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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-KSB



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(Mark One)

|x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------

For the fiscal year ended June 30, 2007

OR



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------

For the transition period from  to

Commission File No. 0-28032



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PATAPSCO BANCORP, INC.

(Name of small business issuer in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)

Issuers telephone number: (410) 285-1010



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Securities registered under
Section 12(b) of the Exchange Act: None

Securities registered under Section 12(b) of the Exchange Act:

Common stock, par value $.01 per share

(Title of Class)



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Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. ̈

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

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. ̈

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

For the fiscal year ended June 30, 2007, the issuer had $17,292,000 in revenues.

As of September 13, 2007, the aggregate market value of voting common stock held by nonaffiliates was approximately $28,363,193, computed by reference to the most recent sales price on September 13, 2007 as
reported on the OTC Electronic Bulletin Board. For purposes of this calculation, it is assumed that directors, executive officers and beneficial owners of more than 5% of the registrants outstanding voting common stock are affiliates.

Number of shares of Common Stock outstanding as of September 13, 2007:1,850,063.



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PART I

Forward-Looking Statements

When used in this Annual Report, the words or phrases will likely result,
are expected to, will continue, is anticipated, estimate, project or similar expressions are intended to identify forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Companys market area, changes in policies by regulatory agencies, fluctuations in interest
rates, demand for loans in the Companys market area, and competition 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. Description of 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.

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

At June 30, 2007, the Bank had $74.3 million, $52.7 million, $23.9 million, $36.3 million, $20.4 and $17.4 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-KSB, quarterly reports on Form 10-QSB, 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-KSB.

Pending
Acquisition

On March 19, 2007, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with
Bradford Bancorp, Inc. and its subsidiary, Bradford Bank, whereby Bradford Bancorp and Bradford Bank will acquire the Company and the Bank. Under the terms of the Merger Agreement, the Companys stockholders will be entitled to receive either
$23.00 in cash or 2.3 shares of Bradford Bancorp common stock in exchange for each share of Company common stock. The merger transaction is valued at approximately $45.5 million. Consummation of the merger is subject to the receipt of all regulatory
approvals, approval by the Companys stockholders and by the members of Bradford Bank MHC. It is expected that the merger will be completed in the fourth quarter of 2007.

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 $225.0 million at June 30, 2007, representing 88.1% of total assets at that date. At June 30, 2007, $74.3 million, or 33.0%, 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 $60.2 million, or 26.8%, of the Companys gross loan
portfolio at June 30, 2007. In addition, the Company originates consumer and other loans, including home equity loans, home improvement loans and loans secured by deposits. At June 30, 2007, consumer and other loans totaled $20.4 million,
or 9.1%, of the Companys gross loan portfolio. The Companys commercial loan portfolio, which consists of small business loans and commercial leases, totaled $70.1 million, or 31.1%, of the Companys gross loan portfolio.

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

The Companys loan originations
are derived from a number of sources, including loan brokers, advertising and referrals by depositors and borrowers. The Companys solicitation programs consist of advertisements in local media, in addition to participation in various community
organizations and events. All of the Companys loan personnel are salaried; however, three originators do receive commissions on loans approved by officers of the



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Bank. With the exception of applications for home improvement loans and equipment leases, which loans may be originated on an indirect basis through a
limited number of approved home improvement contractors and loan brokers, loan applications are accepted at the Companys office. In addition, the Companys salaried loan originators may travel to meet prospective borrowers and take
applications. In all cases, the Company has final approval of the application.

In recent years, the Company has purchased whole loans and
loan participation interests. During the year ended June 30, 2007, the Company purchased $10.5 million in participation interests, $0.0 million in residential mortgage loans and $1.6 million in consumer home improvement loans. In the future,
management will continue to consider purchases of whole loans or participation interests in commercial business, residential and commercial real estate loans and consumer home improvement loans.

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

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

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

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

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

Under applicable law, with certain limited exceptions, loans and extensions of credit by a
commercial bank to a person outstanding, including commitments, at one time shall not exceed 15% of the banks unimpaired capital and surplus. Under these limits, the Companys loans to one borrower were limited to $3.0 million at
June 30, 2007. At that date, the Company had no lending relationships in excess of the loans-to-one-borrower limit. At June 30, 2007, the Companys largest lending relationship was a $2.7 million loan secured by commercial real
estate, which was current and performing in accordance with its terms at June 30, 2007.



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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, 2007,
residential mortgage loans totaled $74.3 million, or 33.0%, of the Companys gross loan portfolio. Of such loans, $3.7 million were secured by nonowner-occupied investment properties.

At June 30, 2007, $69.6 million, or 62.9%, of the Companys residential and commercial real estate loan portfolio was comprised of fixed-rate
mortgage loans and $41.0 million, or 37.1%, of the Companys residential and commercial real estate loan portfolio was comprised of adjustable-rate mortgage loans.

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 $500,000. At June 30, 2007, the
Company had $7.3 million of multi-family residential real estate loans, which amounted to 3.2% 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 generally. To minimize these risks, the Company generally limits
itself to its market area or to borrowers with which it has prior experience or who are otherwise known to the Company. It has been the Companys policy to obtain annual financial statements of the business of the borrower or the project for
which multi-family residential real estate loans are made. The Company seeks to expand multi-family residential real estate lending.

Construction Lending.The Bank also offers residential and commercial construction loans and land acquisition and development loans. Residential construction loans are offered to individuals who are having their primary
or secondary residence built, as well as to local builders to construct single-family dwellings. Residential construction advances are made on a stage of completion basis. Generally, loans to owner/occupants for the construction of residential
properties are originated in conjunction with the permanent mortgage on the property. The term of the construction loans is normally from 6 to 18 months and has a variable interest rate, which is normally up to 2% above the prime interest rate. Upon
completion of construction, the permanent loan rate will be set at the interest rate offered by the Bank on that loan product not sooner than 60 days prior to completion. Interest rates on residential loans to builders are set at the prime interest
rate plus a margin of 0.5% to 2.0% as may be adjusted from time to time. Interest rates on commercial construction loans and land acquisition and development loans are based on the prime rate plus a negotiated margin of between 0.5% and 2.0% and
adjust from time to time, with construction terms generally not exceeding 18 months. Advances are made on a percentage of completion basis. At June 30, 2007, $23.9 million, or 10.6%, 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 construction fee between 1% and 2%.



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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 $2,000,000. At June 30, 2007, the Company had $36.3 million of commercial real estate loans, which amounted to 16.1% of the Companys gross loan portfolio at such
date. Commercial real estate loans are typically originated on an adjustable-rate basis with terms of up to 25 years or are amortized over a maximum of 25 years with a maturity generally of three to ten years, and are underwritten with loan-to-value
ratios of up to 80% of the lesser of the appraised value or the purchase price of the property. Because of the inherently greater risk involved in this type of lending, the Company generally limits its commercial real estate lending to borrowers
within its market area or with which it has had prior experience. The Company seeks to expand commercial real estate lending.

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, 2007, consumer and other loans totaled $20.4 million, or 9.1%, 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, 2007, home improvement loans amounted to $12.5 million, or 5.6%, of the Companys loan portfolio, with $1.4 million of such loans being secured by real estate.



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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, 2007, the Companys commercial loans totaled $70.1 million,
or 31.2%, of the Companys loan portfolio. This commercial lending program employs many of the alternative financing and guarantee programs available through the U.S. Small Business Administration and other state and local economic development
agencies.

The Bank originates commercial business loans to small and medium-sized businesses in its market area. The Banks
commercial business loans may be structured as term loans, lines of credit, or mortgages. The Banks commercial borrowers are generally small businesses engaged in manufacturing, distribution or retailing, or professionals in healthcare,
accounting and law. Commercial business loans are generally made to finance the purchase of inventory, new or used commercial business assets or for short-term working capital, or the purchase of real estate to be occupied by the operating company.
Such loans generally are secured by business assets and, when applicable, cross-collateralized by a real estate lien, although commercial business loans are sometimes granted on an unsecured basis. Such loans are generally made for terms of seven
years or less, depending on the purpose of the loan and the collateral. Interest rates on commercial business loans and lines of credit are either fixed for the term of the loan or adjusted periodically. Generally, commercial business loans are made
in amounts ranging between $10,000 and $2.0 million.

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

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

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

The Company offers 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 reviews the borrowers financial statements, credit reports, tax returns and other documentation. Generally, commercial lease
financing is made in amounts ranging between $3,000 and $120,000 with terms of up to five years and carry fixed interest rates. At June 30, 2007, commercial lease finance transaction loans totaled $17.4 million, or 7.7%, of the Companys
loan portfolio.



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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 2 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, 2007, the Company was servicing
these participation interests for others totaling approximately $12.2 million.

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

Loans generally are placed on nonaccrual
status if the loan becomes past due more than 90 days, except in instances where in managements judgment there is no doubt as to full collectibility of principal and interest. At June 30, 2007, 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 owned until such time as it is
sold. When such property is acquired, it is initially recorded at the lower of cost or estimated fair value and subsequently at the lower of book value or fair value less estimated costs to sell. Fair value is defined as the amount in cash or
cash-equivalent value of 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. See Notes 1 and 3 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, 2007, the Companys entire portfolio
of investment securities was classified as available for sale and had an aggregate carrying value of $13.1 million and an unrealized net loss after tax of $0.3 million. 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.



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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 FHLB of Atlanta and The Bankers Bank of Atlanta, Georgia.

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

The Company attempts to compete for deposits with other institutions in its market area by offering
competitively priced deposit instruments that are tailored to the needs of its customers. Additionally, the Company 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 savings 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 FHLB of Atlanta to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The
FHLB of Atlanta functions as a central reserve bank providing credit for member financial institutions. As a member of the FHLB System, the Bank is required to own stock in the FHLB 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 FHLB under which the Bank may borrow up to 25% of assets subject to normal collateral and
underwriting requirements. Advances from the FHLB of Atlanta are secured by the Banks stock in the FHLB of Atlanta and other eligible assets. At June 30, 2007, the Company had outstanding Federal Home Loan Bank of Atlanta advances of
$38.8 million with an average rate of 4.65%. Additionally, the Bank has a $5.1 million line of credit, of which $0.0 was outstanding at June 30, 2007 with The Bankers Bank of Atlanta, Georgia.

Subsidiary Activities

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

Competition

The Company faces strong competition both in originating loans and in attracting
deposits. The Company competes for loans principally on the basis of interest rates, the types of loans it originates, the deposit products it offers and the quality of services it provides to borrowers. The Company also competes by offering
products that are tailored to the local community. Its competition in originating loans comes primarily from other commercial banks, savings institutions and mortgage bankers, credit unions and finance companies.



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

Employees

As of June 30, 2007, the Company had 68 full-time and 17 part-time employees, none of
who were represented by a collective bargaining agreement.Management considers the Companys relationships with its employees to be good.

Depository Institution Regulation

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

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

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

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

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

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



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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 generally are determined under the Federal Reserve Boards regulations, which establish four risk
categories, with general risk weights of 0%, 20%, 50% and 100%, based on the risk believed inherent to the type of loan involved.

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

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



|                                         |  |                        |        |       |                                                     |   |        |                                                                                      |        |  |      |        |  |       |        |  |       |  
|---------------------------------------- |  | ---------------------- | ------ | ----- | --------------------------------------------------- | - | ------ | ------------------------------------------------------------------------------------ | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                         |  | Actual                 |        |       | RegulatoryRequirements for CapitalAdequacy Purposes |   |        | RegulatoryRequirements to be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                         |  | Amount                 |        | Ratio |                                                     |   | Amount |                                                                                      | Ratio  |  |      | Amount |  | Ratio |       
|                                         |  | (Dollars in thousands) |       
|As of June 30, 2007:                     |  |                        |        |       |                                                     |   |        |                                                                                      |        |  |      |        |  |       |        |  |       |  
|Total Capital (to Risk Weighted Assets)  |  | $                      | 20,091 |       | 10.31                                               | % |        | $                                                                                    | 15,589 |  | 8.00 | %      |  | $     | 19,487 |  | 10.00 | %
|Tier 1 Capital (to Risk Weighted Assets) |  |                        | 18,981 |       | 9.74                                                |   |        |                                                                                      | 7,795  |  | 4.00 |        |  |       | 11,692 |  | 6.00  |  
|Tier 1 Capital (to Average Assets)       |  |                        | 18,981 |       | 7.57                                                |   |        |                                                                                      | 10,030 |  | 4.00 |        |  |       | 12,537 |  | 5.00  |  
|                                         |  |                        |        |       |                                                     |  
|As of June 30, 2006:                     |  |                        |        |       |                                                     |   |        |                                                                                      |        |  |      |        |  |       |        |  |       |  
|Total Capital (to Risk Weighted Assets)  |  | $                      | 18,144 |       | 11.25                                               | % |        | $                                                                                    | 12,904 |  | 8.00 | %      |  | $     | 16,130 |  | 10.00 | %
|Tier 1 Capital (to Risk Weighted Assets) |  |                        | 17,144 |       | 10.63                                               |   |        |                                                                                      | 6,452  |  | 4.00 |        |  |       | 9,678  |  | 6.00  |  
|Tier 1 Capital (to Average Assets)       |  |                        | 17,144 |       | 7.66                                                |   |        |                                                                                      | 8,958  |  | 4.00 |        |  |       | 11,197 |  | 5.00  |  

Prompt Corrective Regulatory Action. Under the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), the federal banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy certain minimum capital requirements. All institutions, regardless of
their capital levels, are restricted from making any capital distribution or paying any management fees if the institution would thereafter fail to satisfy the minimum levels for any of its capital requirements. An institution that fails to meet the
minimum level for any relevant capital measure (an undercapitalized institution) may be, among other things, subject to increased monitoring by the appropriate federal banking regulator, required to submit an acceptable capital
restoration plan within 45 days and are subject to asset growth limits. The capital restoration plan must include a guarantee by the institutions holding company that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5% of the institutions total assets or the amount necessary to bring the institution into capital compliance as of the
date it failed to comply with its capital restoration plan. A significantly undercapitalized institution, as well as any undercapitalized institution that did not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on transactions with affiliates, limitations on interest rates paid on deposits, asset growth and other activities, possible replacement of directors and officers, and
restrictions on capital distributions by any bank holding company



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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, 2007, 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. Management believes that the Bank meets substantially all the standards adopted in the interagency guidelines.

Federal Home Loan Bank System. The FHLB System consists of 12 district FHLBs subject to supervision and regulation by the Federal Housing Finance Board (FHFB). The FHLBs provide a central credit facility primarily
for member institutions. As a member of the FHLB of Atlanta, the Bank is required to acquire and hold specified amounts of capital stock in the FHLB of Atlanta. The Bank was in compliance with this requirement with an investment in FHLB of Atlanta
stock at June 30, 2007 of $2.2 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 $8.5 million and $45.8 million, plus 10% on the remainder. The first $8.5 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, 2007, the Bank met its reserve requirements.

The monetary policies
and regulations of the Federal Reserve Board have a significant effect on the operating results of commercial banks. The Federal Reserve Boards policies affect the levels of bank loans, investments and deposits through its open market
operation in United States government securities, its regulation of the interest rate on borrowings of member banks 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.



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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. The FDIC recently amended its risk-based assessment system for
2007 to implement authority granted by the Federal Deposit Insurance Reform Act of 2005 (Reform Act). Under the revised system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory
capital levels and certain other factors. An institutions assessment rate depends upon the category to which it is assigned. Risk Category I, which contains the least risky depository institutions, is expected to include more than 90% of all
institutions. Unlike the other categories, Risk Category I contains further risk differentiation based on the FDICs analysis of financial ratios, examination component ratings and other information. Assessment rates are determined by the FDIC
and currently range from five to seven basis points for the healthiest institutions (Risk Category I) to 43 basis points of assessable deposits for the riskiest (Risk Category IV). The FDIC may adjust rates uniformly from one quarter to the next,
except that no single adjustment can exceed three basis points. No institution may pay a dividend if in default of the FDIC assessment.

The Reform Act also provided for a one-time credit for eligible institutions based on their assessment base as of December 31, 1996. Subject to certain limitations with respect to institutions that are exhibiting weaknesses, credits
can be used to offset assessments until exhausted. The Banks one-time credit is expected to approximate $188,000. The Reform Act also provided for the possibility that the FDIC may pay dividends to insured institutions once the Deposit
Insurance fund reserve ratio equals or exceeds 1.35% of estimated insured deposits.

In addition to the assessment for deposit insurance,
institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. This payment is established quarterly and during the calendar year ending June 30,
2007 averaged 1.24 basis points of assessable deposits.

The Reform Act provided the FDIC with authority to adjust the Deposit Insurance
Fund ratio to insured deposits within a range of 1.15% and 1.50%, in contrast to the prior statutorily fixed ratio of 1.25%. The ratio, which is viewed by the FDIC as the level that the fund should achieve, was established by the agency at 1.25% for
2007.

The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse
effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.

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

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

The Banks payment of dividends is also subject to the Federal Reserve
Boards Regulation H, which provides that a state member bank may not pay a dividend if the total of all dividends declared by the bank in any calendar year exceeds the total of its net profits for the year combined with its retained net
profits for the preceding two calendar years, less any required transfers to surplus or to a fund for the retirement of preferred stock, unless the bank has received the prior approval of the Federal Reserve Board. The previously referenced prompt
corrective action requirements prohibit dividends where the Bank would be undercapitalized, significantly undercapitalized, or critically undercapitalized after the dividend. Additionally, both the Commissioner
and the



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Federal Reserve Board has the authority to prohibit the payment of dividends by a Maryland commercial bank when it determines such payment to be an unsafe
and unsound banking practice. Finally, the Bank is not able to pay dividends on its capital stock if its regulatory capital would thereby be reduced below the remaining balance of the liquidation account established in connection with its conversion
in April 1996 from mutual to stock form. See Note 9 of the Notes to Consolidated Financial Statements appearing in Item 7 of this Annual Report on Form 10-KSB.

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

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

Limits on Loans to One Borrower. The Bank has chosen to be subject to federal law with respect to limits on loans to one borrower.
Generally, under federal law, the maximum amount that a commercial bank may loan to one borrower at one time may not exceed 15% of the unimpaired capital and surplus of the commercial bank, plus an additional 10% if secured by specified
readily marketable collateral. The Banks lending limit to one borrower as of June 30, 2007 was $3.0 million.

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

State member banks also are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act and the Federal Reserves Regulation O thereunder 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



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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 non-officer and non-director 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 savings institution. If action is not taken by the Federal Reserve Board, the FDIC has authority to take
such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.

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

Regulation of the Company

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

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

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

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



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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 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.

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

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



15



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Taxation

For fiscal year 2007, 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, 2007. The Company has had no material tax liability through June 30, 2007.

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

State Income Taxation.
The State of Maryland imposes an income tax of approximately 7% on income measured substantially the same as federally taxable income, except that U.S. Government interest is not fully taxable.

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

Item 2. Description of Property

The
following table sets forth the location and certain additional information regarding the Banks offices at June 30, 2007.



|                               |  |                        |  |                |  |                            |       |                           |      
|------------------------------ |  | ---------------------- |  | -------------- |  | -------------------------- | ----- | ------------------------- | -----
|                               |  | YearOpened             |  | Owned orLeased |  | Book Value atJune 30, 2007 |       | ApproximateSquare Footage
|                               |  | (Dollars in thousands)
|Headquarters and Branch Office |  |                        |  |                |  |                            |       |                           |      
|1301 Merritt Boulevard         |  | 1970                   |  | Owned          |  | $                          | 438   |                           | 9,600
|Dundalk, Maryland 21222        |  |                        |  |                |  |                            |       |                           |      
|                               |  |                        |  |               
|Branch Office                  |  |                        |  |                |  |                            |       |                           |      
|2028 Joppa Road                |  |                        |  |                |  |                            |       |                           |      
|Baltimore, Maryland 21234      |  | 2007                   |  | Leased         |  |                            | 3,095 |                           | 7,000
|                               |  |                        |  |               
|Branch Office                  |  |                        |  |                |  |                            |       |                           |      
|7802 Harford Road              |  |                        |  |                |  |                            |       |                           |      
|Baltimore, Maryland 21234      |  | 1979                   |  | Owned          |  |                            | 226   |                           | 2,000
|                               |  |                        |  |               
|Branch Office                  |  |                        |  |                |  |                            |       |                           |      
|821 W. 36thStreet              |  |                        |  |                |  |                            |       |                           |      
|Baltimore, Maryland 21211      |  | 1988                   |  | Owned          |  |                            | 113   |                           | 1,100
|                               |  |                        |  |               
|Branch Office                  |  |                        |  |                |  |                            |       |                           |      
|12128 Long Green Pike          |  |                        |  |                |  |                            |       |                           |      
|Glen Arm, Maryland 21057       |  | 1988                   |  | Leased         |  |                            | 25    |                           | 1,400
|                               |  |                        |  |               
|Branch Office                  |  |                        |  |                |  |                            |       |                           |      
|11630 Glen Arm Road            |  |                        |  |                |  |                            |       |                           |      
|Glen Arm, Maryland 21057       |  | 2006                   |  | Leased         |  |                            |      |                           | 400  

The book value of the Banks investment in premises and equipment totaled $4.5 million at
June 30, 2007. See Note 4 of Notes to Consolidated Financial Statements.



16



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Item 3. Legal Proceedings

From time to time, the Bank is a party to various legal proceedings incident to its business. At June 30, 2007, 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 subsidiary is a party or to which any of their properties is subject which are currently expected to result in a material loss.

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

None.

PART II

Item 5. Market for Common Equity,
Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

(a)The Companys common stock
trades under the symbol PATD on the OTC Electronic Bulletin Board.There were 1,864,985 shares of common stock outstanding and approximately 396 holders of record at June 30, 2007. 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 paid during each quarter.



|               |  |      |       |     |   |                    |  |   |      
|-------------- |  | ---- | ----- | --- | - | ------------------ |  | - | -----
|               |  | High |       | Low |   | DividendsPer Share
|Fiscal 2007:   |  |      |       |     |   |                    |  |   |      
|First Quarter  |  | $    | 11.00 |     | $ | 10.05              |  | $ | .0625
|Second Quarter |  |      | 13.75 |     |   | 10.30              |  |   | .0700
|Third Quarter  |  |      | 23.25 |     |   | 11.65              |  |   | .0700
|Fourth Quarter |  |      | 23.25 |     |   | 22.75              |  |   | .0700
|               |  |      |      
|Fiscal 2006:   |  |      |       |     |   |                    |  |   |      
|First Quarter  |  |      | 13.00 |     |   | 11.00              |  |   | .0625
|Second Quarter |  |      | 11.60 |     |   | 10.00              |  |   | .0625
|Third Quarter  |  |      | 12.00 |     |   | 10.60              |  |   | .0625
|Fourth Quarter |  |      | 11.70 |     |   | 9.70               |  |   | .0625

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

(b)Not applicable.

(c)During the fourth quarter of the fiscal year ended June 30, 2007, the Company repurchased the following shares of its common stock.



17



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|                        |  |                               |  |                            |       |                                                                              |   |                                                                           |   
|----------------------- |  | ----------------------------- |  | -------------------------- | ----- | ---------------------------------------------------------------------------- | - | ------------------------------------------------------------------------- | --
|                        |  | (a)                           |  | (b)                        |       | (c)                                                                          |   | (d)                                                                      
|Period                  |  | TotalNumber ofSharesPurchased |  | AveragePrice Paidper Share |       | Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor Programs |   | MaximumNumber of Sharesthat May Yet BePurchased Underthe Plans orPrograms
|April 2007              |  |                               |  |                            |       |                                                                              |   |                                                                           | NA
|Beginning date: April 1 |  |                              |  | $                          |      |                                                                              |  |                                                                           |   
|Ending date: April 30   |  |                               |  |                            |       |                                                                              |   |                                                                           |   
|                        |  |                               |  |                           
|May 2007                |  |                               |  |                            |       |                                                                              |   |                                                                           |   
|Beginning date: May 1   |  |                               |  |                            |       |                                                                              |   |                                                                           |   
|Ending date: May 31     |  |                              |  |                            |      |                                                                              |  |                                                                           |   
|                        |  |                               |  |                            |       |                                                                              |   |                                                                           |   
|June 2007               |  |                               |  |                            |       |                                                                              |   |                                                                           |   
|Beginning date: June 1  |  | 29,992                        |  |                            | 23.00 |                                                                              |  |                                                                           |   
|                        |  |                               |  |                            |       |                                                                              |   |                                                                           |   
|Ending date: June 30    |  |                               |  |                            |       |                                                                              |   |                                                                           |   
|Total                   |  | 29,992                        |  | $                          | 23.00 |                                                                              |  |                                                                           | NA
|                        |  |                               |  |                            |       |                                                                              |   |                                                                           |   

The share repurchases included in the above table, are the result of participants in the
Companys ESOP exercising their put options on shares distributed. See Note 11 of the Notes to the consolidated financial statements appearing in Item 7 to this Annual Report on Form 10-KSB.

Item 6. Managements Discussion and Analysis or Plan of Operation

General

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

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

Announced Transaction

As announced on March 19, 2007, Patapsco Bancorp, Inc. executed a definitive merger agreement with Bradford Bancorp, Inc whereby the Company will be merged with and into Bradford Bancorp. The transaction is
expected to be completed early in the forth calendar quarter of 2007 and is subject to the approval of the members of Bradford Bank MHC, the shareholders of Patapsco Bancorp and regulatory authorities.



18



---

In connection with the merger, Bradford Banks current mutual holding company, Bradford Bank MHC,
which owns 100% of Bradford Bancorps outstanding shares, will undergo a full mutual-to-stock conversion and stock offering. Under the terms of the transaction, shareholders of Patapsco Bancorp will be entitled to receive either $23.00 in cash
or 2.3 shares of Bradford Bancorp common stock (assuming a $10.00 per share initial public offering price) in exchange for each share of Patapsco Bancorp common stock. Based upon the $23.00 per share price, the consideration is approximately 278% of
tangible book value, 229% of book value and 30 times trailing twelve months earnings, computed as of the date of the announcement.

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

The allowance for loan losses
(allowance) represents an amount, that in the judgment of management, will be adequate to absorb probable losses on outstanding loans and leases that may become uncollectible. The allowance represents an estimate made based upon two
principles of accounting: (1) Statement of Financial Accounting Standards (SFAS) No.5 Accounting for Contingencies, that requires losses to be accrued when their occurrence is probable and estimable, and (2) SFAS
No. 114 Accounting by Creditors for Impairment of a Loan, that requires losses be accrued when it is probable that the lender will not collect all principal and interest when due under the original term 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 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



19



---

formula allowance. The factors used in determining the nonspecific allowance include trends in delinquencies, trends in volumes and terms of loans, the size
of loans relative to the allowance, concentration of credits, the quality of the risk identification system and credit administration and local and national economic trends.

In accordance with the provisions of Statement of Financial Accounting Standards No. 114, Patapsco 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 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. Statement 114 requires that impairment be measured through a comparison of the loans carrying amount to the present value of its 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.

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

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

Marketable equity securities and debt securities not
classified as held to maturity or trading are classified as available for sale. Securities available for sale are acquired as part of the Companys asset/liability management strategy and may be sold in response to changes in interest rates,
loan demand, changes in prepayment risk and other factors. Securities available for sale are carried at fair value, with unrealized gains or losses based on the difference between amortized cost and fair value, reported net of deferred tax, as
accumulated other comprehensive income (loss), a separate component of stockholders equity. Realized gains and losses, using the specific identification method, are included as a separate component of non-interest income. Related interest and
dividends are included in interest income. Declines in the fair value of individual available-for-sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair
value. Factors affecting the determination of whether an other-than-temporary impairment has occurred include a downgrading of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or that
management would not have the intent and ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value.

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



20



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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,    |        
|                                                                                 |  | 2007                   |         |          | 2006 |                   |  | 2005   |               
|                                                                                 |  | AverageBalance         |         | Interest |      | AverageYield/Cost |  |        | AverageBalance |  | Interest |         | AverageYield/Cost |   |        | AverageBalance |        | Interest |  | AverageYield/Cost |        
|                                                                                 |  | (Dollars in thousands) |        
|Interest-earning assets:                                                         |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Loans receivable (1)                                                             |  | $                      | 209,228 |          | $    | 15,461            |  | 7.39   | %              |  | $        | 177,598 |                   | $ | 12,501 |                | 7.04   | %        |  | $                 | 155,352 |  | $ | 10,613 |  | 6.83   | %
|Investment securities (2)                                                        |  |                        | 17,866  |          |      | 802               |  | 4.49   |                |  |          | 23,412  |                   |   | 941    |                | 4.02   |          |  |                   | 28,327  |  |   | 1,046  |  | 3.69   |  
|Short-term investments and other interest-earning assets                         |  |                        | 3,283   |          |      | 163               |  | 4.98   |                |  |          | 3,036   |                   |   | 114    |                | 3.77   |          |  |                   | 7,671   |  |   | 152    |  | 1.98   |  
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Total interest-earning assets                                                    |  |                        | 230,377 |          |      | 16,426            |  | 7.13   |                |  |          | 204,046 |                   |   | 13,556 |                | 6.64   |          |  |                   | 191,350 |  |   | 11,811 |  | 6.17   |  
|Non-interest-earning assets                                                      |  |                        | 14,581  |          |      |                   |  |        |                |  |          | 12,848  |                   |   |        |                |        |          |  |                   | 13,367  |  |   |        |  |        |  
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Total assets                                                                     |  | $                      | 244,958 |          |      |                   |  |        |                |  | $        | 216,894 |                   |   |        |                |        |          |  | $                 | 204,717 |  |   |        |  |        |  
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Interest-bearing liabilities:                                                    |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Deposits (3)                                                                     |  | $                      | 169,324 |          | $    | 5,458             |  | 3.22   |                |  | $        | 152,904 |                   | $ | 3,486  |                | 2.28   |          |  | $                 | 153,961 |  | $ | 2,818  |  | 1.83   |  
|Short-term borrowings                                                            |  |                        | 661     |          |      | 37                |  | 5.61   |                |  |          | 3,116   |                   |   | 140    |                | 4.51   |          |  |                   |        |  |   |       |  |       |  
|Long-term borrowings                                                             |  |                        | 41,538  |          |      | 2,008             |  | 4.83   |                |  |          | 28,444  |                   |   | 1,323  |                | 4.65   |          |  |                   | 21,296  |  |   | 936    |  | 4.39   |  
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Total interest-bearing liabilities                                               |  |                        | 211,523 |          |      | 7,503             |  | 3.55   |                |  |          | 184,464 |                   |   | 4,949  |                | 2.68   |          |  |                   | 175,257 |  |   | 3,754  |  | 2.14   |  
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Non-interest-bearing liabilities                                                 |  |                        | 14,369  |          |      |                   |  |        |                |  |          | 14,528  |                   |   |        |                |        |          |  |                   | 12,353  |  |   |        |  |        |  
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Total liabilities                                                                |  |                        | 225,892 |          |      |                   |  |        |                |  |          | 198,992 |                   |   |        |                |        |          |  |                   | 187,610 |  |   |        |  |        |  
|Total equity                                                                     |  |                        | 19,066  |          |      |                   |  |        |                |  |          | 17,902  |                   |   |        |                |        |          |  |                   | 17,107  |  |   |        |  |        |  
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Total liabilities and equity                                                     |  | $                      | 244,958 |          |      |                   |  |        |                |  | $        | 216,894 |                   |   |        |                |        |          |  | $                 | 204,717 |  |   |        |  |        |  
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Net interest income                                                              |  |                        |         |          | $    | 8,923             |  |        |                |  |          |         |                   | $ | 8,607  |                |        |          |  |                   |         |  | $ | 8,057  |  |        |  
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Interest rate margin                                                             |  |                        |         |          |      |                   |  | 3.87   | %              |  |          |         |                   |   |        |                | 4.22   | %        |  |                   |         |  |   |        |  | 4.21   | %
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Net interest spread                                                              |  |                        |         |          |      |                   |  | 3.58   | %              |  |          |         |                   |   |        |                | 3.96   | %        |  |                   |         |  |   |        |  | 4.03   | %
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                        |         |          |      |                   |  | 108.91 | %              |  |          |         |                   |   |        |                | 110.62 | %        |  |                   |         |  |   |        |  | 109.18 | %
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  

---

|(1) | Includes nonaccrual loans.
|--- | --------------------------

|(2) | Includes investments required by law.
|--- | -------------------------------------

|(3) | Includes escrow accounts.
|--- | -------------------------



21



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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).



|                                                         |  |                            |       |   |                            |   |       |       |  |   |        |   |  |      |       |   |       |   |      |   |  |   |       |  
|-------------------------------------------------------- |  | -------------------------- | ----- | - | -------------------------- | - | ----- | ----- |  | - | ------ | - |  | ---- | ----- | - | ----- | - | ---- | - |  | - | ----- | -
|                                                         |  | Year Ended June 30,        |       |   | Year Ended June 30,        |  
|                                                         |  | 2007 vs. 2006              |       |   | 2006 vs. 2005              |  
|                                                         |  | Increase (Decrease) Due to |       |   | Increase (Decrease) Due to |  
|                                                         |  |                            |       |   |                            |  
|                                                         |  | Volume                     |       |   | Rate                       |   |       | Total |  |   | Volume |   |  | Rate |       |   | Total |  
|                                                         |  | (In thousands)             |       |   | (In thousands)             |  
|Interest income:                                         |  |                            |       |   |                            |   |       |       |  |   |        |   |  |      |       |   |       |   |      |   |  |   |       |  
|Loans receivable                                         |  | $                          | 2,313 |   |                            | $ | 647   |       |  | $ | 2,960  |   |  | $    | 1,558 |   |       | $ | 330  |   |  | $ | 1,888 |  
|Investment securities                                    |  |                            | (235  | ) |                            |   | 96    |       |  |   | (139   | ) |  |      | (132  | ) |       |   | 27   |   |  |   | (105  | )
|Short-term investments and other interest-earning assets |  |                            | 11    |   |                            |   | 38    |       |  |   | 49     |   |  |      | (134  | ) |       |   | 96   |   |  |   | (38   | )
|                                                         |  |                            |       |   |                            |   |       |       |  |   |        |   |  |      |       |   |       |   |      |   |  |   |       |  
|Total interest-earning assets                            |  |                            | 2,089 |   |                            |   | 781   |       |  |   | 2,870  |   |  |      | 1,292 |   |       |   | 453  |   |  |   | 1,745 |  
|                                                         |  |                            |       |   |                            |   |       |       |  |   |        |   |  |      |       |   |       |   |      |   |  |   |       |  
|                                                         |  |                            |       |   |                            |  
|Interest expense:                                        |  |                            |       |   |                            |   |       |       |  |   |        |   |  |      |       |   |       |   |      |   |  |   |       |  
|Deposits (1)                                             |  |                            | 406   |   |                            |   | 1,566 |       |  |   | 1,972  |   |  |      | (19   | ) |       |   | 687  |   |  |   | 668   |  
|Short-term borrowings                                    |  |                            | 47    |   |                            |   | (103  | )     |  |   | 140    |   |  |      |      |   |       |   | 140  |   |  |   |       |  
|Long-term borrowings                                     |  |                            | 631   |   |                            |   | 54    |       |  |   | 685    |   |  |      | 330   |   |       |   | 57   |   |  |   | 387   |  
|                                                         |  |                            |       |   |                            |   |       |       |  |   |        |   |  |      |       |   |       |   |      |   |  |   |       |  
|Total interest-bearing liabilities                       |  |                            | 887   |   |                            |   | 1,667 |       |  |   | 2,554  |   |  |      | 451   |   |       |   | 744  |   |  |   | 1,195 |  
|                                                         |  |                            |       |   |                            |   |       |       |  |   |        |   |  |      |       |   |       |   |      |   |  |   |       |  
|Change in net interest income                            |  | $                          | 1,202 |   |                            | $ | (886  | )     |  | $ | 316    |   |  | $    | 841   |   |       | $ | (291 | ) |  | $ | 550   |  
|                                                         |  |                            |       |   |                            |   |       |       |  |   |        |   |  |      |       |   |       |   |      |   |  |   |       |  

---

|(1) | Includes interest-bearing escrow accounts.
|--- | ------------------------------------------

|(2) | Combined rate/volume variances, a third element of the calculation, are allocated to the volume and rate variances based on their relative size.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

Comparison of Financial Condition at June 30, 2007 and 2006

General.Total assets increased by $27.4 million or 12.0% to $255.5 million at June 30, 2007 from $228.1 million at June 30, 2006. Growth was funded primarily with interest bearing
deposits, primarily certificate accounts and to a lesser extent, borrowings.

Loans Receivable.Gross loans receivable
increased by $26.1 million, or 13.1%, to $225.0 million at June 30, 2007 from $198.9 million at June 30, 2006. Construction loans increased by $9.9 million or 71.8%, commercial business loans increased by $17.9 million or 51.4%, commercial
real estate loans increased by $6.6 million or 22.1%, consumer loans increased $2.1 million or 11.3%. Commercial leases decreased by $4.0 million or 18.9% and residential mortgages decreased by $6.4 million or 7.9%.



22



---

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, 2007, the Company had no concentrations of loans exceeding 10% of gross loans other than as disclosed below:



|                                            |  |             |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |         |  |   |         |  |        |  
|------------------------------------------- |  | ----------- | ------- | - | ------- | ------ | - | ------ | - | ------- | ------- |  | ------ | ------ |  | - | ------- | - |  | ------ | - |  | ------- | ------- | - | ------ | ------ | ------- |  | - | ------- |  | ------ | -
|                                            |  | At June 30, |        
|                                            |  | 2007        |         |   | 2006    |        |   | 2005   |   |         | 2004    |  |        | 2003   | 
|(Dollars in thousands)                      |  | Amount      |         |   | % Total |        |   | Amount |   |         | % Total |  |        | Amount |  |   | % Total |   |  | Amount |   |  | % Total |         |   | Amount |        | % Total | 
|Real Estate Loans:                          |  |             |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |         |  |   |         |  |        |  
|Residential                                 |  | $           | 74,332  |   |         | 33.03  | % |        | $ | 80,693  |         |  | 40.58  | %      |  | $ | 74,600  |   |  | 44.46  | % |  | $       | 78,303  |   |        | 49.27  | %       |  | $ | 48,664  |  | 40.76  | %
|Commercial                                  |  |             | 36,302  |   |         | 16.13  |   |        |   | 29,712  |         |  | 14.94  |        |  |   | 25,109  |   |  | 14.96  | % |  |         | 16,545  |   |        | 10.41  |         |  |   | 14,622  |  | 12.25  |  
|Construction                                |  |             | 23,907  |   |         | 10.62  |   |        |   | 13,913  |         |  | 7.00   |        |  |   | 5,520   |   |  | 3.29   | % |  |         | 6,510   |   |        | 4.10   |         |  |   | 4,266   |  | 3.57   |  
|                                            |  |             |         |   |         |        |   |        |   |        
|Consumer Loans:                             |  |             |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |         |  |   |         |  |        |  
|Home Improvement                            |  |             | 12,481  |   |         | 5.55   | % |        |   | 11,442  |         |  | 5.75   | %      |  |   | 7,910   |   |  | 4.71   | % |  |         | 8,063   |   |        | 5.07   | %       |  |   | 9,161   |  | 7.67   | %
|Home Equity                                 |  |             | 4,964   |   |         | 2.21   |   |        |   | 4,400   |         |  | 2.21   |        |  |   | 5,205   |   |  | 3.10   | % |  |         | 4,244   |   |        | 2.67   |         |  |   | 3,709   |  | 3.11   |  
|Other Consumer                              |  |             | 2,955   |   |         | 1.31   |   |        |   | 2,483   |         |  | 1.25   |        |  |   | 2,401   |   |  | 1.43   | % |  |         | 2,170   |   |        | 1.36   |         |  |   | 2,194   |  | 1.84   |  
|                                            |  |             |         |   |         |        |   |        |   |        
|Commercial Loans:                           |  |             |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |         |  |   |         |  |        |  
|Commercial Loans                            |  |             | 52,711  |   |         | 23.43  |   |        |   | 34,827  |         |  | 17.51  | %      |  |   | 28,102  |   |  | 16.75  | % |  |         | 21,919  |   |        | 13.79  |         |  |   | 17,564  |  | 14.70  | %
|Commercial Leases                           |  |             | 17,366  |   |         | 7.72   |   |        |   | 21,409  |         |  | 10.76  |        |  |   | 18,969  |   |  | 11.30  | % |  |         | 21,182  |   |        | 13.33  |         |  |   | 19,225  |  | 16.10  |  
|                                            |  |             |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |         |  |   |         |  |        |  
|Gross Loans                                 |  |             | 225,018 |   |         | 100.00 | % |        |   | 198,879 |         |  | 100.00 |        |  |   | 167,816 |   |  | 100.00 | % |  |         | 158,936 |   |        | 100.00 | %       |  |   | 119,405 |  | 100.00 | %
|                                            |  |             |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |         |  |   |         |  |        |  
|Less:                                       |  |             |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |         |  |   |         |  |        |  
|Deferred Origination Fees, net of costs     |  |             | 240     |   |         |        |   |        |   | 178     |         |  |        |        |  |   | 99      |   |  |        |   |  |         | 94      |   |        |        |         |  |   | 96      |  |        |  
|Unearned Interest Consumer Loans            |  |             | 1,147   |   |         |        |   |        |   | 1,245   |         |  |        |        |  |   | 503     |   |  |        |   |  |         | 465     |   |        |        |         |  |   | 408     |  |        |  
|Unearned Interest Commercial Leases         |  |             | 2,480   |   |         |        |   |        |   | 6,091   |         |  |        |        |  |   | 5,446   |   |  |        |   |  |         | 6,473   |   |        |        |         |  |   | 4,356   |  |        |  
|Purchase Accounting (Premium) discount, net |  |             | (198    | ) |         |        |   |        |   | (224    | )       |  |        |        |  |   | (271    | ) |  |        |   |  |         | (445    | ) |        |        |         |  |   | 154     |  |        |  
|Allowance for Loan Loss                     |  |             | 1,110   |   |         |        |   |        |   | 1,000   |         |  |        |        |  |   | 945     |   |  |        |   |  |         | 936     |   |        |        |         |  |   | 1,139   |  |        |  
|                                            |  |             |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |         |  |   |         |  |        |  
|Net Loans                                   |  | $           | 220,239 |   |         |        |   |        | $ | 190,589 |         |  |        |        |  | $ | 161,094 |   |  |        |   |  | $       | 151,413 |   |        |        |         |  | $ | 113,252 |  |        |  
|                                            |  |             |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |         |  |   |         |  |        |  



23



---

The following table sets forth certain information at June 30, 2007 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.



|                   |  |                                        |        |                                              |   |                                     |  |       |        |  |   |       
|------------------ |  | -------------------------------------- | ------ | -------------------------------------------- | - | ----------------------------------- |  | ----- | ------ |  | - | ------
|                   |  | Due duringthe year endingJune 30, 2008 |        | Due after1 through5 years afterJune 30, 2007 |   | Due after5 years afterJune 30, 2007 |  | Total
|                   |  | (In thousands)                        
|Construction Loans |  | $                                      | 17,877 |                                              | $ | 6,030                               |  | $     |       |  | $ | 23,907
|Commercial loans   |  |                                        | 6,331  |                                              |   | 7,274                               |  |       | 39,106 |  |   | 52,711
|                   |  |                                        |        |                                              |   |                                     |  |       |        |  |   |       
|Total              |  | $                                      | 24,208 |                                              | $ | 13,304                              |  | $     | 39,106 |  | $ | 76,618
|                   |  |                                        |        |                                              |   |                                     |  |       |        |  |   |       

The following table sets forth at June 30, 2007 the dollar amount of the above loans which
may reprice or are due one year or more after June 30, 2007 which have predetermined interest rates and have floating or adjustable interest rates.



|             |  |                    |        |                             |   |        |  |   |       
|------------ |  | ------------------ | ------ | --------------------------- | - | ------ |  | - | ------
|             |  | PredeterminedRates |        | Floating orAdjustable Rates |   | Total 
|             |  | (In thousands)    
|Construction |  | $                  |       |                             | $ | 23,907 |  | $ | 23,907
|Commercial   |  |                    | 20,090 |                             |   | 32,621 |  |   | 52,711
|             |  |                    |        |                             |   |        |  |   |       
|Total        |  | $                  | 20,090 |                             | $ | 56,528 |  | $ | 76,618
|             |  |                    |        |                             |   |        |  |   |       

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.
U.S. government agency and corporate securities decreased by $1.9 million or 22.8% to $6.6 million at June 30, 2007 from $8.5 million at June 30, 2006 due to scheduled maturities and a decrease in the unrealized loss on these securities.
Mortgage-backed securities decreased by $1.6 million or 19.3% in the year ended June 30, 2007 as pay-downs in the portfolio were not replaced with any purchases. Stock in the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank of
Richmond increased by $0.2 million due to the membership requirements of these organizations.

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



|                                              |  |                |        |      |   |        |  |   |       
|--------------------------------------------- |  | -------------- | ------ | ---- | - | ------ |  | - | ------
|                                              |  | At June 30 ,  
|                                              |  | 2007           |        | 2006 |   | 2005  
|                                              |  | (in thousands)
|Securities available for sale, at fair value: |  |                |        |      |   |        |  |   |       
|U.S. Government and agency securities         |  | $              | 4,676  |      | $ | 6,559  |  | $ | 11,661
|Equity securities                             |  |                |       |      |   | 78     |  |   | 68    
|Corporate bonds                               |  |                | 1,913  |      |   | 1,903  |  |   | 2,580 
|Mortgage-backed securities                    |  |                | 6,558  |      |   | 8,127  |  |   | 10,491
|                                              |  |                |        |      |   |        |  |   |       
|Total securities available for sale           |  |                | 13,147 |      |   | 16,667 |  |   | 24,800
|                                              |  |                |        |      |   |        |  |   |       
|Investments required by law, at cost:         |  |                |        |      |   |        |  |   |       
|FHLB of Atlanta stock                         |  |                | 2,190  |      |   | 2,018  |  |   | 1,279 
|FRB of Richmond stock                         |  |                | 409    |      |   | 398    |  |   | 398   
|                                              |  |                |        |      |   |        |  |   |       
|Total investments required by law, at cost    |  |                | 2,599  |      |   | 2,416  |  |   | 1,677 
|                                              |  |                |        |      |   |        |  |   |       
|Total investments                             |  | $              | 15,746 |      | $ | 19,083 |  | $ | 26,477
|                                              |  |                |        |      |   |        |  |   |       



24



---

The following table sets forth the scheduled maturities, carrying amounts, fair values and average yields
for the Companys investment portfolio at June 30, 2007:



|                               |  |                        |       |              |                   |   |               |                   |              |  |                     |               |  |                            |       |  |               |   |              |   |       |               |      |           |  |              |        |  |   |        |  |      |  
|------------------------------ |  | ---------------------- | ----- | ------------ | ----------------- | - | ------------- | ----------------- | ------------ |  | ------------------- | ------------- |  | -------------------------- | ----- |  | ------------- | - | ------------ | - | ----- | ------------- | ---- | --------- |  | ------------ | ------ |  | - | ------ |  | ---- | -
|                               |  | One Year or Less       |       |              | One to Five Years |   |               | Five to Ten Years |              |  | More than Ten Years |               |  | Total Investment Portfolio |      
|                               |  | AmortizedCost          |       | AverageYield |                   |   | AmortizedCost |                   | AverageYield |  |                     | AmortizedCost |  | AverageYield               |       |  | AmortizedCost |   | AverageYield |   |       | AmortizedCost |      | FairValue |  | AverageYield |       
|                               |  | (Dollars in thousands) |      
|Securities available for sale: |  |                        |       |              |                   |   |               |                   |              |  |                     |               |  |                            |       |  |               |   |              |   |       |               |      |           |  |              |        |  |   |        |  |      |  
|Mortgage-backed securities     |  | $                      | 1     |              | 8.00              | % |               | $                 |             |  |                    | %             |  | $                          | 2,115 |  | 4.50          | % |              | $ | 4,796 |               | 4.97 | %         |  | $            | 6,912  |  | $ | 6,558  |  | 5.09 | %
|U.S. Government & agency       |  |                        | 1,000 |              | 3.25              |   |               |                   | 2,496        |  | 5.05                |               |  |                            | 500   |  | 4.88          |   |              |   | 750   |               | 4.25 |           |  |              | 4,746  |  |   | 4,676  |  | 4.59 |  
|Corporate bonds                |  |                        |      |              |                  |   |               |                   | 1,000        |  | 3.73                |               |  |                            |      |  |              |   |              |   | 1,000 |               | 5.60 |           |  |              | 2,000  |  |   | 1,913  |  | 4.88 |  
|Investments required by law    |  |                        |      |              |                  |   |               |                   |             |  |                    |               |  |                            |      |  |              |   |              |   | 2,599 |               | 6.00 |           |  |              | 2,599  |  |   | 2,599  |  | 6.00 |  
|                               |  |                        |       |              |                   |   |               |                   |              |  |                     |               |  |                            |       |  |               |   |              |   |       |               |      |           |  |              |        |  |   |        |  |      |  
|Total                          |  | $                      | 1,001 |              | 3.25              | % |               | $                 | 3,496        |  | 4.67                | %             |  | $                          | 2,615 |  | 4.57          | % |              | $ | 9,145 |               | 5.27 | %         |  | $            | 16,257 |  | $ | 15,746 |  | 5.07 | %
|                               |  |                        |       |              |                   |   |               |                   |              |  |                     |               |  |                            |       |  |               |   |              |   |       |               |      |           |  |              |        |  |   |        |  |      |  



25



---

Deposits.Total deposits increased by $22.9 million or 13.7% to $189.7 million at
June 30, 2007 from $166.8 million at June 30, 2006. Decreases in savings ($5.6) and non-interest checking ($1.4) were offset by increases in certificates of deposit ($26.7) and money market ($3.2) accounts. Rising rates paid on deposits in
the Companys market area have resulted in depositors moving money into higher yielding certificate accounts. Competition for deposits in the Companys market area remains intense. Of the $26.7 million increase in certificates of deposit,
$12.9 million or 48.3% was due to an increase in brokered deposits.

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



|                             |  |                        |         |         |        |   |         |      |         |  |        |         |  |         |         |  |        |  
|---------------------------- |  | ---------------------- | ------- | ------- | ------ | - | ------- | ---- | ------- |  | ------ | ------- |  | ------- | ------- |  | ------ | -
|                             |  | At June 30,            |        
|                             |  | (Dollars in thousands) |        
|                             |  | 2007                   |         |         | 2006   |   |         | 2005 |        
|                             |  | Balance                |         | % Total |        |   | Balance |      | % Total |  |        | Balance |  | % Total |        
|Savings accounts             |  | $                      | 20,228  |         | 10.66  | % |         | $    | 25,819  |  | 15.48  | %       |  | $       | 31,984  |  | 19.46  | %
|NOW checking                 |  |                        | 12,745  |         | 6.72   |   |         |      | 12,781  |  | 7.66   |         |  |         | 13,406  |  | 8.16   |  
|Money market                 |  |                        | 32,235  |         | 16.99  |   |         |      | 28,968  |  | 17.36  |         |  |         | 29,211  |  | 17.78  |  
|Certificates of deposits     |  |                        | 112,751 |         | 59.43  |   |         |      | 86,079  |  | 51.60  |         |  |         | 77,647  |  | 47.25  |  
|                             |  |                        |         |         |        |   |         |      |         |  |        |         |  |         |         |  |        |  
|Interest-bearing deposits    |  |                        | 177,959 |         | 93.80  |   |         |      | 153,647 |  | 92.10  |         |  |         | 152,248 |  | 92.65  |  
|Noninterest-bearing checking |  |                        | 11,753  |         | 6.20   |   |         |      | 13,186  |  | 7.90   |         |  |         | 12,072  |  | 7.35   |  
|                             |  |                        |         |         |        |   |         |      |         |  |        |         |  |         |         |  |        |  
|Total                        |  | $                      | 189,712 |         | 100.00 | % |         | $    | 166,833 |  | 100.00 | %       |  | $       | 164,320 |  | 100.00 | %
|                             |  |                        |         |         |        |   |         |      |         |  |        |         |  |         |         |  |        |  

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



|                             |  |                        |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|---------------------------- |  | ---------------------- | ------- | ----------- | ---- | - | -------------- | ---- | ----------- |  | ---- | -------------- |  | ----------- | ------- |  | ---- | -
|                             |  | Year Ended June 30,    |        
|                             |  | 2007                   |         |             | 2006 |   |                | 2005 |            
|                             |  | AverageBalance         |         | AverageRate |      |   | AverageBalance |      | AverageRate |  |      | AverageBalance |  | AverageRate |        
|                             |  | (Dollars in thousands) |        
|Savings accounts             |  | $                      | 22,512  |             | 0.43 | % |                | $    | 29,021      |  | 0.42 | %              |  | $           | 31,434  |  | 0.47 | %
|NOW checking                 |  |                        | 12,473  |             | 0.20 |   |                |      | 12,130      |  | .13  |                |  |             | 12,778  |  | 0.29 |  
|Money market                 |  |                        | 29,561  |             | 2.49 |   |                |      | 29,029      |  | 1.49 |                |  |             | 29,612  |  | 1.01 |  
|Certificates of deposit      |  |                        | 104,778 |             | 4.44 |   |                |      | 82,152      |  | 3.54 |                |  |             | 78,815  |  | 3.20 |  
|Noninterest-bearing checking |  |                        | 12,366  |             |     |   |                |      | 12,776      |  |     |                |  |             | 11,324  |  |     |  
|                             |  |                        |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Total                        |  | $                      | 181,690 |             |      |   |                | $    | 165,108     |  |      |                |  | $           | 163,963 |  |      |  
|                             |  |                        |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  

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, 2007. At such date, such deposits represented 12.55% of total deposits and had a weighted average rate of 4.79%.



|                            |  |                         |       
|--------------------------- |  | ----------------------- | ------
|Maturity Period             |  | Certificates of Deposit
|                            |  | (In thousands)         
|Three months or less        |  | $                       | 1,276 
|Over three through 6 months |  |                         | 5,884 
|Over six through 12 months  |  |                         | 7,574 
|Over 12 months              |  |                         | 9,084 
|                            |  |                         |       
|Total                       |  | $                       | 23,818
|                            |  |                         |       

Borrowings. The Companys long-term borrowings increased by $3.7 million or
10.7% to $38.8 million at June 30, 2007 from $35.1 million at June 30, 2006. Loan fundings well in excess of deposit growth is the reason for the growth.



26



---

The following table sets forth certain information regarding borrowings, but not the subordinated debt,
by the Company as of or for the year ended June 30:



|                                                            |  |                        |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                            |  | 2007                   |        |   | 2006 |   |        | 2005 | 
|                                                            |  | (Dollars in thousands) |       
|Amounts outstanding at end of period:                       |  |                        |        |   |      |   |        |      |  |   |        |  
|FHLB advances                                               |  | $                      | 38,800 |   |      | $ | 35,050 |      |  | $ | 18,400 |  
|Other borrowings                                            |  |                        |       |   |      |   |       |      |  |   | 1,833  |  
|Weighted average rate paid on:                              |  |                        |        |   |      |   |        |      |  |   |        |  
|FHLB advances                                               |  |                        | 4.65   | % |      |   | 4.33   | %    |  |   | 4.36   | %
|Other borrowings                                            |  |                        |       |   |      |   |       |      |  |   | 4.72   | %
|Maximum amount of borrowings outstanding at any month end:  |  |                        |        |   |      |   |        |      |  |   |        |  
|FHLB advances                                               |  | $                      | 38,800 |   |      | $ | 35,050 |      |  | $ | 20,900 |  
|Other borrowings                                            |  |                        |       |   |      |   |       |      |  |   | 2,000  |  
|Approximate average borrowings outstanding with respect to: |  |                        |        |   |      |   |        |      |  |   |        |  
|FHLB advances                                               |  | $                      | 36,933 |   |      | $ | 27,452 |      |  | $ | 19,325 |  
|Other borrowings                                            |  |                        |       |   |      |   |       |      |  |   | 1,971  |  

Comparison of Operating Results for the Years Ended June 30, 2007 and 2006

General. The Companys net income decreased by $0.2 million or 14.6% to $1.2 million for the year ended June 30, 2007 from
$1.4 million for the year ended June 30, 2006. The decrease in the Companys net income is a result of higher operating expenses resulting from the previously disclosed merger agreement with Bradford Bancorp and a higher provision for loan
losses. Direct expenses, primarily professional fees, related to the transaction for the year ended June 30, 2007 totaled $385,000. Additionally, the provision for loan losses increased substantially in the comparative year-to-date periods.

Net Interest Income. The Companys net interest income increased by $0.3 million or 3.7%, to $8.9 million in the
year ended June 30, 2007 from $8.6 million in the year ended June 30, 2006. Interest income increased by $2.9 million or 21.2% and interest expense increased by $2.6 million or 51.6%.

The increase in net interest income is primarily attributable to higher average balances of interest-earning assets, primarily loans, in the twelve
months ended June 30, 2007 compared to the twelve months ended June 30, 2006, offsetting higher rates paid on deposits and borrowings.

The Companys net interest margin decreased to 3.87% for the year ended June 30, 2007 from 4.22% for the year ended June 30, 2006. Intense competition for both loans and deposits, as well as a flat yield curve has made it
difficult to maintain the net interest margin.

Interest Income.The Companys total interest income increased by $2.9
million or 21.2% to $16.4 million from $13.6 million in the year ended June 30, 2006. The increase in interest income is primarily attributable to higher average loan balances and higher rates earned on all interest-earning asset classes
offsetting reduced income from securities available for sale due to lower average balances in the year ended June 30, 2007 compared to the year ended June 30, 2006. As shown in the rate/volume analysis above, the increase in the average
volume of loans is responsible for a $2.3 million increase in interest income. This is somewhat offset by lower average balances of investment securities.

Interest income on loans increased $2.9 million, or 23.7% during fiscal year 2007 due to both higher average balances and higher rates earned on the loan portfolio.



27



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Interest income on investment securities decreased by $139,000 or 14.8% to $0.8 million in fiscal year
2007 compared to $0.9 million in fiscal year 2006. The decrease was the result of lower average balances resulting from scheduled maturities and pay-downs offsetting higher rates earned on these securities.

Interest income on short-term investments and other interest earning assets increased $49,000, or 43.0%, to $163,000 in the fiscal year ended
June 30, 2007 from $114,000 in the fiscal year ended June 30, 2006. The increase is due to both higher rates earned on these assets and higher average balances outstanding during the year.

Interest Expense.The Companys total interest expense increased by $2.6 million, or 51.6%, to $7.5 million in fiscal year 2007
from $4.9 million in fiscal 2006. As shown in the rate/volume table on page 7, the increase in rates paid on deposits and borrowings is responsible for $1.7 million of the increase while the higher average balances of deposits and borrowings
outstanding is responsible for the remainder.

Interest expense on deposits increased $2.0 million or 56.6%, to $5.5 million in fiscal year
2007 from $3.5 million in fiscal 2006. The increase is due to both higher rates paid on deposits and higher average balances.

Interest
expense on short-term borrowings which includes federal funds borrowed and borrowings from the Federal Home Loan Bank of Atlanta, decreased by $103,000 or 73.6% to $37,000 in the year ended June 30, 2007 from $140,000 in the year ended
June 30, 2006 due to lower average balances outstanding offsetting higher rates paid on these borrowings.

Interest expense on
long-term borrowings, which includes borrowings from the Federal Home Loan Bank of Atlanta and subordinated debentures, increased $685,000, or 51.8%, to $2.0 million in the year ended June 30, 2007 from $1.3 million in the year ended
June 30, 2006. This increase is the result of both higher average balances used to fund loan growth and higher rates paid on long-term borrowings.

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 $430,000 in fiscal year 2007, an increase of $365,000, or 561.5%, from the fiscal year 2006 provision of $65,000. The
Companys allowance for loan losses as a percentage of total loans outstanding decreased to 0.50% at June 30, 2007 from 0.52% at June 30, 2006. The decrease in this percentage resulted from the increase in loans outstanding offsetting
the small growth in the allowance. The primary driver of the level of the allowance for loan losses is the Companys determination of the level of risk in the portfolio. The Company has determined that there is minimal risk in the residential
loan portfolio (33% of total loans.) The residential mortgage portfolio 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 Company conservatively underwrites all commercial business and commercial real estate loans with multiple sources of repayment. Loans granted must cash-flow on their own and be backed by substantial collateral. Additionally, $6.3 million
of the commercial loan portfolio, including the two commercial loans on non-accrual are guaranteed by the Small Business Administration with an average guarantee percentage of 76%. In the Companys estimation, the most risk in the portfolio
resides in the commercial leasing portfolio whose net balance of $14.9 million represents 7.0% of the portfolio and whose average lease size is only $16,750. These determinations by management have been reviewed by an independent third party loan
review consultant in a report dated November 13, 2006. The Companys allowance for loan losses as a percentage of non-performing loans was 230.3% at June 30, 2007 as compared to 409.8% at June 30, 2006.



28



---

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



|                                                                        |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|----------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | -------- | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                        |  | Year Ended June 30,    |       
|                                                                        |  | 2007                   |        |   | 2006 |   |        | 2005 |  |   | 2004     |   |  | 2003 |       
|                                                                        |  | (Dollars in thousands) |       
|Balance at beginning of period                                          |  | $                      | 1,000  |   |      | $ | 945    |      |  | $ | 936      |   |  | $    | 1,139  |   |  | $ | 1,438  |  
|Loans charged off:                                                      |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|Real estate mortgage                                                    |  |                        |       |   |      |   |       |      |  |   |         |   |  |      | 40     |   |  |   |       |  
|Commercial loan                                                         |  |                        | 9      |   |      |   |       |      |  |   | 5        |   |  |      | 16     |   |  |   | 499    |  
|Commercial leases                                                       |  |                        | 265    |   |      |   | 40     |      |  |   | 184      |   |  |      | 178    |   |  |   | 320    |  
|Consumer                                                                |  |                        | 202    |   |      |   | 146    |      |  |   | 143      |   |  |      | 212    |   |  |   | 145    |  
|                                                                        |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|Total charge-offs                                                       |  |                        | 476    |   |      |   | 186    |      |  |   | 332      |   |  |      | 446    |   |  |   | 964    |  
|Recoveries:                                                             |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|Real estate mortgage                                                    |  |                        |       |   |      |   | 41     |      |  |   |         |   |  |      |       |   |  |   |       |  
|Commercial loan                                                         |  |                        | 33     |   |      |   | 16     |      |  |   | 5        |   |  |      | 51     |   |  |   | 37     |  
|Commercial leases                                                       |  |                        | 48     |   |      |   | 78     |      |  |   | 54       |   |  |      | 95     |   |  |   | 55     |  
|Consumer                                                                |  |                        | 75     |   |      |   | 41     |      |  |   | 57       |   |  |      | 55     |   |  |   | 42     |  
|                                                                        |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|Total recoveries                                                        |  |                        | 156    |   |      |   | 176    |      |  |   | 116      |   |  |      | 201    |   |  |   | 134    |  
|                                                                        |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|Net loans charged off                                                   |  |                        | 320    |   |      |   | 10     |      |  |   | 216      |   |  |      | 245    |   |  |   | 830    |  
|Provision for loan losses                                               |  |                        | 430    |   |      |   | 65     |      |  |   | 225      |   |  |      | 42     |   |  |   | 531    |  
|                                                                        |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|Balance at end of period                                                |  | $                      | 1,110  |   |      | $ | 1,000  |      |  | $ | 945      |   |  | $    | 936    |   |  | $ | 1,139  |  
|                                                                        |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|Ratio of net charge-offs to average loans outstanding during the period |  |                        | 0.15   | % |      |   | 0.01   | %    |  |   | 0.14     | % |  |      | 0.20   | % |  |   | 0.72   | %
|                                                                        |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  
|Ratio of allowance to non-performing loans                              |  |                        | 230.34 | % |      |   | 409.84 | %    |  |   | 2,487.45 | % |  |      | 188.01 | % |  |   | 348.32 | %
|                                                                        |  |                        |        |   |      |   |        |      |  |   |          |   |  |      |        |   |  |   |        |  



29



---

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, 2007    |       |                           | As of June 30, 2006 |   |        | As of June 30, 2005 |                          |  | As of June 30, 2004 |        |  | As of June 30, 2003      |    
|                                |  | Amount                 |       | % of Loans to Total Loans |                     |   | Amount |                     | % of Loans to TotalLoans |  |                     | Amount |  | % of Loans to TotalLoans |     |  | Amount |   | % of Loans to Total Loans |   |     | Amount |       | % of Loans to TotalLoans | 
|                                |  | (Dollars in thousands) |      
|Real estate mortgage:           |  |                        |       |                           |                     |   |        |                     |                          |  |                     |        |  |                          |     |  |        |   |                           |   |     |        |       |                          |  |   |       |  |       |  
|Residential                     |  | $                      | 45    |                           | 33.1                | % |        | $                   | 61                       |  | 40.6                | %      |  | $                        | 60  |  | 44.5   | % |                           | $ | 78  |        | 49.3  | %                        |  | $ | 118   |  | 40.8  | %
|Commercial                      |  |                        | 144   |                           | 16.1                |   |        |                     | 67                       |  | 14.9                |        |  |                          | 79  |  | 15.0   |   |                           |   | 70  |        | 10.4  |                          |  |   | 95    |  | 12.2  |  
|Construction                    |  |                        | 146   |                           | 10.6                |   |        |                     | 64                       |  | 7.0                 |        |  |                          | 55  |  | 3.3    |   |                           |   | 65  |        | 4.1   |                          |  |   | 163   |  | 3.6   |  
|Consumer and other              |  |                        | 137   |                           | 9.1                 |   |        |                     | 67                       |  | 9.2                 |        |  |                          | 99  |  | 9.2    |   |                           |   | 95  |        | 9.1   |                          |  |   | 153   |  | 12.6  |  
|Commercial Business             |  |                        | 413   |                           | 23.4                |   |        |                     | 558                      |  | 17.5                |        |  |                          | 494 |  | 16.7   |   |                           |   | 428 |        | 13.8  |                          |  |   | 275   |  | 14.7  |  
|Commercial Leases               |  |                        | 225   |                           | 7.7                 |   |        |                     | 183                      |  | 10.8                |        |  |                          | 158 |  | 11.3   |   |                           |   | 200 |        | 13.3  |                          |  |   | 335   |  | 16.1  |  
|                                |  |                        |       |                           |                     |   |        |                     |                          |  |                     |        |  |                          |     |  |        |   |                           |   |     |        |       |                          |  |   |       |  |       |  
|Total allowance for loan Losses |  | $                      | 1,110 |                           | 100.0               | % |        | $                   | 1,000                    |  | 100.0               | %      |  | $                        | 945 |  | 100.0  | % |                           | $ | 936 |        | 100.0 | %                        |  | $ | 1,139 |  | 100.0 | %
|                                |  |                        |       |                           |                     |   |        |                     |                          |  |                     |        |  |                          |     |  |        |   |                           |   |     |        |       |                          |  |   |       |  |       |  

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



|                                                                |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|--------------------------------------------------------------- |  | ---------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | - |  | ---- | ---- | - |  | - | ---- | -
|                                                                |  | At June 30,            |     
|                                                                |  | 2007                   |      |   | 2006 |   |      | 2005 |  |   | 2004 |   |  | 2003 |     
|                                                                |  | (Dollars in thousands) |     
|Loans accounted for on a non-accrual basis: (1)                 |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Real estate:                                                    |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Residential                                                     |  | $                      | 168  |   |      | $ | 13   |      |  | $ |     |   |  | $    |     |   |  | $ | 90   |  
|Commercial                                                      |  |                        |     |   |      |   | 146  |      |  |   |     |   |  |      |     |   |  |   |     |  
|Construction                                                    |  |                        |     |   |      |   |     |      |  |   |     |   |  |      |     |   |  |   |     |  
|Consumer                                                        |  |                        | 14   |   |      |   | 7    |      |  |   | 16   |   |  |      | 12   |   |  |   | 44   |  
|Commercial Loan/Lease                                           |  |                        | 300  |   |      |   | 78   |      |  |   | 22   |   |  |      | 486  |   |  |   | 193  |  
|                                                                |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Total                                                           |  | $                      | 482  |   |      | $ | 244  |      |  | $ | 38   |   |  | $    | 498  |   |  | $ | 327  |  
|                                                                |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Accruing loans which are contractually past due 90 days or more |  | $                      |     |   |      | $ |     |      |  | $ |     |   |  | $    |     |   |  | $ |     |  
|                                                                |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Total non-performing loans                                      |  | $                      | 482  |   |      | $ | 244  |      |  | $ | 38   |   |  | $    | 498  |   |  | $ | 327  |  
|                                                                |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Percentage of total loans, net                                  |  |                        | 0.22 | % |      |   | 0.13 | %    |  |   | 0.02 | % |  |      | 0.33 | % |  |   | 0.26 | %
|                                                                |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Other non-performing assets (2)                                 |  | $                      | 5    |   |      | $ |     |      |  | $ | 60   |   |  | $    |     |   |  | $ | 19   |  
|                                                                |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  

---

|(1) | Non-accrual 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.
|--- | -------------------------------------------------------------------------------------------------------------------------

At June 30, 2007, non-accrual loans consisted of one residential mortgage with a balance of $168,000 and an approximate loan-to-value ratio of 44%,
two commercial business loans with a combined balance of $247,000, both with 85% guarantees from the SBA, four commercial leases with balances of $53,000 and four consumer loans with a balance of $14,000.

At June 30, 2007, 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.

Non-interest Income. The Companys non-interest income 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 $5,000 or 0.6% to $866,000 during the year ended June 30, 2007 from $871,000 during
the year ended June 30, 2006.



30



---

Non-interest Expense. The Companys total noninterest expense increased by $0.2
million or 3.4%, to $7.4 million during fiscal 2007, as compared to $7.2 million in fiscal 2006. The primary reason for the increase are the direct expenses, primarily professional fees resulting from the previously disclosed merger agreement with
Bradford Bancorp. These expenses totaled $385,000 for the year ended June 30, 2007, respectively.

Income Tax
Provision. The Company had income tax expense of $0.73 million in 2007 compared to $0.82 million in 2006. The resulting effective tax rates were 38.0% and 37.2 % respectively. The increase in the effective tax rate is a result of
the non-deductability of certain merger related expenses.

Comparison of Operating Results for the Years Ended June 30, 2006 and 2005

General. The Companys net income increased by $42,000, or 3.1%, to $1.39 million in the year ended
June 30, 2006 compared to $1.35 million in the year ended June 30, 2005. The increase in net income was primarily due to higher net interest income, non-interest income and a lower provision for loan losses slightly offsetting higher
operating expenses.

Net Interest Income. The Companys net interest income increased by $0.5 million or 6.8%, to
$8.6 million in the year ended June 30, 2006 from $8.1 million in the year ended June 30, 2005. Interest income increased by $1.7 million or 14.8% and interest expense increased by $1.2 million or 31.8%.

The increase in net interest income is primarily attributable to higher average balances of interest-earning assets, primarily loans, in the twelve
months ended June 30, 2006 compared to the twelve months ended June 30, 2005, offsetting higher rates paid on deposits and borrowings. The increase in interest expense is primarily due to higher rates paid on deposits as well as higher
average balances of borrowings.

The Companys net interest margin was relatively unchanged at 4.22% for the year ended June 30,
2006 compared to 4.21% for the year ended June 30, 2005. Intense competition for both loans and deposits, as well as a flat yield curve makes margin expansion very difficult. Like many financial institutions, a steeper yield curve (one with a
greater difference between short-term interest rates and long-term interest rates) will be beneficial to the Company.

Interest
Income.The Companys total interest income increased by $1.7 million or 14.8%. The increase in interest income is primarily attributable to higher average balances of loans in the twelve months ended June 30, 2006 compared to the
twelve months ended June 30, 2005. The higher average balances primarily result from increased loan production and lower early pay-offs in the first mortgage portfolio. As shown in the rate/volume analysis on page 9, the increase in the average
volume of loans is responsible for a $1.6 million increase in interest income. This is somewhat offset by lower average balances of investment securities and other interest-earning assets. Higher rates earned on all classes of interest-earning
assets also contributed to the increase in interest income.

Interest income on loans increased $1.9 million, or 17.8% during fiscal year
2006 due to both higher average balances, resulting from increase production and lower early pay-offs and higher rates earned on the loan portfolio.

Interest income on investment securities decreased by $105,000 or 10.1% to $0.9 million in fiscal year 2006 compared to $1 million in fiscal year 2005. The decrease was the result of lower average balances resulting
from scheduled maturities and pay-downs offsetting higher rates earned on these securities.

Interest income on short-term investments and
other interest earning assets decreased $38,000, or 24.8%, to $114,000 in the fiscal year ended June 30, 2006 from $152,000 in the fiscal year ended June 30, 2005. The lower average balance of these assets, primarily federal funds sold,
offset higher rates earned on these assets.

Interest Expense. The Companys total interest expense increased by
$1.2 million, or 31.8%, to $4.9 million in fiscal year 2006 from $3.7 million in fiscal 2005. As shown in the rate/volume table on page 98, the increase in rates paid on deposits and borrowings is responsible for $0.74 million of the increase while
the higher average balance of borrowings outstanding is responsible for the remainder.



31



---

Interest expense on deposits increased $0.7 million or 23.7%, to $3.5 million in fiscal year 2006 from
$2.8 million in fiscal 2005. The impact of higher rates paid on deposits more than offset the slightly lower average balances of interest-bearing deposits outstanding.

Interest expense on short-term borrowings which includes federal funds borrowed and borrowings from the Federal Home Loan Bank of Atlanta, totaled $0.14 million in the year ended June 30, 2006. There was no
interest expense on short-term borrowings in the year ended June 30, 2005.

Interest expense on long-term borrowings, which includes
borrowings from the Federal Home Loan Bank of Atlanta and subordinated debentures, increased $387,000, or 41.4%, to $1.3 million in the year ended June 30, 2006 from $0.9 million in the year ended June 30, 2005. This increase is the result
of both higher average balances used to fund loan growth and higher rates paid on long-term borrowings.

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 $65,000 in fiscal year 2006, a decrease of $160,000, or 71.1%, from the fiscal year 2005 provision of $225,000. The Companys allowance for loan losses as a percentage of total loans outstanding decreased to 0.52%
at June 30, 2006 from 0.58% at June 30, 2005. The decrease in this percentage resulted from the increase in loans outstanding offsetting the small growth in the allowance. The Companys allowance for loan losses as a percentage of
nonperforming loans was 409.9% at June 30, 2006 as compared to 2,486.8% at June 30, 2005.

Non-interest Income.The Companys noninterest income consists primarily of service charges on deposit accounts, and net gains and losses on sales of investment securities and repossessed assets. Total noninterest income increased by $187,000 or 27.4% to
$871,000 in fiscal year 2006 as compared to $684,000 in fiscal year 2005. Fees and service charges increased $131,000 or 25.0% to $656,000 from $525,000 primarily due to higher service charges, overdraft and debit card income. The Company sold a
former branch office facility for a gain of $64,000. The Company also sold one investment security for a gain of $2,000. Other non-interest income decreased $10,000 or 6.2% to $149,000 due to a decline in the commissions earned on the sale of
insurance and investment products.

Non-interest Expense. The Companys total noninterest expense increased by
$0.8 million or 12.4%, to $7.2 million during fiscal 2006, as compared to $6.4 million in fiscal 2005. Increases in compensation and benefits ($717,000), occupancy ($246,000) equipment expense ($42,000) and data processing expense ($41,000) exceeded
the decreases in other expenses ($112,000), advertising expense ($92,000) and professional fees ($46,000). The increase in compensation and benefits is a result of new hires in the loan production area as well as salary adjustments made as a result
of the level of compensation required to hire new commercial lenders. The increase in occupancy expense is primarily a result of the cost of leasing the land on the site of the new branch and loan administration building under construction as well
as the accelerated depreciation of leasehold improvements and equipment in the leased space housing loan administration that will be vacated once the building is complete. The decrease in other expenses is due to cost controls on other discretionary
spending.

Income Tax Provision.The Company had an income tax expense of $0.82 million in 2006 compared to $0.76
million in 2005. The resulting effective tax rates were 37.2% and 36.1 % respectively.

Asset/Liability Management

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



32



---

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 portfolio, including locally originated adjustable-rate commercial real estate and commercial
business loans. In addition, the Company has available for sale investment securities, carried at fair value, totaling $13.1 million as of June 30, 2007. 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, 2007, is
presented in the following table. The table was derived using assumptions which management believes to be reasonable.



33



---

The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities
outstanding at June 30, 2007 that are expected to mature or reprice in each of the time periods shown.



|                                                         |  |                        |        |   |                                  |   |         |                           |  |   |                           |   |  |                             |        |   |                 |   |        |       |  |   |        |   |  |   |        
|-------------------------------------------------------- |  | ---------------------- | ------ | - | -------------------------------- | - | ------- | ------------------------- |  | - | ------------------------- | - |  | --------------------------- | ------ | - | --------------- | - | ------ | ----- |  | - | ------ | - |  | - | -------
|                                                         |  | ThreeMonthsor Less     |        |   | Over ThreeMonths ThroughOne Year |   |         | Over OneThroughFive Years |  |   | Over FiveThroughTen Years |   |  | Over TenThroughTwenty Years |        |   | OverTwentyYears |   |        | Total
|                                                         |  | (Dollars in thousands)
|Rate sensitive assets:                                   |  |                        |        |   |                                  |   |         |                           |  |   |                           |   |  |                             |        |   |                 |   |        |       |  |   |        |   |  |   |        
|Loans receivable                                         |  | $                      | 60,188 |   |                                  | $ | 55,253  |                           |  | $ | 76,854                    |   |  | $                           | 24,873 |   |                 | $ | 6,970  |       |  | $ | 880    |   |  | $ | 225,018
|Investment securities                                    |  |                        | 1,272  |   |                                  |   | 910     |                           |  |   | 6,792                     |   |  |                             | 2,150  |   |                 |   | 2,008  |       |  |   | 15     |   |  |   | 13,147 
|Short-term investments and other interest-earning assets |  |                        | 5,761  |   |                                  |   |        |                           |  |   |                          |   |  |                             |       |   |                 |   |       |       |  |   |       |   |  |   | 5,761  
|                                                         |  |                        |        |   |                                  |   |         |                           |  |   |                           |   |  |                             |        |   |                 |   |        |       |  |   |        |   |  |   |        
|Total                                                    |  |                        | 67,221 |   |                                  |   | 56,163  |                           |  |   | 83,646                    |   |  |                             | 27,023 |   |                 |   | 8,978  |       |  |   | 895    |   |  |   | 243,926
|                                                         |  |                        |        |   |                                  |   |         |                           |  |   |                           |   |  |                             |        |   |                 |   |        |       |  |   |        |   |  |   |        
|Rate sensitive liabilities:                              |  |                        |        |   |                                  |   |         |                           |  |   |                           |   |  |                             |        |   |                 |   |        |       |  |   |        |   |  |   |        
|Deposits                                                 |  |                        | 30,939 |   |                                  |   | 64,087  |                           |  |   | 70,376                    |   |  |                             | 9,577  |   |                 |   | 2,386  |       |  |   | 594    |   |  |   | 177,959
|Borrowings                                               |  |                        | 17,700 |   |                                  |   | 9,000   |                           |  |   | 12,100                    |   |  |                             | 5,000  |   |                 |   |       |       |  |   |       |   |  |   | 43,800 
|                                                         |  |                        |        |   |                                  |   |         |                           |  |   |                           |   |  |                             |        |   |                 |   |        |       |  |   |        |   |  |   |        
|Total                                                    |  |                        | 48,639 |   |                                  |   | 73,087  |                           |  |   | 82,476                    |   |  |                             | 14,577 |   |                 |   | 2,386  |       |  |   | 594    |   |  |   | 221,759
|                                                         |  |                        |        |   |                                  |   |         |                           |  |   |                           |   |  |                             |        |   |                 |   |        |       |  |   |        |   |  |   |        
|Interest sensitivity gap                                 |  | $                      | 18,582 |   |                                  | $ | (16,924 | )                         |  | $ | 1,170                     |   |  | $                           | 12,446 |   |                 | $ | 6,592  |       |  | $ | 301    |   |  |   |        
|                                                         |  |                        |        |   |                                  |   |         |                           |  |   |                           |   |  |                             |        |   |                 |   |        |       |  |   |        |   |  |   |        
|Cumulative interest sensitivity gap                      |  | $                      | 18,582 |   |                                  | $ | 1,658   |                           |  | $ | 2,828                     |   |  |                             | 15,274 |   |                 | $ | 21,866 |       |  | $ | 22,167 |   |  |   |        
|                                                         |  |                        |        |   |                                  |   |         |                           |  |   |                           |   |  |                             |        |   |                 |   |        |       |  |   |        |   |  |   |        
|Ratio of cumulative gap to total assets                  |  |                        | 7.27   | % |                                  |   | 0.65    | %                         |  |   | 1.11                      | % |  |                             | 5.98   | % |                 |   | 8.58   | %     |  |   | 8.68   | % |  |   |        
|                                                         |  |                        |        |   |                                  |   |         |                           |  |   |                           |   |  |                             |        |   |                 |   |        |       |  |   |        |   |  |   |        

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.



34



---

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, 2007, the Bank had the following estimated sensitivity profile for net interest income and fair value of equity:



|                                 |  |                    |   |  |                   |   |  |              |  
|-------------------------------- |  | ------------------ | - |  | ----------------- | - |  | ------------ | -
|                                 |  | + 200 basis points |   |  | -200 basis points |   |  | Policy Limit |  
|% Change in Net Interest Income  |  | 3.7                | % |  | -9.0              | % |  | ±10.0        | %
|% Change in Fair Value of Equity |  | 7.1                | % |  | -19.8             | % |  | ±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 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, 2007, the Companys cash on hand, interest-bearing deposits and Federal funds sold totaled $7.5 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 $34.4 million and $25.0 million at June 30, 2007
and 2006, respectively. Certificates of deposit that are scheduled to mature in less than one year at June 30, 2007 totaled $75.4 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 $868,000 for the payment of common 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.



35



---

At June 30, 2007, 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, 2007.



|                                         |  |                        |        |       |                              |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|---------------------------------------- |  | ---------------------- | ------ | ----- | ---------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                         |  | Actual                 |        |       | For CapitalAdequacy Purposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                         |  | Amount                 |        | Ratio |                              |   | Amount |                                                               | Ratio  |  |      | Amount |  | Ratio |       
|                                         |  | (Dollars in thousands) |       
|Total Capital (to Risk Weighted Assets)  |  | $                      | 20,091 |       | 10.26                        | % |        | $                                                             | 15,665 |  | 8.00 | %      |  | $     | 19,582 |  | 10.00 | %
|Tier 1 Capital (to Risk Weighted Assets) |  |                        | 18,981 |       | 9.69                         |   |        |                                                               | 7,833  |  | 4.00 |        |  |       | 11,749 |  | 6.00  |  
|Tier 1 Capital (to Average Assets)       |  |                        | 18,981 |       | 7.57                         |   |        |                                                               | 10,030 |  | 4.00 |        |  |       | 12,537 |  | 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:



|                                    |  |                |        |      |   |       
|----------------------------------- |  | -------------- | ------ | ---- | - | ------
|                                    |  | 2007           |        | 2006
|                                    |  | (In thousands)
|Commitments to originate new loans  |  | $              | 19,452 |      | $ | 13,860
|Undisbursed lines of credit         |  |                | 14,909 |      |   | 11,161
|Financial standby letters of credit |  |                | 1,749  |      |   | 1,583 

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.

Contractual Obligations

The following table sets forth the
companys contractual obligations as of June 30, 2007.



|                                                        |  |                        |        |              |   |              |  |              |        |       |   |        |  |   |        
|------------------------------------------------------- |  | ---------------------- | ------ | ------------ | - | ------------ |  | ------------ | ------ | ----- | - | ------ |  | - | -------
|                                                        |  | < 1 year               |        | 1 to 3 Years |   | 4 to 5 Years |  | Over 5 Years |        | Total
|                                                        |  | (Dollars in thousands)
|Time Deposits                                           |  | $                      | 75,357 |              | $ | 23,400       |  | $            | 13,875 |       | $ | 119    |  | $ | 112,751
|Long-term borrowings, including subordinated debentures |  |                        | 9,700  |              |   | 4,000        |  |              | 5,100  |       |   | 25,000 |  |   | 43,800 
|Lease obligations                                       |  |                        | 181    |              |   | 336          |  |              | 318    |       |   | 2,449  |  |   | 3,284  
|                                                        |  |                        |        |              |   |              |  |              |        |       |   |        |  |   |        
|Total contractual obligations                           |  | $                      | 85,238 |              | $ | 27,736       |  | $            | 19,293 |       | $ | 27,568 |  | $ | 159,835
|                                                        |  |                        |        |              |   |              |  |              |        |       |   |        |  |   |        



36



---

Item 7. Financial Statements

LOGO

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Patapsco Bancorp, Inc.

Dundalk, Maryland

We have audited the accompanying consolidated statements of financial condition of Patapsco Bancorp, Inc. and subsidiaries as of June 30, 2007 and
2006, and the related consolidated statements of income, stockholders equity, and cash flows for each of the three years in the period ended June 30, 2007. These consolidated financial statements are the responsibility of the
Companys management. 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 audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our
opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Patapsco Bancorp, Inc. and subsidiaries as of June 30, 2007 and 2006, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended June 30, 2007, in conformity with accounting principles generally accepted in the United States of America.

LOGO



|                        
|------------------------
|Beard Miller Company LLP
|Baltimore, Maryland     
|September 6, 2007       



37



---

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

June 30, 2007 and 2006



|                                                                                                                                                        |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(dollars in thousands except for per share data)                                                                                                        |  | 2007 |         |   | 2006 |  
|Assets                                                                                                                                                  |  |      |         |   |      |   |         |  
|Cash on hand and due from banks                                                                                                                         |  | $    | 4,308   |   |      | $ | 4,839   |  
|Interest bearing deposits in other financial institutions                                                                                               |  |      | 907     |   |      |   | 968     |  
|Federal funds sold                                                                                                                                      |  |      | 2,255   |   |      |   | 2,381   |  
|                                                                                                                                                        |  |      |         |   |      |   |         |  
|Cash and Cash Equivalents                                                                                                                               |  |      | 7,470   |   |      |   | 8,188   |  
|Time deposits at other financial institutions                                                                                                           |  |      |        |   |      |   | 605     |  
|                                                                                                                                                        |  |     
|Securities available for sale                                                                                                                           |  |      | 13,147  |   |      |   | 16,667  |  
|Loans receivable, net of allowance for loan losses of $1,110 and $1,000 respectively                                                                    |  |      | 220,239 |   |      |   | 190,589 |  
|Investment securities required by law, at cost                                                                                                          |  |      | 2,599   |   |      |   | 2,416   |  
|Property and equipment, net                                                                                                                             |  |      | 4,474   |   |      |   | 2,175   |  
|Goodwill and other intangible assets                                                                                                                    |  |      | 3,303   |   |      |   | 3,354   |  
|Accrued interest and other assets                                                                                                                       |  |      | 4,226   |   |      |   | 4,076   |  
|                                                                                                                                                        |  |      |         |   |      |   |         |  
|Total Assets                                                                                                                                            |  | $    | 255,458 |   |      | $ | 228,070 |  
|                                                                                                                                                        |  |      |         |   |      |   |         |  
|Liabilities and Stockholders Equity Deposits:                                                                                                          |  |      |         |   |      |   |         |  
|                                                                                                                                                        |  |     
|Non-interest bearing deposits                                                                                                                           |  | $    | 11,753  |   |      | $ | 13,186  |  
|Interest bearing deposits                                                                                                                               |  |      | 177,959 |   |      |   | 53,647  |  
|                                                                                                                                                        |  |      |         |   |      |   |         |  
|Total Deposits                                                                                                                                          |  |      | 189,712 |   |      |   | 166,833 |  
|Junior Subordinated debentures                                                                                                                          |  |      | 5,000   |   |      |   | 5,000   |  
|Long-Term Debt                                                                                                                                          |  |      | 38,800  |   |      |   | 35,050  |  
|Accrued expenses and other liabilities                                                                                                                  |  |      | 3,030   |   |      |   | 2,899   |  
|                                                                                                                                                        |  |      |         |   |      |   |         |  
|Total liabilities                                                                                                                                       |  | $    | 236,542 |   |      | $ | 209,782 |  
|                                                                                                                                                        |  |     
|Commitments and contingencies                                                                                                                           |  |      |        |   |      |   |        |  
|                                                                                                                                                        |  |     
|Temporary equity - ESOP shares subject to put option                                                                                                    |  |      | 935     |   |      |   | 1,121   |  
|                                                                                                                                                        |  |     
|Stockholders equity                                                                                                                                    |  |      |         |   |      |   |         |  
|Common stock $0.01 par value; authorized 4,000,000 shares; issued and outstanding 1,864,985 and 1,813,925 shares at June 30, 2007 and
2006 respectively |  |      | 18      |   |      |   | 18      |  
|Additional paid-in capital                                                                                                                              |  |      | 6,937   |   |      |   | 6,950   |  
|Deferred compensation contra                                                                                                                            |  |      | (78     | ) |      |   | (78     | )
|Obligation under deferred compensation                                                                                                                  |  |      | 423     |   |      |   | 395     |  
|Retained earnings, substantially restricted                                                                                                             |  |      | 10,994  |   |      |   | 10,317  |  
|Accumulated other comprehensive loss, net of taxes                                                                                                      |  |      | (313    | ) |      |   | (435    | )
|                                                                                                                                                        |  |      |         |   |      |   |         |  
|Total Stockholders Equity - Permanent                                                                                                                  |  |      | 17,981  |   |      |   | 17,167  |  
|                                                                                                                                                        |  |      |         |   |      |   |         |  
|Total Stockholders Equity - including Temporary Equity                                                                                                 |  |      | 18,916  |   |      |   | 18,288  |  
|                                                                                                                                                        |  |      |         |   |      |   |         |  
|Total Liabilities and Stockholders Equity                                                                                                              |  | $    | 255,458 |   |      | $ | 228,070 |  
|                                                                                                                                                        |  |      |         |   |      |   |         |  

See accompanying notes to consolidated financial statements.



38



---

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

Years Ended June 30, 2007, 2006 and 2005



|                                                    |  |      |        |   |      |   |        |  |   |       
|--------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ |  | - | ------
|(in thousands except for per share data)            |  | 2007 |        |   | 2006 |   | 2005  
|Interest income:                                    |  |      |        |   |      |   |        |  |   |       
|Loans receivable                                    |  | $    | 15,461 |   |      | $ | 12,501 |  | $ | 10,613
|Investment securities                               |  |      | 802    |   |      |   | 941    |  |   | 1,046 
|Federal funds sold and other investments            |  |      | 163    |   |      |   | 114    |  |   | 152   
|                                                    |  |      |        |   |      |   |        |  |   |       
|Total interest income                               |  |      | 16,426 |   |      |   | 13,556 |  |   | 11,811
|                                                    |  |      |        |   |      |   |        |  |   |       
|Interest expense:                                   |  |      |        |   |      |   |        |  |   |       
|Deposits                                            |  |      | 5,458  |   |      |   | 3,486  |  |   | 2,818 
|Short-term debt                                     |  |      | 37     |   |      |   | 140    |  |   |      
|Long term debt and junior subordinated debentures   |  |      | 2,008  |   |      |   | 1,323  |  |   | 936   
|                                                    |  |      |        |   |      |   |        |  |   |       
|Total interest expense                              |  |      | 7,503  |   |      |   | 4,949  |  |   | 3,754 
|                                                    |  |      |        |   |      |   |        |  |   |       
|Net interest income                                 |  |      | 8,923  |   |      |   | 8,607  |  |   | 8,057 
|Provision for loan losses                           |  |      | 430    |   |      |   | 65     |  |   | 225   
|                                                    |  |      |        |   |      |   |        |  |   |       
|Net interest income after provision for loan losses |  |      | 8,493  |   |      |   | 8,542  |  |   | 7,832 
|                                                    |  |      |        |   |      |   |        |  |   |       
|Non-interest income:                                |  |      |        |   |      |   |        |  |   |       
|Fees and service charges                            |  |      | 730    |   |      |   | 656    |  |   | 525   
|Gain on sale of securities available for sale       |  |      |       |   |      |   | 2      |  |   |      
|Gain on sale of office building                     |  |      | 14     |   |      |   | 64     |  |   |      
|Loss on sale of other repossessed assets            |  |      | (9     | ) |      |   |       |  |   |      
|Other                                               |  |      | 131    |   |      |   | 149    |  |   | 159   
|                                                    |  |      |        |   |      |   |        |  |   |       
|Total non-interest income                           |  |      | 866    |   |      |   | 871    |  |   | 684   
|                                                    |  |      |        |   |      |   |        |  |   |       
|Non-interest expenses:                              |  |      |        |   |      |   |        |  |   |       
|Compensation and employee benefits                  |  |      | 4,382  |   |      |   | 4,490  |  |   | 3,773 
|Professional fees                                   |  |      | 591    |   |      |   | 241    |  |   | 287   
|Equipment expenses                                  |  |      | 331    |   |      |   | 326    |  |   | 284   
|Net occupancy costs                                 |  |      | 565    |   |      |   | 552    |  |   | 306   
|Advertising                                         |  |      | 110    |   |      |   | 86     |  |   | 178   
|Data processing                                     |  |      | 304    |   |      |   | 285    |  |   | 244   
|Amortization of core deposit intangible             |  |      | 51     |   |      |   | 51     |  |   | 51    
|Telephone, postage and delivery                     |  |      | 250    |   |      |   | 271    |  |   | 276   
|Other                                               |  |      | 863    |   |      |   | 900    |  |   | 1,012 
|                                                    |  |      |        |   |      |   |        |  |   |       
|Total non-interest expenses                         |  |      | 7,447  |   |      |   | 7,202  |  |   | 6,411 
|                                                    |  |      |        |   |      |   |        |  |   |       
|Income before income taxes                          |  |      | 1,912  |   |      |   | 2,211  |  |   | 2,105 
|Income tax provision                                |  |      | 727    |   |      |   | 823    |  |   | 759   
|                                                    |  |      |        |   |      |   |        |  |   |       
|Net income                                          |  |      | 1,185  |   |      |   | 1,388  |  |   | 1,346 
|                                                    |  |      |        |   |      |   |        |  |   |       
|Preferred dividends declared                        |  |      |       |   |      |   | 123    |  |   | 177   
|                                                    |  |      |        |   |      |   |        |  |   |       
|Net income available to common stockholders         |  | $    | 1,185  |   |      | $ | 1,265  |  | $ | 1,169 
|                                                    |  |      |        |   |      |   |        |  |   |       
|Basic earnings per share                            |  | $    | 0.62   |   |      | $ | 0.80   |  | $ | 0.81  
|Diluted earnings per share                          |  | $    | 0.61   |   |      | $ | 0.72   |  | $ | 0.70  
|Cash dividends declared per common share            |  | $    | 0.27   |   |      | $ | 0.25   |  | $ | 0.23  

See accompanying notes to consolidated financial statements.



39



---

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders Equity

Years Ended June 30, 2007, 2006 and 2005



|                                                                                           |  |                 |    |   |                                      |   |        |              |  |                                   |    |  |                                         |       |   |                                       |   |       |                   |  |   |                                                             |   |  |                          |        |   |  |   |      |   |  |   |        |  
|------------------------------------------------------------------------------------------ |  | --------------- | -- | - | ------------------------------------ | - | ------ | ------------ |  | --------------------------------- | -- |  | --------------------------------------- | ----- | - | ------------------------------------- | - | ----- | ----------------- |  | - | ----------------------------------------------------------- | - |  | ------------------------ | ------ | - |  | - | ---- | - |  | - | ------ | -
|(dollars in thousands exceptfor per share data)                                            |  | Preferred Stock |    |   | Additional Paid-In Capital Preferred |   |        | Common Stock |  | Additional Paid-In Capital Common |    |  | Temp. Equity ESOP Shares Subject to Put |       |   | Obligation Under DeferredCompensation |   |       | Retained Earnings |  |   | Accumulated Other Comprehensive Income (Loss), Net of
Taxes |   |  | TotalStockholdersEquity |       
|Balance at July 1, 2004                                                                    |  | $               | 1  |   |                                      | $ | 2,454  |              |  | $                                 | 14 |  | $                                       | 4,098 |   |                                       | $ | 1,404 |                   |  | $ | 172                                                         |   |  | $                        | 8,592  |   |  | $ | (355 | ) |  | $ | 16,380 |  
|Comprehensive income:                                                                      |  |                 |    |   |                                      |   |        |              |  |                                   |    |  |                                         |      |   |                                       |   |       |                   |  |   |                                                             |   |  |                          |        |   |  |   |      |   |  |   |        |  
|Net income                                                                                 |  |                 |   |   |                                      |   |       |              |  |                                   |   |  |                                         |      |   |                                       |   |      |                   |  |   |                                                            |   |  |                          | 1,346  |   |  |   |     |   |  |   | 1,346  |  
|Change in unrealized gains (losses) on Securities available-for-sale, net of taxes of $116 |  |                 |   |   |                                      |   |       |              |  |                                   |   |  |                                         |      |   |                                       |   |      |                   |  |   |                                                            |   |  |                          |       |   |  |   | 184  |   |  |   | 184    |  
|                                                                                           |  |                 |    |   |                                      |   |        |              |  |                                   |    |  |                                         |       |   |                                       |   |       |                   |  |   |                                                             |   |  |                          |        |   |  |   |      |   |  |   |        |  
|Comprehensive income                                                                       |  |                 |    |   |                                      |   |        |              |  |                                   |    |  |                                         |       |   |                                       |   |       |                   |  |   |                                                             |   |  |                          |        |   |  |   |      |   |  |   | 1,530  |  
|                                                                                           |  |                 |    |   |                                      |   |        |              |  |                                   |    |  |                                         |       |   |                                       |   |       |                   |  |   |                                                             |   |  |                          |        |   |  |   |      |   |  |   |        |  
|Preferred stock dividends ($1.875 per share)                                               |  |                 |   |   |                                      |   |       |              |  |                                   |   |  |                                         |      |   |                                       |   |      |                   |  |   |                                                            |   |  |                          | (177   | ) |  |   |     |   |  |   | (177   | )
|Common stock dividends ($.23 per share)                                                    |  |                 |   |   |                                      |   |       |              |  |                                   |   |  |                                         |      |   |                                       |   |      |                   |  |   |                                                            |   |  |                          | (323   | ) |  |   |     |   |  |   | (323   | )
|Options exercised and related tax benefit, 22,635 shares                                   |  |                 |   |   |                                      |   |       |              |  |                                   |   |  |                                         | 184   |   |                                       |   |      |                   |  |   |                                                            |   |  |                          |       |   |  |   |     |   |  |   | 184    |  
|Shares surrendered in exercise of stock options 4,387 shares                               |  |                 |    |   |                                      |   |        |              |  |                                   |    |  |                                         | (92   | ) |                                       |   |       |                   |  |   |                                                             |   |  |                          |        |   |  |   |      |   |  |   | (92    | )
|Purchase of shares under ESOP put option, 7,755 shares                                     |  |                 |    |   |                                      |   |        |              |  |                                   |    |  |                                         | (105  | ) |                                       |   |       |                   |  |   |                                                             |   |  |                          |        |   |  |   |      |   |  |   | (105   | )
|Transfer from temporary equity                                                             |  |                 |   |   |                                      |   |       |              |  |                                   |   |  |                                         | 138   |   |                                       |   | (138  | )                 |  |   |                                                            |   |  |                          |       |   |  |   |     |   |  |   |       |  
|Obligation under deferred compensation                                                     |  |                 |   |   |                                      |   |       |              |  |                                   |   |  |                                         |      |   |                                       |   |      |                   |  |   | 190                                                         |   |  |                          |        |   |  |   |      |   |  |   | 190    |  
|Conversion of Preferred to Common                                                          |  |                 |   |   |                                      |   | (109   | )            |  |                                   |   |  |                                         | 109   |   |                                       |   |      |                   |  |   |                                                            |   |  |                          |       |   |  |   |     |   |  |   |       |  
|                                                                                           |  |                 |    |   |                                      |   |        |              |  |                                   |    |  |                                         |       |   |                                       |   |       |                   |  |   |                                                             |   |  |                          |        |   |  |   |      |   |  |   |        |  
|Balance at June 30, 2005                                                                   |  | $               | 1  |   |                                      | $ | 2,345  |              |  | $                                 | 14 |  | $                                       | 4,332 |   |                                       | $ | 1,266 |                   |  | $ | 362                                                         |   |  | $                        | 9,438  |   |  | $ | (171 | ) |  | $ | 17,587 |  
|Comprehensive income:                                                                      |  |                 |    |   |                                      |   |        |              |  |                                   |    |  |                                         |       |   |                                       |   |       |                   |  |   |                                                             |   |  |                          |        |   |  |   |      |   |  |   |        |  
|Net income                                                                                 |  |                 |   |   |                                      |   |       |              |  |                                   |   |  |                                         |      |   |                                       |   |      |                   |  |   |                                                            |   |  |                          | 1,388  |   |  |   |     |   |  |   | 1,388  |  
|Change in unrealized gains (losses) on Securities available-for-sale, net of taxes of $166 |  |                 |   |   |                                      |   |       |              |  |                                   |   |  |                                         |      |   |                                       |   |      |                   |  |   |                                                            |   |  |                          |       |   |  |   | (263 | ) |  |   | (263   | )
|Reclassification adjustment for gains included in net income, net of tax of $0.6           |  |                 |    |   |                                      |   |        |              |  |                                   |    |  |                                         |       |   |                                       |   |       |                   |  |   |                                                             |   |  |                          |        |   |  |   | (1   | ) |  |   | (1     | )
|                                                                                           |  |                 |    |   |                                      |   |        |              |  |                                   |    |  |                                         |       |   |                                       |   |       |                   |  |   |                                                             |   |  |                          |        |   |  |   |      |   |  |   |        |  
|Comprehensive income                                                                       |  |                 |    |   |                                      |   |        |              |  |                                   |    |  |                                         |       |   |                                       |   |       |                   |  |   |                                                             |   |  |                          |        |   |  |   |      |   |  |   | 1,124  |  
|                                                                                           |  |                 |    |   |                                      |   |        |              |  |                                   |    |  |                                         |       |   |                                       |   |       |                   |  |   |                                                             |   |  |                          |        |   |  |   |      |   |  |   |        |  
|Preferred stock dividends ($1.41 per share)                                                |  |                 |   |   |                                      |   |       |              |  |                                   |   |  |                                         |      |   |                                       |   |      |                   |  |   |                                                            |   |  |                          | (123   | ) |  |   |     |   |  |   | (123   | )
|Common stock dividends ($0.25 per share)                                                   |  |                 |   |   |                                      |   |       |              |  |                                   |   |  |                                         |      |   |                                       |   |      |                   |  |   |                                                            |   |  |                          | (386   | ) |  |   |     |   |  |   | (386   | )
|Compensation under stock-based benefit plan                                                |  |                 |   |   |                                      |   |       |              |  |                                   |   |  |                                         | 89    |   |                                       |   |      |                   |  |   | (72                                                         | ) |  |                          |       |   |  |   |     |   |  |   | 17     |  
|Options exercised and related tax benefit, 36,353 shares                                   |  |                 |   |   |                                      |   |       |              |  |                                   |   |  |                                         | 189   |   |                                       |   |      |                   |  |   |                                                            |   |  |                          |       |   |  |   |     |   |  |   | 189    |  
|Shares surrendered in exercise of stock options, 5,649shares                               |  |                 |   |   |                                      |   |       |              |  |                                   |   |  |                                         | (59   | ) |                                       |   |      |                   |  |   |                                                            |   |  |                          |       |   |  |   |     |   |  |   | (59    | )
|Purchase of shares under ESOP put option, 1,938 shares                                     |  |                 |   |   |                                      |   |       |              |  |                                   |   |  |                                         | (23   | ) |                                       |   |      |                   |  |   |                                                            |   |  |                          |        |   |  |   |      |   |  |   | (23    | )
|Transfer from temporary equity                                                             |  |                 |   |   |                                      |   |       |              |  |                                   |   |  |                                         | 145   |   |                                       |   | (145  | )                 |  |   |                                                            |   |  |                          |       |   |  |   |     |   |  |   |       |  
|Obligation under deferred compensation                                                     |  |                 |   |   |                                      |   |       |              |  |                                   |   |  |                                         |      |   |                                       |   |      |                   |  |   | 27                                                          |   |  |                          |        |   |  |   |      |   |  |   | 27     |  
|Conversion of Preferred to Common                                                          |  |                 | (1 | ) |                                      |   | (2,280 | )            |  |                                   | 4  |  |                                         | 2,277 |   |                                       |   |      |                   |  |   |                                                            |   |  |                          |       |   |  |   |     |   |  |   |       |  
|Conversion of Preferred stock to cash                                                      |  |                 |   |   |                                      |   | (65    | )            |  |                                   |   |  |                                         |      |   |                                       |   |      |                   |  |   |                                                            |   |  |                          |        |   |  |   |      |   |  |   | (65    | )
|                                                                                           |  |                 |    |   |                                      |   |        |              |  |                                   |    |  |                                         |       |   |                                       |   |       |                   |  |   |                                                             |   |  |                          |        |   |  |   |      |   |  |   |        |  
|Balance at June 30, 2006                                                                   |  | $               |   |   |                                      | $ |       |              |  | $                                 | 18 |  | $                                       | 6,950 |   |                                       | $ | 1,121 |                   |  | $ | 317                                                         |   |  | $                        | 10,317 |   |  | $ | (435 | ) |  | $ | 18,288 |  



(continued on next
page)



40



---

|                                                                                          |  |   |   |  |   |   |  |   |    |  |   |       |   |  |   |       |   |  |   |     |  |   |        |   |  |   |      |   |  |   |        |  
|----------------------------------------------------------------------------------------- |  | - | - |  | - | - |  | - | -- |  | - | ----- | - |  | - | ----- | - |  | - | --- |  | - | ------ | - |  | - | ---- | - |  | - | ------ | -
|Balance at June 30, 2006                                                                  |  | $ |  |  | $ |  |  | $ | 18 |  | $ | 6,950 |   |  | $ | 1,121 |   |  | $ | 317 |  | $ | 10,317 |   |  | $ | (435 | ) |  | $ | 18,288 |  
|Comprehensive income:                                                                     |  |   |   |  |   |   |  |   |    |  |   |       |   |  |   |       |   |  |   |     |  |   |        |   |  |   |      |   |  |   |        |  
|Net income                                                                                |  |   |  |  |   |  |  |   |   |  |   |      |   |  |   |      |   |  |   |    |  |   | 1,185  |   |  |   |     |   |  |   | 1,185  |  
|Change in unrealized gains (losses) on Securities available-for-sale, net of taxes of $76 |  |   |  |  |   |  |  |   |   |  |   |      |   |  |   |      |   |  |   |    |  |   |       |   |  |   | 122  |   |  |   | 122    |  
|                                                                                          |  |   |   |  |   |   |  |   |    |  |   |       |   |  |   |       |   |  |   |     |  |   |        |   |  |   |      |   |  |   |        |  
|Comprehensive income                                                                      |  |   |   |  |   |   |  |   |    |  |   |       |   |  |   |       |   |  |   |     |  |   |        |   |  |   |      |   |  |   | 1,307  |  
|                                                                                          |  |   |   |  |   |   |  |   |    |  |   |       |   |  |   |       |   |  |   |     |  |   |        |   |  |   |      |   |  |   |        |  
|Common stock dividends ($0.27 per share)                                                  |  |   |  |  |   |  |  |   |   |  |   |      |   |  |   |      |   |  |   |    |  |   | (508   | ) |  |   |     |   |  |   | (508   | )
|Compensation under stock-based benefit plan                                               |  |   |  |  |   |  |  |   |   |  |   | 105   |   |  |   |      |   |  |   |     |  |   |       |   |  |   |     |   |  |   | 105    |  
|Options exercised and related tax benefit, 90,623 shares                                  |  |   |  |  |   |  |  |   |   |  |   | 538   |   |  |   |      |   |  |   |    |  |   |       |   |  |   |     |   |  |   | 538    |  
|Shares surrendered in exercise of stock options, 13,831shares                             |  |   |  |  |   |  |  |   |   |  |   | (152  | ) |  |   |      |   |  |   |    |  |   |       |   |  |   |     |   |  |   | (152   | )
|Purchase of shares under ESOP put option, 29,992 shares                                   |  |   |  |  |   |  |  |   |   |  |   | (690  | ) |  |   |      |   |  |   |    |  |   |        |   |  |   |      |   |  |   | (690   | )
|Transfer from temporary equity                                                            |  |   |  |  |   |  |  |   |   |  |   | 186   |   |  |   | (186  | ) |  |   |    |  |   |       |   |  |   |     |   |  |   |       |  
|Obligation under deferred compensation                                                    |  |   |  |  |   |  |  |   |   |  |   |      |   |  |   |      |   |  |   | 28  |  |   |        |   |  |   |      |   |  |   | 28     |  
|                                                                                          |  |   |   |  |   |   |  |   |    |  |   |       |   |  |   |       |   |  |   |     |  |   |        |   |  |   |      |   |  |   |        |  
|Balance at June 30, 2007                                                                  |  | $ |  |  | $ |  |  | $ | 18 |  | $ | 6,937 |   |  | $ | 935   |   |  | $ | 345 |  | $ | 10,994 |   |  | $ | (313 | ) |  | $ | 18,916 |  
|                                                                                          |  |   |   |  |   |   |  |   |    |  |   |       |   |  |   |       |   |  |   |     |  |   |        |   |  |   |      |   |  |   |        |  

See accompanying notes to consolidated financial statements.



41



---

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended June 30, 2007, 2006 and 2005



|                                                                                                                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|(in thousands)                                                                                                                                                            |  | 2007 |         |   | 2006 |   |         | 2005 | 
|Cash flows from operating activities:                                                                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Net income                                                                                                                                                                |  | $    | 1,185   |   |      | $ | 1,388   |      |  | $ | 1,346   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                                                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Depreciation                                                                                                                                                              |  |      | 316     |   |      |   | 312     |      |  |   | 271     |  
|Provision for losses on loans                                                                                                                                             |  |      | 430     |   |      |   | 65      |      |  |   | 225     |  
|Non-cash compensation under stock-based benefit plans                                                                                                                     |  |      | 116     |   |      |   | 59      |      |  |   | 48      |  
|Income tax benefit from exercise of stock options                                                                                                                         |  |      | 48      |   |      |   | 9       |      |  |   | 45      |  
|Amortization of core deposit intangible                                                                                                                                   |  |      | 51      |   |      |   | 51      |      |  |   | 51      |  
|Amortization of premiums and discounts, net                                                                                                                               |  |      | 42      |   |      |   | 28      |      |  |   | (5      | )
|Income from bank-owned life insurance                                                                                                                                     |  |      | (68     | ) |      |   | (59     | )    |  |   | (59     | )
|Amortization of deferred loan origination fees, net of costs                                                                                                              |  |      | (34     | ) |      |   | (43     | )    |  |   | (105    | )
|Gain on sale of securities available for sale                                                                                                                             |  |      |        |   |      |   | (2      | )    |  |   |        |  
|Gain on sale of office building                                                                                                                                           |  |      | (14     | ) |      |   | (64     | )    |  |   |        |  
|Loss on sale of repossessed asset                                                                                                                                         |  |      | 9       |   |      |   |        |      |  |   |        |  
|(Increase) decrease in accrued interest and other assets                                                                                                                  |  |      | (165    | ) |      |   | 24      |      |  |   | 80      |  
|Increase (decrease) in accrued expenses and other liabilities                                                                                                             |  |      | 156     |   |      |   | 327     |      |  |   | (371    | )
|                                                                                                                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                                                                                                                 |  | $    | 2,072   |   |      | $ | 2,095   |      |  | $ | 1,526   |  
|                                                                                                                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Cash flows from investing activities:                                                                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Proceeds from maturing time deposit investments                                                                                                                           |  |      | 600     |   |      |   |        |      |  |   | 293     |  
|Purchase of securities available for sale                                                                                                                                 |  |      | (20     | ) |      |   | (10     | )    |  |   | (2,006  | )
|Proceeds from sale of securities available for sale                                                                                                                       |  |      | 92      |   |      |   | 302     |      |  |   |        |  
|Proceeds from maturing securities available for sale and principal payments on mortgage-backed securities available for sale                                              |  |      | 3,612   |   |      |   | 7,356   |      |  |   | 6,653   |  
|Loan principal disbursements, net of repayments                                                                                                                           |  |      | (28,498 | ) |      |   | (26,838 | )    |  |   | (9,825  | )
|Purchase of consumer loans                                                                                                                                                |  |      | (1,577  | ) |      |   | (2,726  | )    |  |   |        |  
|Proceeds from sale of repossessed assets                                                                                                                                  |  |      | 15      |   |      |   |        |      |  |   |        |  
|(Increase) decrease in investments required by law                                                                                                                        |  |      | (183    | ) |      |   | (739    | )    |  |   | 83      |  
|Cash received in sale of property and equipment                                                                                                                           |  |      | 50      |   |      |   | 154     |      |  |   |        |  
|Purchases of property and equipment                                                                                                                                       |  |      | (2,651  | ) |      |   | (992    | )    |  |   | (241    | )
|                                                                                                                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                                                                                                                     |  | $    | (28,560 | ) |      | $ | (23,493 | )    |  | $ | (5,043  | )
|                                                                                                                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                                                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in deposits                                                                                                                                       |  | $    | 22,905  |   |      | $ | 2,603   |      |  | $ | (3,627  | )
|Net increase (decrease) in advance payments by borrowers                                                                                                                  |  |      | (43     | ) |      |   | 6       |      |  |   | (127    | )
|Proceeds from long-term borrowings                                                                                                                                        |  |      | 8,000   |   |      |   | 20,000  |      |  |   | 2,000   |  
|Repayments of long-term borrowings                                                                                                                                        |  |      | (4,250  | ) |      |   | (5,183  | )    |  |   | (4,667  | )
|Proceeds from the issuance of junior subordinated debentures                                                                                                              |  |      |        |   |      |   | 5,000   |      |  |   |        |  
|Cash received in exercise of stock options                                                                                                                                |  |      | 338     |   |      |   | 121     |      |  |   | 47      |  
|Repurchase of common stock due to ESOP put options                                                                                                                        |  |      | (690    | ) |      |   | (23     | )    |  |   | (105    | )
|Dividends paid                                                                                                                                                            |  |      | (490    | ) |      |   | (521    | )    |  |   | (500    | )
|Repurchase of preferred stock                                                                                                                                             |  |      |        |   |      |   | (65     | )    |  |   |        |  
|                                                                                                                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) financing activities                                                                                                                       |  |      | 25,770  |   |      |   | 21,938  |      |  |   | (6,979  | )
|                                                                                                                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                                                                                                      |  |      | (718    | ) |      |   | 540     |      |  |   | (10,496 | )
|Cash and cash equivalents at beginning of year                                                                                                                            |  |      | 8,188   |   |      |   | 7,648   |      |  |   | 18,144  |  
|                                                                                                                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                                                                                                                  |  | $    | 7,470   |   |      | $ | 8,188   |      |  | $ | 7,648   |  
|Supplemental cash flow information:                                                                                                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                                                                                                          |  |      |        
|Interest paid                                                                                                                                                             |  | $    | 7,351   |   |      | $ | 4,940   |      |  | $ | 3,735   |  
|Income taxes paid                                                                                                                                                         |  |      | 837     |   |      |   | 790     |      |  |   | 656     |  
|Non-cash equity transactions:                                                                                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Conversion of 91,297 preferred shares to 363,878 common shares and 4,345 preferred shares to 17,348 common shares in the years ended
June 30, 2006 and 2005, respectively |  |      |        |   |      |   | 2,281   |      |  |   | 109     |  

See accompanying notes to consolidated financial statements.



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(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. (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 origination and servicing of commercial finance leases. The primary business of Financial is the sale of consumer investment products.

Announced
Transaction

As announced on March 19, 2007, Patapsco Bancorp, Inc. executed a definitive merger agreement with Bradford Bancorp, Inc whereby the
Company will be merged with and into Bradford Bancorp. The transaction is expected to be completed in the fourth calendar quarter of 2007 and is subject to the approval of the members of Bradford Bank MHC, the shareholders of Patapsco Bancorp and
regulatory authorities.

In connection with the merger, Bradford Banks current mutual holding company, Bradford Bank MHC, which owns 100% of Bradford
Bancorps outstanding shares, will undergo a full mutual-to-stock conversion and stock offering. Under the terms of the transaction, shareholders of Patapsco Bancorp will be entitled to receive either $23.00 in cash or 2.3 shares of Bradford
Bancorp common stock (assuming a $10.00 per share initial public offering price) in exchange for each share of Patapsco Bancorp common stock. Based upon the $23.00 per share price, the consideration is approximately 278% of tangible book value, 229%
of book value and 30 times trailing twelve months earnings, computed as of the day of the announcement.

Basis of Presentation

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

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

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

Significant concentrations of credit risk

Most of the Companys activities are with customers in the Greater
Baltimore Metropolitan Area. Note 2 discusses the types of securities the Company invests in. Note 3 discuses the types of lending that the Company engages in. The Companys largest lending relationship is $2.7 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.



43



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Cash and Cash Equivalents

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

Securities

Debt securities that the Company has the positive intent
and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. As the Company does not engage in securities trading, the balance of its debt and equity securities are classified as available-for-sale and recorded
at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders equity, net of tax effects. All of the Companys securities are classified as available-for sale at June 30,
2007 and 2006.

If a decline in value of an individual security classified as held-to-maturity or available-for-sale is judged to be other than temporary,
the cost basis of that security is reduced to its fair value and the amount of the write-down is included in earnings. Fair value is determined based on bid quotations received from securities dealers. In estimating other-than-temporary impairment
losses, management considers the length of time and extent to which fair value has been less than cost, the financial condition and near term prospects of the issuer and the intent and ability of the Company to hold the securities until the earlier
of market price recovery or maturity. For purposes of computing realized gains or losses on the sales of securities, cost is determined using the specific identification method. Premiums and discounts on securities are amortized over the term of the
security using the interest method.

Investments Securities Required by Law

Investment securities required by law represent Federal Reserve Bank of Richmond and Federal Home Loan Bank of Atlanta stock, which are considered restricted as to marketability.

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, 2007 and 2006.

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 collectibility 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 collectibility 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 collectibility of the total contractual principal and interest is no longer in doubt.



44



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Loan Fees

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

Allowance for Loan Losses

The allowance for loan losses (allowance) represents an amount, that in the judgment of management,
will be adequate to absorb probable losses on outstanding loans and leases that may become uncollectible. The allowance represents an estimate made based upon two principles of accounting: (1) Statement of Financial Accounting Standards
(SFAS) No.5 Accounting for Contingencies, that requires losses to be accrued when their occurrence is probable and estimable, and (2) SFAS No. 114 Accounting by Creditors for Impairment of a Loan, that
requires losses be accrued when it is probable that the lender will not collect all principal and interest when due under the original term 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 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 when 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, 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.



45



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Foreclosed Real Estate and Other Repossessed Assets

Foreclosed real estate and other repossessed assets are initially recorded at the estimated fair value, net of estimated selling costs, and subsequently at the lower of carrying cost or fair value less estimated costs
to sell. Costs relating to holding such property are charged against income in the current period, while costs relating to improving such real estate are capitalized until a salable condition is reached. At June 30, 2007, the Company had no
foreclosed real estate and other repossessed assets of $5,000. There were no foreclosed real estate or other repossessed assets at June 30, 2006.

Deferred Income Taxes

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

Earnings per Share of Common Stock

Basic earnings per 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. No adjustments were made to net income (numerator) for all periods presented.



|                                           |  |               |       |               |   |               |  |         |       |       |   |         |  |   |       |  |   |      
|------------------------------------------ |  | ------------- | ----- | ------------- | - | ------------- |  | ------- | ----- | ----- | - | ------- |  | - | ----- |  | - | -----
|                                           |  | Year Ended   
|(in thousands, except per share data)      |  | June 30, 2007 |       | June 30, 2006 |   | June 30, 2005
|                                           |  | Basic         |       | Diluted       |   | Basic         |  | Diluted |       | Basic |   | Diluted
|Net income                                 |  | $             | 1,185 |               | $ | 1,185         |  | $       | 1,388 |       | $ | 1,388   |  | $ | 1,346 |  | $ | 1,346
|Preferred Stock Dividends                  |  |               |      |               |   |              |  |         | 123   |       |   |        |  |   | 177   |  |   |     
|                                           |  |               |       |               |   |               |  |         |       |       |   |         |  |   |       |  |   |      
|Net Income Available to Common Stock       |  | $             | 1,185 |               | $ | 1,185         |  | $       | 1,265 |       | $ | 1,388   |  | $ | 1,169 |  | $ | 1,346
|                                           |  |               |       |               |   |              
|Weighted average common shares outstanding |  |               | 1,906 |               |   | 1,906         |  |         | 1,573 |       |   | 1,573   |  |   | 1,441 |  |   | 1,441
|                                           |  |               |       |               |   |              
|Diluted securities:                        |  |               |       |               |   |               |  |         |       |       |   |         |  |   |       |  |   |      
|Convertible preferred stock                |  |               |      |               |   |              |  |         |      |       |   | 265     |  |   |      |  |   | 374  
|Stock options                              |  |               |      |               |   | 48            |  |         |      |       |   | 81      |  |   |      |  |   | 108  
|                                           |  |               |       |               |   |               |  |         |       |       |   |         |  |   |       |  |   |      
|Adjusted weighted average shares           |  |               | 1,906 |               |   | 1,954         |  |         | 1,573 |       |   | 1,919   |  |   | 1,441 |  |   | 1,923
|                                           |  |               |       |               |   |               |  |         |       |       |   |         |  |   |       |  |   |      
|Per share amount                           |  | $             | 0.62  |               | $ | 0.61          |  | $       | 0.80  |       | $ | 0.72    |  | $ | 0.81  |  | $ | 0.70 
|                                           |  |               |       |               |   |               |  |         |       |       |   |         |  |   |       |  |   |      

Stock-Based Compensation

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



46



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$5,600 in the year ended June 30, 2007 for the expense related to the final scheduled vesting of all outstanding stock option awards. There were no
stock options granted in the year ended June 30, 2007. Any additional impact of adopting the new accounting standard will be determined by share-based payments granted in future periods.

Prior to revision, Statement 123 allowed companies to account for stock-based compensation either under the new provisions of Statement 123 or under the provisions of
Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, but required pro forma disclosure in the footnotes to the financial statements as if the measurement provisions of Statement 123 had been adopted.
The Company accounted for its stock-based compensation in accordance with APB 25, through June 30, 2006. Accordingly, no stock option based employee compensation cost is reflected in net income for the years ended June 30 2006 and 2005, as
all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the company had applied the
fair value recognition provisions of Statement 123.



|                                                                                                                                             |  |                     |       |   |      |   |       |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ----- | - | ---- | - | ----- | -
|(in thousands except for per share data)                                                                                                     |  | Year Ended June 30, |      
|                                                                                                                                             |  | 2006                |       |   | 2005 |  
|Net Income as reported                                                                                                                       |  | $                   | 1,388 |   |      | $ | 1,346 |  
|                                                                                                                                             |  |                    
|Amounts recognized as expense in financial statements, net of related tax effects                                                            |  |                     | 22    |   |      |   | 30    |  
|                                                                                                                                             |  |                    
|Deduct: Total stock option based employee compensation expense determined under fair value method for all awards, net of related tax effects |  |                     | (28   | ) |      |   | (57   | )
|                                                                                                                                             |  |                     |       |   |      |   |       |  
|Pro forma Net Income                                                                                                                         |  | $                   | 1,382 |   |      | $ | 1,319 |  
|                                                                                                                                             |  |                    
|Earnings per share                                                                                                                           |  |                     |       |   |      |   |       |  
|Basic - as reported                                                                                                                          |  | $                   | 0.80  |   |      | $ | 0.81  |  
|Basic - pro forma                                                                                                                            |  | $                   | 0.80  |   |      | $ | 0.79  |  
|                                                                                                                                             |  |                    
|Diluted - as reported                                                                                                                        |  | $                   | 0.72  |   |      | $ | 0.70  |  
|Diluted - pro forma                                                                                                                          |  | $                   | 0.72  |   |      | $ | 0.69  |  

Comprehensive Income

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

Goodwill and Intangible Assets

Goodwill is not amortized, but rather it 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.
The Company amortizes such assets 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.



47



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Amortizable intangible assets were composed of the following:



|                                                               |  |                      |     |                         |   |                      |  |                         |     |  |   |    
|-------------------------------------------------------------- |  | -------------------- | --- | ----------------------- | - | -------------------- |  | ----------------------- | --- |  | - | ---
|                                                               |  | June 30, 2007        |     | June 30, 2006          
|(Dollars in Thousands)                                         |  | Gross CarryingAmount |     | AccumulatedAmortization |   | Gross CarryingAmount |  | AccumulatedAmortization
|Amortizable intangible assets, acquisition of deposit accounts |  | $                    | 516 |                         | $ | 168                  |  | $                       | 516 |  | $ | 116
|                                                               |  |                      |     |                         |   |                      |  |                         |     |  |   |    

Amortization expense was $51,000 for the year ended June 30, 2007, 2006 and 2005 and is scheduled to be
$51,000 for each of the next five years

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.

Off-Balance Sheet Credit Related Financial Instruments

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.

New Accounting Pronouncements

In February 2006, the
FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments. SFAS No. 155 amends FASB Statement No. 133 and FASB Statement No. 140, and improves the financial reporting of certain hybrid
financial instruments by requiring more consistent accounting that eliminates exemptions and provides a means to simplify the accounting for these instruments. Specifically, SFAS No. 155 allows financial instruments that have embedded
derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 is effective for all financial
instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. Management does not believe the adoption of SFAS No. 155 will have a material impact on the Companys
consolidated financial position and results of operations.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial
Assets  An Amendment of FASB Statement No. 140 (SFAS 156). SFAS No. 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if
practicable. The statement permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. SFAS No. 156 is effective as of the beginning of an entitys first fiscal year that
begins after September 15, 2006. The Company does not believe that the adoption of SFAS No. 156 will have a significant effect on its consolidated financial statements.



48



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In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that companies recognize in their financial statements the impact of a tax position, if
that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the
change in accounting principle recorded as an adjustment to opening retained earnings. The Company does not believe that the adoption of FIN 48 will have a significant effect on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market
in which the reporting entity operates. This Statement does not require any new fair value measurements, but rather, it provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value.
This Statement is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. The Company does not expect that the adoption of this Statement will have a material impact on its financial position, results of
operations or cash flows.

At its September 2006 meeting, the Emerging Issues Task Force (EITF) reached a final consensus on Issue 06-04,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. The consensus stipulates that an agreement by an employer to share a portion of the proceeds of a life
insurance policy with an employee during the postretirement period is a postretirement benefit arrangement required to be accounted for under SFAS No. 106 or Accounting Principles Board Opinion (APB) No. 12, Omnibus
Opinion1967. The consensus concludes that the purchase of a split-dollar life insurance policy does not constitute a settlement under SFAS No. 106 and, therefore, a liability for the postretirement obligation must be recognized
under SFAS No. 106 if the benefit is offered under an arrangement that constitutes a plan or under APB No. 12, if it is not part of a plan. Issue 06-04 is effective for annual or interim reporting periods beginning after December 15,
2007. The Company is currently assessing the financial statement impact of implementing EITF 06-04.

In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement permits entities to choose, at specified dates, to measure eligible items at fair value. This election is referred to as the fair value
option and must generally be applied on an instrument by instrument basis; is irrevocable, unless a new election occurs; and is applied only to an entire instrument, not to only specified risks, specific cash flows, or portions of an instrument. A
business entity that elects the fair value option, must report any unrealized gains and losses on the items involved, in earnings at each subsequent reporting date. The statement also establishes presentation and disclosure requirements designed to
facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The effective date of SFAS No. 159 is for fiscal years beginning after November 15, 2007 unless early
adoption is elected. The Company does not expect that the adoption of this Statement will have a material impact on its financial position.



49



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(2) Securities Available for Sale

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



|                           |  |               |        |                 |   |                  |  |           |     |  |   |       
|-------------------------- |  | ------------- | ------ | --------------- | - | ---------------- |  | --------- | --- |  | - | ------
|                           |  | 2007         
|(In thousands)             |  | AmortizedCost |        | UnrealizedGains |   | UnrealizedLosses |  | Fairvalue
|Corporate Bonds            |  | $             | 2,000  |                 | $ |                 |  | $         | 87  |  | $ | 1,913 
|U.S. Government agencies   |  |               | 4,746  |                 |   |                 |  |           | 70  |  |   | 4,676 
|Mortgage-backed securities |  |               | 6,911  |                 |   | 5                |  |           | 358 |  |   | 6,558 
|                           |  |               |        |                 |   |                  |  |           |     |  |   |       
|                           |  | $             | 13,657 |                 | $ | 5                |  | $         | 515 |  | $ | 13,147
|                           |  |               |        |                 |   |                  |  |           |     |  |   |       
|(In thousands)             |  |              
|                           |  | 2006         
|Equity securities          |  | $             | 72     |                 | $ | 6                |  | $         |    |  | $ | 78    
|Corporate Bonds            |  |               | 2,000  |                 |   |                 |  |           | 97  |  |   | 1,903 
|U.S. Government agencies   |  |               | 6,749  |                 |   |                 |  |           | 190 |  |   | 6,559 
|Mortgage-backed securities |  |               | 8,554  |                 |   | 6                |  |           | 433 |  |   | 8,127 
|                           |  |               |        |                 |   |                  |  |           |     |  |   |       
|                           |  | $             | 17,375 |                 | $ | 12               |  | $         | 720 |  | $ | 16,667
|                           |  |               |        |                 |   |                  |  |           |     |  |   |       

Mortgage-backed securities are allocated based on scheduled maturities. The scheduled maturities of investments
available for sale at June 30, 2007 are as follows:



|                                 |  |               |        |           |   |       
|-------------------------------- |  | ------------- | ------ | --------- | - | ------
|                                 |  | 2007         
|(In thousands)                   |  | AmortizedCost |        | FairValue
|Due in less than one year        |  | $             | 1,000  |           | $ | 998   
|Due in one to five years         |  |               | 3,496  |           |   | 3,416 
|Due after five through ten years |  |               | 3,075  |           |   | 2,930 
|Due after ten years              |  |               | 6,086  |           |   | 5,803 
|                                 |  |               |        |           |   |       
|                                 |  | $             | 13,657 |           | $ | 13,147
|                                 |  |               |        |           |   |       

The Company sold $92,000 of equity securities in the year ended June 30, 2007. No gain or loss was
recognized. In fiscal year 2006, the Company received $302,000 from the sale of a corporate bond resulting in a gross realized gain of $2,000. There were no securities sold in 2005.

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, 2007.



|                                      |  |                     |       |                  |                   |     |           |       |                  |        |  |           |      |                  |  |   |        |  |   |      |  
|------------------------------------- |  | ------------------- | ----- | ---------------- | ----------------- | --- | --------- | ----- | ---------------- | ------ |  | --------- | ---- | ---------------- |  | - | ------ |  | - | ---- | -
|                                      |  | Less than 12 Months |       |                  | 12 Months or More |     |           | Total |                 
|                                      |  | FairValue           |       | UnrealizedLosses |                   |     | FairValue |       | UnrealizedLosses |        |  | FairValue |      | UnrealizedLosses | 
|                                      |  | (In Thousands)      |      
|U.S. Government agencies              |  | $                   |      |                  | $                 |    |           |       | $                | 4,676  |  | $         | (70  | )                |  | $ | 4,676  |  | $ | (70  | )
|Corporate Bonds                       |  |                     |      |                  |                   |    |           |       |                  | 1,913  |  |           | (87  | )                |  |   | 1,913  |  |   | (87  | )
|Mortgage-backed securities            |  |                     | 1,097 |                  |                   | (13 | )         |       |                  | 5,319  |  |           | (345 | )                |  |   | 6,416  |  |   | (358 | )
|                                      |  |                     |       |                  |                   |     |           |       |                  |        |  |           |      |                  |  |   |        |  |   |      |  
|Total Temporarily Impaired Securities |  | $                   | 1,097 |                  | $                 | (13 | )         |       | $                | 11,908 |  | $         | (502 | )                |  | $ | 13,005 |  | $ | (515 | )
|                                      |  |                     |       |                  |                   |     |           |       |                  |        |  |           |      |                  |  |   |        |  |   |      |  

At June 30, 2007, the Company had 15 securities in an unrealized loss position. Unrealized losses detailed
above relate primarily to investment grade corporate securities and mortgage-backed securities issued by FNMA, FHLMC and GNMA. The decline in fair value is considered temporary and is due only to interest rate fluctuations. The Company has the
intent and ability to hold such investments until maturity or market price recovery. None of the individual unrealized losses are significant.



50



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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, 2006.



|                                      |  |                     |       |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|------------------------------------- |  | ------------------- | ----- | ----------------- | - | --------- |  | ---------------- | ------ | --------- | - | ---------------- |  | - | ------ |  | - | ---
|                                      |  | Less than 12 Months |       | 12 Months or More |   | Total    
|                                      |  | FairValue           |       | UnrealizedLosses  |   | FairValue |  | UnrealizedLosses |        | FairValue |   | UnrealizedLosses
|                                      |  | (In Thousands)     
|U.S. Government agencies              |  | $                   |      |                   | $ |          |  | $                | 6,559  |           | $ | 190              |  | $ | 6,559  |  | $ | 190
|Corporate Bonds                       |  |                     |      |                   |   |          |  |                  | 1,903  |           |   | 97               |  |   | 1,903  |  |   | 97 
|Mortgage-backed securities            |  |                     | 1,976 |                   |   | 32        |  |                  | 5,963  |           |   | 401              |  |   | 7,939  |  |   | 433
|                                      |  |                     |       |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|Total Temporarily Impaired Securities |  | $                   | 1,976 |                   | $ | 32        |  | $                | 14,425 |           | $ | 688              |  | $ | 16,401 |  | $ | 720
|                                      |  |                     |       |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    

At June 30, 2006, the Company had 17 securities in an unrealized loss position. Unrealized losses detailed
above relate primarily to U.S. Government agency debt and mortgage-backed securities. The decline in fair value is considered temporary and is due only to interest rate fluctuations. The Company has the intent and ability to hold such investments
until maturity or market price recovery. None of the individual unrealized losses are significant.

(3) Loans Receivable

Loans receivable are summarized as follows as of June 30:



|                                             |  |      |         |   |      |   |         |  
|-------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(In thousands)                               |  | 2007 |         |   | 2006 |  
|Real estate secured by first mortgage:       |  |      |         |   |      |   |         |  
|Residential                                  |  | $    | 74,332  |   |      | $ | 80,693  |  
|Commercial                                   |  |      | 36,302  |   |      |   | 29,712  |  
|Construction, net of loans in process        |  |      | 23,907  |   |      |   | 13,913  |  
|                                             |  |      |         |   |      |   |         |  
|                                             |  |      | 134,541 |   |      |   | 124,318 |  
|                                             |  |     
|Home improvement loans                       |  |      | 12,481  |   |      |   | 11,442  |  
|Home equity loans                            |  |      | 4,964   |   |      |   | 4,400   |  
|Other Consumer loans                         |  |      | 2,955   |   |      |   | 2,483   |  
|Commercial loans                             |  |      | 52,711  |   |      |   | 34,827  |  
|Commercial leases                            |  |      | 17,366  |   |      |   | 21,409  |  
|                                             |  |      |         |   |      |   |         |  
|                                             |  |      | 225,018 |   |      |   | 198,879 |  
|                                             |  |     
|Less:                                        |  |      |         |   |      |   |         |  
|Deferred loan origination fees, net of costs |  |      | 240     |   |      |   | 178     |  
|Unearned interest consumer loans             |  |      | 1,147   |   |      |   | 1,245   |  
|Unearned interest commercial leases          |  |      | 2,480   |   |      |   | 6,091   |  
|Purchase accounting premium, net             |  |      | (198    | ) |      |   | (224    | )
|Allowance for loan losses                    |  |      | 1,110   |   |      |   | 1,000   |  
|                                             |  |      |         |   |      |   |         |  
|Loans receivable, net                        |  | $    | 220,239 |   |      | $ | 190,589 |  
|                                             |  |      |         |   |      |   |         |  

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.

The total recorded investment in impaired loans
was $972,000, $244,000 and $38,000 at June 30, 2007, 2006 and 2005 respectively. Average recorded investment in impaired loans during 2007, 2006 and 2005 was $877,000, $169,000, and $560,000, respectively. There was an allocated allowance for
losses related to those loans of



51



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$200,000, $169,000, and $35,000 at June 30, 2007, 2006 and 2005, respectively. The amount of interest that would have been recorded on non-accrual loans
at June 30, 2007, 2006 and 2005, respectively had the loans performed in accordance with their terms was approximately $41,000, $42,000 and $4,000, respectively. The actual interest income recorded on these loans during 2007, 2006 and 2005 was
$164,000, $17,000 and $3,000, respectively. The Company is not obligated to lend any additional monies pertaining to the aforementioned impaired and non-accrual loans.

Loans on which the accrual of interest has been discontinued amounted to $482,000, $244,000, and $38,000 at June 30, 2007, 2006, and 2005, respectively. The Company had no loan balances past due 90 days or more
accruing interest at June 30, 2007, 2006 and 2005.

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



|                              |  |      |       |   |      |   |       |      |  |   |      |  
|----------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ---- | -
|(In thousands)                |  | 2007 |       |   | 2006 |   |       | 2005 | 
|Balance at beginning of year  |  | $    | 1,000 |   |      | $ | 945   |      |  | $ | 936  |  
|Provision for losses on loans |  |      | 430   |   |      |   | 65    |      |  |   | 225  |  
|Charge-offs                   |  |      | (476  | ) |      |   | (186  | )    |  |   | (332 | )
|Recoveries                    |  |      | 156   |   |      |   | 176   |      |  |   | 116  |  
|                              |  |      |       |   |      |   |       |      |  |   |      |  
|Balance at end of year        |  | $    | 1,110 |   |      | $ | 1,000 |      |  | $ | 945  |  
|                              |  |      |       |   |      |   |       |      |  |   |      |  

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 savings 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, 2007 and 2006 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, 2007
|(In thousands)                      |  | Fixed rate    |       | Floating rate
|Commercial business and lease loans |  | $             | 2,910 |               | $ |      
|Real Estate Loans                   |  |               | 4,894 |               |   | 11,648
|Undisbursed lines of credit         |  |               | 1,743 |               |   | 13,166
|                                    | 
|                                    |  | June 30, 2006
|Commercial business and lease loans |  | $             | 9,539 |               | $ | 100   
|Real Estate Loans                   |  |               | 265   |               |   | 3,956 
|Undisbursed lines of credit         |  |               | 1,940 |               |   | 9,221 

At June 30, 2007, the range of interest rates for fixed rate loan commitments was 6.50% -12.92%. At
June 30, 2006, the range of interest rates for fixed rate loan commitments was 7.00% -11.74%.

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, 2007 and 2006, Patapsco had outstanding letters of credit of
$1,749,000 and $1,583,000, 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 current amount of the liability as of June 30, 2007 and June 30, 2006 for guarantees under standby letters of credit issued is not material.



52



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As of June 30, 2007, 2006 and 2005, Patapsco was servicing loans for the benefit of others in the amount of
$12,214,000, $5,710,000, and $7,067,000, 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.

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:



|                                       |  |          |      |   |      |   |     |  
|-------------------------------------- |  | -------- | ---- | - | ---- | - | --- | -
|(in thousands)                         |  | June 30, |     
|                                       |  | 2007     |      |   | 2006 |  
|Beginning balance                      |  | $        | 220  |   |      | $ | 31  |  
|New loans or draws on existing loans   |  |          | 64   |   |      |   | 220 |  
|Loan repayments                        |  |          | (18  | ) |      |   | (31 | )
|Change in related party classification |  |          | (143 | ) |      |   |    |  
|                                       |  |          |      |   |      |   |     |  
|Ending balance                         |  | $        | 123  |   |      | $ | 220 |  

(4) Property and Equipment

Property and equipment are summarized as follows at June 30:



|                                  |  |      |       |      |   |                        |  |              
|--------------------------------- |  | ---- | ----- | ---- | - | ---------------------- |  | -------------
|(In thousands)                    |  | 2007 |       | 2006 |   | Estimated Useful lives
|Land                              |  | $    | 152   |      | $ | 188                    |  |             
|Building and improvements         |  |      | 4,490 |      |   | 2,100                  |  | 30 - 40 years
|Leasehold improvements            |  |      | 238   |      |   | 238                    |  | 3 - 10 years 
|Furniture, fixtures and equipment |  |      | 2,999 |      |   | 2,738                  |  | 3 - 10 years 
|                                  |  |      |       |      |   |                        |  |              
|Total, at cost                    |  |      | 7,879 |      |   | 5,264                  |  |              
|Less accumulated depreciation     |  |      | 3,405 |      |   | 3,089                  |  |              
|                                  |  |      |       |      |   |                        |  |              
|Property and equipment, net       |  | $    | 4,474 |      | $ | 2,175                  |  |              
|                                  |  |      |       |      |   |                        |  |              

Rent expense was $270,000, $325,000 and $105,000 in the years ended June 30, 2007, 2006 and 2005,
respectively.

At June 30, 2007, the minimal rental commitments under noncancellable operating leases are as follows:



|                    |  |   |          
|------------------- |  | - | ---------
|Year ended June 30, |  |   |          
|2008                |  | $ | 181,000  
|2009                |  |   | 175,000  
|2010                |  |   | 161,000  
|2011                |  |   | 161,000  
|2012                |  |   | 157,000  
|Thereafter          |  |   | 2,449,000
|                    |  |   |          
|                    |  | $ | 3,284,000

(5) Deposits

The aggregate amount of jumbo certificates of deposit, each with a minimum denomination of $100,000, was approximately $23,818,000 and $19,559,000 at June 30, 2007 and 2006, respectively.



53



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At June 30, 2007, the scheduled maturities of certificates of deposit are as follows:

(In thousands)



|                             |  |   |        
|---------------------------- |  | - | -------
|Twelve months ended June 30, |  |  
|2008                         |  | $ | 75,357 
|2009                         |  |   | 12,098 
|2010                         |  |   | 11,302 
|2011                         |  |   | 8,897  
|2012                         |  |   | 4,978  
|Thereafter                   |  |   | 119    
|                             |  |   |        
|                             |  | $ | 112,751
|                             |  |   |        

The components of interest expense are as follows:



|                        |  |                     |       |      |   |       |  |   |      
|----------------------- |  | ------------------- | ----- | ---- | - | ----- |  | - | -----
|(In thousands)          |  | Year ended June 30,
|                        |  | 2007                |       | 2006 |   | 2005 
|Now Checking            |  | $                   | 25    |      | $ | 16    |  | $ | 37   
|Savings accounts        |  |                     | 96    |      |   | 123   |  |   | 148  
|Money Market Accounts   |  |                     | 737   |      |   | 432   |  |   | 300  
|Certificates of Deposit |  |                     | 4,600 |      |   | 2,915 |  |   | 2,333
|                        |  |                     |       |      |   |       |  |   |      
|Total                   |  | $                   | 5,458 |      | $ | 3,486 |  | $ | 2,818

(6) Borrowings

At June 30, 2007 and 2006, the Company has an agreement under a blanket-floating lien with the Federal Home Loan Bank of Atlanta providing the Company a line of credit of $63.6 million and $57.2 million, respectively. Borrowings
totaled $38.8 million and $35.1 million at June 30, 2007 and 2006 respectively. The Company is required to maintain as collateral for its FHLB borrowings qualified mortgage loans in an amount equal to 120% of the outstanding advances. At
June 30, 2007 and 2006 the Bank has a Federal Funds accommodation with the Bankers Bank of Atlanta, GA of $5.1 million of which no amounts were outstanding. At June 30, 2007 and 2006, all borrowings are at fixed rates.

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



|                        |  |         |        |                       |      |   |         |   |                      |  |      |  
|----------------------- |  | ------- | ------ | --------------------- | ---- | - | ------- | - | -------------------- |  | ---- | -
|                        |  | 2007    |        |                       | 2006 |  
|(In thousands)          |  | Balance |        | Weighted Average Rate |      |   | Balance |   | Weighted AverageRate | 
|Under 12 months         |  | $       | 9,700  |                       | 4.81 | % |         | $ | 4,250                |  | 3.11 | %
|12 months to 24months   |  |         | 4,000  |                       | 4.71 |   |         |   | 1,700                |  | 2.71 |  
|24 months to 36 months  |  |         |       |                       |     |   |         |   | 4,000                |  | 4.71 |  
|36 months to 48 months  |  |         | 5,100  |                       | 5.57 |   |         |   |                     |  |     |  
|48 months to 60 months  |  |         |       |                       |     |   |         |   | 5,100                |  | 5.57 |  
|60 months to 120 months |  |         | 20,000 |                       | 4.33 |   |         |   | 20,000               |  | 4.33 |  
|                        |  |         |        |                       |      |   |         |   |                      |  |      |  
|                        |  | $       | 38,800 |                       | 4.65 | % |         | $ | 35,050               |  | 4.33 | %
|                        |  |         |        |                       |      |   |         |   |                      |  |      |  



54



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The borrowings from the Federal Home Loan Bank of Atlanta with conversion or call features at June 30, 2007, and
June 30, 2006 are detailed below:



|               |  |      |   |  |          |  |                                                       
|-------------- |  | ---- | - |  | -------- |  | ------------------------------------------------------
|Balance        |  | Rate |   |  | Maturity |  | Call\Conversion feature                               
|$    5,100,000 |  | 5.57 | % |  | 11/17/10 |  | Callable every three months                           
|3,000,000      |  | 3.79 |   |  | 07/22/15 |  | Callable on 07/22/08 and every three months thereafter
|6,000,000      |  | 4.24 |   |  | 11/18/15 |  | Callable on 11/18/08 and every three months thereafter
|11,000,000     |  | 4.53 |   |  | 04/22/13 |  | Callable on 04/22/07 and every three months thereafter

(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 Patapsco Bancorp. 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. Patapsco Bancorp has also fully
and unconditionally guaranteed the obligations of the Trust under the capital securities. The capital securities are redeemable by Patapsco Bancorp 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. The funds are available to make capital contributions to the Bank and for other corporate purposes.

(8) Income Taxes

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



|               |  |      |     |   |      |   |     |      |  |   |    
|-------------- |  | ---- | --- | - | ---- | - | --- | ---- |  | - | ---
|(In thousands) |  | 2007 |     |   | 2006 |   |     | 2005
|Current:       |  |      |     |   |      |   |     |      |  |   |    
|Federal        |  | $    | 645 |   |      | $ | 727 |      |  | $ | 474
|State          |  |      | 172 |   |      |   | 158 |      |  |   | 123
|               |  |      |     |   |      |   |     |      |  |   |    
|               |  |      | 817 |   |      |   | 885 |      |  |   | 597
|               |  |      |     |   |      |   |     |      |  |   |    
|Deferred:      |  |      |     |   |      |   |     |      |  |   |    
|Federal        |  |      | (74 | ) |      |   | (51 | )    |  |   | 133
|State          |  |      | (16 | ) |      |   | (11 | )    |  |   | 29 
|               |  |      |     |   |      |   |     |      |  |   |    
|               |  |      | (90 | ) |      |   | (62 | )    |  |   | 162
|               |  |      |     |   |      |   |     |      |  |   |    
|               |  | $    | 727 |   |      | $ | 823 |      |  | $ | 759
|               |  |      |     |   |      |   |     |      |  |   |    

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



|                                                   |  |      |      |   |      |   |      |  
|-------------------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|(In thousands)                                     |  | 2007 |      |   | 2006 |  
|Unrealized losses on securities available for sale |  | $    | 197  |   |      | $ | 274  |  
|Allowance for losses on loans                      |  |      | 429  |   |      |   | 386  |  
|Deferred compensation                              |  |      | 242  |   |      |   | 265  |  
|Other                                              |  |      | 5    |   |      |   | 1    |  
|                                                   |  |      |      |   |      |   |      |  
|Total deferred tax assets                          |  |      | 873  |   |      |   | 926  |  
|Purchase accounting adjustment                     |  |      | (219 | ) |      |   | (237 | )
|Federal Home Loan Bank stock dividends             |  |      | (164 | ) |      |   | (164 | )
|Depreciation                                       |  |      | (43  | ) |      |   | (92  | )
|                                                   |  |      |      |   |      |   |      |  
|Total deferred tax liabilities                     |  |      | (426 | ) |      |   | (493 | )
|                                                   |  |      |      |   |      |   |      |  
|Net deferred tax assets                            |  | $    | 447  |   |      | $ | 433  |  
|                                                   |  |      |      |   |      |   |      |  



55



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



|                                                      |  |      |       |   |      |   |       |      |  |   |       |  
|----------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|(In thousands)                                        |  | 2007 |       |   | 2006 |   |       | 2005 | 
|Tax at statutory rate                                 |  | $    | 650   |   |      | $ | 752   |      |  | $ | 716   |  
|State income taxes, net of Federal income tax benefit |  |      | 114   |   |      |   | 95    |      |  |   | 97    |  
|Other                                                 |  |      | (37   | ) |      |   | (24   | )    |  |   | (54   | )
|                                                      |  |      |       |   |      |   |       |      |  |   |       |  
|Income tax provision                                  |  | $    | 727   |   |      | $ | 823   |      |  | $ | 759   |  
|Effective tax rates                                   |  |      | 38.00 | % |      |   | 37.22 | %    |  |   | 36.06 | %
|                                                      |  |      |       |   |      |   |       |      |  |   |       |  

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.

(9) Regulatory Matters

The Federal Deposit Insurance
Corporation (FDIC) insures deposits of account holders up to $100,000. Patapsco pays an annual premium to provide for this insurance. Patapsco is also a member of the Federal Home Loan Bank System and is required to maintain an investment in the
stock of the Federal Home Loan Bank of Atlanta (FHLBA) equal to at least 4.50% of the outstanding borrowings from the FHLBA plus the lesser of 0.20% of total assets or $25 million. The investment in the FHLBA stock is reported in the balance sheet
as investment securities required by law. Purchases and sales of stock are made directly with Patapsco at par value.

Pursuant to regulations of the
Federal Reserve Board, all FDIC-insured depository institutions must maintain average daily reserves against their transaction accounts. No reserves are required to be maintained on the first $8.5 million of transaction accounts, reserves equal to
3% must be maintained on the next $45.8 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, 2007 and 2006, the Bank met its reserve requirements of $533,000 and $628,000, respectively.

The Company, as the holding company for the
Bank, has an annual cash requirement of approximately $868,000 for the payment of common 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.

On February 27, 2006, The
Board of Governors of the Federal Reserve System (Board) announced the approval of a final rule that expands the definition of a small bank holding company under the Boards Small Bank Holding Company Policy Statement and the Boards risk
based and leverage capital guidelines for bank holding companies. The Company has been informed by the Federal Reserve Bank of Richmond that it meets the expanded criteria for definition as a small bank holding company. One result of this rule
change is that the Company is now exempt from the Boards consolidated risk-based and leverage capital adequacy guidelines for Bank Holding Companies. The Banks regulatory capital guidelines remain unchanged.

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 meet other requirements of
regulatory authorities when declaring or paying dividends. The Bank has complied with such capital requirements.



56



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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, 2007 and 2006, that Patapsco meets all capital adequacy requirements to which it is subject.

As of June 30, 2007, 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, 2007 the Bank exceeded all regulatory minimum capital requirements. The table below presents certain information relating to the Banks regulatory
compliance at June 30, 2007.



|                                         |  |                        |        |       |                              |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|---------------------------------------- |  | ---------------------- | ------ | ----- | ---------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                         |  | Actual                 |        |       | For CapitalAdequacy Purposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                         |  | Amount                 |        | Ratio |                              |   | Amount |                                                               | Ratio  |  |      | Amount |  | Ratio |       
|                                         |  | (Dollars in thousands) |       
|Total Capital (to Risk Weighted Assets)  |  | $                      | 20,091 |       | 10.26                        | % |        | $                                                             | 15,665 |  | 8.00 | %      |  | $     | 19,582 |  | 10.00 | %
|Tier 1 Capital (to Risk Weighted Assets) |  |                        | 18,981 |       | 9.69                         |   |        |                                                               | 7,833  |  | 4.00 |        |  |       | 11,749 |  | 6.00  |  
|Tier 1 Capital (to Average Assets)       |  |                        | 18,981 |       | 7.57                         |   |        |                                                               | 10,030 |  | 4.00 |        |  |       | 12,537 |  | 5.00  |  

At June 30, 2006, the Bank exceeded all regulatory minimum capital requirements. The table below presents
certain information relating to the Banks regulatory compliance at June 30, 2006.



|                                         |  |                        |        |       |                              |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|---------------------------------------- |  | ---------------------- | ------ | ----- | ---------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                         |  | Actual                 |        |       | For CapitalAdequacy Purposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                         |  | Amount                 |        | Ratio |                              |   | Amount |                                                               | Ratio  |  |      | Amount |  | Ratio |       
|                                         |  | (Dollars in thousands) |       
|Total Capital (to Risk Weighted Assets)  |  | $                      | 18,144 |       | 11.25                        | % |        | $                                                             | 12,904 |  | 8.00 | %      |  | $     | 16,130 |  | 10.00 | %
|Tier 1 Capital (to Risk Weighted Assets) |  |                        | 17,144 |       | 10.63                        |   |        |                                                               | 6,452  |  | 4.00 |        |  |       | 9,678  |  | 6.00  |  
|Tier 1 Capital (to Average Assets)       |  |                        | 17,144 |       | 7.66                         |   |        |                                                               | 8,958  |  | 4.00 |        |  |       | 11,197 |  | 5.00  |  

(10) Stockholders Equity and Related Matters

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

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

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



57



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In November 2000, as part of the acquisition of Northfield Bancorp, the Company issued 109,235 shares of Series A
Noncumulative, Convertible Perpetual Preferred Stock. Each share of the preferred stock earned dividends at the rate of 7.5% of the liquidation preference of $25.00 per share, payable when declared by the Board of Directors. If Patapsco Bancorp
failed to pay dividends to holders of Patapsco Bancorp Preferred stock for a given quarter, then during that quarter, no dividends could be paid on Patapsco Bancorp Common Stock.

The holders had the right to convert the preferred shares into common shares of Patapsco Bancorp, Inc. at any time. The Company could redeem the shares on or after November 2005. When issued, the preferred stock was
convertible into common stock at a one to one basis. Due to three 10% stock dividends and a three for one stock split in the form of a 200% stock dividend paid to common shareholders since the issuance of the preferred shares, the conversion ratio
changed to 1 to 3.993. One share of preferred stock was convertible into 3.993 shares of common stock.

On January 19, 2006, the Company issued a
press release announcing that the Board of Directors had voted to call for redemption of all outstanding shares of Series A Non-cumulative, Perpetual Convertible Preferred Stock, par value $0.01 per share (the Series A Preferred Stock),
that had not been converted into common stock at the election of the holders and remained outstanding on or prior to the close of business on March 31, 2006 (the Redemption Date). All shares of Series A Preferred Stock not converted
into shares of Patapsco Bancorp, Inc. common stock prior to the close of business on the Redemption Date were automatically redeemed at the face value of $25 per share.

Shareholders elected to convert a total of 82,435 of the 85,051 outstanding preferred shares into Company common stock. The remaining 2,616 shares were redeemed at $25 per share for a total of $65,000. As a result,
the Companys common stock outstanding increased by 329,164 shares and shareholders equity decreased by $65,000.

(11) Benefit Plans

Employee Stock Ownership Plan

Patapsco
has established an Employee Stock Ownership Plan (ESOP) for its employees. On April 1, 1996 the ESOP acquired 113,891 shares of the Companys common stock in connection with Patapscos conversion to a capital stock form of
organization. The ESOP purchased an additional 28,721 shares as a result of the return of capital distribution paid by the Company in June 1997. The ESOP holds the common stock in a trust for allocation among participating employees.

All ESOP shares contain a Put Option which requires the Company to repurchase the share at the then fair market value subject to the availability of retained
earnings. The Put Option may be exercised within 60 days of distribution of the shares and then again within 60 days after the fair market value determination date of the next plan year. The current fair market value of 41,085 shares
subject to the put option is $935,000 at June 30, 2007. This amount is included in temporary equity in accordance with SEC Accounting Series Release No. 268.

The ESOP shares have been fully allocated and the Company has received approval from the Internal Revenue Service to terminate the Plan. Of the 103,278 plan shares outstanding at June 30, 2006, participants
representing 62,193 shares had returned their election of distribution forms. Of this amount, participants representing 29,992 shares had exercised their put option and the Company had repurchased these shares for a total cash outflow and reduction
in stockholders equity of $690,000. The remaining 32,201 shares have been distributed to the participants. The Company is awaiting responses from the participants who represent the 41,085 shares subject to the put option mentioned above.

For the years ended June 30, 2007, 2006 and 2005 compensation expense recognized related to the ESOP and Patapscos contribution to the ESOP was $0.

2004 Stock Incentive Plan

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



58



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As of June 30, 2007, there are 53,850 deferred shares under this plan of which 12,906 are issued and outstanding.
These deferred shares are allocated in lieu of cash compensation to Directors of the Company. Deferred shares are required to be distributed upon a Director leaving the Company or upon a change-in-control event. All these shares are included in
shares outstanding for the purposes of computing earnings per share. Additionally, as of June 30, 2007 there are 14,453 non-vested shares outstanding under this plan.

Compensation expense recognized in connection with these plans during the years ended June 30, 2007, 2006 and 2005 was $67,300, $17,400 and $80,700, respectively.

A summary of the status of the Companys non-vested shares as of and for the year ended June 30, 2007 is presented below:



|                               |  |               |  |                                       |      
|------------------------------ |  | ------------- |  | ------------------------------------- | -----
|                               |  | Common Shares |  | Weighted AverageGrant-Date Fair Value
|Non-Vested as of June 30, 2006 |  |              |  | $                                     |     
|Awards Granted, November 2006  |  | 14,453        |  |                                       | 13.71
|Vested                         |  |              |  |                                       |     
|Forfeited                      |  |              |  |                                       |      
|                               |  |               |  |                                       |      
|Non-vested at June 30, 2007    |  | 14,453        |  | $                                     | 13.71

As of June 30, 2007 there was $148,000 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 27 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. On May 1, 2000, the Company granted options to purchase 18,981 shares at $4.86 per share.

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.



59



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



|                           |  |         |   |  |                              |      |                    |         |                              |   |                                |  |   |    
|-------------------------- |  | ------- | - |  | ---------------------------- | ---- | ------------------ | ------- | ---------------------------- | - | ------------------------------ |  | - | ---
|                           |  | Options |   |  | WeightedAverageExercisePrice |      | OptionsExercisable |         | WeightedAverageExercisePrice |   | AggregateIntrinsicValue (000s)
|Outstanding, June 30, 2004 |  | 197,898 |   |  | $                            | 5.40 |                    | 140,116 |                              | $ | 5.40                           |  |   |    
|Granted                    |  |        |   |  |                              |     |                    |         |                              |   |                                |  |   |    
|Exercised                  |  | (22,635 | ) |  |                              | 4.60 |                    |         |                              |   |                                |  |   |    
|Cancelled                  |  |        |   |  |                              |     |                    |         |                              |   |                                |  |   |    
|                           |  |         |   |  |                              |      |                    |         |                              |   |                                |  |   |    
|Outstanding, June 30, 2005 |  | 175,263 |   |  |                              | 5.40 |                    | 139,723 |                              |   | 5.51                           |  |   |    
|Granted                    |  |        |   |  |                              |     |                    |         |                              |   |                                |  |   |    
|Exercised                  |  | (36,353 | ) |  |                              | 5.07 |                    |         |                              |   |                                |  |   |    
|Cancelled                  |  | (415    | ) |  |                              | 6.29 |                    |         |                              |   |                                |  |   |    
|                           |  |         |   |  |                              |      |                    |         |                              |   |                                |  |   |    
|Outstanding, June 30, 2006 |  | 138,495 |   |  |                              | 5.62 |                    | 122,877 |                              |   | 5.51                           |  |   |    
|Granted                    |  |        |   |  |                              |     |                    |         |                              |   |                                |  |   |    
|Exercised                  |  | (90,623 | ) |  |                              | 5.41 |                    |         |                              |   |                                |  |   |    
|Cancelled                  |  |        |   |  |                              |     |                    |         |                              |   |                                |  |   |    
|                           |  |         |   |  |                              |      |                    |         |                              |   |                                |  |   |    
|Outstanding, June 30, 2007 |  | 47,872  |   |  | $                            | 6.02 |                    | 47,872  |                              | $ | 6.02                           |  | $ | 801
|                           |  |         |   |  |                              |      |                    |         |                              |   |                                |  |   |    

The following table summarizes information about stock options outstanding at June 30, 2007



|               |  |                    |  |                            |  |                   
|-------------- |  | ------------------ |  | -------------------------- |  | ------------------
|Exercise Price |  | Number Outstanding |  | Remaining Contractual Life |  | Number Exercisable
|4.86           |  | 8,827              |  | 2.88 years                 |  | 8,827             
|6.29           |  | 39,045             |  | 4.15 years                 |  | 39,045            
|               |  |                    |  |                            |  |                   
|               |  | 47,872             |  | 3.92 years                 |  | 47,872            
|               |  |                    |  |                            |  |                   

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 and are 21 years old are eligible to participate. The Companys contribution to this
plan was $91,000, $73,000 and $67,000 for the years ended June 30, 2007, 2006 and 2005, respectively. Additionally, since the ESOP is fully allocated, the Compensation Committee of the Board of Directors has approved a discretionary profit
sharing component to the 401K plan. The accrual for this component of the plan for the years ended June 30, 2007, 2006 and 2005 was $113,000, $108,000, and $31,000, respectively.

(12) Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107,
Disclosures about Fair Value of Financial Instruments (SFAS 107) requires the Company to disclose estimated fair values for certain on- and off-balance sheet financial instruments. Fair value estimates, methods, and assumptions are set forth
below for the Companys financial instruments as of June 30, 2007 and 2006.

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.



60



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



|                                                                    |  |                |         |            |   |                |  |            |         |  |   |        
|------------------------------------------------------------------- |  | -------------- | ------- | ---------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                                                                    |  | 2007           |         | 2006      
|(In thousands)                                                      |  | Carryingamount |         | Fair value |   | Carryingamount |  | Fair value
|Assets:                                                             |  |                |         |            |   |                |  |            |         |  |   |        
|Cash and interest-bearing deposits                                  |  | $              | 5,215   |            | $ | 5,215          |  | $          | 5,807   |  | $ | 5,807  
|Federal funds sold                                                  |  |                | 2,255   |            |   | 2,255          |  |            | 2,381   |  |   | 2,381  
|Time deposits at other financial institutions                       |  |                |        |            |   |               |  |            | 605     |  |   | 605    
|Investment securities available for sale                            |  |                | 13,147  |            |   | 13,147         |  |            | 16,667  |  |   | 16,667 
|Loans receivable, net                                               |  |                | 220,239 |            |   | 217,376        |  |            | 190,589 |  |   | 186,882
|Investment securities required by law                               |  |                | 2,599   |            |   | 2,599          |  |            | 2,416   |  |   | 2,416  
|Accrued interest receivable                                         |  |                | 1,063   |            |   | 1,063          |  |            | 929     |  |   | 929    
|Liabilities:                                                        |  |                |         |            |   |                |  |            |         |  |   |        
|Deposits                                                            |  |                | 189,712 |            |   | 181,981        |  |            | 166,833 |  |   | 159,977
|Advance payments by borrowers for taxes, insurance and ground rents |  |                | 1,362   |            |   | 1,362          |  |            | 1,405   |  |   | 1,405  
|Long-term debt                                                      |  |                | 43,800  |            |   | 43,032         |  |            | 40,050  |  |   | 39,044 
|Accrued interest payable                                            |  |                | 472     |            |   | 472            |  |            | 334     |  |   | 334    
|Off balance sheet instruments:                                      |  |                |         |            |   |                |  |            |         |  |   |        
|Commitments to extend credit                                        |  |                |        |            |   |               |  |            |        |  |   |       

Cash and 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.

Time deposits at other financial institutions

The fair value of these time deposits was calculated by discounting the scheduled cash flows at current market rates.

Securities

The fair value of securities is based on quoted market values.

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 current loan origination rates.

Accrued Interest Receivable

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

Securities Required by Law

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



61



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Deposits

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

Long-Term Debt

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

Accrued Interest Payable

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

Advance Payments by Borrowers for Taxes, Insurance and Ground Rents

The carrying amount of advance payments by borrowers for taxes,
insurance and ground rents 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.

(13) 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       |  | 2007 |        | 2006
|Cash                                    |  | $    | 1,671  |      | $ | 2,834 
|Investment securities                   |  |      |       |      |   | 78    
|Equity in net assets of the bank        |  |      | 22,369 |      |   | 20,422
|Other assets                            |  |      | 251    |      |   | 271   
|                                        |  |      |        |      |   |       
|Total Assets                            |  | $    | 24,291 |      | $ | 23,605
|                                        |  |      |        |      |   |       
|                                        |  |     
|Accrued expenses and other liabilities  |  | $    | 375    |      | $ | 317   
|Subordinated Debentures                 |  |      | 5,000  |      |   | 5,000 
|Stockholders equity                    |  |      | 18,916 |      |   | 18,288
|                                        |  |      |        |      |   |       
|Total Liabilities & Stockholders Equity |  | $    | 24,291 |      | $ | 23,605
|                                        |  |      |        |      |   |       



62



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|                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|(In thousands)                                                                    |  |      |        |   |      |   |        |      | 
|Statements of Income                                                              |  | 2007 |        |   | 2006 |   |        | 2005 | 
|Total Revenue                                                                     |  | $    | 5      |   |      | $ | 10     |      |  | $ | 13     |  
|                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Interest Expense                                                                  |  |      | 323    |   |      |   | 252    |      |  |   | 93     |  
|                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Non-interest Income                                                               |  |      | 2      |   |      |   | 1      |      |  |   |       |  
|                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Non-interest Expense                                                              |  |      | 11     |   |      |   | (2     | )    |  |   | 28     |  
|                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Loss before equity in net income of subsidiary and income taxes                   |  |      | (327   | ) |      |   | (239   | )    |  |   | (108   | )
|Net income of subsidiary                                                          |  |      | 1,399  |   |      |   | 1,527  |      |  |   | 1,417  |  
|                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Income before income tax provision                                                |  |      | 1,072  |   |      |   | 1,288  |      |  |   | 1,309  |  
|Income tax provision (benefit)                                                    |  |      | (113   | ) |      |   | (100   | )    |  |   | (37    | )
|                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Net income                                                                        |  | $    | 1,185  |   |      | $ | 1,388  |      |  | $ | 1,346  |  
|                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|                                                                                  |  |      |       
|(In thousands)                                                                    |  |      |        |   |      |   |        |      | 
|Statements of Cash Flows                                                          |  | 2007 |        |   | 2006 |   |        | 2005 | 
|Operating activities:                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Net income                                                                        |  | $    | 1,185  |   |      | $ | 1,388  |      |  | $ | 1,346  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |        |   |      |   |        |      |  |   |        |  
|Equity in net income of subsidiary                                                |  |      | (1,399 | ) |      |   | (1,527 | )    |  |   | (1,417 | )
|Increase in other assets                                                          |  |      | (51    | ) |      |   | (189   | )    |  |   |       |  
|Increase (decrease) in accrued expenses and other liabilities                     |  |      | 172    |   |      |   | 81     |      |  |   | (19    | )
|                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Net cash used in operating activities                                             |  |      | (93    | ) |      |   | (247   | )    |  |   | (90    | )
|                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Investing activities:                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Purchase of investment securities                                                 |  |      | (20    | ) |      |   | (10    | )    |  |   | (7     | )
|Proceeds from sale of investment security                                         |  |      | 92     |   |      |   |       |      |  |   |       |  
|Dividend received from subsidiary                                                 |  |      |       |   |      |   |       |      |  |   | 200    |  
|Additional investment in subsidiary                                               |  |      | (300   | ) |      |   |       |      |  |   |       |  
|                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Net cash (used in) provided by investing activities                               |  |      | (228   | ) |      |   | (10    | )    |  |   | 193    |  
|                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Financing activities:                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Net increase (decrease) in borrowings                                             |  |      |       |   |      |   | 3,167  |      |  |   | (167   | )
|Options exercised                                                                 |  |      | 338    |   |      |   | 121    |      |  |   | 47     |  
|Repurchase of common stock pursuant to ESOP put option                            |  |      | (690   | ) |      |   | (23    | )    |  |   | (105   | )
|Redemption of preferred stock                                                     |  |      |       |   |      |   | (65    | )    |  |   |       |  
|Cash dividend paid                                                                |  |      | (490   | ) |      |   | (521   | )    |  |   | (500   | )
|                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Net cash provided by (used in) financing activities                               |  |      | (842   | ) |      |   | 2,679  |      |  |   | (725   | )
|                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|(Decrease) increase in cash and cash equivalents                                  |  |      | (1,163 | ) |      |   | 2,422  |      |  |   | (622   | )
|Cash and cash equivalents, beginning of year                                      |  |      | 2,834  |   |      |   | 412    |      |  |   | 1,034  |  
|                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Cash and cash equivalents, end of year                                            |  | $    | 1,671  |   |      | $ | 2,834  |      |  | $ | 412    |  
|                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  



63



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(14) Quarterly Financial Data

A summary of selected consolidated quarterly financial data for the three years ended June 30, 2007, 2006 and 2005 is reported in the following table:



|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|--------------------------------------------------- |  | ------------ | ----- | ------------- | - | ------------ |  | ------------- | ----- |  | - | -----
|(In thousands, except per share data)               |  | FirstQuarter |       | SecondQuarter |   | ThirdQuarter |  | FourthQuarter
|2007                                                |  |              |       |               |   |              |  |               |       |  |   |      
|Interest income                                     |  | $            | 3,838 |               | $ | 4,086        |  | $             | 4,207 |  | $ | 4,295
|Interest Expense                                    |  |              | 1,633 |               |   | 1,868        |  |               | 1,967 |  |   | 2,035
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|Net interest income                                 |  |              | 2,205 |               |   | 2,218        |  |               | 2,240 |  |   | 2,260
|Provision for loan losses                           |  |              | 40    |               |   | 70           |  |               | 175   |  |   | 145  
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|Net Interest income after provision for loan losses |  |              | 2,165 |               |   | 2,148        |  |               | 2,065 |  |   | 2,115
|Noninterest income                                  |  |              | 187   |               |   | 218          |  |               | 221   |  |   | 240  
|Noninterest expense                                 |  |              | 1,785 |               |   | 1,791        |  |               | 2,067 |  |   | 1,804
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|Income before income taxes                          |  |              | 567   |               |   | 575          |  |               | 219   |  |   | 551  
|Provision for income taxes                          |  |              | 211   |               |   | 216          |  |               | 78    |  |   | 222  
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|Net income                                          |  | $            | 356   |               | $ | 359          |  | $             | 141   |  | $ | 329  
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|Basic net income per share                          |  | $            | 0.19  |               | $ | 0.19         |  | $             | 0.07  |  | $ | 0.17 
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|Diluted net income per share                        |  | $            | 0.19  |               | $ | 0.19         |  | $             | 0.07  |  | $ | 0.17 
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|2006                                                |  |              |       |               |   |              |  |               |       |  |   |      
|Interest income                                     |  | $            | 3,046 |               | $ | 3,327        |  | $             | 3,498 |  | $ | 3,684
|Interest Expense                                    |  |              | 1,025 |               |   | 1,141        |  |               | 1,315 |  |   | 1,468
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|Net interest income                                 |  |              | 2,021 |               |   | 2,186        |  |               | 2,183 |  |   | 2,216
|Provision for loan losses                           |  |              | 20    |               |   | 20           |  |               |      |  |   | 25   
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|Net Interest income after provision for loan losses |  |              | 2,001 |               |   | 2,166        |  |               | 2,183 |  |   | 2,191
|Noninterest income                                  |  |              | 243   |               |   | 198          |  |               | 201   |  |   | 229  
|Noninterest expense                                 |  |              | 1,744 |               |   | 1,800        |  |               | 1,908 |  |   | 1,750
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|Income before income taxes                          |  |              | 500   |               |   | 564          |  |               | 476   |  |   | 670  
|Provision for income taxes                          |  |              | 187   |               |   | 213          |  |               | 175   |  |   | 248  
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|Net income                                          |  | $            | 313   |               | $ | 351          |  | $             | 301   |  | $ | 422  
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|Basic net income per share                          |  | $            | 0.18  |               | $ | 0.21         |  | $             | 0.17  |  | $ | 0.23 
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|Diluted net income per share                        |  | $            | 0.16  |               | $ | 0.18         |  | $             | 0.16  |  | $ | 0.22 
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|2005                                                |  |              |       |               |   |              |  |               |       |  |   |      
|Interest income                                     |  | $            | 2,965 |               | $ | 2,969        |  | $             | 2,977 |  | $ | 2,900
|Interest Expense                                    |  |              | 937   |               |   | 941          |  |               | 945   |  |   | 931  
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|Net interest income                                 |  |              | 2,028 |               |   | 2,028        |  |               | 2,032 |  |   | 1,969
|Provision for loan losses                           |  |              | 35    |               |   | 50           |  |               | 100   |  |   | 40   
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|Net Interest income after provision for loan losses |  |              | 1,993 |               |   | 1,978        |  |               | 1,932 |  |   | 1,929
|Noninterest income                                  |  |              | 130   |               |   | 179          |  |               | 176   |  |   | 199  
|Noninterest expense                                 |  |              | 1,602 |               |   | 1,593        |  |               | 1,720 |  |   | 1,496
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|Income before income taxes                          |  |              | 521   |               |   | 564          |  |               | 388   |  |   | 632  
|Provision for income taxes                          |  |              | 187   |               |   | 204          |  |               | 141   |  |   | 227  
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|Net income                                          |  | $            | 334   |               | $ | 360          |  | $             | 247   |  | $ | 405  
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|Basic net income per share                          |  | $            | 0.20  |               | $ | 0.22         |  | $             | 0.14  |  | $ | 0.25 
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      
|Diluted net income per share                        |  | $            | 0.17  |               | $ | 0.19         |  | $             | 0.13  |  | $ | 0.21 
|                                                    |  |              |       |               |   |              |  |               |       |  |   |      



64



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Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item 8A. Controls and Procedures

As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and
with the participation of the Companys principal executive officer and principal financial officer, of the effectiveness of the Companys disclosure controls and procedures. Based on this evaluation, the Companys principal executive
officer and principal financial officer concluded that the Companys disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms.

There have been no changes in the Companys internal control over financial reporting identified in connection with the evaluation required by
paragraph (d) of Securities and Exchange Commission Rule 13a-15 that occurred during the Companys last fiscal quarter, that have materially affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting.

Item 8B. Other Information

None.

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act

Directors

The Companys board of directors currently consists of six members. The following table sets forth, for each
director of the Company, his or her age, the year he or she first became a director of the Bank, which is the Companys principal operating subsidiary, and the expiration of his or her term as a director.



|                  |  |                      |  |                                                         |  |                                                            |  |                       
|----------------- |  | -------------------- |  | ------------------------------------------------------- |  | ---------------------------------------------------------- |  | ----------------------
|Name              |  | Age at June 30, 2007 |  | Year First Elected or Appointed as Director of the Bank |  | Year First Elected or Appointed as Director of the Company |  | Current Term to Expire
|William R. Waters |  | 64                   |  | 1999                                                    |  | 1999                                                       |  | 2007                  
|Gary R. Bozel     |  | 49                   |  | 2000                                                    |  | 2000                                                       |  | 2007                  
|Douglas H. Ludwig |  | 69                   |  | 1992                                                    |  | 1995                                                       |  | 2008                  
|Thomas P. ONeill |  | 54                   |  | 1995                                                    |  | 1995                                                       |  | 2008                  
|Nicole N. Glaeser |  | 49                   |  | 1993                                                    |  | 1995                                                       |  | 2009                  
|J. Thomas Hoffman |  | 59                   |  | 2000                                                    |  | 2000                                                       |  | 2009                  

Set forth below is information concerning the Companys directors. Unless otherwise stated,
all directors have held the positions indicated for at least the past five years.

William R. Waters is the President and owner of
Bel Air Medicine Inc., which trades as The Medicine Shoppe, and, until January 2004, was the owner of Bel Air Pontiac in Bel Air, Maryland. He is a member of the advisory board of Donahue-Hart and Associates, an insurance and financial services
company located in Bel Air, Maryland. He was formerly a member of the board of directors of the Banks predecessor organization, Patapsco Federal Savings and Loan Association, from 1984 to 1994.



65



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Gary R. Bozel is the managing principal of Gary R. Bozel & Associates P.A., a certified
public accounting firm in Towson, Maryland. Mr. Bozel served as the Chairman of the Board of Northfield Bancorp, Inc. from March 1998 to November 2000 and as the Chairman of the Board of Northfield Federal Savings Bank from 1996 to November
2000. He also served as the President of Northfield Federal Savings Bank from 1993 to 1996. Mr. Bozel is a member of the board of directors and finance committee of the Towson Golf and Country Club.

Douglas H. Ludwig served as a teacher, counselor and principal in the high schools of the southeast area of the Baltimore County Public Schools
until his retirement in 1992. Mr. Ludwig has been active in many community organizations during his 47 years of residence in Dundalk.

Thomas P. ONeill was named Chairman of the board of directors of the Company and the Bank in August 1999 and has been a director since 1995. He is a managing director of RSM McGladrey, Inc. Formerly, he was the managing partner
of the regional accounting firm of Wolpoff & Company LLP (Wolpoff), which merged with American Express Tax and Business Services in 1998. He joined Wolpoff as a staff accountant in 1974 and became a partner in 1983.
Mr. ONeill is a member of the American Institute of Certified Public Accountants and the Maryland Association of Certified Public Accountants. He has served on the boards of many charitable and civic groups.

Nicole N. Glaeser is Budget Director for the Baltimore County Police Department, a position she has held since 1988. On a part-time basis,
Ms. Glaeser is a practicing attorney and also a Certified Public Accountant.

J. Thomas Hoffman is a self-employed financial
consultant in Towson, Maryland. Mr. Hoffman is also a registered representative with Signator Investors, Inc. He served as Secretary of the board of directors of Northfield Federal Savings Bank from 1983 to 1998. He also served as Secretary for
Northfield Bancorp, Inc. from 1998 to 2000. He is a member of the Towson Business Association, Building Congress and Exchange and the American Subcontractors Association where he sits on the Board. He is a member of various trade organizations
associated with his profession.

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, 2007 |  | Title with the Bank                                                                      
|Frank J. Duchacek, Jr. |  | 63                   |  | Senior Vice President  Operations                                                       
|Michael J. Dee         |  | 47                   |  | President, Chief Executive Officer and ChiefFinancial Officer of the Company and the Bank
|Laurence S. Mitchell   |  | 60                   |  | Senior Vice President  Lending                                                          

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



66



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Michael J. Dee was named President and Chief Executive Officer of the Company and the Bank in
October 2006. He also continues to serve as the Chief Financial Officer of the Company and the Bank. He joined the Company in May 1999 as its Chief Financial Officer and Controller. From September 1997 to May 1999, Mr. Dee was Vice President of
Management Accounting for Sandy Spring National Bank of Maryland. From May 1995 to October 1997, Mr. Dee was the Manager of Financial Planning and Analysis with United Press International in Washington, D.C. From December 1989 to March 1995,
Mr. Dee was employed by the Bank of Baltimore and its successors, First Fidelity Bank, N.A. and First Union Bank, in a variety of financial positions. Mr. Dee is a Certified Management Accountant (CMA).

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.

Section 16(a) Beneficial Ownership Reporting Compliance

Pursuant to regulations promulgated under the Exchange Act, the Companys officers, directors and persons who own more than 10% of
the outstanding Common Stock (Reporting Persons) are required to file reports detailing their ownership and changes of ownership in such Common Stock (collectively, Reports), and to furnish the Company with copies of all such
Reports. Based solely on its review of the copies of such Reports or written representations that no such Reports were necessary that the Company received during the past fiscal year or with respect to the last fiscal year, management believes that
during the fiscal year ended June 30, 2007, all of the Reporting Persons complied with these reporting requirements, except that director Gary R. Bozel filed one late Report relating to two transactions.

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 Douglas H. Ludwig, Corporate Secretary, Patapsco Bancorp, Inc., 1301 Merritt Boulevard, Dundalk, Maryland 21222-2194.

Audit Committee

The Company has a separately
designated Audit Committee established in accordance with the Securities Exchange Act of 1934. The board of directors Audit Committee consists of directors ONeill, Bozel and Glaeser, who serves as Chairperson. All members of the Audit
Committee are deemed to be independent under Nasdaq Stock Market listing standards. The board of directors has designated Directors ONeill, Bozel and Glaeser as audit committee financial experts under the rules of the Securities and Exchange
Commission.

Item 10. Executive Compensation

Executive Compensation

Summary Compensation Table.The following table provides information concerning total
compensation earned or paid, by the Company, to the President, Chief Executive Officer and Chief Financial Officer, the former President and Chief Executive Officer, and the two most highly compensated executive officers other than the President,
Chief Executive Officer and Chief Financial Officer who received compensation totaling $100,000 or more during the year ended June 30, 2007.



67



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|                                                                                  |  |      |  |            |         |           |   |                    |  |                                  |        |           |   |       |  |   |        
|--------------------------------------------------------------------------------- |  | ---- |  | ---------- | ------- | --------- | - | ------------------ |  | -------------------------------- | ------ | --------- | - | ----- |  | - | -------
|Name and Principal Position                                                       |  | Year |  | Salary ($) |         | Bonus ($) |   | StockAwards ($)(1) |  | All Other Compensation ($)(2)(3) |        | Total ($)
|Michael J. Dee President, Chief Executive Officer and Chief Financial Officer (4) |  | 2007 |  | $          | 136,215 |           | $ | 26,625             |  | $                                | 34,728 |           | $ | 9,011 |  | $ | 206,579
|Joseph J. Bouffard Former President and Chief Executive Officer (4)               |  | 2007 |  |            | 60,366  |           |   |                   |  |                                  |       |           |   | 9,762 |  |   | 70,128 
|Laurence S. Mitchell Senior Vice PresidentLending                                |  | 2007 |  |            | 109,990 |           |   | 30,822             |  |                                  | 9,797  |           |   | 8,188 |  |   | 158,798
|Frank J. Duchacek, Jr. Senior Vice PresidentOperations                           |  | 2007 |  |            | 100,232 |           |   | 25,500             |  |                                  | 3,132  |           |   | 9,043 |  |   | 137,907

---

|(1) | Reflects the dollar amount recognized for financial statement reporting purposes in accordance with SFAS 123(R). Amounts are calculated using the closing stock price of each award
on the date of grant. When shares become vested the recipient will also receive an amount equal to accumulated cash and stock dividends (if any) paid with respect thereon. For fiscal 2007, accumulated cash dividends equaled $1,372 and $439 for
Messrs. Mitchell and Duchacek, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Does not include the aggregate amount of perquisites and other benefits, which was less than $10,000.
|--- | -----------------------------------------------------------------------------------------------------

|(3) | For fiscal year 2007, consists of $7,651, $2,945, $7,288 and $6,340 of matching contributions under the Banks 401(k) Plan for the benefit of Messrs. Dee, Bouffard, Mitchell
and Duchacek, respectively, $1,360, $5,060, $901 and $2,703 in cash allocated to the accounts of Messrs. Dee, Bouffard, Mitchell and Duchacek, respectively, under the ESOP, and $1,756 accrued for the benefit of Mr. Bouffard under a Supplemental
Executive Retirement Agreement.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Mr. Bouffard resigned as President and Chief Executive Officer of the Company and the Bank effective October 30, 2006, at which time Mr. Dee was named President and
Chief Executive Officer of the Company and the Bank.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Outstanding Equity Awards at Fiscal Year-End.The following table provides information concerning unexercised options, stock awards that have not vested and equity incentive plan awards for each named executive officer outstanding as of June 30, 2007.



68



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|                     |  |                                                                |  |                          |  |                       |  |                                                            |  |                                                                 
|-------------------- |  | -------------------------------------------------------------- |  | ------------------------ |  | --------------------- |  | ---------------------------------------------------------- |  | ----------------------------------------------------------------
|                     |  | Option Awards                                                  |  | Stock Awards            
|Name                 |  | Number ofSecuritiesUnderlyingUnexercisedOptions (#)Exercisable |  | Option ExercisePrice ($) |  | OptionExpiration Date |  | Number ofShares or Unitsof Stock
ThatHave NotVested (#)(1) |  | Market Valueof Shares
orUnits of StockThat Have NotVested ($)(2)
|Michael J. Dee       |  | 8,8276,393                                                     |  | 4.866.29                 |  | 5/11/20108/3/2011     |  |                                                           |  |                                                                
|Joseph J. Bouffard   |  |                                                               |  |                         |  |                      |  |                                                           |  |                                                                
|Laurence S. Mitchell |  | 836                                                            |  | 6.29                     |  | 8/3/2011              |  | 3,675                                                      |  | 83,606                                                          
|Frank J. Duchacek    |  |                                                               |  |                         |  |                       |  | 1,175                                                      |  | 26,731                                                          

---

|(1) | With respect to Mr. Mitchell, 318 shares vest on November 6, 2008 and 3,357 shares vest on November 6, 2009. With respect to Mr. Duchacek, 318 shares vest on
November 6, 2008 and 857 shares vest on November 6, 2009.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Based upon the Companys closing stock price of $22.75 on June 30, 2007.
|--- | ------------------------------------------------------------------------

Severance Agreements. The Bank has entered into the Amended and Restated Severance Agreements (the Severance Agreements) with Officers Dee, Mitchell and Duchacek (collectively, the
Employees) that have terms ending on the earlier of (a) 24 months after their most recent renewal date and (b) the date on which the Employee terminates employment with the Bank. On each annual anniversary date from the date of
commencement of the Severance Agreements, the term of the Severance Agreements may be extended for additional one-year periods beyond the then effective expiration date, provided that the Employee is elected an officer of the Bank at a 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. An Employee becomes entitled to collect severance benefits
under the Severance Agreement in the event of the Employees (a) voluntary termination of employment (i) within 24 months following a change of control or (ii) within 90 days following the occurrence of certain specified events
that generally reduce the employees compensation or responsibilities, or (b) involuntary termination of employment for any reason other than for cause in connection with or within 24 months of any change in control of the Bank or the
Company.

In the event an Employee becomes entitled to receive severance benefits, the Employee will (i) be paid an amount equal to
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 and regulations promulgated thereunder, and (ii) the sum of any other parachute payments (as defined in Section 280G(b)(2) of the Internal Revenue Code) that the Employee receives on account of the change in control. The
Severance Agreements provide that any sum owed to the Employee shall be paid in one lump sum within ten days of such termination.

The
Company also maintains the 2006 Severance Agreement (the 2006 Agreement) with Mr. Dee. The 2006 Agreement provides for a payment to Mr. Dee of $125,000, payable in one lump sum, immediately upon the occurrence of a change in
control, as defined in the 2006 Agreement, of either the Company or the Bank. The merger between Bradford Bancorp and the Company will constitute a change in control. The 2006 Agreement does not affect the existing Amended and Restated Severance
Agreement, described above, by and between the Bank and Mr. Dee.

Director Compensation

The following table sets forth the compensation received by non-employee directors for their service on the boards of directors of the Company and the
Bank during fiscal 2007.



69



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|                  |  |                            |        |                  |   |        |  |   |       
|----------------- |  | -------------------------- | ------ | ---------------- | - | ------ |  | - | ------
|Director          |  | Fees Earnedor Paid In Cash |        | Stock Awards (1) |   | Total 
|Thomas P. ONeill |  | $                          | 38,700 |                  | $ | 10,800 |  | $ | 49,500
|Nicole N. Glaeser |  |                            | 24,100 |                  |   |       |  |   | 24,100
|Douglas H. Ludwig |  |                            | 22,850 |                  |   |       |  |   | 22,850
|William R. Waters |  |                            | 13,300 |                  |   | 7,700  |  |   | 21,000
|Gary R. Bozel     |  |                            | 14,100 |                  |   | 7,700  |  |   | 21,800
|J. Thomas Hoffman |  |                            | 12,600 |                  |   | 7,700  |  |   | 20,300

---

|(1) | Reflects the dollar amount recognized for financial statement reporting purposes in fiscal 2007 in accordance with Statement of Financial Accounting Standard 123(R) (SFAS
123(R)). Directors Gary R. Bozel and J. Thomas Hoffman elected to defer receipt of their stock awards under the Company, Inc. 2004 Stock Option and Incentive Plan.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Each nonemployee member of the Companys board of directors receives a fee of $450 for each regular and special meeting attended of the
Companys board of directors and $200 for each meeting attended of a committee of either the Companys or the Banks board of directors. The Chairperson of the Audit Committee receives $450 for each Audit Committee meeting. The
Chairman of the board of directors receives an additional $500 per month. No fees are paid for attendance at meetings of the Banks board of directors. In addition, directors of the Company and the Bank are paid an annual retainer based on
years of service as directors. The annual retainer is $7,000 for 0-5 years of service as a director, $7,700 for 6-10 years of service, $8,400 for 11-15 years of services and $9,100 for 16 or more years of service. The Chairman of the board of
directors receives a retainer that is 20% higher than the retainer he would otherwise receive based on years of service.

Nonemployee
directors also participate in the Companys 1996 Stock Option and Incentive Plan (Option Plan) and the Companys 2004 Stock Option and Incentive Plan (the 2004 Plan). During the year ended June 30, 2007, no
director received any awards under the Option Plan. Pursuant to the 2004 Plan, directors are permitted to elect to receive shares of Common Stock in lieu of some or all of their cash board of directors fees, with the value of the shares received
equal to the fees that otherwise would have been received. Directors may elect to receive their shares quarterly or to defer receipt of the shares until after termination of service as a director. During the year ended June 30, 2007, directors
Thomas P. ONeil, William R. Waters, Gary R. Bozel and J. Thomas Hoffman were credited with 929, 710, 710 and 1,615 shares, respectively, of Common Stock in lieu of cash board of directors fees. Directors Gary R. Bozel and J. Thomas Hoffman
elected to defer receipt of their shares.

Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters

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



|                                                           |  |                                                                                         |  |                                                                             |      |                                                                                                                                            |       
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------
|                                                           |  | (a)                                                                                     |  | (b)                                                                         |      | (c)                                                                                                                                       
|                                                           |  | Number of securities to beissued upon exercise ofoutstanding options, warrants &
rights |  | Weighted-average exercise price of outstanding options, warrants and rights |      | Number of securitiesremaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
|Equity compensation plans approved by security holders     |  | 88,816                                                                                  |  | $                                                                           | 6.02 |                                                                                                                                            | 65,174
|                                                           |  |                                                                                         | 
|Equity compensation plans not approved by security holders |  |                                                                                        |  |                                                                             |     |                                                                                                                                            |      
|                                                           |  |                                                                                         |  |                                                                             |      |                                                                                                                                            |       
|Total                                                      |  | 88,816                                                                                  |  | $                                                                           | 6.02 |                                                                                                                                            | 65,174
|                                                           |  |                                                                                         |  |                                                                             |      |                                                                                                                                            |       



70



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(b) Security Ownership of Certain Beneficial Owners.

Persons and groups beneficially owning in excess of 5% of the Companys common stock are required to file certain reports regarding such ownership
pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act). The following table sets forth, as of August 29, 2007, certain information as to the common stock believed by management to be beneficially owned by
persons owning in excess of 5% of the Companys common stock.



|                                     |  |                                        |     |  |                                            |  
|------------------------------------ |  | -------------------------------------- | --- |  | ------------------------------------------ | -
|Name and Address of Beneficial Owner |  | Amount andNature ofBeneficialOwnership |     |  | Percent ofShares ofCommon StockOutstanding |  
|Jeffrey L. Gendell                   |  | 136,585                                | (1) |  | 6.98                                       | %
|Tontine Financial Partners, L.P.     |  |                                        |     |  |                                            |  
|Tontine Management, L.L.C.           |  |                                        |     |  |                                            |  
|55 Railroad Avenue                   |  |                                        |     |  |                                            |  
|Greenwich, CT 06830                  |  |                                        |     |  |                                            |  

---

|(1) | Pursuant to a joint Schedule 13G/A filed by Tontine Financial Partners, L.P., Tontine Management, L.L.C. and Mr. Gendell on February 13, 2007. Tontine Financial Partners,
L.P., Tontine Management, L.L.C. and Mr. Gendell reported shared voting and dispositive power with respect to 132,592 shares, and Mr. Gendell reported sole voting and dispositive power with respect to 3,993 shares.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(c) Security Ownership of Management.

The following table sets forth, as of August 29, 2007, the beneficial ownership of the Companys common stock by each of the Companys directors and nominees, the Companys named executive officers
and by all directors and executive officers as a group.



|                                                             |  |                                                             |  |                                                   |  
|------------------------------------------------------------ |  | ----------------------------------------------------------- |  | ------------------------------------------------- | -
|Name                                                         |  | Amount and Nature ofBeneficial Ownershipof Common Stock (1) |  | Percent of Shares of Common Stock Outstanding (2) |  
|Gary R. Bozel                                                |  | 49,697                                                      |  | 2.69                                              | %
|Michael J. Dee                                               |  | 40,903                                                      |  | 2.20                                              |  
|Nicole N. Glaeser                                            |  | 22,032                                                      |  | 1.19                                              |  
|J. Thomas Hoffman                                            |  | 25,452                                                      |  | 1.38                                              |  
|Douglas H. Ludwig                                            |  | 18,985                                                      |  | 1.02                                              |  
|Thomas P. ONeill                                            |  | 46,619                                                      |  | 2.52                                              |  
|William R. Waters                                            |  | 18,250                                                      |  | *                                                 |  
|Laurence S. Mitchell                                         |  | 11,797                                                      |  | *                                                 |  
|Frank J. Duchacek, Jr.                                       |  | 42,503                                                      |  | 2.30                                              |  
|All Executive Officers and Directors as a Group (10 persons) |  | 276,238                                                     |  | 14.83                                             |  

---

|* | Less than 1.0%.
|- | ---------------

|(1) | Ownership is direct and the named individual exercises sole voting and investment power over the shares listed as beneficially owned by such person. Amounts shown include 6,393,
2,796, 836 and 2,796 shares which may be acquired by Messrs. Dee, Ludwig and Mitchell and Ms. Glaeser and by all directors and executive officers of the Company as a group, respectively, upon the exercise of options exercisable within 60 days
of the Record Date.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Based on 1,850,063 shares of Company common stock outstanding and entitled to vote as of August 29, 2007, plus the number of shares that each person or the group may acquire
within 60 days by exercising stock options.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



71



---

(d) 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.

Item 12. Certain Relationships and Related Transactions and Director Independence

Transactions with Related Persons

The Bank offers loans to its directors and officers. Under current law, the Banks loans to directors and executive officers are
required to be made on substantially the same terms, including interest rates, as those prevailing for comparable transactions and must not involve more than the normal risk of repayment or present other unfavorable features. Furthermore, all loans
to such persons must be approved in advance by a disinterested majority of the board of directors. At June 30, 2007, the Banks loans to directors and executive officers totaled $123,000, or 0.65%, of stockholders equity. All loans
made by the Bank to its directors and executive officers and members of their immediate families were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons not related to the Bank, and did not involve more than the normal risk of collectibility or present other unfavorable features.

The Audit Committee of the board of directors periodically reviews a summary of the Companys transactions with its directors and executive officers
and with firms that employ directors, as well as other related person transactions, to recommend to the disinterested members of the board of directors that the transactions are fair, reasonable and within the Company policy and should be ratified
and approved. The Company does not maintain written policies or procedures for the review, approval or ratification of transactions with related persons. However, in accordance with banking regulations, the board of directors reviews all loans made
to a director or executive officer in an amount that, when aggregated with the amount of all other loans to such person and his or her related interests, exceed the greater of $25,000 or 5% of the Companys capital and surplus (up to a maximum
of $500,000) and such loan must be approved in advance by a majority of the disinterested members of the board of directors. Additionally, pursuant to the Companys Code of Ethics, all directors, officers and employees must disclose any actual
or apparent conflicts of interest.

Director Independence

Each of the directors of the Company is considered independent under the current listing standards of the Nasdaq Stock Market, Inc. In determining the independence of directors, the board of directors considered
transactions, relationships or arrangements between the Company and the Bank and its directors that are not required to be disclosed in this Annual Report on Form 10-KSB under the heading Item 12Certain Relationships and Related
Transactions, including loans with the Bank.

Item 13. Exhibits

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

(1) Financial Statements. The following consolidated financial statements are incorporated by reference from Item 7 hereof:

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Financial Condition as of June 30, 2007 and 2006

Consolidated Statements of
Income for the Years Ended June 30, 2007, 2006 and 2005

Consolidated Statements of Stockholders Equity for the Years Ended
June 30, 2007, 2006 and 2005

Consolidated Statements of Cash Flows for the Years Ended June 30, 2007, 2006 and 2005

Notes to Consolidated Financial Statements



72



---

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



|     |  |                                                                                                                                                                                      
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.  |  | Description                                                                                                                                                                          
|2.0  |  | Agreement and Plan of Merger dated March 19, 2007 by and among New Bradford Bancorp, Inc., Bradford Bank MHC, Bradford Bancorp, Inc. and Bradford Bank and Patapsco Bancorp, Inc.
(1)
|     | 
|3.1  |  | Articles of Incorporation of Patapsco Bancorp, Inc. and Articles Supplementary (2)                                                                                                   
|     | 
|3.2  |  | Bylaws of Patapsco Bancorp, Inc., as amended (3)                                                                                                                                     
|     | 
|4    |  | Form of Common Stock Certificate of Patapsco Bancorp, Inc. (4)                                                                                                                       
|     | 
|10.1 |  | Patapsco Bancorp, Inc. 1996 Stock Option and Incentive Plan (5)                                                                                                                     
|     | 
|10.2 |  | Intentionally omitted                                                                                                                                                                
|     | 
|10.3 |  | Intentionally omitted                                                                                                                                                                
|     | 
|10.4 |  | Form of Severance Agreement by and between The Patapsco Bank and John McClean, Francis Broccolino and William Peters (6)                                                            
|     | 
|10.5 |  | Form of Amended and Restated Severance Agreement by and between The Patapsco Bank. and Michael J. Dee, Laurence S. Mitchell and Frank J. Duchacek, Jr. (7)                          
|     | 
|10.6 |  | Intentionally omitted                                                                                                                                                                
|     | 
|10.7 |  | Patapsco Bancorp, Inc. 2000 Stock Option and Incentive Plan (2)                                                                                                                     
|     | 
|10.8 |  | Patapsco Bancorp, Inc. 2004 Stock Incentive Plan (8)                                                                                                                                
|     | 
|10.9 |  | 2006 Severance Agreement by and between The Patapsco Bank and Michael J. Dee (9)                                                                                                     
|     | 
|21   |  | Subsidiaries of the Registrant                                                                                                                                                       
|     | 
|23   |  | Consent of Beard Miller Company LLP                                                                                                                                                  
|     | 
|31.1 |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer and Chief Financial Officer                                                                                        
|     | 
|32   |  | Section 1350 Certifications                                                                                                                                                          

---

| | Management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------

|(1) | Incorporated herein by reference to the Companys Current Report on Form 8-K for the event on March 19, 2007 filed on March 21,2007 (File No. 0-28032).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | 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).
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated herein by reference from the Companys Annual Report on Form 10-KSB for the year ended June 30, 2003 (File No. 0-28032).
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated herein by reference from the Companys Registration Statement on Form 8-A (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 Current Report on Form 8-K for the event on March 19, 2007 filed on March 20, 2007 (File No. 0-28032).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

Item 14. Principal Accountant Fees and Services

Audit and Other Fees Paid to Independent Accountant

For the years ended June 30, 2007 and 2006, the Company was billed by its independent registered public accounting firm, Beard Miller Company LLP, for fees aggregating $89,415 and $69,800, respectively. Such fees
were comprised of the following:

Audit Fees. The aggregate fees billed for the audit of the Companys annual financial
statements and for the reviews of the financial statements included in the Companys Quarterly Reports on Form 10-QSB were $65,490 and $60,200 for the fiscal years ended June 30, 2007 and 2006, respectively.



73



---

Audit-Related Fees.There were $12,000 of fees billed by the Companys independent
auditors for audit-related services for the fiscal year ended June 30, 2007. No fees were billed for such services for the fiscal year ended June 30, 2006.

Tax Fees.The aggregate fees billed by the Companys independent auditors for tax services for the fiscal years ended June 30, 2007 and 2006 were $11,925 and $9,600, respectively. For the
fiscal year ended June 30, 2007 and 2006, these fees related to the preparation of federal and state income tax returns.

All
Other Fees.No fees were billed by the Companys independent auditors for services not included above for the fiscal years ended June 30, 2007 and 2006.

Pre-Approval of Services by the Independent Auditor

The Audit Committee does not have a policy for
the pre-approval of nonaudit services to be provided by the Companys independent auditor. Any such services would be considered on a case-by-case basis. All nonaudit services provided by the independent auditors in fiscal years 2007 and 2006
were pre-approved by the Audit Committee.



74



---

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                   |  |  |  |                        |  |                                                               
|------------------ |  |  |  | ---------------------- |  | --------------------------------------------------------------
|                   |  |  |  | PATAPSCO BANCORP, INC.
|September 25, 2007 |  |  |  |                       
|                   |  |  |  | By:                    |  | /s/ Michael J. Dee                                            
|                   |  |  |  |                        |  | Michael J. Dee                                                
|                   |  |  |  |                        |  | President, Chief Executive Officer and Chief
Financial Officer
|                   |  |  |  |                        |  | (Duly Authorized Officer)                                     

In accordance with the Exchange Act, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.



|                                                                             |  |  |  |                   
|---------------------------------------------------------------------------- |  |  |  | ------------------
|/s/ Michael J. Dee                                                           |  |  |  | September 25, 2007
|Michael J. Dee                                                               |  |  |  |                   
|President, Chief Executive Officer and Chief Financial
Officer               |  |  |  |                   
|(Principal Executive Officer and Principal Financial and
Accounting Officer) |  |  |  |                   
|                                                                             |  | 
|/s/ Thomas P. ONeill                                                        |  |  |  | September 25, 2007
|Thomas P. ONeill                                                            |  |  |  |                   
|Chairman of the Board                                                        |  |  |  |                   
|                                                                             |  | 
|/s/ Douglas H. Ludwig                                                        |  |  |  | September 25, 2007
|Douglas H. Ludwig                                                            |  |  |  |                   
|Director and Secretary                                                       |  |  |  |                   
|                                                                             |  | 
|/s/ Nicole N. Glaeser                                                        |  |  |  | September 25, 2007
|Nicole N. Glaeser                                                            |  |  |  |                   
|Director                                                                     |  |  |  |                   
|                                                                             |  | 
|/s/ William R. Waters                                                        |  |  |  | September 25, 2007
|William R. Waters                                                            |  |  |  |                   
|Director                                                                     |  |  |  |                   
|                                                                             |  | 
|/s/ Gary R. Bozel                                                            |  |  |  | September 25, 2007
|Gary R. Bozel                                                                |  |  |  |                   
|Director                                                                     |  |  |  |                   
|                                                                             |  | 
|/s/ J. Thomas Hoffman                                                        |  |  |  | September 25, 2007
|J. Thomas Hoffman                                                            |  |  |  |                   
|Director                                                                     |  |  |  |