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Exhibit 13

PATAPSCO BANCORP, INC.

[LOGO]

2006 ANNUAL REPORT



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PATAPSCO BANCORP, INC.

Patapsco Bancorp, Inc. (the Company) is the holding company for The Patapsco
Bank (the Bank). The Bank is a Maryland commercial bank operating through five offices in Baltimore County and City. The principal business of the Bank consists of attracting deposits from the general public and investing these deposits
in loans secured by residential and commercial real estate, construction loans, commercial business loans, commercial leases and consumer loans. The Bank derives its income principally from interest earned on loans and, to a lesser extent, interest
earned investment securities and noninterest income. Principally operating revenues, deposits and repayments of outstanding loans and investment securities provide funds for these activities.

MARKET INFORMATION

The Companys common stock trades under the symbol PATD on the OTC
Electronic Bulletin Board.There were 1,813,925 shares of common stock outstanding and approximately 415 holders of record at June 30, 2006. 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 |   | Dividends Per Share
|Fiscal 2005:   |  |      |       |     |   |                     |  |   |      
|First Quarter  |  | $    | 14.75 |     | $ | 12.33               |  | $ | .0575
|Second Quarter |  |      | 14.00 |     |   | 12.00               |  |   | .0575
|Third Quarter  |  |      | 14.00 |     |   | 12.25               |  |   | .0575
|Fourth Quarter |  |      | 13.00 |     |   | 11.80               |  |   | .0575
|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.

TABLE OF CONTENTS



|                                                                                      |  |                   |  
|------------------------------------------------------------------------------------- |  | ----------------- | -
|Patapsco Bancorp, Inc.                                                                |  | (i                | )
|Market Information                                                                    |  | (i                | )
|Letter to Stockholders                                                                |  | 1                 |  
|Selected Consolidated Financial and Other Data                                        |  | 3                 |  
|Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 5                 |  
|Consolidated Financial Statements                                                     |  | 23                |  
|Corporate Information                                                                 |  | Inside Back Cover |  



(i)



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[LETTERHEAD OF PATAPSCO BANCORP, INC.]

Dear Shareholder:

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

Your Company completed its fiscal year 2006 with assets, loans and deposits of
$228.1, $190.6 and $166.8 million, respectively. This compares to fiscal year 2005 totals of $204.7, $161.1 and $164.3. Earnings for the year were $1.39 million compared to $1.35 million the previous year. This resulted in diluted earnings per share
increasing by 3% to $.72/share. Your Company remains well capitalized according to all regulatory benchmarks.

These figures reflect the
Companys major strategy of growing its assets by making loans. In the past fiscal year the Companys major subsidiary, The Patapsco Bank, enjoyed record loan production of just under $75 million dollars, compared to $50 million dollars
the previous year, which was also a record. This allowed your Bank to grow its loan portfolios by 18% to $191 million dollars, with most of the growth occurring in the commercial business and commercial real estate areas. This growth is consistent
with the ongoing goal to change the Banks balance sheet to be more commercial bank like and less thrift like. The expanded loan production did not come without a cost. The Bank geared up its production area by bringing on several experienced
lenders, which significantly impacted upon compensation expense.

The loan growth was funded largely by investment portfolio pay-downs and
increased borrowings. Deposits only increased modestly during year and reflected an industry wide problem of attracting deposits in a flat yield curve environment with significant competition from non traditional financial institutions. To overcome
this issue the Bank is rolling out several new deposit products, including ACH origination and cash management services as well as remote deposit capture; all of which are designed for the commercial banking customer, an area where the Bank has not
been competitive because of its lack of a significant branch system.

Your Company is in the process of replacing an outdated branch
facility with a new office building that will not only have a state of the art bank branch but will also house all of the Banks lending operations, which currently are spread out over several leased offices. This new facility is slated to open
in the 2ndquarter of fiscal 2007.

The Bank continues to enjoy excellent asset quality, with non performing assets at .11% of total assets. This enabled the Bank to maintain its allowance for loan losses with only minimal impact on earnings.

Non interest income also showed strong growth, growing by 27% from $.68 million to $.87 million. This is an area, where the Bank has
lagged it peers but has made steady progress in the last few years.



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We are confident that in fiscal year 2006, we solidified the foundation for managed growth and increasing
earnings over the next few fiscal years. The major challenge is how to fund this growth with lower cost core deposits rather higher costing wholesale funding from brokered deposits and/or borrowings and to continue the progress we have made in other
areas of the Bank.

We remain committed to improving our franchise value. That means we will grow whether externally through acquisitions
or by internally by leveraging our assets. We are positioned well from a capital standpoint and additional capital may be raised if needed. We will continue to look for ways to improve our branch network. This will need to be done within an
uncertain economy, continued heavy regulation and increasing pressures from financial intermediaries who are able to compete without many of the burdens faced by the community banking industry.

We will also continue to serve our three constituencies, our shareholders, our customers and our employees. Perhaps therein lays our greatest strengths.
Our shareholders have been very supportive and we expect continue to reward them with regular dividends and increasing shareholder value. Our customers are very loyal and meeting their expectations will always be a priority. Last but certainly not
least are our employees, who are also shareholders and customers, and who remain dedicated to the success of your Company.

In conclusion,
the directors, officers and staff of Patapsco Bancorp, Inc. and The Patapsco Bank thank all of our stockholders and customers for their confidence and support during the past year. We look forward to a prosperous new year.



|                         |  |                          
|------------------------ |  | -------------------------
|/s/    Thomas P. ONeill |  | /s/    Joseph J. Bouffard
|Thomas P. ONeill        |  | Joseph J. Bouffard       
|Chairman of the          |  | President and            
|Board of Directors       |  | Chief Executive Officer  



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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

PATAPSCO BANCORP, INC.

Selected Consolidated Financial Condition Data



|                                                             |  |                                              |         |      |   |         |  |   |        
|------------------------------------------------------------ |  | -------------------------------------------- | ------- | ---- | - | ------- |  | - | -------
|                                                             |  | At June 30,                                 
|                                                             |  | 2006                                         |         | 2005 |   | 2004   
|                                                             |  | (In thousands)                              
|Total assets                                                 |  | $                                            | 228,070 |      | $ | 204,704 |  | $ | 210,616
|Loans receivable, net                                        |  |                                              | 190,589 |      |   | 161,094 |  |   | 151,413
|Cash, federal funds sold and other interest bearing deposits |  |                                              | 8,793   |      |   | 8,267   |  |   | 19,134 
|Investment securities                                        |  |                                              | 16,667  |      |   | 24,800  |  |   | 29,227 
|Deposits                                                     |  |                                              | 166,833 |      |   | 164,320 |  |   | 168,132
|Borrowings                                                   |  |                                              | 40,050  |      |   | 20,233  |  |   | 22,900 
|Stockholders equity                                         |  |                                              | 18,288  |      |   | 17,587  |  |   | 16,380 
|                                                             |  |                                              |        
|Selected Consolidated Income Data                            |  |                                              |         |      |   |         |  |   |        
|                                                             | 
|                                                             |  | Year Ended June 30,                         
|                                                             |  | 2006                                         |         | 2005 |   | 2004   
|                                                             |  | (In thousands, except for per share amounts)
|Interest income                                              |  | $                                            | 13,556  |      | $ | 11,811  |  | $ | 10,519 
|Interest expense                                             |  |                                              | 4,949   |      |   | 3,754   |  |   | 3,726  
|                                                             |  |                                              |         |      |   |         |  |   |        
|Net interest income before provision for loan losses         |  |                                              | 8,607   |      |   | 8,057   |  |   | 6,793  
|Provision for loan losses                                    |  |                                              | 65      |      |   | 225     |  |   | 42     
|                                                             |  |                                              |         |      |   |         |  |   |        
|Net interest income after provision for loan losses          |  |                                              | 8,542   |      |   | 7,832   |  |   | 6,751  
|Noninterest income                                           |  |                                              | 871     |      |   | 684     |  |   | 579    
|Noninterest expenses:                                        |  |                                              |         |      |   |         |  |   |        
|Compensation and employee benefits                           |  |                                              | 4,490   |      |   | 3,773   |  |   | 2,971  
|Professional fees                                            |  |                                              | 241     |      |   | 287     |  |   | 245    
|Equipment expenses                                           |  |                                              | 326     |      |   | 284     |  |   | 196    
|Net occupancy costs                                          |  |                                              | 552     |      |   | 306     |  |   | 233    
|Advertising                                                  |  |                                              | 86      |      |   | 178     |  |   | 141    
|Data processing                                              |  |                                              | 285     |      |   | 244     |  |   | 234    
|Amortization of intangible asset                             |  |                                              | 51      |      |   | 51      |  |   | 14     
|Telephone, postage and delivery                              |  |                                              | 271     |      |   | 276     |  |   | 179    
|Other                                                        |  |                                              | 900     |      |   | 1,012   |  |   | 796    
|                                                             |  |                                              |         |      |   |         |  |   |        
|Total noninterest expenses                                   |  |                                              | 7,202   |      |   | 6,411   |  |   | 5,009  
|                                                             |  |                                              |         |      |   |         |  |   |        
|Income before provision for income taxes                     |  |                                              | 2,211   |      |   | 2,105   |  |   | 2,321  
|Income tax provision                                         |  |                                              | 823     |      |   | 759     |  |   | 852    
|                                                             |  |                                              |         |      |   |         |  |   |        
|Net income                                                   |  | $                                            | 1,388   |      | $ | 1,346   |  | $ | 1,469  
|                                                             |  |                                              |         |      |   |         |  |   |        
|Earnings per share of common stock                           |  |                                              |         |      |   |         |  |   |        
|Basic                                                        |  | $                                            | 0.80    |      | $ | 0.81    |  | $ | 0.92   
|Diluted                                                      |  | $                                            | 0.72    |      | $ | 0.70    |  | $ | 0.77   



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KEY OPERATING RATIOS

PATAPSCO BANCORP, INC.



|                                                                                                      |  |                                       |   |  |          |   |  |        |  
|----------------------------------------------------------------------------------------------------- |  | ------------------------------------- | - |  | -------- | - |  | ------ | -
|                                                                                                      |  | As of and for the Year Ended,June 30, |  
|                                                                                                      |  | 2006                                  |   |  | 2005     |   |  | 2004   |  
|Performance Ratios:                                                                                   |  |                                       |  
|Return on average assets (net income divided by average total assets)                                 |  | 0.64                                  | % |  | 0.66     | % |  | 0.80   | %
|Return on average stockholders equity (net income divided by average stockholders equity)(1)        |  | 7.75                                  |   |  | 7.87     |   |  | 9.11   |  
|Interest rate spread (weighted average interest rate earned less weighted average interest rate cost) |  | 3.96                                  |   |  | 4.03     |   |  | 3.92   |  
|Net interest margin (net interest income divided by average interest-earning assets)                  |  | 4.22                                  |   |  | 4.21     |   |  | 4.06   |  
|Ratio of average interest-earning assets to average interest-bearing liabilities                      |  | 110.62                                |   |  | 109.18   |   |  | 106.31 |  
|Ratio of noninterest expense to average total assets                                                  |  | 3.32                                  |   |  | 3.13     |   |  | 2.86   |  
|                                                                                                      |  |                                       |  
|Asset Quality Ratios:                                                                                 |  |                                       |   |  |          |   |  |        |  
|Nonperforming assets to total assets at end of period                                                 |  | 0.11                                  |   |  | 0.05     |   |  | 0.24   |  
|Nonperforming (nonaccrual) loans to loans receivable, net at end of period                            |  | 0.13                                  |   |  | 0.02     |   |  | 0.33   |  
|Allowance for loan losses to total loans at end of period                                             |  | 0.52                                  |   |  | 0.58     |   |  | 0.61   |  
|Allowance for loan losses to nonperforming loans at end of period                                     |  | 409.84                                |   |  | 2,487.45 |   |  | 188.01 |  
|Net charge-offs to average loans outstanding                                                          |  | 0.01                                  |   |  | 0.14     |   |  | 0.20   |  
|                                                                                                      |  |                                       |  
|Capital Ratios:                                                                                       |  |                                       |   |  |          |   |  |        |  
|Stockholders equity to total assets at end of period (1)                                             |  | 8.02                                  |   |  | 8.59     |   |  | 7.75   |  
|Average stockholders equity to average assets (1)                                                    |  | 8.25                                  |   |  | 8.36     |   |  | 9.21   |  
|Dividends declared per share to diluted net income per share                                          |  | 34.72                                 |   |  | 32.86    |   |  | 27.71  |  
|Tier one capital to average assets (Leverage ratio)                                                   |  | 7.66                                  |   |  | 7.87     |   |  | 6.13   |  
|Tier one capital to risk weighted assets                                                              |  | 10.63                                 |   |  | 11.37    |   |  | 10.17  |  
|Total capital to risk weighted assets                                                                 |  | 11.25                                 |   |  | 12.05    |   |  | 10.91  |  

---

|(1) | Stockholders equity includes temporary equity.
|--- | -----------------------------------------------



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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

General

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

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

Forward-Looking Statements

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



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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 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.

In accordance with the provisions of Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by Statement 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures (collectively referred to as Statement 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 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 at the present value of their 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 amounts
that actually occur.

SFAS No. 123, Accounting for Stock-Based Compensation, permits the Company to make certain
disclosures as if the fair value method of accounting had been applied to the Companys stock option grants made subsequent to 1994. Accordingly, no stock option based employee compensation cost is reflected in net income, as all options
granted by the Company since that date have an exercise price equal to the market value of the underlying common stock on the date of grant.

The value and therefore compensation cost is dependent upon certain assumptions made by management including expected life of the options and the volatility of the related stock. 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



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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 will adopt 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 will recognize a pre-tax expense of approximately $5,600 in the quarter ending
September 30, 2006 for the expense related to the final scheduled vesting of all outstanding stock option awards.

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



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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,    |        
|                                                                                 |  | 2006                   |         |          | 2005 |                   |  | 2004   |               
|                                                                                 |  | AverageBalance         |         | Interest |      | AverageYield/Cost |  |        | AverageBalance |  | Interest |         | AverageYield/Cost |   |        | AverageBalance |        | Interest |  | AverageYield/Cost |        
|                                                                                 |  | (Dollars in thousands) |        
|Interest-earning assets:                                                         |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Loans receivable (1)                                                             |  | $                      | 177,598 |          | $    | 12,501            |  | 7.04   | %              |  | $        | 155,352 |                   | $ | 10,613 |                | 6.83   | %        |  | $                 | 121,770 |  | $ | 9,042  |  | 7.43   | %
|Investment securities (2)                                                        |  |                        | 23,412  |          |      | 941               |  | 4.02   |                |  |          | 28,327  |                   |   | 1,046  |                | 3.69   |          |  |                   | 33,268  |  |   | 1,336  |  | 4.02   |  
|Short-term investments and other interest-earning assets                         |  |                        | 3,036   |          |      | 114               |  | 3.77   |                |  |          | 7,671   |                   |   | 152    |                | 1.98   |          |  |                   | 12,097  |  |   | 141    |  | 1.16   |  
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Total interest-earning assets                                                    |  |                        | 204,046 |          |      | 13,556            |  | 6.64   |                |  |          | 191,350 |                   |   | 11,811 |                | 6.17   |          |  |                   | 167,135 |  |   | 10,519 |  | 6.29   |  
|Non-interest-earning assets                                                      |  |                        | 12,848  |          |      |                   |  |        |                |  |          | 13,367  |                   |   |        |                |        |          |  |                   | 16,480  |  |   |        |  |        |  
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Total assets                                                                     |  | $                      | 216,894 |          |      |                   |  |        |                |  | $        | 204,717 |                   |   |        |                |        |          |  | $                 | 183,615 |  |   |        |  |        |  
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Interest-bearing liabilities:                                                    |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Deposits (3)                                                                     |  | $                      | 152,904 |          | $    | 3,486             |  | 2.28   |                |  | $        | 153,961 |                   | $ | 2,818  |                | 1.83   |          |  | $                 | 128,736 |  | $ | 2,524  |  | 1.96   |  
|Short-term borrowings                                                            |  |                        | 3,116   |          |      | 140               |  | 4.51   |                |  |          |        |                   |   |       |                |       |          |  |                   |        |  |   |       |  |       |  
|Long-term borrowings                                                             |  |                        | 28,444  |          |      | 1,323             |  | 4.65   |                |  |          | 21,296  |                   |   | 936    |                | 4.39   |          |  |                   | 28,482  |  |   | 1,202  |  | 4.22   |  
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Total interest-bearing liabilities                                               |  |                        | 184,464 |          |      | 4,949             |  | 2.68   |                |  |          | 175,257 |                   |   | 3,754  |                | 2.14   |          |  |                   | 157,218 |  |   | 3,726  |  | 2.37   |  
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Non-interest-bearing liabilities                                                 |  |                        | 14,528  |          |      |                   |  |        |                |  |          | 12,353  |                   |   |        |                |        |          |  |                   | 10,276  |  |   |        |  |        |  
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Total liabilities                                                                |  |                        | 198,992 |          |      |                   |  |        |                |  |          | 187,610 |                   |   |        |                |        |          |  |                   | 167,494 |  |   |        |  |        |  
|Total equity                                                                     |  |                        | 17,902  |          |      |                   |  |        |                |  |          | 17,107  |                   |   |        |                |        |          |  |                   | 16,121  |  |   |        |  |        |  
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Total liabilities and equity                                                     |  | $                      | 216,894 |          |      |                   |  |        |                |  | $        | 204,717 |                   |   |        |                |        |          |  | $                 | 183,615 |  |   |        |  |        |  
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Net interest income                                                              |  |                        |         |          | $    | 8,607             |  |        |                |  |          |         |                   | $ | 8,057  |                |        |          |  |                   |         |  | $ | 6,793  |  |        |  
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Interest rate margin                                                             |  |                        |         |          |      |                   |  | 4.22   | %              |  |          |         |                   |   |        |                | 4.21   | %        |  |                   |         |  |   |        |  | 4.06   | %
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Net interest spread                                                              |  |                        |         |          |      |                   |  | 3.96   | %              |  |          |         |                   |   |        |                | 4.03   | %        |  |                   |         |  |   |        |  | 3.92   | %
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                        |         |          |      |                   |  | 110.62 | %              |  |          |         |                   |   |        |                | 109.18 | %        |  |                   |         |  |   |        |  | 106.31 | %
|                                                                                 |  |                        |         |          |      |                   |  |        |                |  |          |         |                   |   |        |                |        |          |  |                   |         |  |   |        |  |        |  

---

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



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



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



8



---

##### Table of Contents

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,         |  
|                                                         |  | 2006        vs.        2005 |       |   | 2005        vs.        2004 |  
|                                                         |  | Increase (Decrease) Due to  |       |   | Increase (Decrease) Due to  |  
|                                                         |  | Volume                      |       |   | Rate                        |   |      | Total |  |   | Volume |   |  | Rate |       |   | Total |  
|                                                         |  | (In thousands)              |       |   | (In thousands)              |  
|Interest income:                                         |  |                             |       |   |                             |   |      |       |  |   |        |   |  |      |       |   |       |   |      |   |  |   |       |  
|Loans receivable                                         |  | $                           | 1,558 |   |                             | $ | 330  |       |  | $ | 1,888  |   |  | $    | 2,217 |   |       | $ | (646 | ) |  | $ | 1,571 |  
|Investment securities                                    |  |                             | (132  | ) |                             |   | 27   |       |  |   | (105   | ) |  |      | (270  | ) |       |   | (20  | ) |  |   | (290  | )
|Short-term investments and other interest-earning assets |  |                             | (134  | ) |                             |   | 96   |       |  |   | (38    | ) |  |      | (12   | ) |       |   | 23   |   |  |   | 11    |  
|                                                         |  |                             |       |   |                             |   |      |       |  |   |        |   |  |      |       |   |       |   |      |   |  |   |       |  
|Total interest-earning assets                            |  |                             | 1,292 |   |                             |   | 453  |       |  |   | 1,745  |   |  |      | 1,935 |   |       |   | (643 | ) |  |   | 1,292 |  
|                                                         |  |                             |       |   |                             |   |      |       |  |   |        |   |  |      |       |   |       |   |      |   |  |   |       |  
|Interest expense:                                        |  |                             |       |   |                             |   |      |       |  |   |        |   |  |      |       |   |       |   |      |   |  |   |       |  
|Deposits (1)                                             |  |                             | (19   | ) |                             |   | 687  |       |  |   | 668    |   |  |      | 470   |   |       |   | (176 | ) |  |   | 294   |  
|Short-term borrowings                                    |  |                             | 140   |   |                             |   |     |       |  |   | 140    |   |  |      |      |   |       |   |     |   |  |   |      |  
|Long-term borrowings                                     |  |                             | 330   |   |                             |   | 57   |       |  |   | 387    |   |  |      | (318  | ) |       |   | 52   |   |  |   | (266  | )
|                                                         |  |                             |       |   |                             |   |      |       |  |   |        |   |  |      |       |   |       |   |      |   |  |   |       |  
|Total interest-bearing liabilities                       |  |                             | 451   |   |                             |   | 744  |       |  |   | 1,195  |   |  |      | 152   |   |       |   | (124 | ) |  |   | 28    |  
|                                                         |  |                             |       |   |                             |   |      |       |  |   |        |   |  |      |       |   |       |   |      |   |  |   |       |  
|Change in net interest income                            |  | $                           | 841   |   |                             | $ | (291 | )     |  | $ | 550    |   |  | $    | 1,783 |   |       | $ | (519 | ) |  | $ | 1,264 |  
|                                                         |  |                             |       |   |                             |   |      |       |  |   |        |   |  |      |       |   |       |   |      |   |  |   |       |  

---

|(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, 2006 and 2005

General.Total assets increased by $23.4 million or 11.4% to $228.1 million at June 30, 2006 from $204.7 million at June 30, 2005. Growth was funded primarily with borrowed money and
cash from maturities and other payments from the investment portfolio.

Loans Receivable.Gross loans receivable increased by $31.1 million, or 18.5%, to $198.9 million at June 30, 2006 from $167.8 million at June 30, 2005. Loan production in the year ended June 30, 2006
totaled $73.3 million compared to $49.0 million in the year ended June 30, 2005, an increase of 49.6%. Construction loans increased by $8.4 million or 152.1%, commercial business loans increased by $6.7 million or 23.9%, residential mortgages
increased by $6.1 million or 8.2%, commercial real estate loans increased by $4.6 million or 18.3%, consumer loans increased $2.8 million of 18.1% and commercial leases increased by $2.4 million or 12.8%.



9



---

##### Table of Contents

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, 2006, the Company had no concentrations of loans exceeding 10% of gross loans other than as disclosed below:



|                                             |  |                        |         |   |      |        |   |        |   |         |      |  |        |        |  |   |         |   |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|-------------------------------------------- |  | ---------------------- | ------- | - | ---- | ------ | - | ------ | - | ------- | ---- |  | ------ | ------ |  | - | ------- | - |  | ------ | - | - | - | ------- | ------ | ------ | - |  | - | ------- |  | ------ | -
|                                             |  | At June 30,            |        
|                                             |  | 2006                   |         |   | 2005 |        |   | 2004   |   |         | 2003 |  |        | 2002   | 
|                                             |  | Amount                 |         |   | %    |        |   | Amount |   |         | %    |  |        | Amount |  |   | %       |   |  | Amount |   | % |   |         | Amount |        | % | 
|                                             |  | (Dollars in thousands) |        
|Real estate loans:                           |  |                        |         |   |      |        |   |        |   |         |      |  |        |        |  |   |         |   |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Residential (1)                              |  | $                      | 80,693  |   |      | 40.58  | % |        | $ | 74,600  |      |  | 44.46  | %      |  | $ | 78,303  |   |  | 49.27  | % |   | $ | 48,664  |        | 40.76  | % |  | $ | 59,609  |  | 47.88  | %
|Commercial                                   |  |                        | 29,712  |   |      | 14.94  |   |        |   | 25,109  |      |  | 14.96  |        |  |   | 16,545  |   |  | 10.41  |   |   |   | 14,622  |        | 12.25  |   |  |   | 15,487  |  | 12.44  |  
|Construction (2)                             |  |                        | 13,913  |   |      | 7.00   |   |        |   | 5,520   |      |  | 3.29   |        |  |   | 6,510   |   |  | 4.10   |   |   |   | 4,266   |        | 3.57   |   |  |   | 3,332   |  | 2.68   |  
|Consumer loans:                              |  |                        |         |   |      |        |   |        |   |         |      |  |        |        |  |   |         |   |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Home improvement                             |  |                        | 11,442  |   |      | 5.75   |   |        |   | 7,910   |      |  | 4.71   |        |  |   | 8,063   |   |  | 5.07   |   |   |   | 9,161   |        | 7.67   |   |  |   | 9,562   |  | 7.68   |  
|Home equity loans                            |  |                        | 4,400   |   |      | 2.21   |   |        |   | 5,205   |      |  | 3.10   |        |  |   | 4,244   |   |  | 2.67   |   |   |   | 3,709   |        | 3.11   |   |  |   | 3,096   |  | 2.49   |  
|Other consumer loans                         |  |                        | 2,483   |   |      | 1.25   |   |        |   | 2,401   |      |  | 1.43   |        |  |   | 2,170   |   |  | 1.36   |   |   |   | 2,194   |        | 1.84   |   |  |   | 1,576   |  | 1.27   |  
|Commercial loans:                            |  |                        |         |   |      |        |   |        |   |         |      |  |        |        |  |   |         |   |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Commercial loans                             |  |                        | 34,827  |   |      | 17.51  |   |        |   | 28,102  |      |  | 16.75  |        |  |   | 21,919  |   |  | 13.79  |   |   |   | 17,564  |        | 14.70  |   |  |   | 14,159  |  | 11.38  |  
|Commercial leases                            |  |                        | 21,409  |   |      | 10.76  |   |        |   | 18,969  |      |  | 11.30  |        |  |   | 21,182  |   |  | 13.33  |   |   |   | 19,225  |        | 16.10  |   |  |   | 17,643  |  | 14.18  |  
|                                             |  |                        |         |   |      |        |   |        |   |         |      |  |        |        |  |   |         |   |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|                                             |  |                        | 198,879 |   |      | 100.00 | % |        |   | 167,816 |      |  | 100.00 | %      |  |   | 158,936 |   |  | 100.00 | % |   |   | 119,405 |        | 100.00 | % |  |   | 124,464 |  | 100.00 | %
|                                             |  |                        |         |   |      |        |   |        |   |         |      |  |        |        |  |   |         |   |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Less:                                        |  |                        |         |   |      |        |   |        |   |         |      |  |        |        |  |   |         |   |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Deferred loan origination fees, net of costs |  |                        | 178     |   |      |        |   |        |   | 99      |      |  |        |        |  |   | 94      |   |  |        |   |   |   | 96      |        |        |   |  |   | 66      |  |        |  
|Unearned interest consumer loans             |  |                        | 1,245   |   |      |        |   |        |   | 503     |      |  |        |        |  |   | 465     |   |  |        |   |   |   | 408     |        |        |   |  |   | 289     |  |        |  
|Unearned interest commercial leases          |  |                        | 6,091   |   |      |        |   |        |   | 5,446   |      |  |        |        |  |   | 6,473   |   |  |        |   |   |   | 4,356   |        |        |   |  |   | 3,976   |  |        |  
|Purchase accounting discount (premium), net  |  |                        | (224    | ) |      |        |   |        |   | (271    | )    |  |        |        |  |   | (445    | ) |  |        |   |   |   | 154     |        |        |   |  |   | 345     |  |        |  
|Allowance for loan losses                    |  |                        | 1,000   |   |      |        |   |        |   | 945     |      |  |        |        |  |   | 936     |   |  |        |   |   |   | 1,139   |        |        |   |  |   | 1,438   |  |        |  
|                                             |  |                        |         |   |      |        |   |        |   |         |      |  |        |        |  |   |         |   |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Total                                        |  | $                      | 190,589 |   |      |        |   |        | $ | 161,094 |      |  |        |        |  | $ | 151,413 |   |  |        |   |   | $ | 113,252 |        |        |   |  | $ | 118,350 |  |        |  
|                                             |  |                        |         |   |      |        |   |        |   |         |      |  |        |        |  |   |         |   |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  



|(1) | Does not include loans held for sale.
|--- | -------------------------------------



|(2) | Net of loans in process.
|--- | ------------------------



10



---

##### Table of Contents

The following table sets forth certain information at June 30, 2006 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 significantly shorten the average life of all loans and may cause the Companys repayment experience to
differ from that shown below.



|                   |  |                                        |       |                                             |   |                                    |  |       |        |  |   |       
|------------------ |  | -------------------------------------- | ----- | ------------------------------------------- | - | ---------------------------------- |  | ----- | ------ |  | - | ------
|                   |  | Due duringthe year endingJune 30, 2007 |       | Due after1 through5 years afterJune 30,2006 |   | Due after5 years afterJune 30,2006 |  | Total
|                   |  | (In thousands)                        
|Construction Loans |  |                                        |      |                                             |   | 13,913                             |  |       |       |  |   | 13,913
|Commercial loans   |  |                                        | 5,467 |                                             |   | 4,276                              |  |       | 25,084 |  |   | 34,827
|                   |  |                                        |       |                                             |   |                                    |  |       |        |  |   |       
|Total              |  | $                                      | 5,467 |                                             | $ | 18,189                             |  | $     | 25,084 |  | $ | 48,740
|                   |  |                                        |       |                                             |   |                                    |  |       |        |  |   |       

The following table sets forth at June 30, 2006 the dollar amount of the above loans which
may reprice or are due one year or more after June 30, 2006 which have predetermined interest rates and have floating or adjustable interest rates.



|             |  |                    |        |                             |   |        |  |   |       
|------------ |  | ------------------ | ------ | --------------------------- | - | ------ |  | - | ------
|             |  | PredeterminedRates |        | Floating orAdjustable Rates |   | Total 
|             |  | (In thousands)    
|Construction |  |                    |       |                             |   | 13,913 |  |   | 13,913
|Commercial   |  |                    | 11,560 |                             |   | 23,269 |  |   | 34,827
|             |  |                    |        |                             |   |        |  |   |       
|Total        |  | $                  | 11,560 |                             | $ | 37,182 |  | $ | 48,740
|             |  |                    |        |                             |   |        |  |   |       

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. The average life of mortgage loans tends to increase when current mortgage loan market rates are substantially higher than rates on existing
mortgage loans and, conversely, decrease when current mortgage loan market rates are substantially lower than rates on existing mortgage loans.

Investment Securities.U.S. government agency securities decreased by $5.1 million or 43.7% to $6.6 million at June 30, 2006 from $11.6 million at June 30, 2005. Corporate bonds decreased by $0.7 million due to a
maturity and the sale of one security in the year ended June 30, 2006. The sale occurred after the issuer was put on a negative watch by a national rating agency. Mortgage-backed securities decreased by $2.1 million in the year ended
June 30, 2006 as pay-downs in the portfolio were not replaced with any purchases. Due to loan growth, maturities and pay-downs of these securities were not replaced with purchases. Stock in the Federal Home Loan Bank of Atlanta increased by
$0.7 million primarily do to an increase in borrowings outstanding.

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



|                                              |  |                |        |      |   |        |  |   |       
|--------------------------------------------- |  | -------------- | ------ | ---- | - | ------ |  | - | ------
|                                              |  | At June 30,   
|                                              |  | 2006           |        | 2005 |   | 2004  
|                                              |  | (in thousands)
|Securities available for sale, at fair value: |  |                |        |      |   |        |  |   |       
|U.S. Government and agency securities         |  | $              | 6,559  |      | $ | 11,661 |  | $ | 13,490
|Equity securities                             |  |                | 78     |      |   | 68     |  |   | 55    
|Corporate securities                          |  |                | 1,903  |      |   | 2,580  |  |   | 2,572 
|Mortgage-backed securities                    |  |                | 8,127  |      |   | 10,491 |  |   | 13,110
|                                              |  |                |        |      |   |        |  |   |       
|Total securities available for sale           |  |                | 16,667 |      |   | 24,800 |  |   | 29,227
|                                              |  |                |        |      |   |        |  |   |       
|Investments required by law, at cost:         |  |                |        |      |   |        |  |   |       
|FHLB of Atlanta stock                         |  |                | 2,018  |      |   | 1,279  |  |   | 1,381 
|FRB of Richmond stock                         |  |                | 398    |      |   | 398    |  |   | 379   
|                                              |  |                |        |      |   |        |  |   |       
|Total investments required by law, at cost    |  |                | 2,416  |      |   | 1,677  |  |   | 1,760 
|                                              |  |                |        |      |   |        |  |   |       
|Total investments                             |  | $              | 19,083 |      | $ | 26,477 |  | $ | 30,987
|                                              |  |                |        |      |   |        |  |   |       



11



---

##### Table of Contents

The following table sets forth the scheduled maturities, carrying amounts, fair values and average yields
for the Companys investment portfolio at June 30, 2006:



|                               |  |                        |       |               |                   |   |                |                   |               |  |                    |                |  |                            |       |  |                |   |               |   |       |                |      |            |  |               |        |  |   |        |  |      |  
|------------------------------ |  | ---------------------- | ----- | ------------- | ----------------- | - | -------------- | ----------------- | ------------- |  | ------------------ | -------------- |  | -------------------------- | ----- |  | -------------- | - | ------------- | - | ----- | -------------- | ---- | ---------- |  | ------------- | ------ |  | - | ------ |  | ---- | -
|                               |  | One Year or Less       |       |               | One to Five Years |   |                | Five to Ten Years |               |  | More than TenYears |                |  | Total Investment Portfolio |      
|                               |  | Amortized Cost         |       | Average Yield |                   |   | Amortized Cost |                   | Average Yield |  |                    | Amortized Cost |  | Average Yield              |       |  | Amortized Cost |   | Average Yield |   |       | Amortized Cost |      | Fair Value |  | Average Yield |       
|                               |  |                        |       |               |                   |   |                |                   |               |  |                   
|                               |  | (Dollars in thousands) |      
|Securities available for sale: |  |                        |       |               |                   |   |                |                   |               |  |                    |                |  |                            |       |  |                |   |               |   |       |                |      |            |  |               |        |  |   |        |  |      |  
|Mortgage-backed securities     |  | $                      | 97    |               | 6.20              | % |                | $                 | 5             |  | 8.20               | %              |  | $                          | 2,721 |  | 4.50           | % |               | $ | 5,731 |                | 4.96 | %          |  | $             | 8,554  |  | $ | 8,127  |  | 5.09 | %
|U.S. Government & agency       |  |                        | 2,006 |               | 3.63              |   |                |                   | 3,493         |  | 3.61               |                |  |                            | 500   |  | 4.88           |   |               |   | 750   |                | 4.25 |            |  |               | 6,749  |  |   | 6,559  |  | 3.89 |  
|Corporate securities           |  |                        |      |               |                  |   |                |                   | 1,000         |  | 4.22               |                |  |                            |      |  |               |   |               |   | 1,000 |                | 5.60 |            |  |               | 2,000  |  |   | 1,903  |  | 5.16 |  
|Investments required by law    |  |                        |      |               |                  |   |                |                   |              |  |                   |                |  |                            |      |  |               |   |               |   | 2,416 |                | 4.54 |            |  |               | 2,416  |  |   | 2,416  |  | 4.54 |  
|Equity securities              |  |                        | 72    |               | 6.22              |   |                |                   |              |  |                   |                |  |                            |      |  |               |   |               |   |      |                |     |            |  |               | 72     |  |   | 78     |  | 6.22 |  
|                               |  |                        |       |               |                   |   |                |                   |               |  |                    |                |  |                            |       |  |                |   |               |   |       |                |      |            |  |               |        |  |   |        |  |      |  
|Total                          |  | $                      | 2,175 |               | 3.55              | % |                | $                 | 4,498         |  | 3.75               | %              |  | $                          | 3,221 |  | 4.56           | % |               | $ | 9,897 |                | 4.87 | %          |  | $             | 19,791 |  | $ | 19,083 |  | 4.62 | %
|                               |  |                        |       |               |                   |   |                |                   |               |  |                    |                |  |                            |       |  |                |   |               |   |       |                |      |            |  |               |        |  |   |        |  |      |  



12



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##### Table of Contents

Deposits.Total deposits increased by $2.5 million or 1.5% to $166.8
million at June 30, 2006 from $164.3 million at June 30, 2005. Decreases in savings ($6.1), money market ($0.3) and NOW checking (($0.6) were offset by increases in certificate ($8.4) and non-interest checking ($1.1) accounts. Rising rates
paid on deposits in the Companys market area has resulted in depositors moving money into higher yielding certificate accounts. Competition for deposits in the Companys market area remains intense. In the fourth quarter of the year, the
Company raised $2.2 million in brokered certificates of deposits. The following table sets forth deposit balances by type as of the dates indicated.



|                              |  |                        |         |         |        |   |         |      |         |  |        |         |  |         |         |  |        |  
|----------------------------- |  | ---------------------- | ------- | ------- | ------ | - | ------- | ---- | ------- |  | ------ | ------- |  | ------- | ------- |  | ------ | -
|                              |  | At June 30,            |        
|                              |  | 2006                   |         |         | 2005   |   |         | 2004 |        
|                              |  | Balance                |         | % Total |        |   | Balance |      | % Total |  |        | Balance |  | % Total |        
|                              |  | (Dollars in thousands) |        
|Savings Accounts              |  | $                      | 25,819  |         | 15.48  | % |         | $    | 31,984  |  | 19.46  | %       |  | $       | 31,718  |  | 18.86  | %
|NOW Checking                  |  |                        | 12,781  |         | 7.66   |   |         |      | 13,406  |  | 8.16   |         |  |         | 12,440  |  | 7.40   |  
|Money Market                  |  |                        | 28,968  |         | 17.36  |   |         |      | 29,211  |  | 17.78  |         |  |         | 33,067  |  | 19.67  |  
|Certificated of Deposits      |  |                        | 86,079  |         | 51.60  |   |         |      | 77,647  |  | 47.25  |         |  |         | 79,918  |  | 47.53  |  
|                              |  |                        |         |         |        |   |         |      |         |  |        |         |  |         |         |  |        |  
|Interest-bearing deposits     |  |                        | 153,647 |         | 92.10  |   |         |      | 152,248 |  | 92.65  |         |  |         | 157,143 |  | 93.46  |  
|Non-interest bearing checking |  |                        | 13,186  |         | 7.90   |   |         |      | 12,072  |  | 7.35   |         |  |         | 10,989  |  | 6.54   |  
|                              |  |                        |         |         |        |   |         |      |         |  |        |         |  |         |         |  |        |  
|Total                         |  | $                      | 166,833 |         | 100.00 | % |         | $    | 164,320 |  | 100.00 | %       |  | $       | 168,132 |  | 100.00 | %
|                              |  |                        |         |         |        |   |         |      |         |  |        |         |  |         |         |  |        |  

The following table sets forth the average balances based on daily balances and interest rates for
various types of deposits as of the dates indicated.



|                             |  |                        |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|---------------------------- |  | ---------------------- | ------- | ----------- | ---- | - | -------------- | ---- | ----------- |  | ---- | -------------- |  | ----------- | ------- |  | ---- | -
|                             |  | Year Ended June 30,    |        
|                             |  | 2006                   |         |             | 2005 |   |                | 2004 |            
|                             |  | AverageBalance         |         | AverageRate |      |   | AverageBalance |      | AverageRate |  |      | AverageBalance |  | AverageRate |        
|                             |  | (Dollars in thousands) |        
|Savings Accounts             |  | $                      | 29,021  |             | 0.42 | % |                | $    | 31,434      |  | 0.47 | %              |  | $           | 26,874  |  | 0.56 | %
|NOW checking                 |  |                        | 12,130  |             | 0.13 |   |                |      | 12,778      |  | .29  |                |  |             | 8,884   |  | 0.32 |  
|Money market                 |  |                        | 29,029  |             | 1.49 |   |                |      | 29,612      |  | 1.01 |                |  |             | 18,701  |  | 1.05 |  
|Certificates of deposit      |  |                        | 82,152  |             | 3.54 |   |                |      | 78,815      |  | 3.20 |                |  |             | 73,626  |  | 3.01 |  
|Noninterest-bearing checking |  |                        | 12,776  |             |     |   |                |      | 11,324      |  |     |                |  |             | 9,497   |  |     |  
|                             |  |                        |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Total                        |  | $                      | 165,108 |             |      |   |                | $    | 163,963     |  |      |                |  | $           | 137,582 |  |      |  
|                             |  |                        |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  

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, 2006. At such date, such deposits represented 11.72% of total deposits and had a weighted average rate of 4.38%.



|                            |  |                         |       
|--------------------------- |  | ----------------------- | ------
|Maturity Period             |  | Certificates of Deposit
|                            |  | (In thousands)         
|Three months or less        |  | $                       | 743   
|Over three through 6 months |  |                         | 2,543 
|Over six through 12 months  |  |                         | 7,071 
|Over 12 months              |  |                         | 9,202 
|                            |  |                         |       
|Total                       |  | $                       | 19,559
|                            |  |                         |       

Borrowings. The Companys borrowings increased by $14.8 million or 73.2% to
$35.0 million at June 30, 2006 from $20.2 million at June 30, 2005. Loan fundings well in excess of deposit growth is the reason for the growth. In addition, in October 2005, the Company issued $5.0 million in subordinated debentures. The
proceeds were utilized to pay-off the remaining $1.7 million balance in the loan from the Bankers Bank used in the acquisition of Parkville Federal Savings Bank in April 2004. The remaining funds are available to make capital contributions to the
Bank and for other corporate purposes.



13



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##### Table of Contents

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:



|                                                            |  |                        |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                            |  | 2006                   |        |   | 2005 |   |        | 2004 | 
|                                                            |  | (Dollars in thousands) |       
|Amounts outstanding at end of period:                       |  |                        |        |   |      |   |        |      |  |   |        |  
|FHLB advances                                               |  | $                      | 35,050 |   |      | $ | 18,400 |      |  | $ | 20,900 |  
|Other borrowings                                            |  |                        |       |   |      |   | 1,833  |      |  |   | 2,000  |  
|Weighted average rate paid on:                              |  |                        |        |   |      |   |        |      |  |   |        |  
|FHLB advances                                               |  |                        | 4.33   | % |      |   | 4.36   | %    |  |   | 4.23   | %
|Other borrowings                                            |  |                        |       |   |      |   | 4.72   | %    |  |   | 3.36   | %
|Maximum amount of borrowings outstanding at any month end:  |  |                        |        |   |      |   |        |      |  |   |        |  
|FHLB advances                                               |  | $                      | 35,050 |   |      | $ | 20,900 |      |  | $ | 30,200 |  
|Other borrowings                                            |  |                        |       |   |      |   | 2,000  |      |  |   | 2,000  |  
|Approximate average borrowings outstanding with respect to: |  |                        |        |   |      |   |        |      |  |   |        |  
|FHLB advances                                               |  | $                      | 27,452 |   |      | $ | 19,325 |      |  | $ | 27,985 |  
|Other borrowings                                            |  |                        |       |   |      |   | 1,971  |      |  |   | 497    |  

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.



14



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##### Table of Contents

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.

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.

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



|                               |  |                        |     |      |   |      |  |      |       |      |   |       |  |   |      
|------------------------------ |  | ---------------------- | --- | ---- | - | ---- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                               |  | Year Ended June 30,   
|                               |  | 2006                   |     | 2005 |   | 2004 |  | 2003 |       | 2002
|                               |  | (Dollars in thousands)
|Balance at beginning of period |  | $                      | 945 |      | $ | 936  |  | $    | 1,139 |      | $ | 1,438 |  | $ | 1,161
|Loans charged off:             |  |                        |     |      |   |      |  |      |       |      |   |       |  |   |      
|Real estate mortgage           |  |                        |    |      |   |     |  |      | 40    |      |   |      |  |   |     
|Commercial loan                |  |                        |    |      |   | 5    |  |      | 16    |      |   | 499   |  |   | 28   
|Commercial lease               |  |                        | 40  |      |   | 184  |  |      | 178   |      |   | 320   |  |   | 129  
|Consumer                       |  |                        | 146 |      |   | 143  |  |      | 212   |      |   | 145   |  |   | 200  
|                               |  |                        |     |      |   |      |  |      |       |      |   |       |  |   |      
|Total charge-offs              |  |                        | 186 |      |   | 332  |  |      | 446   |      |   | 964   |  |   | 357  
|Recoveries:                    |  |                        |     |      |   |      |  |      |       |      |   |       |  |   |      
|Real estate mortgage           |  |                        | 41  |      |   |     |  |      |      |      |   |      |  |   | 12   
|Commercial loan                |  |                        | 16  |      |   | 5    |  |      | 51    |      |   | 37    |  |   | 10   
|Commercial lease               |  |                        | 78  |      |   | 54   |  |      | 95    |      |   | 55    |  |   | 16   
|Consumer                       |  |                        | 41  |      |   | 57   |  |      | 55    |      |   | 42    |  |   | 36   
|                               |  |                        |     |      |   |      |  |      |       |      |   |       |  |   |      
|Total recoveries               |  |                        | 176 |      |   | 116  |  |      | 201   |      |   | 134   |  |   | 74   
|                               |  |                        |     |      |   |      |  |      |       |      |   |       |  |   |      



15



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##### Table of Contents

|                                                                        |  |   |        |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------- |  | - | ------ | - |  | - | -------- | - |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|Net loans charged off                                                   |  |   | 10     |   |  |   | 216      |   |  |   | 245    |   |  |   | 830    |   |  |   | 283    |  
|Provision for loan losses                                               |  |   | 65     |   |  |   | 225      |   |  |   | 42     |   |  |   | 531    |   |  |   | 560    |  
|                                                                        |  |   |        |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |        |  
|Balance at end of period                                                |  | $ | 1,000  |   |  | $ | 945      |   |  | $ | 936    |   |  | $ | 1,139  |   |  | $ | 1,438  |  
|                                                                        |  |   |        |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |        |  
|Ratio of net charge-offs to average loans outstanding during the period |  |   | 0.01   | % |  |   | 0.14     | % |  |   | 0.20   | % |  |   | 0.72   | % |  |   | 0.23   | %
|                                                                        |  |   |        |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |        |  
|Ratio of allowance to non-performing loans                              |  |   | 409.84 | % |  |   | 2,487.45 | % |  |   | 188.01 | % |  |   | 348.32 | % |  |   | 206.48 | %
|                                                                        |  |   |        |   |  |   |          |   |  |   |        |   |  |   |        |   |  |   |        |  

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, 2006    |       |                           | As of June 30, 2005 |   |        | As of June 30, 2004 |                          |  | As of June 30, 2003 |        |  | As of June 30, 2002      |    
|                                |  | 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                     |  | $                      | 61    |                           | 40.6                | % |        | $                   | 60                       |  | 44.5                | %      |  | $                        | 78  |  | 49.3   | % |                           | $ | 118   |        | 40.8  | %                        |  | $ | 123   |  | 47.9  | %
|Commercial                      |  |                        | 67    |                           | 14.9                |   |        |                     | 79                       |  | 15.0                |        |  |                          | 70  |  | 10.4   |   |                           |   | 95    |        | 12.2  |                          |  |   | 283   |  | 12.4  |  
|Construction                    |  |                        | 64    |                           | 7.0                 |   |        |                     | 55                       |  | 3.3                 |        |  |                          | 65  |  | 4.1    |   |                           |   | 163   |        | 3.6   |                          |  |   | 55    |  | 2.7   |  
|Consumer and other              |  |                        | 67    |                           | 9.2                 |   |        |                     | 99                       |  | 9.2                 |        |  |                          | 95  |  | 9.1    |   |                           |   | 153   |        | 12.6  |                          |  |   | 251   |  | 11.4  |  
|Commercial Business             |  |                        | 558   |                           | 17.5                |   |        |                     | 494                      |  | 16.7                |        |  |                          | 428 |  | 13.8   |   |                           |   | 275   |        | 14.7  |                          |  |   | 305   |  | 11.4  |  
|Commercial Leases               |  |                        | 183   |                           | 10.8                |   |        |                     | 158                      |  | 11.3                |        |  |                          | 200 |  | 13.3   |   |                           |   | 335   |        | 16.1  |                          |  |   | 335   |  | 14.2  |  
|                                |  |                        |       |                           |                     |   |        |                     |                          |  |                     |        |  |                          |     |  |        |   |                           |   |       |        |       |                          |  |   |       |  |       |  
|Total allowance for loan losses |  | $                      | 1,000 |                           | 100.0               | % |        | $                   | 945                      |  | 100.0               | %      |  | $                        | 936 |  | 100.0  | % |                           | $ | 1,139 |        | 100.0 | %                        |  | $ | 1,352 |  | 100.0 | %
|                                |  |                        |       |                           |                     |   |        |                     |                          |  |                     |        |  |                          |     |  |        |   |                           |   |       |        |       |                          |  |   |       |  |       |  

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



|                                                                |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|--------------------------------------------------------------- |  | ---------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | - |  | ---- | ---- | - |  | - | ---- | -
|                                                                |  | At June 30,            |     
|                                                                |  | 2006                   |      |   | 2005 |   |      | 2004 |  |   | 2003 |   |  | 2002 |     
|                                                                |  | (Dollars in thousands) |     
|Loans accounted for on a non-accrual basis: (1)                 |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Real estate:                                                    |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Residential                                                     |  | $                      | 13   |   |      | $ |     |      |  | $ |     |   |  | $    | 90   |   |  | $ | 285  |  
|Commercial                                                      |  |                        | 146  |   |      |   |     |      |  |   |     |   |  |      |     |   |  |   |     |  
|Construction                                                    |  |                        |     |   |      |   |     |      |  |   |     |   |  |      |     |   |  |   |     |  
|Consumer                                                        |  |                        | 7    |   |      |   | 16   |      |  |   | 12   |   |  |      | 44   |   |  |   |     |  
|Commercial Loan/Lease                                           |  |                        | 78   |   |      |   | 22   |      |  |   | 486  |   |  |      | 193  |   |  |   | 411  |  
|                                                                |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Total                                                           |  | $                      | 244  |   |      | $ | 38   |      |  | $ | 498  |   |  | $    | 327  |   |  | $ | 696  |  
|                                                                |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Accruing loans which are contractually past due 90 days or more |  | $                      |     |   |      | $ |     |      |  | $ |     |   |  | $    |     |   |  | $ |     |  
|                                                                |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Total                                                           |  | $                      |     |   |      | $ |     |      |  | $ |     |   |  | $    |     |   |  | $ |     |  
|                                                                |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Total non-performing loans                                      |  | $                      | 244  |   |      | $ | 38   |      |  | $ | 498  |   |  | $    | 327  |   |  | $ | 696  |  
|                                                                |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Percentage of total loans                                       |  |                        | 0.13 | % |      |   | 0.02 | %    |  |   | 0.33 | % |  |      | 0.29 | % |  |   | 0.58 | %
|                                                                |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|Other non-performing assets (2)                                 |  | $                      |     |   |      | $ | 60   |      |  | $ |     |   |  | $    | 19   |   |  | $ | 128  |  
|                                                                |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  

---

|(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, 2006, commercial non-accrual loans include two loans to the same borrower for $146,000. The Company expects full collection of the
balance and all interest and late charges within 90 days. Consumer non-accrual loans consisted of two home improvement loans. These loans are typically charged-off when they reach 90 days delinquent. For various reasons, management determined that
there was a good chance that these loans will be brought current. Non-accrual



16



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##### Table of Contents

loans also include one commercial lease with a total balance of $78,000. Management is currently evaluating this credit and it is expected that some
charge-off will be made in the first quarter of fiscal year 2007.

Except as discussed below, 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 result
in disclosure as nonaccrual, 90 days past due or restructured.

The Company continues to closely monitor a previously disclosed credit
relationship with a total exposure of $293,000. There is a 75% guarantee by the Small Business Administration for one of the loans to this borrower with a balance of $97,000. The borrower is making monthly payments on both loans and as of
June 30, 2006, neither is 90 days delinquent.

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 2006. 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.

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



17



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##### Table of Contents

business loans. In addition, the Company has available for sale investment securities, carried at fair value, totaling $16.7 million as of June 30,
2006. 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, 2006, is presented in the following table. The table was derived using assumptions which management believes to be reasonable.



18



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##### Table of Contents

The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities
outstanding at June 30, 2006 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                                         |  | $                      | 45,253 |   |                                  | $ | 48,035 |                           |  | $ | 72,254                    |   |  | $                           | 24,112 |   |                 | $ | 8,158  |       |  | $ | 1,067  |   |  | $ | 198,879
|Investment securities                                    |  |                        | 1,399  |   |                                  |   | 3,730  |                           |  |   | 7,189                     |   |  |                             | 2,813  |   |                 |   | 1,514  |       |  |   | 22     |   |  |   | 16,667 
|Short-term investments and other interest-earning assets |  |                        | 5,765  |   |                                  |   | 605    |                           |  |   |                          |   |  |                             |       |   |                 |   |       |       |  |   |       |   |  |   | 6,370  
|                                                         |  |                        |        |   |                                  |   |        |                           |  |   |                           |   |  |                             |        |   |                 |   |        |       |  |   |        |   |  |   |        
|Total                                                    |  |                        | 52,417 |   |                                  |   | 52,370 |                           |  |   | 79,443                    |   |  |                             | 26,925 |   |                 |   | 9,672  |       |  |   | 1,089  |   |  |   | 221,916
|                                                         |  |                        |        |   |                                  |   |        |                           |  |   |                           |   |  |                             |        |   |                 |   |        |       |  |   |        |   |  |   |        
|Rate sensitive liabilities:                              |  |                        |        |   |                                  |   |        |                           |  |   |                           |   |  |                             |        |   |                 |   |        |       |  |   |        |   |  |   |        
|Deposits                                                 |  |                        | 14,590 |   |                                  |   | 48,353 |                           |  |   | 77,181                    |   |  |                             | 10,822 |   |                 |   | 2,153  |       |  |   | 548    |   |  |   | 153,647
|Borrowings                                               |  |                        | 2,250  |   |                                  |   | 13,000 |                           |  |   | 19,800                    |   |  |                             | 5,000  |   |                 |   |       |       |  |   |       |   |  |   | 40,050 
|                                                         |  |                        |        |   |                                  |   |        |                           |  |   |                           |   |  |                             |        |   |                 |   |        |       |  |   |        |   |  |   |        
|Total                                                    |  |                        | 16,840 |   |                                  |   | 61,353 |                           |  |   | 96,981                    |   |  |                             | 15,822 |   |                 |   | 2,153  |       |  |   | 548    |   |  |   | 193,697
|                                                         |  |                        |        |   |                                  |   |        |                           |  |   |                           |   |  |                             |        |   |                 |   |        |       |  |   |        |   |  |   |        
|Interest sensitivity gap                                 |  | $                      | 35,577 |   |                                  | $ | (8,983 | )                         |  | $ | (17,538                   | ) |  | $                           | 11,103 |   |                 | $ | 7,519  |       |  | $ | 541    |   |  |   |        
|                                                         |  |                        |        |   |                                  |   |        |                           |  |   |                           |   |  |                             |        |   |                 |   |        |       |  |   |        |   |  |   |        
|Cumulative interest sensitivity gap                      |  | $                      | 35,577 |   |                                  | $ | 26,594 |                           |  | $ | 9,056                     |   |  |                             | 20,159 |   |                 | $ | 27,678 |       |  | $ | 28,219 |   |  |   |        
|                                                         |  |                        |        |   |                                  |   |        |                           |  |   |                           |   |  |                             |        |   |                 |   |        |       |  |   |        |   |  |   |        
|Ratio of cumulative gap to total assets                  |  |                        | 15.60  | % |                                  |   | 11.66  | %                         |  |   | 3.97                      | % |  |                             | 8.84   | % |                 |   | 12.14  | %     |  |   | 12.37  | % |  |   |        
|                                                         |  |                        |        |   |                                  |   |        |                           |  |   |                           |   |  |                             |        |   |                 |   |        |       |  |   |        |   |  |   |        

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



19



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##### Table of Contents

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, 2006, 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  |  | 5.8                | % |  | 10.6               | % |  | ±10.0        | %
|% Change in Fair Value of Equity |  | -18.1              | % |  | 6.2                | % |  | ±25.0        | %

The change in net interest income under the -200 basis point immediate change in interest rates is
beyond the policy limit. In the current interest rate environment, the Company has recently shortened the maturities of some of its liabilities. This has resulted in a slight overshoot of the policy limits.

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, 2006, the Companys cash on hand,
interest-bearing deposits and Federal funds sold totaled $8.2 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 $13.9 million and $11.2 million, respectively. Certificates of deposit that are scheduled to mature in less than one year at June 30, 2006
totaled $42.3 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 $800,000 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.

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



20



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##### Table of Contents

|                                         |  |                        |        |       |                             |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|---------------------------------------- |  | ---------------------- | ------ | ----- | --------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                         |  | Actual                 |        |       | For CapitalAdequacyPurposes |   |        | 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  | %

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 have not been converted into common
stock at the election of the holders and remain 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.

A total
of 82,435 of the 85,051 outstanding preferred shares elected to convert their 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.

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:



|                                    |  |                |        |               |   |      
|----------------------------------- |  | -------------- | ------ | ------------- | - | -----
|                                    |  | June 30, 2006  |        | June 30, 2005
|                                    |  | (In thousands)
|Commitments to originate new loans  |  | $              | 13,860 |               | $ | 9,000
|Undisbursed lines of credit         |  |                | 11,161 |               |   | 9,799
|Financial standby letters of credit |  |                | 1,583  |               |   | 1,365

Impact of Inflation and Changing Prices

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



21



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Contractual Obligations

The following table sets forth the companys contractual obligations as of June 30, 2006



|                                                        |  |                        |        |              |   |             |  |              |        |       |   |        |  |   |        
|------------------------------------------------------- |  | ---------------------- | ------ | ------------ | - | ----------- |  | ------------ | ------ | ----- | - | ------ |  | - | -------
|                                                        |  | < 1 year               |        | 1 to 3 Years |   | 4  5 Years |  | Over 5 Years |        | Total
|                                                        |  | (dollars in thousands) |        |             
|Time Deposits                                           |  |                        | 42,285 |              | $ | 22,239      |  | $            | 20,654 |       | $ | 901    |  | $ | 86,079 
|Long-term borrowings, including subordinated debentures |  |                        | 4,250  |              |   | 2,700       |  |              | 8,100  |       |   | 25,000 |  |   | 40,050 
|Lease obligations                                       |  |                        | 207    |              |   | 319         |  |              | 310    |       |   | 2,450  |  |   | 3,286  
|                                                        |  |                        |        |              |   |             |  |              |        |       |   |        |  |   |        
|Total Contractual Obligations                           |  | $                      | 46,742 |              | $ | 25,258      |  | $            | 29,064 |       | $ | 28,351 |  | $ | 129,415



22



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Board of Directors

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, 2006 and
2005, and the related consolidated statements of income, stockholders equity, and cash flows for the years then ended. 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. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our
opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Patapsco Bancorp, Inc. and subsidiaries as of June 30, 2006 and 2005 and the consolidated results of their
operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

LOGO

Baltimore, Maryland

September 1,
2006



---

##### Table of Contents

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

June 30, 2006 and 2005



|                                                                                                                                                                                                                                            |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(dollars in thousands except for per share data)                                                                                                                                                                                            |  | 2006 |         |   | 2005 |  
|Assets                                                                                                                                                                                                                                      |  |      |         |   |      |   |         |  
|Cash on hand and due from banks                                                                                                                                                                                                             |  | $    | 4,839   |   |      | $ | 5,270   |  
|Interest bearing deposits in other financial institutions                                                                                                                                                                                   |  |      | 968     |   |      |   | 970     |  
|Federal funds sold                                                                                                                                                                                                                          |  |      | 2,381   |   |      |   | 1,408   |  
|                                                                                                                                                                                                                                            |  |      |         |   |      |   |         |  
|Cash and Cash Equivalents                                                                                                                                                                                                                   |  |      | 8,188   |   |      |   | 7,648   |  
|Time deposits at other financial institutions                                                                                                                                                                                               |  |      | 605     |   |      |   | 619     |  
|Securities available for sale                                                                                                                                                                                                               |  |      | 16,667  |   |      |   | 24,800  |  
|Loans receivable, net of allowance for loan losses of $1,000 and $945, respectively                                                                                                                                                         |  |      | 190,589 |   |      |   | 161,094 |  
|Investment securities required by law, at cost                                                                                                                                                                                              |  |      | 2,416   |   |      |   | 1,677   |  
|Property and equipment, net                                                                                                                                                                                                                 |  |      | 2,175   |   |      |   | 1,585   |  
|Goodwill and other intangible assets                                                                                                                                                                                                        |  |      | 3,354   |   |      |   | 3,406   |  
|Accrued interest and other assets                                                                                                                                                                                                           |  |      | 4,076   |   |      |   | 3,875   |  
|                                                                                                                                                                                                                                            |  |      |         |   |      |   |         |  
|Total Assets                                                                                                                                                                                                                                |  | $    | 228,070 |   |      | $ | 204,704 |  
|                                                                                                                                                                                                                                            |  |      |         |   |      |   |         |  
|Liabilities and Stockholders Equity                                                                                                                                                                                                        |  |      |         |   |      |   |         |  
|Deposits:                                                                                                                                                                                                                                   |  |      |         |   |      |   |         |  
|Non-interest bearing deposits                                                                                                                                                                                                               |  | $    | 13,186  |   |      | $ | 12,072  |  
|Interest bearing deposits                                                                                                                                                                                                                   |  |      | 153,647 |   |      |   | 152,248 |  
|                                                                                                                                                                                                                                            |  |      |         |   |      |   |         |  
|Total Deposits                                                                                                                                                                                                                              |  |      | 166,833 |   |      |   | 164,320 |  
|Junior Subordinated debentures                                                                                                                                                                                                              |  |      | 5,000   |   |      |   |        |  
|Long-Term Debt                                                                                                                                                                                                                              |  |      | 35,050  |   |      |   | 20,233  |  
|Accrued expenses and other liabilities                                                                                                                                                                                                      |  |      | 2,899   |   |      |   | 2,564   |  
|                                                                                                                                                                                                                                            |  |      |         |   |      |   |         |  
|Total liabilities                                                                                                                                                                                                                           |  |      | 209,782 |   |      |   | 187,117 |  
|Temporary equity - ESOP shares subject to put option                                                                                                                                                                                        |  |      | 1,121   |   |      |   | 1,266   |  
|Stockholders equity                                                                                                                                                                                                                        |  |      |         |   |      |   |         |  
|Preferred stock-Series A Non-cumulative Convertible Perpetual $0.01 par value; authorized 1,000,000 shares with a liquidation preference of
$25 per share; 0 and 93,745 shares outstanding at June 30, 2006 and June 30, 2005, respectively |  |      |        |   |      |   | 1       |  
|Additional paid-in-capital                                                                                                                                                                                                                  |  |      |        |   |      |   | 2,345   |  
|Common stock $0.01 par value; authorized 4,000,000 shares; issued and outstanding 1,813,925 shares at June 30, 2006 and 1,414,456 shares
at June 30, 2005                                                                                   |  |      | 18      |   |      |   | 14      |  
|Additional paid-in capital                                                                                                                                                                                                                  |  |      | 6,950   |   |      |   | 4,332   |  
|Deferred compensation contra                                                                                                                                                                                                                |  |      | (78     | ) |      |   | (78     | )
|Obligation under deferred compensation                                                                                                                                                                                                      |  |      | 395     |   |      |   | 440     |  
|Retained earnings, substantially restricted                                                                                                                                                                                                 |  |      | 10,317  |   |      |   | 9,438   |  
|Accumulated other comprehensive loss, net of taxes                                                                                                                                                                                          |  |      | (435    | ) |      |   | (171    | )
|                                                                                                                                                                                                                                            |  |      |         |   |      |   |         |  
|Total Stockholders Equity - Permanent                                                                                                                                                                                                      |  |      | 17,167  |   |      |   | 16,321  |  
|                                                                                                                                                                                                                                            |  |      |         |   |      |   |         |  
|Total Stockholders Equity - including Temporary Equity                                                                                                                                                                                     |  |      | 18,288  |   |      |   | 17,587  |  
|                                                                                                                                                                                                                                            |  |      |         |   |      |   |         |  
|Total Liabilities and Stockholders Equity                                                                                                                                                                                                  |  | $    | 228,070 |   |      | $ | 204,704 |  
|                                                                                                                                                                                                                                            |  |      |         |   |      |   |         |  

See accompanying notes to consolidated financial statements.



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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

Years Ended June 30, 2006 and 2005



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

See accompanying notes to consolidated financial statements.



25



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##### Table of Contents

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders Equity

Years Ended June 30, 2006 and 2005



|                                                                                           |  |                 |    |   |                                      |   |        |              |  |                                   |    |  |                                         |       |   |                                       |   |       |                   |  |   |                                                             |   |  |                          |        |   |  |   |      |   |  |   |        |  
|------------------------------------------------------------------------------------------ |  | --------------- | -- | - | ------------------------------------ | - | ------ | ------------ |  | --------------------------------- | -- |  | --------------------------------------- | ----- | - | ------------------------------------- | - | ----- | ----------------- |  | - | ----------------------------------------------------------- | - |  | ------------------------ | ------ | - |  | - | ---- | - |  | - | ------ | -
|(dollars in thousands except for 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 |  
|                                                                                           |  |                 |    |   |                                      |   |        |              |  |                                   |    |  |                                         |       |   |                                       |   |       |                   |  |   |                                                             |   |  |                          |        |   |  |   |      |   |  |   |        |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended June 30, 2006 and 2005



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

See accompanying notes to consolidated financial statements.



27



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##### Table of Contents

PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2006 and 2005



|(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.

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 $2.5 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.

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, 2006 and 2005.



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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2006 and 2005



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 prices published in financial newspapers or 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, 2006 and 2005, respectively.

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.

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



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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2006 and 2005



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

Large groups of
smaller-balance homogeneous loans are evaluated collectively for impairment. Accordingly, the Company does not separately identify individual residential first and second mortgage loans and consumer installment loans for impairment disclosures,
unless such loans are the subject of a restructuring agreement. Impaired loans are therefore generally comprised of commercial mortgage, real estate development, and certain restructured residential loans. In addition, impaired loans are generally
loans which management has placed in nonaccrual status since loans are placed in nonaccrual status on the earlier of the date that management determines that the collection of principal and/or interest is in doubt or the date that principal or
interest is 90 days or more past-due.

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

Property and Equipment

Land is carried at cost. Property and equipment are stated at cost less
accumulated depreciation computed by use of the straight-line method over the estimated useful lives of the related assets. Additions and betterments are capitalized and costs of repairs and maintenance are expensed when incurred. The related costs
and accumulated depreciation are eliminated from the accounts when an asset is sold or retired and the resultant gain or loss is credited or charged to income.

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. There were no foreclosed real estate or other repossessed assets at either June 30, 2006 or June 30, 2005,
respectively.

Deferred Income Taxes

Deferred income taxes are recognized, with certain exceptions, for temporary differences between the financial reporting basis and income tax basis of assets and liabilities based on enacted tax rates expected to be
in effect



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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2006 and 2005



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   
|                                           |  | June 30, 2006 |       | June 30, 2005
|(in thousands, except per share data)      |  | Basic         |       | Diluted       |   | Basic |  | Diluted
|Net income                                 |  | $             | 1,388 |               | $ | 1,388 |  | $       | 1,346 |  | $ | 1,346
|Preferred Stock Dividends                  |  |               | 123   |               |   |      |  |         | 177   |  |   |     
|                                           |  |               |       |               |   |       |  |         |       |  |   |      
|Net Income Available to Common Stock       |  | $             | 1,265 |               | $ | 1,388 |  | $       | 1,169 |  | $ | 1,346
|Weighted average common shares outstanding |  |               | 1,573 |               |   | 1,573 |  |         | 1,441 |  |   | 1,441
|Diluted securities:                        |  |               |       |               |   |       |  |         |       |  |   |      
|Convertible preferred stock                |  |               | N/A   |               |   | 265   |  |         | N/A   |  |   | 374  
|Stock options                              |  |               | N/A   |               |   | 81    |  |         | N/A   |  |   | 108  
|                                           |  |               |       |               |   |       |  |         |       |  |   |      
|Adjusted weighted average shares           |  |               | 1,573 |               |   | 1,919 |  |         | 1,441 |  |   | 1,923
|                                           |  |               |       |               |   |       |  |         |       |  |   |      
|Per share amount                           |  | $             | 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 will adopt 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 will recognize a pre-tax expense of approximately $5,600 in the quarter ending September 30, 2006 for the expense related to the final scheduled vesting of all outstanding stock option awards. Any additional impact of adopting the
new accounting standard will be determined by share-based payments granted in future periods.

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.

Statement 123, Accounting for Stock-Based Compensation, required the Company to make certain disclosures as if the fair value method of
accounting had been applied to the Companys stock option grants made subsequent to 1994. Accordingly, no stock option based employee compensation cost is reflected in net income, 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.



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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2006 and 2005



|                                                                                                                                                   |  |                     |       |   |      |   |       |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ----- | - | ---- | - | ----- | -
|                                                                                                                                                   |  | Year Ended June 30, |      
|(in thousands, except per share data)                                                                                                              |  | 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 based method for all awards, net of related tax
effects |  |                     | (28   | ) |      |   | (57   | )
|                                                                                                                                                   |  |                     |       |   |      |   |       |  
|Proforma 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  |  

The Company granted no options in the years ended June 30, 2006 or June 30, 2005.

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

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.



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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2006 and 2005



In accordance with the provisions of SFAS No. 142, the Company continues to amortize other
intangible assets over the estimated remaining life of each respective asset. Amortizable intangible assets were composed of the following:



|                                                               |  |                      |     |                         |   |                      |  |                         |     |  |   |   
|-------------------------------------------------------------- |  | -------------------- | --- | ----------------------- | - | -------------------- |  | ----------------------- | --- |  | - | --
|                                                               |  | June 30, 2006        |     | June 30, 2005          
|(Dollars in Thousands)                                         |  | Gross CarryingAmount |     | AccumulatedAmortization |   | Gross CarryingAmount |  | AccumulatedAmortization
|Amortizable intangible assets, acquisition of deposit accounts |  | $                    | 516 |                         | $ | 116                  |  | $                       | 516 |  | $ | 65
|                                                               |  |                      |     |                         |   |                      |  |                         |     |  |   |   
|Aggregate amortization expense:                                |  |                      |     |                         |   |                      |  |                         |     |  |   |   
|For the year ended June 30, 2006                               |  | $                    | 51  |                         |   |                      |  | $                       | 51  |  |   |   
|Estimated amortization expense:                                |  |                      |     |                         |   |                      |  |                         |     |  |   |   
|For the year ending June 30, 2007                              |  | $                    | 51  |                         |   |                      |  | $                       | 51  |  |   |   
|For the year ending June 30, 2008                              |  |                      | 51  |                         |   |                      |  |                         | 51  |  |   |   
|For the year ending June 30, 2009                              |  |                      | 51  |                         |   |                      |  |                         | 51  |  |   |   
|For the year ending June 30, 2010                              |  |                      | 51  |                         |   |                      |  |                         | 51  |  |   |   
|For the year ending June 30, 2011                              |  |                      | 51  |                         |   |                      |  |                         | 51  |  |   |   

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 and Restatement

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

Guarantees

The Company does not
issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to
a third party. Generally, all letters of credit, when issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers.
The Company, generally, holds collateral and/or personal guarantees supporting these commitments. The Company had $1,583,000 and $1,365,000 of standby letters of credit as of June 30, 2006 and June 30, 2005, 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, 2006 and June 30, 2005 for guarantees under standby letters of credit issued is not material.



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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2006 and 2005



Off Balance Sheet Arrangements

With the exception of the Companys standby letters of credit noted above and loan commitments detailed in note 3, the Company has no off balance
sheet arrangements that have or are reasonably likely to have a current or future effect in the Companys financial condition, changes in financial condition, revenues or expenses, or capital resources.

New Accounting Pronouncements

EITF 03-1

In January 2003, the FASBs Emerging Issues Task Force (EITF) issued EITF Issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investors (EITF 03-1), and in March 2004, the EITF issued an update. EITF 03-1 addresses the meaning of other-than-temporary impairment and its application
to certain debt and equity securities. EITF 03-1 aids in the determination of impairment of an investment and gives guidance as to the measurement of impairment loss and the recognition and disclosures of other-than-temporary investments. EITF 03-1
also provides a model to determine other-than-temporary impairment using evidence-based judgment about the recovery of the fair value up to the cost of the investment by considering the severity and duration of the impairment in relation to the
forecasted recovery of the fair value. In July 2005, FASB adopted the recommendation of its staff to nullify key parts of EITF 03-1. The staffs recommendations were to nullify the guidance on the determination of whether an investment is
impaired as set forth in paragraphs 10-18 of Issue 03-1 and not to provide additional guidance on the meaning of other-than-temporary impairment. Instead, the staff recommends entities recognize other-than-temporary impairments by applying existing
accounting literature such as paragraph 16 of SFAS 115.

FASB Exposure Draft - Interpretation of FAS 109

In July 2005, the FASB issued a proposed interpretation of FAS 109, Accounting for Income Taxes, to clarify certain aspects of accounting for
uncertain tax positions, including issues related to the recognition and measurement of those tax positions. If adopted as proposed, the interpretation would be effective in the fourth quarter of 2005, and any adjustments required to be recorded as
a result of adopting the interpretation would be reflected as a cumulative effect from a change in accounting principle. . We evaluated the provisions of the exposure draft and do not believe that its adoption will have a material impact on our
Companys financial condition or results of operations.

EITF 05-6

In June 2005, the FASBs Emerging Issues Task Force (EITF) reached a consensus on Issue No. 05-6, Determining the Amortization Period for
Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination (EITF 05-6). This guidance requires that leasehold improvements acquired in a business combination or purchased subsequent to the
inception of a lease be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are reasonably assured at the date of the business combination or purchase. This guidance is
applicable only to leasehold improvements that are purchased or acquired in reporting periods beginning after June 29, 2005.

FSP
FAS 13-1

In October 2005, the FASB issued FASB Staff Position FAS 13-1 (FSP FAS 13-1), which requires companies to expense
rental costs associated with ground or building operating leases that are incurred during a construction period. As a result, companies that are currently capitalizing these rental costs are required to expense them beginning in its first reporting
period beginning after December 15, 2005. FSP FAS 13-1 is effective for our Company as of the first quarter of fiscal 2006. We evaluated the provisions of FSP FAS 13-1 and do not believe that its adoption will have a material impact on our
Companys financial condition or results of operations.



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Notes to Consolidated Financial Statements

June 30, 2006 and 2005



|(2) | Securities Available for Sale
|--- | -----------------------------

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



|                           |  |               |        |                 |   |                  |  |           |     |  |   |       
|-------------------------- |  | ------------- | ------ | --------------- | - | ---------------- |  | --------- | --- |  | - | ------
|                           |  | 2006         
|(In thousands)             |  | AmortizedCost |        | UnrealizedGains |   | UnrealizedLosses |  | Fairvalue
|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
|                           |  |               |        |                 |   |                  |  |           |     |  |   |       
|                           | 
|                           |  | 2005         
|Equity securities          |  | $             | 62     |                 | $ | 6                |  | $         |    |  | $ | 68    
|Corporate Bonds            |  |               | 2,600  |                 |   | 9                |  |           | 29  |  |   | 2,580 
|U.S. Government agencies   |  |               | 11,771 |                 |   | 1                |  |           | 111 |  |   | 11,661
|Mortgage-backed securities |  |               | 10,645 |                 |   | 68               |  |           | 222 |  |   | 10,491
|                           |  |               |        |                 |   |                  |  |           |     |  |   |       
|                           |  | $             | 25,078 |                 | $ | 84               |  | $         | 362 |  | $ | 24,800
|                           |  |               |        |                 |   |                  |  |           |     |  |   |       

The equity investments have no stated maturity. Mortgage-backed securities are allocated based on
scheduled maturities. The scheduled maturities of other investments available for sale at June 30, 2006 are as follows:



|                                 |  |               |        |           |   |       
|-------------------------------- |  | ------------- | ------ | --------- | - | ------
|                                 |  | 2006         
|(In thousands)                   |  | AmortizedCost |        | FairValue
|Due in less than one year        |  | $             | 2,103  |           | $ | 2,072 
|Due in one to five years         |  |               | 4,497  |           |   | 4,348 
|Due after five through ten years |  |               | 3,221  |           |   | 3,024 
|Due after ten years              |  |               | 7,482  |           |   | 7,145 
|                                 |  |               |        |           |   |       
|                                 |  | $             | 17,303 |           | $ | 16,589
|                                 |  |               |        |           |   |       

In fiscal year 2006, the Company received $301,500 from the sale of a corporate bond resulting in
a gross realized gain of $1,500. There were no gross realized losses. There were no sales of corporate, government, agency or equity securities in fiscal 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, 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
|                                      |  |                     |       |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    



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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2006 and 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, 2005.



|                                      |  |                     |       |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|------------------------------------- |  | ------------------- | ----- | ----------------- | - | --------- |  | ---------------- | ------ | --------- | - | ---------------- |  | - | ------ |  | - | ---
|                                      |  | Less than 12 Months |       | 12 Months or More |   | Total    
|                                      |  | FairValue           |       | UnrealizedLosses  |   | FairValue |  | UnrealizedLosses |        | FairValue |   | UnrealizedLosses
|                                      |  | (In Thousands)     
|U.S. Government agencies              |  | $                   | 5,695 |                   | $ | 43        |  | $                | 5,465  |           | $ | 68               |  | $ | 11,160 |  | $ | 111
|Corporate Bonds                       |  |                     | 489   |                   |   | 11        |  |                  | 1,482  |           |   | 18               |  |   | 1,971  |  |   | 29 
|Mortgage-backed securities            |  |                     |      |                   |   |          |  |                  | 7,615  |           |   | 222              |  |   | 7,615  |  |   | 222
|                                      |  |                     |       |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|Total Temporarily Impaired Securities |  | $                   | 6,184 |                   | $ | 54        |  | $                | 14,562 |           | $ | 308              |  | $ | 20,746 |  | $ | 362
|                                      |  |                     |       |                   |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    

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)                               |  | 2006 |         |   | 2005 |  
|Real estate secured by first mortgage:       |  |      |         |   |      |   |         |  
|Residential                                  |  | $    | 80,693  |   |      | $ | 74,600  |  
|Commercial                                   |  |      | 29,712  |   |      |   | 25,109  |  
|Construction, net of loans in process        |  |      | 13,913  |   |      |   | 5,520   |  
|                                             |  |      |         |   |      |   |         |  
|                                             |  |      | 124,318 |   |      |   | 105,229 |  
|Home improvement loans                       |  |      | 11,442  |   |      |   | 7,910   |  
|Home equity loans                            |  |      | 4,400   |   |      |   | 5,205   |  
|Other Consumer loans                         |  |      | 2,483   |   |      |   | 2,401   |  
|Commercial loans                             |  |      | 34,827  |   |      |   | 28,102  |  
|Commercial leases                            |  |      | 21,409  |   |      |   | 18,969  |  
|                                             |  |      |         |   |      |   |         |  
|                                             |  |      | 198,879 |   |      |   | 167,816 |  
|Less:                                        |  |      |         |   |      |   |         |  
|Deferred loan origination fees, net of costs |  |      | 178     |   |      |   | 99      |  
|Unearned interest consumer loans             |  |      | 1,245   |   |      |   | 503     |  
|Unearned interest commercial leases          |  |      | 6,091   |   |      |   | 5,446   |  
|Purchase accounting premium, net             |  |      | (224    | ) |      |   | (271    | )
|Allowance for loan losses                    |  |      | 1,000   |   |      |   | 945     |  
|                                             |  |      |         |   |      |   |         |  
|Loans receivable, net                        |  | $    | 190,589 |   |      | $ | 161,094 |  
|                                             |  |      |         |   |      |   |         |  

A substantial portion of the Companys loans receivable are mortgage loans secured by
residential real estate properties. Loans are extended only after evaluation by management of customers creditworthiness and other relevant factors on a case-by-case basis. On first mortgage loans, the Company does not lend more than 95% of
the appraised value of an owner occupied residential property and in instances where the Company lends more than 80% of the appraised value, private mortgage insurance is required. For investor loans on residential property (not owner occupied) the
Company generally does not lend more than 80% of the appraised value. Lease financing receivables represent finance leases with no residuals on equipment used in the operation of the customers business. Terms are typically from 3 to 5 years.

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



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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2006 and 2005



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
$244,000 and $38,000 at June 30, 2006 and 2005 respectively. Average recorded investment in impaired loans during 2006 and 2005 was $169,000 and $560,000, respectively. There was an allocated allowance for losses related to those loans of
$169,000 and $35,000 at June 30, 2006 and 2005, respectively. The amount of interest that would have been recorded on non-accrual loans at June 30, 2006 and 2005, respectively had the loans performed in accordance with their terms was
approximately $42,000 and $ 4,000, respectively. The actual interest income recorded on these loans during 2006 and 2005 was $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. All impaired loans were on non-accrual status.

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

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



|                              |  |      |       |   |      |   |      |  
|----------------------------- |  | ---- | ----- | - | ---- | - | ---- | -
|(In thousands)                |  | 2006 |       |   | 2005 |  
|Balance at beginning of year  |  | $    | 945   |   |      | $ | 936  |  
|Provision for losses on loans |  |      | 65    |   |      |   | 225  |  
|Charge-offs                   |  |      | (186  | ) |      |   | (332 | )
|Recoveries                    |  |      | 176   |   |      |   | 116  |  
|                              |  |      |       |   |      |   |      |  
|Balance at end of year        |  | $    | 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, 2006 and
2005 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, 2006
|(In thousands)                      |  | Fixed rate    |       | Floating rate
|Commercial business and lease loans |  | $             | 9,539 |               | $ | 100  
|Real Estate Loans                   |  |               | 265   |               |   | 3,956
|Undisbursed lines of credit         |  |               | 1,940 |               |   | 9,221
|                                    | 
|                                    |  | June 30, 2005
|Commercial business and lease loans |  | $             | 3,336 |               | $ | 2,595
|Real Estate Loans                   |  |               | 1,949 |               |   | 1,120
|Undisbursed lines of credit         |  |               |      |               |   | 9,799

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, 2006 and June 30, 2005, Patapsco had outstanding letters of credit of $1,583,000
and $1,365,000, respectively.



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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2006 and 2005



As of June 30, 2006 and 2005, Patapsco was servicing loans for the benefit of others in the
amount of $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.

At June 30, 2006 and 2005,
the Companys loans outstanding to directors and executive officers totaled $220,000 and $31,000, respectively. New loans and draws on existing lines of credit totaled $220,000 and payments totaled $31,000.



|(4) | Property and Equipment
|--- | ----------------------

Property and equipment are
summarized as follows at June 30:



|                                  |  |      |       |      |   |                        |  |            
|--------------------------------- |  | ---- | ----- | ---- | - | ---------------------- |  | -----------
|(In thousands)                    |  | 2006 |       | 2005 |   | Estimated Useful lives
|Land                              |  | $    | 188   |      | $ | 249                    |  |           
|Building and improvements         |  |      | 2,100 |      |   | 1,446                  |  | 30-40 years
|Leasehold improvements            |  |      | 238   |      |   | 238                    |  | 3-10 years 
|Furniture, fixtures and equipment |  |      | 2,738 |      |   | 2,606                  |  | 3-10 years 
|                                  |  |      |       |      |   |                        |  |            
|Total, at cost                    |  |      | 5,264 |      |   | 4,539                  |  |            
|                                  |  |      |       |      |   |                        |  |            
|Less accumulated depreciation     |  |      | 3,089 |      |   | 2,954                  |  |            
|                                  |  |      |       |      |   |                        |  |            
|Property and equipment, net       |  | $    | 2,175 |      | $ | 1,585                  |  |            
|                                  |  |      |       |      |   |                        |  |            

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

At June 30, 2006, the minimal rental commitments under noncancellable operating leases are as follows:



|                    |  |   |        
|------------------- |  | - | -------
|Year ended June 30, |  |   |        
|2007                |  | $ | 207,000
|2008                |  |   | 164,000
|2009                |  |   | 155,000
|2010                |  |   | 155,000
|2011                |  |   | 155,000
|                    |  |   |        
|                    |  | $ | 836,000



|(5) | Deposits
|--- | --------

The aggregate amount of jumbo
certificates of deposit, each with a minimum denomination of $100,000, was approximately $19,559,000 and $13,450,000 in 2006 and 2005, respectively.

At June 30, 2006, the scheduled maturities of certificates of deposit are as follows:



|               |  |   |       
|-------------- |  | - | ------
|(In thousands) |  |  
|2007           |  | $ | 42,285
|2008           |  |   | 15,368
|2009           |  |   | 6,871 
|2010           |  |   | 11,510
|2011           |  |   | 9,144 
|Thereafter     |  |   | 901   
|               |  |   |       
|               |  | $ | 86,079
|               |  |   |       



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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2006 and 2005



|(6) | Borrowings
|--- | ----------

At June 30, 2006 and 2005, 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 $57.2 and $51.1 million, respectively. Borrowings totaled $35.1 million and $20.2 million at June 30,
2006 and 2005, 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, 2006, and 2005 the Bank has a Federal Funds
accommodation with the Bankers Bank of Atlanta, GA of $5.1 million and $5.1 million, respectively. At June 30, 2006, all borrowings are at fixed rates.

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



|                        |  |         |        |                       |      |   |         |   |                       |  |      |  
|----------------------- |  | ------- | ------ | --------------------- | ---- | - | ------- | - | --------------------- |  | ---- | -
|                        |  | 2006    |        |                       | 2005 |  
|(In thousands)          |  | Balance |        | Weighted Average Rate |      |   | Balance |   | Weighted Average Rate | 
|Under 12 months         |  | $       | 4,250  |                       | 3.11 | % |         | $ | 3,350                 |  | 4.24 | %
|12 months to 24 months  |  |         | 1,700  |                       | 2.71 |   |         |   | 5,950                 |  | 3.00 |  
|24 months to 36 months  |  |         | 4,000  |                       | 4.71 |   |         |   |                      |  |     |  
|36 months to 48 months  |  |         |       |                       |     |   |         |   | 4,000                 |  | 4.71 |  
|48 months to 60 months  |  |         | 5,100  |                       | 5.57 |   |         |   |                      |  |     |  
|60 months to 120 months |  |         | 20,000 |                       | 4.33 |   |         |   | 6,933                 |  | 5.55 |  
|                        |  |         |        |                       |      |   |         |   |                       |  |      |  
|                        |  | $       | 35,050 |                       | 4.33 | % |         | $ | 20,233                |  | 4.42 | %
|                        |  |         |        |                       |      |   |         |   |                       |  |      |  

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

The borrowings from the Federal Home Loan Bank of Atlanta with conversion or call features at
June 30, 2005, are detailed below:



|           |  |      |   |  |          |  |                            
|---------- |  | ---- | - |  | -------- |  | ---------------------------
|Balance    |  | Rate |   |  | Maturity |  | Call\Conversion feature    
|$5,100,000 |  | 5.57 | % |  | 11/17/10 |  | Callable every three months
|2,100,000  |  | 5.74 |   |  | 11/17/05 |  | Callable every three months



|(7) | Junior Subordinated Debentures
|--- | ------------------------------

On October 31,
2005, Patapsco Statutory Trust I, a Connecticut statutory business trust and an unconsolidated wholly-owned subsidiary of the Company, issued $5 million of capital trust pass-through securities to investors. The interest rate is fixed for the first
seven years at 6.465%. Thereafter, the interest rate adjusts on a quarterly basis at the rate of the three month LIBOR plus 1.48%. Patapsco Statutory Trust I purchased $5,155,000 of junior subordinated deferrable interest debentures from 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.



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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2006 and 2005



|(8) | Income Taxes
|--- | ------------

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



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

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



|                                                   |  |      |      |   |      |   |      |  
|-------------------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|(In thousands)                                     |  | 2006 |      |   | 2005 |  
|Unrealized losses on securities available for sale |  | $    | 274  |   |      | $ | 107  |  
|Allowance for losses on loans                      |  |      | 386  |   |      |   | 365  |  
|Deferred compensation                              |  |      | 265  |   |      |   | 277  |  
|Other                                              |  |      | 1    |   |      |   |     |  
|                                                   |  |      |      |   |      |   |      |  
|Total deferred tax assets                          |  |      | 926  |   |      |   | 749  |  
|Purchase accounting adjustment                     |  |      | (237 | ) |      |   | (263 | )
|Federal Home Loan Bank stock dividends             |  |      | (164 | ) |      |   | (164 | )
|Depreciation                                       |  |      | (92  | ) |      |   | (112 | )
|Other                                              |  |      |     |   |      |   | (7   | )
|                                                   |  |      |      |   |      |   |      |  
|Total deferred tax liabilities                     |  |      | (493 | ) |      |   | (546 | )
|                                                   |  |      |      |   |      |   |      |  
|Net deferred tax assets                            |  | $    | 433  |   |      | $ | 203  |  
|                                                   |  |      |      |   |      |   |      |  

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)                                        |  | 2006 |     |   | 2005 |  
|Tax at statutory rate                                 |  | $    | 752 |   |      | $ | 716 |  
|State income taxes, net of Federal income tax benefit |  |      | 95  |   |      |   | 97  |  
|Other                                                 |  |      | (24 | ) |      |   | (54 | )
|                                                      |  |      |     |   |      |   |     |  
|Income tax provision                                  |  | $    | 823 |   |      | $ | 759 |  
|                                                      |  |      |     |   |      |   |     |  

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.



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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2006 and 2005



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 $7.0 million of transaction accounts, reserves equal to 3% must be maintained on the next $47.6 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, 2006 and 2005, the Bank met its reserve requirements of
$628,000 and $574,000, respectively.

The Company, as the holding company for the Bank, has an annual cash requirement of approximately
$800,000 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. The full amount of dividends that the Bank may pay the Company according to the regulation is $3.5 million. However, this level of dividend would result in the Bank meeting the minimum
capital requirements but not meeting the level of capital to remain well capitalized. This level of dividend would also restrict the ability of the Bank to grow.

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

Quantitative measures established by regulation to ensure capital adequacy require Patapsco to maintain minimum amounts and ratios (as defined in the
regulations and as set forth in the table below, as defined) of total and Tier I capital (as defined) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of June 30, 2006 and 2005,
that Patapsco meets all capital adequacy requirements to which they are subject.

As of June 30, 2006, 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, 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.



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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2006 and 2005



|                                         |  |                        |        |       |                              |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|---------------------------------------- |  | ---------------------- | ------ | ----- | ---------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                         |  | 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  | %

At June 30, 2005, the Bank exceeded all regulatory minimum capital requirements. The table
below presents certain information relating to the Banks regulatory compliance at June 30, 2005.



|                                         |  |                        |        |       |                              |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|---------------------------------------- |  | ---------------------- | ------ | ----- | ---------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                         |  | 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)  |  | $                      | 16,732 |       | 12.05                        | % |        | $                                                             | 11,113 |  | 8.00 | %      |  | $     | 13,891 |  | 10.00 | %
|Tier 1 Capital (to Risk Weighted Assets) |  |                        | 15,787 |       | 11.37                        | % |        |                                                               | 5,556  |  | 4.00 | %      |  |       | 8,335  |  | 6.00  | %
|Tier 1 Capital (to Average Assets)       |  |                        | 15,787 |       | 7.87                         | % |        |                                                               | 8,021  |  | 4.00 | %      |  |       | 10,026 |  | 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.

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.



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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2006 and 2005



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 have 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 103,278 shares that have been allocated contain a Put Option of $1,121,000. This amount is included in temporary equity
in accordance with SEC Accounting Series Release No. 268.

For the years ended June 30, 2006 and 2005 compensation expense
recognized related to the ESOP and Patapscos contribution to the ESOP was $0 and $0, respectively. The ESOP shares have been fully allocated and the Company has applied to the Internal Revenue Service for termination of the Plan.

2004 Stock Incentive Plan

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

As of June 30, 2006, there are 51,525 deferred shares under this plan of which 12,906 are issued and
outstanding. These deferred shares are allocated in lieu of cash compensation to Directors of the Company. These shares are included in shares outstanding for the purposes of computing earnings per share. As of June 30, 2006, no other share
awards have been made under this plan.

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

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.



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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2006 and 2005



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.

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



|                           |  |         |   |  |                              |      |                    |         |                              |   |     
|-------------------------- |  | ------- | - |  | ---------------------------- | ---- | ------------------ | ------- | ---------------------------- | - | ----
|                           |  | Options |   |  | WeightedAverageExercisePrice |      | OptionsExercisable |         | WeightedAverageExercisePrice
|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 |                              | $ | 5.62
|                           |  |         |   |  |                              |      |                    |         |                              |   |     

The following table summarizes information about stock options outstanding at June 30, 2006.



|              |  |                   |  |                           |  |                  
|------------- |  | ----------------- |  | ------------------------- |  | -----------------
|ExercisePrice |  | NumberOutstanding |  | RemainingContractual Life |  | NumberExercisable
|$4.60         |  | 40,384            |  | 0.30 years                |  | 40,384           
|4.86          |  | 16,981            |  | 3.89 years                |  | 16,981           
|6.29          |  | 81,130            |  | 5.17 years                |  | 65,512           
|              |  |                   |  |                           |  |                  
|              |  | 138,495           |  | 3.59 years                |  | 122,877          
|              |  |                   |  |                           |  |                  

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 $73,000 and $67,000 for the years ended June 30, 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, 2006 and 2005 was $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, 2006 and 2005.

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



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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2006 and 2005



a significant portion of the Companys financial instruments, fair value estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect estimates.

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



|                                                                    |  |                |         |            |   |                |  |            |         |  |   |        
|------------------------------------------------------------------- |  | -------------- | ------- | ---------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                                                                    |  | 2006           |         | 2005      
|(In thousands)                                                      |  | Carryingamount |         | Fair value |   | Carryingamount |  | Fair value
|Assets:                                                             |  |                |         |            |   |                |  |            |         |  |   |        
|Cash and interest-bearing deposits                                  |  | $              | 5,807   |            | $ | 5,807          |  | $          | 6,240   |  | $ | 6,240  
|Federal funds sold                                                  |  |                | 2,381   |            |   | 2,381          |  |            | 1,408   |  |   | 1,408  
|Time deposits at other financial institutions                       |  |                | 605     |            |   | 605            |  |            | 619     |  |   | 605    
|Investment securities available for sale                            |  |                | 16,667  |            |   | 16,667         |  |            | 24,800  |  |   | 24,800 
|Loans receivable, net                                               |  |                | 190,589 |            |   | 186,882        |  |            | 161,094 |  |   | 163,414
|Investment securities required by law                               |  |                | 2,416   |            |   | 2,416          |  |            | 1,677   |  |   | 1,677  
|Accrued interest receivable                                         |  |                | 929     |            |   | 929            |  |            | 792     |  |   | 792    
|Liabilities:                                                        |  |                |         |            |   |                |  |            |         |  |   |        
|Deposits                                                            |  |                | 166,833 |            |   | 159,977        |  |            | 164,320 |  |   | 164,016
|Advance payments by borrowers for taxes, insurance and ground rents |  |                | 1,405   |            |   | 1,405          |  |            | 1,399   |  |   | 1,399  
|Long-term debt                                                      |  |                | 40,050  |            |   | 39,044         |  |            | 20,233  |  |   | 20,670 
|Accrued interest payable                                            |  |                | 334     |            |   | 334            |  |            | 321     |  |   | 321    
|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.



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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2006 and 2005



Securities required by Law

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

Deposits

Under SFAS 107, the
fair value of deposits with no stated maturity, such as non-interest bearing deposits, interest bearing NOW accounts and statement savings accounts, is equal to the carrying amounts. The fair value of certificates of deposit was based on the
discounted value of contractual cash flows. The discount rate for certificates of deposit was estimated using 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       |  | 2006 |        | 2005
|Cash                                    |  | $    | 2,834  |      | $ | 412   
|Investment securities                   |  |      | 78     |      |   | 68    
|Equity in net assets of the bank        |  |      | 20,422 |      |   | 19,131
|Other assets                            |  |      | 271    |      |   | 103   
|                                        |  |      |        |      |   |       
|Total Assets                            |  | $    | 23,605 |      | $ | 19,714
|                                        |  |      |        |      |   |       
|Accrued expenses and other liabilities  |  |      | 317    |      |   | 294   
|Long-term debt                          |  |      |       |      |   | 1,833 
|Subordinated Debentures                 |  |      | 5,000  |      |   |      
|                                        |  |      |        |      |   |       
|Stockholders equity                    |  |      | 18,288 |      |   | 17,587
|                                        |  |      |        |      |   |       
|Total Liabilities & Stockholders Equity |  | $    | 23,605 |      | $ | 19,714
|                                        |  |      |        |      |   |       



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PATAPSCO BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2006 and 2005



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



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##### Table of Contents

BOARD OF DIRECTORS



|                                                                                                                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Thomas P. ONeill Chairman of the
Board Managing Director of RSM McGladrey, Inc.  Joseph J. Bouffard President and Chief Executive Officer ofthe
Company and the Bank  J. Thomas Hoffman Self-employed financial consultant                                                                                                                                                             |  | Nicole N. Glaeser Budget Director for Baltimore
County Police Department  Douglas H. Ludwig Retired Principal of the Baltimore County Public School System Secretary of the Company  Gary R. Bozel Managing Principal Gary R. Bozel & Associates, P.A.                                           |  | William R. Waters Retired Automobile
Dealer Owner Bel Air Medicine, Inc.                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                       
|EXECUTIVE OFFICERS                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                                                                                                                                                                 
|Joseph J. Bouffard President and Chief Executive
Officer                                                                                                                                                                                                                                                                                                                                |  | Frank J. Duchacek, Jr. Senior Vice President -
Branch & Deposit Administration                                                                                                                                                                                                                   |  | Michael J. Dee Senior Vice President -
Treasurer Chief Financial Officer                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                                                                                                                                                                 
|John W. McClean Senior Vice President -
Loan Administration                                                                                                                                                                                                                                                                                                                             |  | Alan H. Herbst Vice President  Consumer
Lending                                                                                                                                                                                                                                                 |  | Laurence S. Mitchell Senior Vice President 
Lending                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                                                                                                                                                                 
|Brian G. Connelly Vice President 
Commercial Leasing                                                                                                                                                                                                                                                                                                                                   |  | Francis C. Broccolino Vice-President  Real
Estate Lending                                                                                                                                                                                                                                       |  | William L. Peters Vice-President Commercial
Lending                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                       
|HONORARY DIRECTORS                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                                                                                                                                                                 
|Joseph N. McGowan                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                                                                                                                                                                                                                                  |  | Dr. Theodore C. Patterson                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                       
|CORPORATE INFORMATION                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                                                                                                                                                                 
|Independent Registered PublicAccounting Firm Beard Miller Company LLP 100 West Road, Suite 404 Baltimore, Maryland 21204-2368  General Counsel Nolan Plumhoff & Williams Suite 700, Nottingham Centre 502 Washington Avenue Towson, Maryland 21204-4528  Transfer Agent and Registrar Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016-3572 1-(800) 368-5948 |  | Special Counsel Muldoon Murphy & Aguggia
LLP 5101 Wisconsin Avenue, NW Washington, DC 20016
 Annual Meeting The 2006 Annual Meeting of Stockholders will be held on October 26, 2006 at 4:00 p.m. at the office of The Patapsco Bank located at 1301 Merritt Boulevard, Dundalk, Maryland 21222. |  | Annual Report on Form 10-KSB A copy of the
Companys Annual Report on Form 10-KSB for the fiscal year ended June 30, 2006 as filed with the Securities and Exchange Commission, will be furnished without charge to stockholders as of the record date for the 2006 Annual Meeting upon
written request to: Corporate Secretary, Patapsco Bancorp, Inc., 1301 Merritt Boulevard, Dundalk, Maryland 21222-2194.