRECTORS

Thomas P. O’Neill Chairman of the Board	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	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	William C. Wiedel, Jr. Senior Vice President - Treasurer Chief Financial Officer	Linda Linz Senior Vice President – Branch & Deposit Administration
Phil Phillips Senior Vice President - Loan Administration and Workouts	Laurence S. Mitchell Senior Vice President – Lending

CORPORATE INFORMATION

Independent Registered Public Accounting Firm ParenteBeard LLC 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 2010 Annual Meeting of Stockholders will be held on November 4, 2010 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, 2010 as filed with the Securities and Exchange Commission, will be furnished without charge to stockholders as of the record date for the 2010 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 8 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 28, 2010, 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/ ParenteBeard LLC

ParenteBeard LLC

Baltimore, Maryland

September 28, 2010

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 28, 2010

/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 28, 2010

/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, 2010 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 28, 2010

EX-99.1

EXHIBIT 99.1

CERTIFICATION

PURSUANT TO 31 C.F.R. § 30.15

I, Michael J. Dee, certify, based on my knowledge, that:

(i) The compensation committee of Patapsco Bancorp, Inc. has discussed, reviewed, and evaluated with senior risk officers at least every six months during any part of the most recently completed fiscal year that was a TARP period, senior executive officer (SEO) compensation plans and the employee compensation plans and the risks these plans pose to Patapsco Bancorp, Inc.;

(ii) The compensation committee of Patapsco Bancorp, Inc. has identified and limited during any part of the most recently completed fiscal year that was a TARP period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Patapsco Bancorp, Inc., and has identified any features of the employee compensation plans that pose risks to Patapsco Bancorp, Inc. and has limited those features to ensure that Patapsco Bancorp, Inc. is not unnecessarily exposed to risks;

(iii) The compensation committee has reviewed, at least every six months during any part of the most recently completed fiscal year that was a TARP period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of Patapsco Bancorp, Inc. to enhance the compensation of an employee, and has limited any such features;

(iv) The compensation committee of Patapsco Bancorp, Inc. will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above;

(v) The compensation committee of Patapsco Bancorp, Inc. will provide a narrative description of how it limited during any part of the most recently completed fiscal year that was a TARP period the features in

(a) SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Patapsco Bancorp, Inc.;

(b) Employee compensation plans that unnecessarily expose Patapsco Bancorp, Inc. to risks; and

(c) Employee compensation plans that could encourage the manipulation of reported earnings of Patapsco Bancorp, Inc. to enhance the compensation of an employee;

(vi) Patapsco Bancorp, Inc. has required that bonus payments to SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;

(vii) Patapsco Bancorp, Inc. has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to a SEO or any of the next five most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

(viii) Patapsco Bancorp, Inc. has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during any part of the most recently completed fiscal year that was a TARP period;

(ix) Patapsco Bancorp, Inc. and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, during any part of the most recently completed fiscal year that was a TARP period; and any expenses that, pursuant to the policy, required approval

of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved;

(x) Patapsco Bancorp, Inc. will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during any part of the most recently completed fiscal year that was a TARP period;

(xi) Patapsco Bancorp, Inc. will disclose the amount, nature, and justification for the offering, during any part of the most recently completed fiscal year that was a TARP period, of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii);

(xii) Patapsco Bancorp, Inc. will disclose whether Patapsco Bancorp, Inc., the board of directors of Patapsco Bancorp, Inc., or the compensation committee of Patapsco Bancorp, Inc. has engaged during any part of the most recently completed fiscal year that was a TARP period a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period;

(xiii) Patapsco Bancorp, Inc. has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

(xiv) Patapsco Bancorp, Inc. has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Patapsco Bancorp, Inc. and Treasury, including any amendments;

(xv) Patapsco Bancorp, Inc. has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee identified; and

(xvi) I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both.

Dated: September 28, 2010	/s/ Michael J. Dee
	Michael J. Dee
	President and Chief Executive Officer
	(Principal Executive Officer)

EX-99.2

EXHIBIT 99.2

CERTIFICATION

PURSUANT TO 31 C.F.R. § 30.15

I, William C. Wiedel, Jr., certify, based on my knowledge, that:

(i) The compensation committee of Patapsco Bancorp, Inc. has discussed, reviewed, and evaluated with senior risk officers at least every six months during any part of the most recently completed fiscal year that was a TARP period, senior executive officer (SEO) compensation plans and the employee compensation plans and the risks these plans pose to Patapsco Bancorp, Inc.;

(ii) The compensation committee of Patapsco Bancorp, Inc. has identified and limited during any part of the most recently completed fiscal year that was a TARP period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Patapsco Bancorp, Inc., and has identified any features of the employee compensation plans that pose risks to Patapsco Bancorp, Inc. and has limited those features to ensure that Patapsco Bancorp, Inc. is not unnecessarily exposed to risks;

(iii) The compensation committee has reviewed, at least every six months during any part of the most recently completed fiscal year that was a TARP period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of Patapsco Bancorp, Inc. to enhance the compensation of an employee, and has limited any such features;

(iv) The compensation committee of Patapsco Bancorp, Inc. will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above;

(v) The compensation committee of Patapsco Bancorp, Inc. will provide a narrative description of how it limited during any part of the most recently completed fiscal year that was a TARP period the features in

(a) SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Patapsco Bancorp, Inc.;

(b) Employee compensation plans that unnecessarily expose Patapsco Bancorp, Inc. to risks; and

(c) Employee compensation plans that could encourage the manipulation of reported earnings of Patapsco Bancorp, Inc. to enhance the compensation of an employee;

(vi) Patapsco Bancorp, Inc. has required that bonus payments to SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;

(vii) Patapsco Bancorp, Inc. has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to a SEO or any of the next five most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

(viii) Patapsco Bancorp, Inc. has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during any part of the most recently completed fiscal year that was a TARP period;

(ix) Patapsco Bancorp, Inc. and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, during any part of the most recently completed fiscal year that was a TARP period; and any expenses that, pursuant to the policy, required approval

of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved;

(x) Patapsco Bancorp, Inc. will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during any part of the most recently completed fiscal year that was a TARP period;

(xi) Patapsco Bancorp, Inc. will disclose the amount, nature, and justification for the offering, during any part of the most recently completed fiscal year that was a TARP period, of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii);

(xii) Patapsco Bancorp, Inc. will disclose whether Patapsco Bancorp, Inc., the board of directors of Patapsco Bancorp, Inc., or the compensation committee of Patapsco Bancorp, Inc. has engaged during any part of the most recently completed fiscal year that was a TARP period a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period;

(xiii) Patapsco Bancorp, Inc. has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

(xiv) Patapsco Bancorp, Inc. has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Patapsco Bancorp, Inc. and Treasury, including any amendments;

(xv) Patapsco Bancorp, Inc. has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee identified; and

(xvi) I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both.

Dated: September 28, 2010	/s/ William C. Wiedel, Jr.
	William C. Wiedel, Jr.
	Senior Vice President and Chief Financial Officer
	(Principal Financial Officer)