UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended June 30, ~~2011~~2012

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

For the transition period from to

Commission file number. 0-28032

PATAPSCO BANCORP, INC. ~~(Exact name of registrant as specified in its charter)~~

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

(Exact name of registrant as specified in its charter)

Maryland		52-1951797
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
1301 Merritt Boulevard, Dundalk, Maryland		21222-2194
(Address of principal executive offices)		(Zip Code)

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

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

Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $0.01 per share ~~(Title of Class)~~

(Title of Class)

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

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

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

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

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

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

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

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

As of December 31, ~~2010~~2011, the aggregate market value of voting common stock held by nonaffiliates was approximately $21,~~938~~410,000, computed by reference to the closing sales price on December 31, ~~2010~~2011 as reported on the OTC Electronic Bulletin Board.

Number of shares of Common Stock outstanding as of September 2425, ~~2011~~2012: 1,~~971~~978,~~843~~833.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the ~~2011~~2012 Annual Report to Stockholders. (Part II)

2. Portions of the Proxy Statement for the ~~2011~~2012 Annual Meeting of Stockholders. (Part III)

INDEX

		PAGE	~~PAGE~~
PART I
Item 1.	Business	~~Business~~1	1
Item 1A.	Risk Factors	~~Risk Factors~~17	17
Item 1B.	Unresolved Staff Comments	~~Unresolved Staff Comments~~20	21
Item 2.	Properties	~~Properties~~20	21
Item 3.	Legal Proceedings	~~Legal Proceedings~~21	21
Item 4.	Mine Safety Disclosures	~~(Removed and Reserved)~~21	21
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	~~Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities~~21
Item 6.	Selected Financial Data	~~Selected Financial Data~~21	22
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	~~Management’s Discussion and Analysis of Financial Condition and Results of Operation~~21	22
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	~~Quantitative and Qualitative Disclosures About Market Risk~~21	22
Item 8.	Financial Statements and Supplementary Data	~~Financial Statements and Supplementary Data~~21	22
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	~~Changes in and Disagreements with Accountants on Accounting and Financial Disclosure~~21	22
Item 9A.	Controls and Procedures	~~Controls and Procedures~~22	22
Item 9B.	Other Information	~~Other Information~~23	23
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	~~Directors, Executive Officers and Corporate Governance~~23	24
Item 11.	Executive Compensation	~~Executive Compensation~~23	24
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters~~24
Item 13.	Certain Relationships and Related Transactions, and Director Independence	~~Certain Relationships and Related Transactions, and Director Independence~~24	25
Item 14.	Principal Accountant Fees and Services	~~Principal Accountant Fees and Services~~24	25
PART IV
Item 15.	Exhibits and Financial Statement Schedules	~~Exhibits and Financial Statement Schedules~~25	25
SIGNATURES

PART I

Forward-Looking Statements

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

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

Item 1. Business

General

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

The Company has no significant assets other than its investment in the Bank. The Company is primarily engaged in the business of directing, planning and coordinating the business activities of the Bank. Accordingly, the information set forth in this report, including consolidated financial statements and related data, focuses primarily on the Bank. In the future, the Company may become an operating company or acquire or organize other operating subsidiaries, including other financial institutions. Currently, the Company does not maintain offices separate from those of the Bank or employ any persons other than its officers who are not separately compensated for such service.

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

The Patapsco Bank. The Bank is a Maryland commercial bank operating through four full-service offices located in Dundalk, Carney, Glen Arm and Baltimore City, Maryland. The primary business of the Bank is to attract deposits from individual and corporate customers and to originate residential and commercial mortgage loans, commercial loans and consumer loans, primarily in the Greater Baltimore Metropolitan area. The Bank is subject to competition from other financial and mortgage institutions in attracting and retaining deposits and in making loans. The Bank is subject to the regulations of certain agencies of the federal and state governments and undergoes periodic examination by those agencies. The Bank has three active operating subsidiaries, Prime Business Leasing, Patapsco Financial Services and PFSL Holding Corp. (“PFSL”). The primary business of Prime Business Leasing is the servicing of commercial leases. The primary business of Patapsco Financial Services is the sale of consumer investments. The primary business of PFSL is to hold foreclosed real estate until disposition.

At June 30, ~~2011~~2012, the Bank had $5662.15 million, $4942.71 million, $129.30 million, $5654.40 million, and $1310.01 million in residential mortgage loans, small business loans, construction loans, commercial real estate loans, home equity and other consumer loans, respectively.

Available Information

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

Market Area

The Company’s market area for gathering deposits consists of the Hampden area of Baltimore City and eastern and northeastern Baltimore County, Maryland, while the Company makes loans to customers in much of the Mid-Atlantic area with a strong emphasis on the Baltimore metropolitan area. The economy of the Company’s market area has historically been based on industries such as steel, shipyards and automobile assembly. The economy in the Company’s market area continues to be dependent, to some extent, on a small number of major industrial employers. A significant portion of eastern Baltimore County has been designated as an “Enterprise Zone.” As a result, employers relocating to this area are entitled to significant tax and other economic incentives. Based on ~~2004~~2010 United States Census data, the ~~per~~median ~~capita personal~~ household income for Baltimore County ($4263,~~852~~959) is ~~greater~~between ~~than~~ that of Maryland as a whole ($3970,~~631~~647) and the United States ($3351,~~050~~914). The median ~~per~~household ~~capita personal~~ income for Baltimore City ($2939,~~153~~386) is lower than both the Maryland and United States averages.

Lending Activities

General. The Company’s gross loan portfolio totaled $~~187~~177.57 million at June 30, ~~2011~~2012, representing 7069.9% of total assets at that date. At June 30, ~~2011~~2012, $5662.15 million, or 2935.91%, of the Company’s gross loan portfolio, consisted of residential mortgage loans. Other loans secured by real estate include construction and commercial real estate loans, which amounted to $6863.70 million, or 3635.75%, of the Company’s gross loan portfolio at June 30, ~~2011~~2012. In addition, the Company originates consumer and other loans, including home equity loans, home improvement loans and loans secured by deposits. At June 30, ~~2011~~2012, consumer and other loans totaled $1310.0 1 million, or 65.97%, of the Company’s gross loan portfolio. The Company’s commercial loan portfolio, which consists of small business loans ~~and commercial leases~~ totaled $4942.71 million, or 2623.57%, of the Company’s gross loan portfolio.

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

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

In recent years, the Company has purchased whole loans and loan participation interests. During the year ended June 30, ~~2011~~2012, the Company purchased no participation interests and no other loans. In the future, management will continue to consider purchases of whole loans or participation interests in commercial business, residential and commercial real estate loans and consumer loans.

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

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

It is the Company’s policy to record a lien on the real estate securing a loan and to obtain title insurance, which insures that the property is free of prior encumbrances and other possible title defects. Borrowers must also obtain hazard insurance policies prior to closing, and when the property is in a flood plain as designated by the Department of Housing and Urban Development, pay flood insurance policy premiums.

With respect to single-family residential mortgage loans, the Company makes a loan commitment of between 30 and 60 days for each loan approved. If the borrower desires a longer commitment, the commitment may be extended for good cause and upon written approval. Typically, a ~~$500~~ commitment fee is not charged in connection with the issuance of a commitment letter; however, extension fees are usually charged. The interest rate is guaranteed for the commitment term.

It is the policy of the Company that appraisals beare obtained in connection with all loans for the purchase of real estate or to refinance real estate loans where the existing mortgage is held by a party other than the Company. It is the Company’s policy that all appraisals be performed by appraisers approved by the Company’s Board of Directors and licensed by the State of Maryland, for properties located in the state of Maryland. Broker price opinions (“BPOs”) may be used as a supplemental source of information to be used in the evaluation of collateral value.

Under applicable law, with certain limited exceptions, loans and extensions of credit by a commercial bank to a person, including commitments, at one time shall not exceed 15% of the Company’s unimpaired capital and surplus. Under these limits, the Company’s loans to one borrower were limited to $3.853 million at June 30, ~~2011~~2012. At that date, the Company had no lending relationships in excess of the loans-to-one-borrower limit. At June 30, ~~2011~~2012, the Company’s largest lending relationship was represented by aloans ~~loan~~ totaling $3.20 million, secured by commercial real estate and business assets, of which 1.2 million is included in non-accrual loans at June 30, ~~2011~~2012.

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

Residential Real Estate Lending. The Company historically has been an originator of residential real estate loans in its market area. ~~Residential~~ Residential real estate loans consist of both single-family and multi-family residential real estate loans. At June 30, ~~2011~~2012, residential mortgage loans totaled $5662.15 million, or 2935.91%, of the Company’s gross loan portfolio. Of such loans, $228.26 million were secured by nonowner-occupied investment properties.

3The Company’s multi-family residential loan portfolio consists primarily of loans secured by small apartment buildings. Such loans generally range in size from $100,000 to $2.0 million. At June 30, 2012, the Company had $4.9 million of multi-family residential real estate loans, which amounted to 2.8% of the Company’s gross loan portfolio at such date. Multi-family real estate loans either are originated on an adjustable-rate basis with terms of up to 25 years or are amortized over a maximum of 25 years with a three or five-year note maturity, and are underwritten with loan-to-value ratios of up to 80% of the lesser of the appraised value or the purchase price of the property.

The Company’s multi-family residential loan portfolio consists primarily of loans secured by small apartment buildings. Such loans generally range in size from $100,000 to $2.0 million. At June 30, 2011, the Company had $5.8 million of multi-family residential real estate loans, which amounted to 3.1% of the Company’s gross loan portfolio at such date. Multi-family real estate loans either are originated on an adjustable-rate basis with terms of up to 25 years or are amortized over a maximum of 25 years with a three or five-year note maturity, and are underwritten with loan-to-value ratios of up to 80% of the lesser of the appraised value or the purchase price of the property.

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

Construction Lending. The Company also offers residential and commercial construction loans and land acquisition and development loans. Residential construction loans are offered to individuals who are having their primary or secondary residence built, as well as to local builders to construct single-family dwellings. Residential construction advances are made on a stage of completion basis. Generally, loans to owner/occupants for the construction of residential properties are originated in conjunction with the permanent mortgage on the property. The term of the construction loans is normally from 6 to 18 months and has a variable interest rate, which is normally up to 2% above the prime interest rate. Upon completion of construction, the permanent loan rate will be set at the interest rate offered by the Company on that loan product not sooner than 60 days prior to completion. Interest rates on residential loans to builders are set at the prime interest rate plus a margin of 0.5% to 2.0% as may be adjusted from time to time. Interest rates on commercial construction loans and land acquisition and development loans are based on the prime rate plus a negotiated margin of between 0.5% and 2.0% and adjust from time to time, with construction terms generally not exceeding 18 months. Advances are made on a percentage of completion basis. At June 30, ~~2011~~2012, $129.30 million, or 65.61%, of the Company’s loan portfolio consisted of construction loans.

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

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

Commercial Real Estate Lending. The Company’s commercial real estate loan portfolio consists of loans to finance the acquisition of small office buildings, shopping centers and commercial and industrial buildings. Such loans generally range in size from $100,000 to $2.0 million. At June 30, ~~2011~~2012, the Company had $5654.40 million of commercial real estate loans, which amounted to 30.04% of the Company’s gross loan portfolio at such date. Commercial real estate loans are typically originated on an adjustable-rate basis with terms of up to 25 years or are amortized over a maximum of 25 years with a maturity generally of three to ten years, and are underwritten with loan-to-value ratios of up to 80% of the lesser of the appraised value or the purchase price of the property. Because of the inherently greater risk involved in this type of lending, the Company generally limits its commercial real estate lending to borrowers within its market area or with which it has had prior experience. The Company seeks to expand commercial real estate lending.

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

Consumer Lending. The consumer loans currently in the Company’s loan portfolio consist of home improvement loans, home equity loans, loans secured by savings deposits and overdraft protection for checking accounts and other consumer loans. At June 30, ~~2011~~2012, consumer and other loans totaled $1310.01 million, or 65.97%, of the Company’s gross loan portfolio.

In July 1995, the Company instituted a home improvement loan program. Such loans were made to finance a variety of other home improvement projects, such as replacement windows, siding and room additions. The Company originated home improvement loans throughout Maryland, Virginia, Delaware, New Jersey and Southern Pennsylvania. In June 2011, the Company exited the origination of home improvement loans. At At June 30, ~~2011~~2012 home improvement loans amounted to $74.10 million, or 32.82%, of the Company’s loan portfolio, with $~~416~~358,000 of originated loans being secured by real estate.

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

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

At June 30, ~~2011~~2012, the Company’s commercial loans, ~~excluding leases,~~ totaled $4742.51 million, or 2523.37%, of the Company’s loan portfolio. This commercial lending program employs many of the alternative financing and guarantee programs available through the U.S. Small Business Administration and other state and local economic development agencies.

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

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

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

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

~~Prior~~Loan toFees ~~October~~and Servicing. ~~2008,~~The ~~the~~ Company ~~offered~~receives ~~loans~~fees toin ~~finance~~connection ~~lease~~with ~~transactions,~~late ~~secured~~payments byand ~~the~~for ~~lease~~miscellaneous ~~and~~services ~~the~~related ~~underlying~~to ~~equipment,~~its toloans. The ~~businesses~~Company ofalso ~~various~~charges ~~size~~fees ~~through~~in ~~its~~connection ~~subsidiary,~~with ~~Prime~~loan ~~Business~~originations ~~Leasing. In~~typically ~~extending~~up ~~the~~to ~~financing~~two inpoints a(one ~~commercial~~point ~~lease~~being ~~transaction,~~equal ~~the~~to ~~Company~~1% ~~reviewed~~of the loan ~~borrower’s~~amount) ~~financial~~on ~~statements,~~real ~~credit~~estate ~~reports,~~loan ~~tax~~originations. ~~returns~~The ~~and~~Company ~~other~~generally ~~documentation. Generally,~~does ~~commercial~~not ~~lease~~service ~~financing~~loans ~~were~~for ~~made~~others. inThe ~~amounts~~Company ~~ranging~~has ~~between~~sold ~~$3,000~~participating interests ~~and~~on ~~$120~~residential,~~000~~ ~~with~~commercial ~~terms~~real ofestate ~~up to five years~~ and ~~carry~~commercial ~~fixed~~business ~~interest~~loans ~~rates. Note that in October 2008, management made a strategic decision~~ to ~~cease~~other ~~origination~~local offinancial ~~leases~~institutions. At June 30, ~~2011~~ 2012, the ~~remaining~~Company ~~portfolio~~was ofservicing ~~commercial~~these ~~lease~~participation ~~finance~~interests ~~transaction~~for ~~loans~~others ~~totaled~~totaling approximately $213.29 million~~, or 1~~.~~2%, of the Company’s loan portfolio.~~

~~Loan~~Nonperforming Loans ~~Fees~~ and ~~Servicing~~Other Problem Assets. ~~The~~ ~~Company~~It ~~receives~~is ~~fees~~management’s inpolicy ~~connection~~to ~~with~~continually ~~late~~monitor ~~payments~~its ~~and~~loan ~~for~~portfolio ~~miscellaneous~~to ~~services~~anticipate and ~~related~~address topotential ~~its~~and ~~loans~~actual delinquencies. ~~The~~ ~~Company~~When ~~also~~a ~~charges~~borrower ~~fees~~fails into ~~connection~~make ~~with~~a payment on a loan, ~~originations~~the ~~typically~~Company uptakes immediate steps to ~~two~~have ~~points~~the ~~(one~~delinquency ~~point~~cured ~~being~~and ~~equal~~the loan restored to 1%current ofstatus. ~~the~~Loans, ~~loan~~which ~~amount)~~are delinquent between ten and 15 days, depending on ~~real~~the ~~estate~~type of loan, ~~originations. The~~typically ~~Company~~incur ~~generally~~a ~~does~~late ~~not~~fee ~~service~~of ~~loans~~5% ~~for~~of ~~others~~principal and interest due. ~~The~~ As a matter of policy, the Company will ~~has~~contact ~~sold~~the ~~participating~~borrower ~~interests~~after onthe ~~residential~~date the late payment is due. If payment is not promptly received, ~~commercial~~the ~~real~~borrower ~~estate~~is contacted again, and ~~commercial~~efforts ~~business~~are ~~loans~~made to ~~other~~formulate ~~local~~an ~~financial~~affirmative ~~institutions. At~~plan ~~June~~to ~~30,~~cure ~~2011~~the delinquency. Generally, ~~the~~after ~~Company~~any ~~was~~loan ~~servicing~~is ~~these~~delinquent ~~participation~~90 days ~~interests~~or ~~for~~more, ~~others~~formal ~~totaling~~legal ~~approximately~~proceedings ~~$14.5~~are ~~million~~commenced to collect amounts owed.

~~Nonperforming~~ Loans ~~and~~generally ~~Other~~are placed ~~Problem~~on ~~Assets. It~~nonaccrual isstatus ~~management’s~~if ~~policy~~the ~~to continually monitor its~~ loan ~~portfolio~~becomes topast ~~anticipate~~due ~~and~~more ~~address~~than ~~potential~~90 ~~and~~days, ~~actual~~except ~~delinquencies. When~~in ainstances ~~borrower~~where ~~fails~~in tomanagement’s ~~make~~judgment there ais ~~payment~~no ondoubt aas ~~loan, the Company takes immediate steps~~ to ~~have~~full ~~the~~collectibility ~~delinquency~~of ~~cured~~principal and ~~the~~interest. ~~loan~~At ~~restored~~June to30, ~~current status. Loans~~2012, ~~which~~all ~~are~~loans ~~delinquent~~past ~~between~~due ~~ten~~more ~~and~~than 1590 days, ~~depending~~ were on ~~the~~nonaccrual. Consumer ~~type~~loans ofare ~~loan,~~generally ~~typically~~charged ~~incur~~off aafter ~~late~~they ~~fee~~become ofmore 5%than of90 ~~principal~~days ~~and~~past ~~interest~~ due. As aAll ~~matter~~other ofloans ~~policy,~~are charged ~~the~~off ~~Company~~when ~~will~~management ~~contact~~concludes ~~the~~that ~~borrower~~they ~~after~~are ~~the date the late payment is due~~uncollectible. If ~~payment~~See isNotes ~~not~~1 ~~promptly received, the borrower is contacted again,~~ and ~~efforts~~3 ~~are~~of ~~made to formulate an affirmative plan to cure~~ the ~~delinquency. Generally,~~Notes ~~after any loan is delinquent 90 days or more, formal legal proceedings are commenced~~ to ~~collect~~Consolidated ~~amounts~~Financial ~~owed~~Statements.

~~Loans~~Real ~~generally~~estate ~~are~~acquired by ~~placed~~the onCompany ~~nonaccrual~~as ~~status~~a ifresult of foreclosure is classified as real estate acquired through foreclosure until such time as it is sold. When such property is acquired, it is initially recorded at the ~~loan~~estimated ~~becomes~~fair ~~past~~value ~~due~~less ~~more~~costs ~~than~~to 90sell, ~~days~~establishing a new cost basis. Subsequent to acquisition, ~~except~~the property is carried at the lower of cost or fair value less estimated costs to sell. Fair value is defined as the amount in ~~instances~~cash ~~where~~or cash-equivalent value or other consideration that a real estate parcel would yield in a ~~management’s~~current ~~judgment~~sale ~~there~~between isa nowilling ~~doubt~~buyer and a willing seller, as tomeasured ~~full~~by ~~collectibility~~market transactions. If a market does not exist, fair value of ~~principal~~the ~~and~~item ~~interest. At~~is ~~June~~estimated 30based on selling prices of similar items in active markets or, ~~2011~~if there are no active markets for similar items, ~~all~~by ~~loans~~discounting ~~past~~a ~~due~~forecast ~~more~~of ~~than~~expected 90cash ~~days~~flows ~~were~~at ona ~~nonaccrual~~rate commensurate with the risk involved. ~~Consumer~~ ~~loans~~Fair ~~are~~value is generally determined ~~charged~~through ~~off~~an ~~after~~appraisal ~~they~~at ~~become~~the ~~more~~time ~~than~~of 90foreclosure. ~~days~~Any ~~past~~required ~~due. All~~write-down ~~other~~of ~~loans~~the ~~are~~loan to its fair value upon foreclosure is charged ~~off~~against ~~when~~the ~~management~~allowance ~~concludes~~for ~~that~~loan ~~they~~losses, ~~are~~with ~~uncollectible~~subsequent write-downs reflected in other expense. See Notes 1, 3 and 4 of the Notes to Consolidated Financial Statements.

~~Real~~Investment estate acquired by the Company as a result of foreclosure is classified as real estate acquired through foreclosure until such time as it is sold. When such property is acquired, it is initially recorded at the estimated fair value less costs to sell, establishing a new cost basis. Subsequent to acquisition, the property is carried at the lower of cost or fair value less estimated costs to sell. Fair value is defined as the amount in cash or cash-equivalent value or other consideration that a real estate parcel would yield in a current sale between a willing buyer and a willing seller, as measured by market transactions. If a market does not exist, fair value of the item is estimated based on selling prices of similar items in active markets or, if there are no active markets for similar items, by discounting a forecast of expected cash flows at a rate commensurate with the risk involved. Fair value is generally determined through an appraisal at the time of foreclosure. Any required write-down of the loan to its fair value upon foreclosure is charged against the allowance for loan losses, with subsequent write-downs reflected in other expense. See Notes 1 and 5 of the Notes to Consolidated Financial Statements.Activities

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

~~General. The~~Under ~~Company~~applicable ~~makes~~accounting rules, ~~investments~~investment insecurities ~~order~~classified as held-to-maturity ~~maintain~~are ~~the~~recorded ~~levels~~at ofamortized ~~liquid~~cost ~~assets~~and ~~preferred~~those byclassified ~~regulatory~~as ~~authorities~~available ~~and~~for sale ~~manage~~are ~~cash~~reported ~~flow,~~at ~~diversify~~fair ~~its assets~~value, ~~obtain~~with ~~yield~~unrealized gains and tolosses ~~satisfy~~excluded ~~certain~~from ~~requirements~~earnings ~~for~~and ~~favorable~~reported ~~tax~~as ~~treatment. The~~a ~~investment~~separate ~~activities~~component of stockholders’ ~~the~~equity. ~~Company~~At ~~consist~~June ~~primarily~~30, of2012, ~~investments~~the inCompany’s ~~mortgage-backed~~entire ~~securities~~portfolio ~~and~~of ~~other~~ investment securities~~. Typical~~ ~~investments~~was ~~include~~classified ~~federally~~as ~~sponsored~~available for ~~agency~~sale ~~mortgage~~and ~~pass-through,~~had ~~federally~~an ~~sponsored~~aggregate ~~agency~~carrying ~~debt~~value ~~securities,~~of U$41.S.1 ~~treasury~~million ~~obligations~~ and ~~investment~~an ~~grade~~unrealized ~~corporate~~net ~~securities. Investment~~loss ~~and~~of ~~aggregate~~$82,000. ~~investment~~Management ~~limitations~~of ~~and~~the ~~credit~~Company currently ~~quality~~does ~~parameters~~not ofanticipate ~~each~~that ~~class~~the presence of ~~investment~~unrealized ~~are~~losses ~~prescribed~~ in the Company’s ~~investment~~portfolio ~~policy. The~~of ~~Company~~investment ~~performs analyses on~~ securities ~~prior to purchase~~ and onmortgage-backed ansecurities ~~ongoing~~is ~~basis~~likely to ~~determine~~have ~~the~~a ~~impact~~material onadverse ~~earnings~~effect ~~and~~on ~~market value under various interest rate and prepayment conditions. Senior management and~~ the Company’s ~~Asset/Liability~~financial ~~Management~~condition, ~~Committee have limited authority to sell investment securities and purchase comparable investment securities with similar characteristics. The Board~~ results of ~~Directors~~operations ~~reviews~~or ~~all securities transactions on a monthly basis~~liquidity.

~~Under~~Deposit ~~applicable~~Activity ~~accounting rules, investment securities classified as held-to-maturity are recorded at amortized cost~~ and ~~those~~Other ~~classified~~Sources ~~as available for sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component~~ of stockholders’ equity. At June 30, 2011, the Company’s entire portfolio of investment securities was classified as available for sale and had an aggregate carrying value of $39.8 million and an unrealized net gain after tax of $39,000. Management of the Company currently does not anticipate that the presence of unrealized losses in the Company’s portfolio of investment securities and mortgage-backed securities is likely to have a material adverse effect on the Company’s financial condition, results of operations or liquidity. Funds

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

~~General.~~ Deposits. The ~~are~~Company ~~the~~attracts ~~primary~~deposits ~~source~~principally offrom ~~the~~within ~~Company’s~~its ~~funds~~market ~~for~~area ~~lending,~~by ~~investment~~offering ~~activities~~a ~~and~~variety ~~general~~of ~~operational~~deposit ~~purposes. In~~instruments, ~~addition~~including ~~to deposits~~checking accounts, ~~the~~Christmas ~~Company~~Club ~~derives~~accounts, ~~funds~~money ~~from~~market ~~loan~~accounts, ~~principal~~statement and ~~interest~~passbook ~~repayments~~savings accounts, ~~maturities~~Individual Retirement Accounts, and certificates of ~~investment~~deposit ~~securities~~which ~~and~~range ~~mortgage-backed~~in ~~securities~~maturity ~~and~~from ~~interest~~seven ~~payments~~days ~~thereon~~to 66 months. ~~Although~~ ~~loan~~Deposit ~~repayments~~terms ~~are~~vary aaccording ~~relatively~~to ~~stable~~the ~~source~~minimum balance required, the length of time the funds, ~~deposit~~must ~~inflows~~remain ~~and~~on ~~outflows~~deposit, ~~are~~and ~~significantly~~the ~~influenced~~interest byrate. ~~general~~Maturities, ~~interest~~terms, ~~rates~~service fees and ~~money~~withdrawal penalties ~~market~~for ~~conditions. Borrowings~~its ~~may~~deposit beaccounts ~~used~~are established by the Company on a ~~short-term~~periodic basis. toThe ~~compensate~~Company ~~for~~reviews ~~reductions~~its indeposit mix and pricing on a weekly basis. In determining the ~~availability~~characteristics of ~~funds~~its deposit accounts, orthe onCompany aconsiders ~~long-term~~the ~~basis~~rates ~~for~~offered by ~~general~~competing ~~operational~~institutions, ~~purposes. The~~lending ~~Company~~and ~~may~~liquidity ~~borrow~~requirements, ~~from~~growth ~~the~~goals ~~Federal~~and ~~Home~~federal ~~Loan~~regulations. ~~Bank~~Management ofbelieves ~~Atlanta~~it ~~and~~prices its ~~Pacific~~deposits ~~Coast~~comparably ~~Bankers~~to ~~Bank~~rates offered by its competitors.

~~Deposits.~~ The Company ~~attracts~~attempts to compete for deposits ~~principally~~with ~~from~~other ~~within~~institutions in its market area by offering acompetitively ~~variety~~priced of deposit instruments, ~~including~~that ~~checking~~are tailored ~~accounts,~~to ~~Christmas~~the ~~Club~~needs ~~accounts,~~of ~~money~~its ~~market~~customers. ~~accounts~~Additionally, ~~statement~~the ~~and~~Company ~~passbook~~seeks ~~savings~~to ~~accounts,~~meet ~~Individual~~customers’ ~~Retirement~~needs ~~Accounts,~~by ~~and~~providing ~~certificates~~convenient customer ofservice ~~deposit which range in maturity from seven days~~ to ~~66 months. Deposit terms vary according to~~ the ~~minimum balance required~~community, ~~the~~efficient ~~length~~staff ~~of time the funds must remain on deposit,~~ and ~~the~~convenient ~~interest~~hours ~~rate. Maturities,~~of ~~terms,~~ service. ~~fees~~Substantially ~~and~~all ~~withdrawal~~of ~~penalties for its deposit accounts are established by~~ the Company’s ondepositors are aMaryland ~~periodic basis~~residents. ~~The~~ ~~Company~~To ~~reviews~~provide ~~its~~additional ~~deposit~~convenience, ~~mix~~the ~~and~~Company ~~pricing~~participates onin ~~a weekly basis. In determining~~ the ~~characteristics~~STAR ofAutomatic ~~its~~Teller ~~deposit~~Machine ~~accounts,~~network at ~~the~~locations ~~Company~~throughout ~~considers~~ the ~~rates~~United ~~offered by competing institutions~~States, ~~lending~~through ~~and~~which ~~liquidity~~customers ~~requirements,~~can ~~growth~~gain ~~goals~~access ~~and federal regulations. Management believes it prices its deposits comparably~~ to ~~rates~~their ~~offered~~accounts byat ~~its~~any ~~competitors~~time.

~~The~~Borrowings. While ~~Company~~deposits ~~attempts~~historically tohave ~~compete~~been the primary source of funds for ~~deposits~~the ~~with~~Company’s ~~other~~lending, ~~institutions~~investments inand general operating activities, the Company utilizes advances from the Federal Home Loan Bank of Atlanta to supplement its ~~market~~supply ~~area~~of bylendable ~~offering~~funds and ~~competitively~~to ~~priced~~meet deposit ~~instruments~~withdrawal ~~that~~requirements. ~~are~~The ~~tailored~~Federal toHome ~~the~~Loan ~~needs~~Bank of ~~its~~Atlanta ~~customers~~functions as a central reserve bank providing credit for member financial institutions. ~~Additionally~~ As a member of the Federal Home Loan Bank System, the Company ~~seeks~~is required to ~~meet~~own ~~customers’~~stock in ~~needs~~the byFederal ~~providing~~Home ~~convenient~~Loan ~~customer~~Bank ~~service~~of Atlanta and is authorized to ~~the~~apply ~~community~~for advances. Advances are pursuant to several different programs, each ~~efficient~~of ~~staff~~which ~~and~~has ~~convenient~~its ~~hours~~own interest rate and range of ~~service~~maturities. ~~Substantially~~ ~~all~~The ofCompany has a Blanket Agreement for advances with the Federal Home Loan Bank under which the Company’s ~~depositors~~may ~~are~~borrow ~~Maryland~~up ~~residents~~to 25% of assets subject to normal collateral and underwriting requirements. To Advances ~~provide~~from ~~additional~~the ~~convenience,~~Federal Home Loan Bank of Atlanta are secured by the Company’s ~~participates~~stock in the ~~STAR~~Federal ~~Automatic~~Home ~~Teller~~Loan ~~Machine~~Bank ~~network~~of atAtlanta and ~~locations~~other ~~throughout~~eligible ~~the~~assets. ~~United~~At ~~States~~June 30, ~~through~~2012, ~~which~~the ~~customers~~Company ~~can~~had ~~gain~~outstanding ~~access~~Federal toHome ~~their~~Loan ~~accounts~~Bank atof ~~any~~Atlanta ~~time~~advances of $9.0 million with an average rate of 3.69%.

~~Borrowings. While~~Troubled ~~deposits~~Asset ~~historically~~Relief ~~have~~Program ~~been~~Capital Purchase the primary source of funds for the Company’s lending, investments and general operating activities, the Company utilizes advances from the Federal Home Loan Bank of Atlanta to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The Federal Home Loan Bank of Atlanta functions as a central reserve bank providing credit for member financial institutions. As a member of the Federal Home Loan Bank System, the Company is required to own stock in the Federal Home Loan Bank of Atlanta and is authorized to apply for advances. Advances are pursuant to several different programs, each of which has its own interest rate and range of maturities. The Company has a Blanket Agreement for advances with the Federal Home Loan Bank under which the Company may borrow up to 25% of assets subject to normal collateral and underwriting requirements. Advances from the Federal Home Loan Bank of Atlanta are secured by the Company’s stock in the Federal Home Loan Bank of Atlanta and other eligible assets. At June 30, 2011, the Company had outstanding Federal Home Loan Bank of Atlanta advances of $12.0 million with an average rate of 3.62%.Program

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

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

~~Subsidiary~~The ~~Activities~~Bank has four subsidiaries, PFSL LLC Holding Corp. I and II (“PFSL”), which it formed to hold certain real estate owned, Prime Business Leasing that was formed in October 1998 and has since been in the run-off process and Patapsco Financial Services, Inc., which was formed in order to sell alternative investment products to the Company’s customers.

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

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

~~The~~Management ~~Company~~considers its ~~faces~~market ~~strong~~area ~~competition~~for ~~both~~gathering ~~in originating loans and in attracting~~ deposits~~. The~~ ~~Company~~to ~~competes~~be ~~for~~eastern ~~loans~~Baltimore ~~principally~~County, onBaltimore ~~the~~City, ~~basis~~and ofHarford ~~interest~~County ~~rates,~~in ~~the~~Maryland. ~~types~~The ofCompany originates loans itthroughout ~~originates,~~much of the ~~deposit~~Mid-Atlantic ~~products~~area. itThe ~~offers~~Company ~~and~~attracts ~~the~~its ~~quality~~deposits ofthrough ~~services~~its itoffices ~~provides~~in toDundalk, ~~borrowers. The~~Carney, Hampden ~~Company~~and ~~also~~Glen ~~competes~~Arm bywhich ~~offering products that~~ are ~~tailored~~primarily tofrom the local community. ~~Its~~ Consequently, competition infor ~~originating~~deposits ~~loans~~is ~~comes~~principally ~~primarily~~ from other commercial banks, savings institutions ~~and mortgage bankers~~, credit unions, ~~and~~mutual ~~finance~~funds ~~companies. The~~and ~~regulatory~~brokers ~~environment~~ in ~~which~~ the local community. The Company competes for deposits and ~~the~~loans ~~Bank~~by ~~operate~~offering iswhat ~~subject~~it believes to ~~change~~be ~~and~~a ~~such~~variety ~~changes~~of ~~may~~deposit ~~adversely~~products ~~affect~~at ~~operating~~competitive ~~results~~rates, convenient business hours, a commitment to outstanding customer service and a well-trained staff.

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

~~Employees~~As of June 30, 2012, the Company had 53 full-time and 9 part-time employees, none of who were represented by a collective bargaining agreement. Management considers the Company’s relationships with its employees to be good.

AsDepository ofInstitution June 30, 2011, the Company had 57 full-time and 13 part-time employees, none of who were represented by a collective bargaining agreement. Management considers the Company’s relationships with its employees to be good.Regulation

8General. The Bank is a Maryland commercial bank and its deposit accounts are insured by the Deposit Insurance Fund (“DIF”) administered by the Federal Deposit Insurance Corporation (“FDIC”). The Bank also is a member of the Federal Reserve System. The Bank is subject to supervision, examination and regulation by the State of Maryland Commissioner of Financial Regulation (“Commissioner”), the Federal Reserve Board, Maryland and federal statutory and regulatory provisions governing such matters as capital standards, mergers and establishment of branch offices, and it is subject to the FDIC’s authority to conduct special examinations. The Bank is required to file reports with the Commissioner and the Federal Reserve Board concerning its activities and financial condition and is required to obtain regulatory approvals prior to entering into certain transactions, including mergers with, or acquisitions of, other depository institutions.

~~Depository Institution Regulation~~8

~~General.~~ The ~~Company~~system isof ~~a Maryland commercial bank~~ regulation and ~~its~~supervision ~~deposit~~applicable ~~accounts~~to ~~are insured by~~ the ~~Deposit~~Bank ~~Insurance~~establishes ~~Fund~~a ~~(“DIF”)~~comprehensive ~~administered~~framework byfor the ~~Federal~~operations ~~Deposit Insurance Corporation (“FDIC”). The Company also is a member~~ of the ~~Federal~~Bank ~~Reserve~~and ~~System. The Company~~ is ~~subject~~intended primarily tofor ~~supervision, examination and regulation by~~ the ~~State~~protection of ~~Maryland Commissioner of Financial Regulation (“Commissioner”),~~ the ~~Federal~~FDIC ~~Reserve Board, Maryland~~ and ~~federal~~the ~~statutory~~depositors ~~and regulatory provisions governing such matters as capital standards, mergers and establishment~~ of ~~branch~~the ~~offices,~~Bank. ~~and~~Changes itin ~~is subject to~~ the ~~FDIC’s~~regulatory ~~authority~~framework tocould ~~conduct~~have ~~special~~a ~~examinations. The~~material effect ~~Company~~on ~~is required to file reports with~~ the ~~Commissioner~~Bank and ~~the Federal Reserve Board concerning~~ its ~~activities and financial condition and is required to obtain regulatory approvals prior to entering into certain transactions, including mergers with, or acquisitions of, other depository institutions~~operations.

Recent Regulatory Reform. The ~~system~~Dodd-Frank ofWall ~~regulation~~Street Reform and ~~supervision~~Consumer ~~applicable~~Protection toAct (the ~~Company~~“Dodd-Frank ~~establishes~~Act”), awhich ~~comprehensive~~was ~~framework~~enacted on ~~for~~July 21, ~~the~~2010, ~~operations~~will ofsignificantly change the ~~Company~~current ~~and~~bank isregulatory ~~intended~~structure ~~primarily~~and ~~for~~affect the ~~protection~~lending, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires the ~~FDIC~~Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository institutions, and the ~~depositors~~components of ~~the~~Tier ~~Bank~~1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. ~~Changes~~ In inaddition, the ~~regulatory~~proceeds ~~framework~~of ~~could~~trust ~~have~~preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets. The legislation also establishes a ~~material~~floor for capital of insured depository institutions that cannot be lower than the standards in effect ontoday, and directs the ~~Company~~federal banking regulators to implement new leverage and ~~its~~capital ~~respective~~requirements within ~~operations~~18 months. These new leverage and capital requirements must take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.

~~Recent Regulatory Reform.~~ The Dodd-Frank ~~Wall~~Act also ~~Street~~creates ~~Reform~~a ~~and~~new Consumer Financial Protection ~~Act~~Bureau ~~(the~~with ~~“Dodd-Frank~~broad ~~Act”),~~powers ~~which~~to ~~was~~supervise ~~enacted on July 21, 2010, will significantly change the current bank regulatory structure~~ and ~~affect~~enforce ~~the~~consumer ~~lending,~~protection ~~investment, trading and operating activities of financial institutions and their holding companies~~laws. The Consumer ~~Dodd-Frank~~Financial ~~Act~~Protection ~~requires~~Bureau ~~the~~has ~~Federal~~broad ~~Reserve~~rulemaking ~~Board~~authority tofor ~~set~~a ~~minimum~~wide ~~capital~~range ~~levels~~of ~~for~~consumer ~~bank~~protection ~~holding~~laws ~~companies~~ that ~~are~~apply asto all ~~stringent~~banks asand ~~those~~savings ~~required for insured depository~~ institutions, ~~and~~including the ~~components~~authority ~~of Tier 1 capital would be restricted~~ to ~~capital~~prohibit ~~instruments~~“unfair, ~~that~~deceptive ~~are~~or ~~currently~~abusive” ~~considered~~acts toand ~~be Tier 1 capital for insured depository institutions~~practices. InThe Consumer ~~addition,~~Financial ~~the~~Protection ~~proceeds~~Bureau ofhas ~~trust~~examination ~~preferred~~and ~~securities~~enforcement ~~are~~authority ~~excluded~~over ~~from~~all ~~Tier~~banks 1and ~~capital unless such securities were issued prior to May 19, 2010 by bank or~~ savings ~~and~~institutions ~~loan holding companies~~ with ~~less~~ more than $1510.0 billion ofin assets. ~~The~~Banks ~~legislation~~and ~~also~~savings ~~establishes~~institutions awith ~~floor~~$10.0 ~~for~~billion ~~capital~~or ofless ~~insured~~in ~~depository~~assets ~~institutions~~will ~~that cannot~~ be ~~lower~~examined ~~than~~by ~~the~~their applicable ~~standards~~bank inregulators. The ~~effect~~new ~~today,~~legislation ~~and~~also ~~directs~~weakens the federal ~~banking~~preemption ~~regulators~~available tofor ~~implement~~national ~~new~~banks ~~leverage~~ and ~~capital~~federal savings ~~requirements~~associations, ~~within 18 months. These new leverage~~ and ~~capital~~gives ~~requirements~~the ~~must~~state ~~take~~attorneys ~~into~~general ~~account~~the ~~off-balance~~ability ~~sheet~~to ~~activities~~enforce ~~and~~applicable ~~other~~federal ~~risks,~~consumer ~~including~~protection ~~risks relating to securitized products and derivatives~~laws.

The Dodd-Frank Act contains ~~also creates~~ a ~~new~~wide ~~Consumer~~variety ~~Financial~~of ~~Protection~~provisions ~~Bureau~~affecting ~~with~~the ~~broad~~regulation ~~powers~~of todepository ~~supervise~~institutions ~~and~~in ~~enforce~~addition ~~consumer~~to ~~protection~~those ~~laws~~stated above. ~~The~~ ~~Consumer~~Those include ~~Financial~~restrictions ~~Protection~~related ~~Bureau~~to ~~has~~mortgage ~~broad~~originations, ~~rulemaking~~risk ~~authority~~retention ~~for~~requirements aas ~~wide range of consumer protection laws that apply~~ to ~~all~~securitized ~~banks~~loans and ~~savings institutions, including~~ the ~~authority to prohibit “unfair, deceptive or abusive” acts and practices. The~~ Consumer Financial Protection Bureau. ~~has~~The ~~examination~~full ~~and~~impact ~~enforcement~~of ~~authority~~the ~~over~~Dodd-Frank ~~all~~Act ~~banks~~on ~~and~~our ~~savings~~business ~~institutions with more than $10.0 billion in assets. Banks~~ and ~~savings~~operations ~~institutions~~will ~~with~~not ~~$10.0~~be ~~billion~~known orfor ~~less~~years inuntil ~~assets~~regulations implementing ~~will~~the bestatute ~~examined~~are bywritten ~~their~~and ~~applicable bank regulators~~adopted. The ~~new~~Dodd-Frank ~~legislation~~Act ~~also~~may ~~weakens~~have ~~the~~a ~~federal~~material ~~preemption~~impact ~~available~~on ~~for~~the ~~national~~Company’s ~~banks~~ and ~~federal~~the Bank’s ~~savings associations~~operations, ~~and~~particularly ~~gives~~through ~~the~~increased ~~state~~compliance ~~attorneys~~costs ~~general~~resulting ~~the~~from ~~ability~~possible tofuture ~~enforce applicable federal~~ consumer ~~protection~~and ~~laws~~fair lending regulations.

Business Activities. The ~~Dodd-Frank~~Commissioner ~~Act~~regulates ~~contains a wide variety of provisions affecting~~ the ~~regulation~~Bank’s ofinternal ~~depository~~organization ~~institutions~~as inwell ~~addition~~as toits ~~those stated above. Those include restrictions related to mortgage originations~~deposit, ~~risk~~lending ~~retention requirements as to securitized loans~~ and ~~the~~investment ~~Consumer Financial Protection Bureau~~activities. The ~~full~~basic ~~impact~~authority offor the ~~Dodd-Frank~~Bank’s ~~Act~~activities onis ~~our~~specified ~~business~~by ~~and~~Maryland ~~operations~~law. ~~will~~Additionally, ~~not~~Maryland belaw ~~known~~contains ~~for~~a ~~years until regulations implementing the~~ parity statute ~~are~~by ~~written~~which ~~and~~Maryland ~~adopted. The~~commercial ~~Dodd-Frank~~banks ~~Act~~ may, ~~have~~with ~~a material impact on~~ the ~~Company’s~~approval ~~and~~of the ~~Bank’s operations~~Commissioner, ~~particularly~~engage ~~through~~in ~~increased~~any ~~compliance~~additional ~~costs~~activity, ~~resulting~~service or ~~from~~practice ~~possible~~permitted ~~future~~for ~~consumer~~national ~~and fair lending regulations~~banks.

~~Business Activities.~~ The ~~Commissioner~~Federal Reserve ~~regulates~~and ~~the~~FDIC ~~Company’s~~also ~~internal~~regulate ~~organization~~many asof ~~well~~the asareas ~~its~~regulated ~~deposit,~~by ~~lending~~the Commissioner and ~~investment~~federal ~~activities. The~~law ~~basic~~may ~~authority~~limit ~~for~~some of the authority ~~Company’s~~provided ~~activities~~to isthe ~~specified~~ Bank by Maryland law. ~~Additionally,~~ ~~Maryland~~Approval ~~law~~of ~~contains~~the aCommissioner ~~parity~~and ~~statute~~the byFederal ~~which~~Reserve ~~Maryland~~is ~~commercial~~required ~~banks may~~for, ~~with~~among other ~~the approval of the Commissioner~~things, ~~engage~~business incombinations ~~any~~and ~~additional~~the ~~activity,~~establishment ~~service~~of orbranch ~~practice permitted for national banks~~offices.

Capital Requirements. The Bank is subject to Federal Reserve ~~and~~Board ~~FDIC~~capital ~~also~~requirements, ~~regulate~~as ~~many~~well as statutory capital requirements imposed under Maryland law. Federal Reserve Board regulations establish two capital standards for state-chartered banks that are members of the ~~areas~~Federal Reserve ~~regulated~~System by(“state ~~the~~member ~~Commissioner~~banks”): a leverage requirement and ~~federal~~a ~~law~~risk-based ~~may~~capital ~~limit~~requirement. ~~some~~In ofaddition, the Federal ~~authority~~Reserve ~~provided~~may, toon a case-by-case basis, establish individual minimum capital requirements for a bank that vary from the ~~Company~~requirements that bywould ~~Maryland~~otherwise ~~law~~apply under Federal Reserve Board regulations. ~~Approval~~ ofA bank that fails to satisfy the ~~Commissioner~~capital ~~and~~requirements established under the Federal Reserve isBoard’s ~~required~~regulations ~~for,~~will ~~among~~be ~~other~~subject ~~things,~~to ~~business~~such ~~combinations~~administrative ~~and~~action or sanctions as the ~~establishment~~Federal ofReserve Board ~~branch~~deems ~~offices~~appropriate.

~~Capital Requirements.~~ The ~~Company~~leverage isratio adopted ~~subject~~by tothe Federal Reserve Board ~~capital~~requires ~~requirements,~~a asminimum ~~well~~ratio asof ~~statutory~~“Tier 1 capital” ~~requirements~~to ~~imposed~~adjusted ~~under~~total ~~Maryland~~assets ~~law. Federal~~of ~~Reserve~~3% ~~Board~~for banks ~~regulations~~rated ~~establish~~composite ~~two~~1 ~~capital~~under ~~standards~~the ~~for~~CAMELS ~~state-chartered~~examination rating system for banks. ~~that~~Banks ~~are~~not ~~members~~rated ofcomposite ~~the~~1 ~~Federal~~under ~~Reserve~~the ~~System~~CAMELS ~~(“state~~rating system ~~member~~for banks~~”):~~ aare ~~leverage~~required ~~requirement~~to ~~and~~maintain a ~~risk-based~~minimum ~~capital~~ratio ~~requirement. In~~of ~~addition,~~Tier ~~the~~1 ~~Federal~~capital ~~Reserve~~to ~~may,~~adjusted ontotal aassets ~~case-by-case~~of ~~basis,~~at ~~establish~~least ~~individual~~4%. ~~minimum~~ Additional capital ~~requirements~~may be necessary for ainstitutions ~~bank~~with ~~that~~supervisory, ~~vary~~financial, ~~from~~operational ~~the~~or ~~requirements~~managerial ~~that~~weaknesses, ~~would~~as ~~otherwise~~well ~~apply~~as ~~under~~institutions experiencing significant growth. For purposes of the Federal Reserve Board’s ~~regulations. A~~leverage ~~bank~~requirement, ~~that~~Tier ~~fails~~1 tocapital ~~satisfy~~consists primarily ~~the~~of ~~capital~~common ~~requirements~~stockholders’ ~~established~~equity, ~~under~~certain ~~the~~perpetual ~~Federal~~preferred ~~Reserve~~stock ~~Board’s~~(which ~~regulations~~must ~~will~~ be ~~subject~~noncumulative towith ~~such~~respect ~~administrative~~to banks), ~~action~~and orminority ~~sanctions~~interests asin the ~~Federal~~equity ~~Reserve~~accounts ~~Board~~of ~~deems~~consolidated ~~appropriate~~subsidiaries; less most intangible assets, except for specified servicing assets and purchased credit card receivables and other specified deductions.

The ~~leverage~~risk-based ~~ratio~~capital requirements ~~adopted~~established by the Federal Reserve Board’s ~~requires~~regulations arequire ~~minimum~~state ~~ratio~~member ofbanks ~~“Tier~~to 1maintain “total capital” equal to ~~adjusted~~at least 8% of total risk-weighted assets. ofFor 3%purposes ~~for~~of ~~banks~~the ~~rated~~risk-based ~~composite~~capital 1requirement, ~~under~~“total ~~the~~capital” means ~~CAMELS~~Tier ~~examination~~1 ~~rating~~capital ~~system~~(as ~~for~~described ~~banks. Banks~~above) ~~not~~plus ~~rated~~“Tier ~~composite~~2 1capital” ~~under~~(as ~~the~~described ~~CAMELS~~below), ~~rating~~provided ~~system~~that ~~for~~the ~~banks~~amount ~~are~~of ~~required~~Tier 2 tocapital ~~maintain~~may anot ~~minimum~~exceed ~~ratio~~the amount of Tier 1 capital, toless ~~adjusted~~certain ~~total~~ assets. ofTier at2 ~~least~~capital ~~4%. Additional~~elements ~~capital~~include, ~~may~~subject beto ~~necessary~~certain limitations, the allowance for ~~institutions~~losses ~~with~~on ~~supervisory,~~loans ~~financial~~and leases, ~~operational~~perpetual orpreferred ~~managerial~~stock ~~weaknesses,~~that asdoes ~~well~~not asqualify ~~institutions~~for ~~experiencing~~Tier ~~significant~~1 ~~growth. For~~and ~~purposes~~long-term preferred stock with an original maturity of ~~the~~at ~~Federal~~least ~~Reserve~~20 ~~Board’s~~years ~~leverage~~from ~~requirement~~issuance, ~~Tier~~hybrid 1 capital ~~consists~~instruments, ~~primarily~~including ofperpetual ~~common~~debt and ~~stockholders’~~mandatory ~~equity~~convertible securities, ~~certain~~and ~~perpetual~~subordinated debt and intermediate-term preferred stock ~~(which~~and ~~must~~up beto ~~noncumulative~~45% ~~with~~of ~~respect~~unrealized togains on ~~banks),~~equity ~~and~~securities. ~~minority~~Total ~~interests~~risk-weighted inassets are determined under the ~~equity~~Federal ~~accounts~~Reserve ofBoard’s ~~consolidated~~regulations, ~~subsidiaries;~~which ~~less~~generally establish ~~most~~four ~~intangible~~risk ~~assets~~categories, ~~except~~with ~~for~~general ~~specified~~risk ~~servicing~~weights ~~assets~~of 0%, 20%, 50% and ~~purchased~~100%, ~~credit~~based ~~card~~on ~~receivables~~the ~~and~~risk ~~other~~believed ~~specified~~inherent ~~deductions~~to the type of asset involved.

~~The~~In ~~risk-based~~addition, ~~capital requirements established by~~ the ~~Federal~~Bank is ~~Reserve~~subject ~~Board’s regulations require state member banks~~ to ~~maintain~~the ~~“total~~statutory capital” ~~equal~~requirements toimposed atby ~~least~~the 8%State of ~~total risk-weighted assets~~Maryland. ~~For~~ ~~purposes~~Under ofMaryland ~~the~~statutory ~~risk-based capital requirement~~law, ~~“total~~if ~~capital”~~the ~~means~~surplus of ~~Tier~~a 1Maryland ~~capital~~commercial ~~(as~~bank ~~described~~at ~~above)~~any ~~plus~~time ~~“Tier~~is 2less ~~capital”~~than ~~(as~~100% ~~described below), provided that the amount~~ of ~~Tier~~its 2 capital ~~may~~stock, ~~not~~then, ~~exceed~~until the ~~amount~~surplus ofis ~~Tier~~100% 1of ~~capital,~~the ~~less certain assets. Tier 2~~ capital ~~elements include~~ stock, ~~subject to certain limitations,~~ the ~~allowance~~commercial ~~for~~bank: ~~losses~~(i) onmust ~~loans~~transfer ~~and~~to ~~leases,~~its ~~perpetual~~surplus ~~preferred~~annually ~~stock that does not qualify for Tier 1 and long-term preferred stock with an original maturity of~~ at least 2010% ~~years~~of ~~from~~its ~~issuance,~~net ~~hybrid~~earnings; ~~capital instruments, including perpetual debt~~ and ~~mandatory~~(ii) ~~convertible~~may ~~securities,~~not ~~and~~declare or ~~subordinated~~pay ~~debt~~any ~~and~~cash ~~intermediate-term~~dividends ~~preferred~~that ~~stock~~exceed ~~and up to 45~~90% of ~~unrealized~~its ~~gains~~net ~~on equity securities~~earnings. Total risk-weighted assets are determined under the Federal Reserve Board’s regulations, which generally establish four risk categories, with general risk weights of 0%, 20%, 50% and 100%, based on the risk believed inherent to the type of asset involved.

InThe ~~addition,~~table ~~the~~below ~~Company~~provides information iswith ~~subject~~respect to the ~~statutory~~Bank’s ~~capital~~compliance ~~requirements~~with ~~imposed by the State of Maryland. Under Maryland statutory law, if the surplus of a Maryland commercial bank at any time is less than 100% of~~ its ~~capital~~regulatory ~~stock, then, until the surplus is 100% of the~~ capital ~~stock,~~requirements ~~the commercial bank: (i) must transfer to its surplus annually~~ at ~~least~~the ~~10%~~dates ofindicated. ~~its~~The ~~net~~holding company ~~earnings;~~ratios ~~and~~do ~~(ii) may~~ not ~~declare~~differ orsignificantly ~~pay~~from ~~any~~the ~~cash~~Bank’s ~~dividends that exceed 90% of its net earnings~~ratios.

The table below provides information with respect to the Bank’s compliance with its regulatory capital requirements at the dates indicated. The holding company ratios do not differ significantly from the Bank’s ratios.

	Actual					Regulatory Requirements for Capital Adequacy Purposes					Regulatory Requirements to be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
As of June 30, 2012:
Total Capital (to Risk Weighted Assets)	$	20,036		13.26	%	$	12,089		8.00	%	$	15,111		10.00	%
Tier 1 Capital (to Risk Weighted Assets)		18,124		11.99			6,044		4.00			9,067		6.00
Tier 1 Leverage		18,124		7.13			10,164		4.00			12,706		5.00

As of June 30, 2011:
Total Capital (to Risk Weighted Assets)	$	21,432		12.94	%	$	13,250		8.00	%	$	16,563		10.00	%
Tier 1 Capital (to Risk Weighted Assets)		19,335		11.67			6,625		4.00			9,938		6.00
Tier 1 Leverage		19,335		7.26			10,659		4.00			13,323		5.00

	Actual					Regulatory Requirements for Capital Adequacy Purposes					Regulatory Requirements to be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
As of June 30, 2011:
Total Capital (to Risk Weighted Assets)	$	21,432		12.94	%	$	13,250		8.00	%	$	16,563		10.00	%
Tier 1 Capital (to Risk Weighted Assets)		19,335		11.67			6,625		4.00			9,938		6.00
Tier 1 Leverage		19,335		7.26			10,659		4.00			13,323		5.00
As of June 30, 2010:
Total Capital (to Risk Weighted Assets)	$	23,009		12.35	%	$	15,000		8.00	%	$	18,750		10.00	%
Tier 1 Capital (to Risk Weighted Assets)		20,663		11.09			7,500		4.00			11,250		6.00
Tier 1 Leverage		20,663		7.76			10,649		4.00			13,311		5.00

10Prompt Corrective Regulatory Action. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), the federal banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy certain minimum capital requirements. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees if the institution would thereafter fail to satisfy the minimum levels for any of its capital requirements. An institution that fails to meet the minimum level for any relevant capital measure (an “undercapitalized institution”) may be, among other things, subject to increased monitoring by the appropriate federal banking regulator, required to submit an acceptable capital restoration plan within 45 days and are subject to asset growth limits. The capital restoration plan must include a guarantee by the institution’s holding company that the institution will comply with the plan until it has been adequately capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5% of the institution’s total assets or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan. A “significantly undercapitalized” institution, as well as any undercapitalized institution that did not submit an acceptable capital restoration plan, may be subject to regulatory demands for recapitalization, broader application of restrictions on transactions with affiliates, limitations on interest rates paid on deposits, asset growth and other activities, possible replacement of directors and officers, and restrictions on capital distributions by any bank holding company controlling the institution. Any company controlling the institution could also be required to divest the institution or the institution could be required to divest subsidiaries. In their discretion, the federal banking regulators may also impose the foregoing sanctions on an undercapitalized institution if the regulators determine that such actions are necessary to carry out the purposes of the prompt corrective action provisions. If an institution’s ratio of tangible capital to total assets falls below a “critical capital level,” the institution will be subject to conservatorship or receivership within 90 days unless periodic determinations are made that forbearance from such action would better protect the deposit insurance fund. Unless appropriate findings and certifications are made by the appropriate federal bank regulatory agencies, a critically undercapitalized institution must be placed in receivership if it remains critically undercapitalized on average during the calendar quarter beginning 270 days after the date it became critically undercapitalized.

~~Prompt~~For ~~Corrective~~purposes ~~Regulatory Action. Under the Federal Deposit Insurance Corporation Improvement Act~~ of ~~1991 (“FDICIA”)~~these restrictions, ~~the~~an ~~federal~~“undercapitalized ~~banking~~institution” ~~regulators~~is ~~are~~a ~~required to take prompt corrective action if an insured~~ depository institution ~~fails~~that tohas ~~satisfy~~(i) ~~certain~~a ~~minimum~~total ~~capital~~risk-based ~~requirements. All institutions, regardless of their~~ capital ratio ~~levels,~~less ~~are~~than ~~restricted~~8.0%; ~~from making any capital distribution~~ or ~~paying~~(ii) ~~any~~a ~~management~~Tier ~~fees~~1 ifrisk-based ~~the~~capital ~~institution~~ratio ~~would~~of ~~thereafter~~less ~~fail~~than to4.0%; ~~satisfy~~or ~~the~~(iii) ~~minimum~~a ~~levels~~leverage ~~for~~ratio ~~any~~ of ~~its~~less ~~capital~~than ~~requirements~~4. An0% (or ~~institution~~less ~~that~~than ~~fails~~3.0% toif ~~meet~~ the ~~minimum~~institution ~~level~~has ~~for~~a ~~any~~composite ~~relevant~~1 ~~capital~~CAMELS ~~measure~~rating). ~~(an~~A “significantly undercapitalized” institution”) is ~~may~~defined ~~be,~~as among other things, subject to increased monitoring by the appropriate federal banking regulator, required to submit an acceptable capital restoration plan within 45 days and are subject to asset growth limits. The capital restoration plan must include a ~~guarantee~~depository ~~by the~~ institution’s ~~holding company~~ that ~~the institution will comply with the plan until it~~ has: ~~been~~(i) ~~adequately~~a ~~capitalized~~total onrisk-based ~~average~~capital ~~for~~ratio ~~four~~of ~~consecutive~~less ~~quarters,~~than ~~under which the holding company would be liable up to the lesser of 5~~6.0%; ~~of the institution’s total assets~~ or ~~the~~(ii) ~~amount~~a ~~necessary~~Tier to1 ~~bring the institution into~~ risk-based capital ~~compliance~~ratio as of ~~the~~less ~~date~~than it3.0%; ~~failed~~or to(iii) ~~comply~~a ~~with~~leverage ~~its~~ratio ~~capital~~of ~~restoration~~less ~~plan~~than 3. 0%. A “~~significantly~~critically undercapitalized” institution, is asdefined ~~well~~ as ~~any~~a ~~undercapitalized~~depository institution that ~~did~~has ~~not~~a ~~submit~~ratio anof ~~acceptable~~“tangible ~~capital~~equity” ~~restoration plan, may be subject~~ to ~~regulatory~~total ~~demands~~assets ~~for recapitalization, broader application~~ of ~~restrictions~~less onthan ~~transactions~~2.0%. ~~with~~The appropriate ~~affiliates,~~federal ~~limitations~~banking onagency ~~interest~~may ~~rates~~reclassify ~~paid~~a onwell ~~deposits,~~capitalized ~~asset~~depository ~~growth~~institution ~~and~~as ~~other~~adequately ~~activities,~~capitalized ~~possible replacement of directors~~ and ~~officers,~~may ~~and~~require an ~~restrictions~~adequately oncapitalized ~~capital~~or ~~distributions~~undercapitalized ~~by any bank holding company controlling the~~ institution~~. Any~~ ~~company controlling the institution could also be required~~ to ~~divest~~comply ~~the~~with ~~institution or~~ the ~~institution~~supervisory ~~could~~actions beapplicable ~~required~~ to ~~divest~~institutions ~~subsidiaries. In~~in the ~~their~~next ~~discretion,~~lower ~~the~~capital ~~federal~~category ~~banking~~(but ~~regulators~~ may ~~also~~not ~~impose~~reclassify ~~the~~a ~~foregoing~~significantly ~~sanctions on an~~ undercapitalized institution ifas ~~the~~critically ~~regulators~~under-capitalized) if ~~determine~~it ~~that~~determines, ~~such~~after ~~actions~~notice ~~are~~and ~~necessary to carry out the purposes of the prompt corrective action provisions. If~~ an ~~institution’s~~opportunity ~~ratio~~for ~~of tangible capital to total assets falls below~~ a ~~“critical capital level~~hearing,” that the institution ~~will~~is bein ~~subject~~an tounsafe ~~conservatorship~~ or ~~receivership~~unsound ~~within~~condition 90or ~~days unless periodic determinations are made~~ that ~~forbearance from such action would better protect~~ the ~~deposit~~institution ~~insurance~~has ~~fund. Unless~~received ~~appropriate findings~~ and ~~certifications~~not ~~are~~corrected ~~made by the appropriate federal bank regulatory agencies,~~ a ~~critically~~less-than-satisfactory ~~undercapitalized~~rating ~~institution~~for ~~must~~any beexamination ~~placed~~rating incategory. ~~receivership~~At ifJune it30, 2012, ~~remains critically undercapitalized on average during~~ the ~~calendar~~Bank ~~quarter~~was ~~beginning~~classified ~~270~~as ~~days~~well ~~after~~capitalized ~~the~~under ~~date~~Federal itReserve ~~became critically undercapitalized~~regulations.

~~For~~Safety ~~purposes~~and ofSoundness Guidelines. ~~these~~Under ~~restrictions~~FDICIA, anas ~~“undercapitalized~~amended ~~institution”~~by isthe aRiegle ~~depository~~Community ~~institution~~Development ~~that~~and ~~has~~Regulatory ~~(i)~~Improvement aAct ~~total~~of ~~risk-based~~1994, ~~capital~~each ~~ratio~~federal banking ~~less~~agency ~~than~~was ~~8.0%;~~required orto ~~(ii)~~establish asafety ~~Tier~~and 1soundness ~~risk-based~~standards ~~capital~~for ~~ratio~~institutions ofunder ~~less~~its ~~than 4~~authority.~~0%;~~ orThe ~~(iii)~~federal abanking agencies, ~~leverage~~including ~~ratio~~the ofFederal ~~less~~Reserve ~~than~~Board, ~~4.0%~~have ~~(or~~released ~~less~~Interagency ~~than~~Guidelines ~~3.0%~~Establishing ifStandards ~~the~~for ~~institution~~Safety ~~has~~and ~~a composite 1 CAMELS rating)~~Soundness. A The ~~“significantly~~guidelines ~~undercapitalized”~~require ~~institution is defined as a~~ depository ~~institution~~institutions ~~that~~to ~~has: (i)~~maintain ainternal ~~total~~controls ~~risk-based~~and ~~capital~~information ~~ratio~~systems ofand ~~less~~internal ~~than~~audit ~~6.0%;~~systems that orare ~~(ii)~~appropriate afor ~~Tier~~the 1size, ~~risk-based~~nature ~~capital~~and ~~ratio~~scope of ~~less~~the ~~than~~institution’s ~~3.0%;~~business, orestablish ~~(iii)~~certain abasic ~~leverage~~standards ~~ratio~~for loan ofdocumentation, ~~less~~credit ~~than~~underwriting, ~~3.0%. A~~asset ~~“critically~~quality, ~~undercapitalized”~~capital ~~institution~~adequacy, isearnings, ~~defined~~interest asrate arisk ~~depository~~exposure ~~institution~~and ~~that~~asset ~~has~~growth, information asecurity ~~ratio~~and offurther ~~“tangible~~provide ~~equity”~~that todepository ~~total~~institutions ~~assets~~should ofmaintain ~~less~~safeguards ~~than~~to ~~2.0%. The~~prevent ~~appropriate~~the ~~federal~~payment ~~banking~~of ~~agency~~compensation, fees ~~may reclassify a well capitalized depository institution as adequately capitalized~~ and ~~may~~benefits ~~require~~that anare ~~adequately~~excessive ~~capitalized~~ or ~~undercapitalized~~that ~~institution~~could lead to ~~comply~~material ~~with~~financial ~~the~~loss. ~~supervisory~~If ~~actions applicable to institutions in~~ the ~~next~~appropriate ~~lower~~federal ~~capital~~banking ~~category~~agency ~~(but~~determines that ~~may not reclassify~~ a ~~significantly~~depository ~~undercapitalized~~ institution asis ~~critically~~not ~~under-capitalized)~~in ifcompliance itwith ~~determines,~~the ~~after~~safety ~~notice~~ and ansoundness ~~opportunity~~guidelines, ~~for~~it amay ~~hearing,~~require ~~that~~ the institution isto submit in an ~~unsafe~~acceptable orplan ~~unsound~~to ~~condition~~achieve orcompliance ~~that~~with the ~~institution~~guidelines. ~~has~~Failure ~~received~~to ~~and~~submit ~~not~~or ~~corrected~~implement a ~~less-than-satisfactory~~compliance ~~rating~~plan ~~for~~may ~~any examination rating category. At June 30, 2011,~~ subject the ~~Company~~institution ~~and~~to ~~the~~regulatory ~~Bank were classified as well capitalized under Federal Reserve regulations~~sanctions.

~~Safety~~Federal ~~and~~Home Loan ~~Soundness~~Bank ~~Guidelines~~System. ~~Under~~ ~~FDICIA,~~The asFederal ~~amended~~Home byLoan ~~the~~Bank ~~Riegle~~System ~~Community~~consists ~~Development and Regulatory Improvement Act~~ of ~~1994,~~12 ~~each~~district ~~federal~~Federal ~~banking~~Home ~~agency~~Loan ~~was required to establish safety and soundness standards for institutions under its authority~~Banks. The ~~federal banking agencies, including the~~ Federal ~~Reserve~~Home ~~Board,~~Loan Banks ~~have~~provide ~~released~~a ~~Interagency~~central ~~Guidelines~~credit ~~Establishing~~facility ~~Standards~~primarily for ~~Safety~~member ~~and Soundness~~institutions. ~~The~~ ~~guidelines~~As ~~require~~a ~~depository~~member ~~institutions~~of ~~to maintain internal controls and information systems and internal audit systems that are appropriate for~~ the ~~size,~~Federal ~~nature~~Home ~~and~~Loan ~~scope~~Bank of Atlanta, the ~~institution’s~~Bank ~~business,~~is ~~establish~~required ~~certain~~to ~~basic~~acquire ~~standards for loan documentation, credit underwriting, asset quality, capital adequacy, earnings, interest rate risk exposure~~ and ~~asset~~hold ~~growth,~~specified ~~information~~amounts ~~security and further provide that depository institutions should maintain safeguards to prevent the payment~~ of ~~compensation,~~capital ~~fees~~stock ~~and~~in ~~benefits~~ that ~~are~~Federal ~~excessive~~Home orLoan ~~that could lead to material financial loss~~Bank. If ~~the~~The ~~appropriate~~Bank ~~federal~~was ~~banking agency determines that a depository institution is not~~ in compliance with ~~the~~this ~~safety~~requirement ~~and~~with ~~soundness guidelines, it may require the institution to submit~~ an ~~acceptable~~investment ~~plan~~in toFederal ~~achieve~~Home ~~compliance~~Loan ~~with~~Bank ~~the~~of ~~guidelines. Failure~~Atlanta tostock ~~submit~~at orJune ~~implement~~30, a2012 ~~compliance~~of ~~plan may subject the institution to regulatory sanctions~~$887,000.

Federal ~~Home~~Reserve System. Pursuant ~~Loan~~to ~~Bank~~regulations ~~System. The~~of the Federal ~~Home~~Reserve ~~Loan~~Board, ~~Bank~~a ~~System~~financial ~~consists~~institution ofmust 12maintain ~~district~~average ~~Federal~~daily reserves ~~Home~~equal ~~Loan~~to ~~Banks. The~~3% ~~Federal~~on ~~Home~~transaction ~~Loan~~accounts ~~Banks~~of ~~provide~~between a$11.5 ~~central~~million ~~credit~~and ~~facility~~$71.0 ~~primarily~~million, ~~for~~plus ~~member~~10% ~~institutions~~on the remainder. As aThe ~~member~~first $11.5 million of ~~the~~transaction ~~Federal~~accounts ~~Home~~are ~~Loan~~exempt. ~~Bank~~These ofpercentages ~~Atlanta,~~are subject to adjustment by the ~~Bank~~Federal isReserve Board. Because required reserves tomust ~~acquire~~be ~~and~~maintained ~~hold~~in ~~specified~~the ~~amounts~~form of ~~capital~~vault ~~stock~~cash or in ~~that~~a ~~Federal~~noninterest-bearing ~~Home~~account ~~Loan~~at ~~Bank. The~~a ~~Bank~~Federal ~~was~~Reserve inBank, ~~compliance~~the ~~with~~effect of ~~this~~the reserve requirement ~~with~~is anto ~~investment~~reduce inthe ~~Federal~~amount ~~Home~~of ~~Loan~~the ~~Bank~~institution’s ofinterest-earning ~~Atlanta~~assets. ~~stock~~As atof June 30, ~~2011~~2012, ofthe Bank ~~$1.7~~met ~~million~~its reserve requirements.

~~Federal~~The ~~Reserve~~monetary ~~System. Pursuant~~policies and to regulations of the Federal Reserve Board, have a ~~financial~~significant ~~institution~~effect ~~must maintain average daily reserves equal to 3%~~ on ~~transaction~~the ~~accounts~~operating results of ~~between~~commercial ~~$10~~banks.7 ~~million~~The ~~and~~Federal Reserve ~~$58.8~~Board’s ~~million,~~policies ~~plus~~affect ~~10% on~~ the ~~remainder. The~~levels ~~first $10.7 million~~ of ~~transaction~~bank ~~accounts~~loans, ~~are~~investments ~~exempt. These~~and ~~percentages~~deposits ~~are~~through ~~subject~~its toopen ~~adjustment~~market byoperation ~~the~~in ~~Federal~~United States ~~Reserve~~government ~~Board. Because~~securities, ~~required~~its ~~reserves~~regulation ~~must~~of ~~be maintained in~~ the ~~form~~interest ofrate ~~vault~~on ~~cash~~borrowings orfrom ~~in a noninterest-bearing account at a~~ Federal Reserve ~~Bank,~~Banks ~~the~~and ~~effect~~its imposition of nonearning ~~the~~ reserve ~~requirement~~requirements ison toall ~~reduce~~depository ~~the~~institutions, ~~amount~~such ofas the ~~institution’s interest-earning assets. As of June 30~~Bank, ~~2011,~~that ~~the~~maintain ~~Bank~~transaction ~~met~~accounts ~~its~~or ~~reserve~~non-personal time ~~requirements~~deposits.

Insurance of Deposit Accounts. The ~~monetary~~Bank’s ~~policies~~deposits ~~and~~are ~~regulations~~insured up to applicable limits by the Deposit Insurance Fund of the FDIC. ~~Federal~~Under ~~Reserve~~the ~~Board~~FDIC’s ~~have~~previous arisk-based ~~significant~~assessment ~~effect~~system, oninsured ~~the~~institutions ~~operating~~were ~~results~~assigned to one of ~~commercial~~four ~~banks. The~~risk ~~Federal~~categories based ~~Reserve~~on ~~Board~~supervisory evaluations, regulatory capital levels and certain other factors, with less risky institutions paying lower assessments. An institution’s ~~policies~~assessment ~~affect~~rate depends upon the ~~levels~~category ofto ~~bank~~which ~~loans,~~it ~~investments~~is assigned and ~~deposits~~assessment ~~through~~rates ~~its~~ranged from ~~open~~seven ~~market~~to ~~operation~~77.5 inbasis ~~United~~points. ~~States~~On ~~government~~February 7, ~~securities~~2011, ~~its~~however, ~~regulation~~the ofFDIC approved a final rule that implemented changes to the ~~interest~~deposit ~~rate~~insurance assessment system mandated by the Dodd-Frank Act. The final rule, which took effect for the quarter beginning April 1, 2011, requires that the base on ~~borrowings~~which deposit insurance assessments are charged be revised from ~~Federal~~one ~~Reserve~~that ~~Banks~~is ~~and~~based on ~~its~~domestic ~~imposition~~deposits ofto ~~nonearning~~one ~~reserve~~that ~~requirements~~is based on ~~all~~average consolidated total assets minus average tangible equity. Under the final rule, insured depository institutions are required to report their average consolidated total assets on a daily basis, ~~such~~using asthe regulatory accounting methodology established for reporting total assets. For purposes of the ~~Bank~~final rule, ~~that~~tangible ~~maintain~~equity ~~transaction~~is ~~accounts~~defined oras ~~non-personal~~Tier 1 ~~time~~capital. ~~deposits~~No institution may pay a dividend if in default of the federal deposit insurance assessment.

~~Insurance~~Due ~~of Deposit Accounts. The Bank’s deposits are insured up~~ to ~~applicable~~stress ~~limits~~on by the Deposit Insurance Fund ofcaused ~~the~~by ~~FDIC.~~bank ~~Under~~failures, the FDIC’s ~~previous~~imposed ~~risk-based~~on ~~assessment~~all ~~system,~~ insured institutions ~~were~~a ~~assigned~~special toemergency ~~one~~assessment of five ~~four~~basis ~~risk~~points ~~categories~~of ~~based~~total onassets ~~supervisory~~minus ~~evaluations,~~Tier ~~regulatory~~1 capital, ~~levels~~as ~~and~~of ~~certain~~June ~~other factors~~30, ~~with~~2009 ~~less~~(capped ~~risky~~at ~~institutions~~ten ~~paying~~basis ~~lower~~points ~~assessments.~~of Anan institution’s deposit assessment ~~rate~~base), ~~depends~~in ~~upon~~order ~~the category~~ to ~~which~~cover itlosses ~~is assigned and assessment rates ranged from seven~~ to ~~77.5 basis points. On February 7, 2011, however,~~ the ~~FDIC~~Deposit ~~approved~~Insurance aFund. ~~final~~That ~~rule~~special ~~that implemented changes to the deposit insurance~~ assessment ~~system~~was ~~mandated~~collected byon ~~the~~September 30, ~~Dodd-Frank Act~~2009. The ~~final~~FDIC ~~rule,~~provided ~~which~~for ~~took~~similar ~~effect~~assessments ~~for~~during the ~~quarter~~final ~~beginning~~two ~~April~~quarters 1,of ~~2011~~2009, ~~requires~~if ~~that~~deemed ~~the~~necessary. ~~base~~However, onin ~~which~~lieu of ~~deposit~~further ~~insurance~~special assessments, ~~are~~the ~~charged~~FDIC berequired ~~revised~~insured ~~from~~institutions ~~one~~to ~~that~~prepay isestimated quarterly risk-based onassessments ~~domestic~~for the ~~deposits~~fourth toquarter ~~one~~of ~~that~~2009 isthrough ~~based~~the onfourth ~~average~~quarter ~~consolidated~~of ~~total assets minus average tangible equity~~2012. ~~Under~~The ~~the~~estimated ~~final rule~~assessments, ~~insured~~which ~~depository~~include ~~institutions~~an ~~are~~assumed ~~required~~annual toassessment base ~~report~~increase ~~their~~of ~~average~~5%, ~~consolidated~~were ~~total~~recorded ~~assets~~as on a ~~daily~~prepaid ~~basis,~~expense ~~using~~asset ~~the~~as ~~regulatory~~of ~~accounting~~December ~~methodology~~30, ~~established for reporting total assets~~2009. ~~For~~As ~~purposes~~ of ~~the~~December ~~final~~31, ~~rule~~2009, ~~tangible~~and ~~equity~~each isquarter thereafter, ~~defined~~a ascharge ~~Tier~~to 1earnings ~~capital.~~will Nobe ~~institution~~recorded ~~may~~for ~~pay~~each aregular ~~dividend~~assessment ifwith inan ~~default~~offsetting ofcredit to the ~~federal~~prepaid ~~deposit insurance assessment~~asset.

~~Due~~Because toof ~~stress on~~ the ~~Deposit~~recent difficult ~~Insurance~~economic ~~Fund~~conditions, ~~caused~~deposit byinsurance ~~bank~~per ~~failures,~~account ~~the~~owner ~~FDIC~~had ~~imposed~~been onraised ~~all~~to ~~insured~~$250,000 ~~institutions~~for aall ~~special~~types ~~emergency assessment~~ of ~~five~~accounts ~~basis~~until January 1, ~~points~~2014. ofThat ~~total~~level ~~assets~~was ~~minus~~made ~~Tier~~permanent 1by ~~capital,~~the asDodd-Frank ofAct. ~~June~~In 30addition, ~~2009~~the ~~(capped~~FDIC atadopted ~~ten~~an ~~basis~~optional ~~points~~Temporary Liquidity ofGuarantee anProgram ~~institution’s~~(“TLGP”) ~~deposit~~under ~~assessment base)~~which, infor ~~order~~a tofee, ~~cover~~noninterest-bearing ~~losses~~transaction toaccounts ~~the~~would ~~Deposit~~receive unlimited ~~Insurance~~insurance ~~Fund. That~~coverage ~~special~~until ~~assessment~~June 30, ~~was~~2010, ~~collected~~subsequently onextended ~~September~~to 30December 31, ~~2009~~2012. The ~~FDIC~~Dodd-Frank ~~provided~~Act ~~for~~extends ~~similar assessments during~~ the unlimited ~~final~~coverage ~~two~~of ~~quarters~~noninterest-bearing oftransaction ~~2009,~~accounts ifuntil ~~deemed~~December ~~necessary. However~~31, in2012 ~~lieu~~without ofproviding ~~further~~an ~~special~~opt ~~assessments,~~out. ~~the~~The ~~FDIC~~TLGP ~~required~~also included ~~insured~~a ~~institutions~~debt tocomponent ~~prepay~~under ~~estimated~~which ~~quarterly~~certain ~~risk-based~~senior ~~assessments~~unsecured ~~for~~debt ~~the~~issued ~~fourth~~by ~~quarter~~institutions ofand ~~2009~~their ~~through~~holding ~~the~~companies ~~fourth~~between October 13, ~~quarter~~2008 ofand ~~2012. The~~October ~~estimated assessments~~31, ~~which~~2009 ~~include~~would anbe ~~assumed~~guaranteed ~~annual~~by ~~assessment~~the ~~base~~FDIC ~~increase~~through ofJune 30, 5%2012, ~~were~~or ~~recorded~~in assome ~~a prepaid expense asset as of December 30~~cases, ~~2009. As of~~ December 31, ~~2009,~~2012. ~~and~~The ~~each~~Bank ~~quarter~~opted ~~thereafter,~~to aparticipate ~~charge~~in tothe ~~earnings~~unlimited ~~will~~noninterest-bearing betransaction ~~recorded~~account ~~for~~coverage ~~each~~and ~~regular~~the ~~assessment~~Bank ~~with~~opted annot ~~offsetting~~to ~~credit~~participate toin the ~~prepaid~~unsecured ~~asset~~debt guarantee program.

~~Because~~In ofaddition to the assessment ~~recent~~for ~~difficult economic conditions,~~ deposit insurance, ~~per~~institutions ~~account~~are ~~owner~~required ~~had been raised~~ to ~~$250,000~~make ~~for~~payments ~~all~~on ~~types~~bonds ofissued ~~accounts~~in ~~until~~the ~~January 1,~~late ~~2014. That~~1980s ~~level was made permanent~~ by the ~~Dodd-Frank~~Financing Corporation ~~Act. In~~to ~~addition,~~recapitalize ~~the FDIC adopted an optional Temporary Liquidity Guarantee Program (“TLGP”) under which, for~~ a ~~fee,~~predecessor ~~noninterest-bearing~~deposit ~~transaction accounts would receive unlimited~~ insurance ~~coverage until June 30, 2010, subsequently extended to December 31, 2012~~fund. ~~The~~ ~~Dodd-Frank~~This ~~Act~~payment ~~extends~~is ~~the~~established ~~unlimited~~quarterly coverage of noninterest-bearing transaction accounts until December 31, 2012 without providing an opt out. The TLGP also included a debt component under which certain senior unsecured debt issued by institutions and ~~their~~during ~~holding companies between October 13, 2008 and October 31, 2009 would be guaranteed by~~ the ~~FDIC~~four ~~through~~quarters ended June 30, 2012, oraveraged ~~in some cases, December 31, 2012~~1. ~~The~~47 ~~Bank~~basis ~~opted~~points toof ~~participate~~assessable ~~in the unlimited noninterest-bearing transaction account coverage and the Bank and Company opted not to participate in the unsecured debt guarantee program~~deposits.

InThe ~~addition~~FDIC has authority to ~~the~~increase ~~assessment for deposit~~ insurance, ~~institutions~~assessments. ~~are~~A ~~required~~significant toincrease ~~make~~in ~~payments~~insurance onpremiums ~~bonds~~would ~~issued~~likely inhave ~~the~~an ~~late~~adverse ~~1980s~~effect byon the ~~Financing~~operating expenses ~~Corporation~~and toresults ~~recapitalize~~of aoperations ~~predecessor~~of ~~deposit~~the ~~insurance fund~~Bank. ~~This~~ ~~payment~~Management iscannot ~~established~~predict ~~quarterly~~what ~~and~~insurance ~~during~~assessment ~~the~~rates ~~four~~will ~~quarters~~be ~~ended~~in ~~June~~the ~~30, 2011 averaged 1~~future.~~04 basis points of assessable deposits.~~

12Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The management of the Company does not know of any practice, condition or violation that might lead to termination of deposit insurance.

The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.12

~~Insurance~~Dividend ofRestrictions. The ~~deposits~~Bank’s ~~may~~ability beto ~~terminated~~pay dividends is governed by Maryland law and the ~~FDIC~~regulations ~~upon~~of athe ~~finding~~Federal Reserve Board. Maryland law provides that ~~the~~dividends ~~institution~~may ~~has~~be ~~engaged~~paid inout ~~unsafe~~of individual profits or ~~unsound~~with ~~practices~~approval of the Commissioner, issurplus inup anto ~~unsafe~~100% orof ~~unsound~~capital stock. ~~condition~~Under Maryland law relating to ~~continue~~financial ~~operations~~institutions, orif ~~has~~the ~~violated~~surplus of a commercial bank at any ~~applicable~~time ~~law,~~is ~~regulation,~~less ~~rule,~~than ~~order~~100% of orits ~~condition~~capital ~~imposed~~stock, bythen, until the ~~FDIC. The~~surplus ~~management~~is 100% of the ~~Company~~capital ~~does~~stock, ~~not~~the ~~know~~commercial bank: (i) must transfer to its surplus annually at least 10% of ~~any~~its ~~practice,~~net ~~condition~~earnings; and (ii) may not declare or ~~violation~~pay ~~that~~any ~~might~~cash ~~lead~~dividends tothat ~~termination~~exceed 90% of ~~deposit~~its ~~insurance~~net earnings.

~~Dividend Restrictions.~~ The Bank’s ~~ability~~payment of dividends is also subject to ~~pay~~the ~~dividends~~Federal isReserve ~~governed~~Board’s byRegulation ~~Maryland~~H, ~~law~~which ~~and~~provides that a state member bank may not pay a dividend if the ~~regulations~~total of ~~the~~all ~~Federal~~dividends ~~Reserve~~declared ~~Board. Maryland~~by ~~law~~the ~~provides~~bank ~~that~~in ~~dividends~~any ~~may~~calendar beyear ~~paid~~exceeds ~~out~~the total of ~~individual~~its net profits orfor the year combined with ~~approval~~its ofretained net profits for the ~~Commissioner~~preceding two calendar years, ~~surplus~~less upany required transfers to ~~100%~~surplus or to a fund for the retirement of ~~capital~~preferred stock, unless the bank has received the prior approval of the Federal Reserve Board. ~~Under~~ The ~~Maryland~~previously ~~law~~referenced ~~relating~~prompt tocorrective ~~financial~~action ~~institutions~~requirements prohibit dividends where the Bank would be “undercapitalized,” “significantly ifundercapitalized,” or “critically undercapitalized” after the ~~surplus~~dividend. Additionally, both the Commissioner and the Federal Reserve Board has the authority to prohibit the payment of dividends by a ~~commercial~~Maryland commercial bank atwhen ~~any~~it ~~time~~determines such payment to be an unsafe and unsound banking practice. Finally, the Bank is ~~less~~not ~~than~~able ~~100%~~to ofpay dividends on its capital stock, ~~then,~~if ~~until~~its ~~the~~regulatory ~~surplus~~capital iswould ~~100%~~thereby ofbe reduced below the ~~capital~~remaining ~~stock,~~balance of the ~~commercial~~liquidation ~~bank: (i)~~account established ~~must~~in ~~transfer~~connection towith its ~~surplus~~conversion ~~annually~~in atApril ~~least~~1996 ~~10%~~from ofmutual ~~its~~to ~~net~~stock ~~earnings;~~form. ~~and~~See ~~(ii)~~Note ~~may~~10 ~~not~~of ~~declare~~the orNotes ~~pay~~to ~~any~~Consolidated Financial ~~cash~~Statements ~~dividends~~appearing ~~that~~in ~~exceed~~Item ~~90%~~7 of ~~its~~this ~~net~~Annual ~~earnings~~Report on Form 10-K.

~~The~~In ~~Bank’s~~addition, ~~payment~~under the terms of ~~dividends is also subject to~~ the ~~Federal~~TARP ~~Reserve~~Capital ~~Board’s~~Purchase ~~Regulation H~~Program, ~~which~~(1) ~~provides~~prior ~~that~~to athe ~~state~~earlier ~~member~~of ~~bank~~(a) ~~may~~December ~~not~~5, ~~pay~~2011, aor ~~dividend~~(b) if the ~~total~~date ofon which all of ~~dividends declared by~~ the ~~bank~~Company’s inpreferred ~~any~~shares ~~calendar~~held ~~year~~by ~~exceeds~~Treasury ~~the~~have ~~total~~been ofredeemed ~~its~~in ~~net~~full, ~~profits for~~ the ~~year~~Company ~~combined~~cannot ~~with~~increase its ~~retained~~quarterly cash ~~net~~dividend ~~profits~~above ~~for~~$0.07 ~~the~~per ~~preceding~~common ~~two~~share; ~~calendar~~(2) ~~years,~~during ~~less~~the ~~any~~period ~~required~~beginning ~~transfers~~on toDecember ~~surplus~~6, or2011 toand aending ~~fund~~on ~~for~~ the ~~retirement~~earlier of ~~preferred~~(a) December ~~stock~~5, ~~unless~~2018 ~~the~~or ~~bank~~(b) ~~has received~~ the ~~prior~~date ~~approval~~on ofwhich the ~~Federal~~preferred ~~Reserve~~shares ~~Board. The~~held ~~previously~~by ~~referenced~~Treasury ~~prompt~~have ~~corrective~~been ~~action~~redeemed ~~requirements~~in ~~prohibit~~full ~~dividends~~or ~~where~~ the ~~Bank~~Treasury ~~would~~has transferred beall ~~“undercapitalized,”~~its ~~“significantly~~preferred ~~undercapitalized,”~~shares orto ~~“critically undercapitalized” after the dividend. Additionally~~non-affiliates, ~~both~~Treasury’s ~~the~~consent ~~Commissioner~~shall ~~and~~be ~~the~~required ~~Federal~~for ~~Reserve~~any ~~Board~~increase ~~has~~in ~~the~~aggregate common ~~authority to prohibit the payment of~~ dividends byper ashare ~~Maryland~~greater ~~commercial~~than ~~bank~~3% ~~when~~per itannum; ~~determines such payment to be an unsafe~~ and ~~unsound~~(3) ~~banking~~during ~~practice. Finally,~~ the ~~Bank~~period isbeginning ~~not able to pay dividends~~ on ~~its~~December ~~capital~~6, ~~stock~~2018 ifand ~~its~~ending ~~regulatory~~on ~~capital would thereby be reduced below~~ the date ~~remaining~~on ~~balance~~which all of the ~~liquidation~~preferred ~~account~~shares ~~established~~held inby ~~connection~~Treasury ~~with~~have ~~its~~been ~~conversion~~redeemed in ~~April~~full ~~1996~~or ~~from~~the ~~mutual~~Treasury tohas ~~stock~~transferred ~~form. See~~all ~~Note 11~~ of ~~the~~its preferred ~~Notes~~shares to ~~Consolidated~~non-affiliates, ~~Financial~~the ~~Statements~~Company, ~~appearing~~without inthe ~~Item~~consent 7 of ~~this~~the ~~Annual~~Treasury, ~~Report~~cannot onpay ~~Form~~any ~~10-K~~cash dividends.

InUniform ~~addition,~~Lending Standards. ~~under~~Under ~~the~~Federal ~~terms~~Reserve ofBoard ~~the TARP Capital Purchase Program~~regulations, ~~(1)~~state ~~prior~~member tobanks ~~the~~must ~~earlier~~adopt ofand ~~(a)~~maintain ~~December~~written 5,policies ~~2011,~~that orestablish appropriate ~~(b)~~limits ~~the~~and ~~date~~standards onfor ~~which~~extensions ~~all~~ of ~~the~~credit ~~Company’s~~that ~~preferred~~are ~~shares~~secured ~~held~~ by ~~Treasury~~liens ~~have~~or ~~been~~interests ~~redeemed~~ in ~~full,~~real ~~the~~estate ~~Company~~or ~~cannot~~are ~~increase~~made ~~its~~for the ~~quarterly~~purpose ~~cash~~of ~~dividend~~financing ~~above~~permanent ~~$0.07~~improvements ~~per~~to ~~common~~real ~~share;~~estate. ~~(2)~~These ~~during~~policies ~~the~~must ~~period~~establish ~~beginning~~loan onportfolio ~~December~~diversification 6standards, prudent ~~2011~~underwriting ~~and ending on the earlier of (a) December 5~~standards, ~~2018~~including ~~or (b) the date on which the preferred shares held by Treasury have been redeemed in full or the Treasury has transferred all its preferred shares~~ loan-to ~~non~~-~~affiliates,~~value ~~Treasury’s~~limits ~~consent~~that ~~shall~~are beclear ~~required for any increase in aggregate common dividends per share greater than 3% per annum;~~ and ~~(3)~~measurable, ~~during~~loan ~~the~~administration ~~period~~procedures ~~beginning on December 6~~and documentation, ~~2018~~approval and ~~ending~~reporting onrequirements. ~~the~~The ~~date~~real onestate ~~which~~lending ~~all~~policies of ~~the~~state ~~preferred~~member ~~shares~~banks ~~held~~must byreflect ~~Treasury~~consideration of ~~have been redeemed in full or~~ the ~~Treasury~~Interagency ~~has~~Guidelines ~~transferred~~for ~~all~~Real ofEstate ~~its~~Lending ~~preferred~~Policies ~~shares to non-affiliates,~~ (the ~~Company,~~“Interagency ~~without~~Guidelines”) ~~the~~that ~~consent~~have ofbeen adopted by the ~~Treasury,~~federal ~~cannot~~banking ~~pay any cash dividends~~agencies.

~~Uniform~~Management ~~Lending~~will ~~Standards. Under~~periodically evaluate ~~Federal~~its ~~Reserve~~lending ~~Board regulations, state member banks must adopt and maintain written~~ policies ~~that establish appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements~~ to ~~real~~assure ~~estate. These~~conformity ~~policies must establish loan portfolio diversification standards, prudent underwriting standards, including loan-~~to~~-value~~ limits that are clear and measurable, loan administration procedures and documentation, approval and reporting requirements. The real estate lending policies of state member banks must reflect consideration of the Interagency Guidelines ~~for~~and ~~Real~~does ~~Estate~~not ~~Lending~~anticipate ~~Policies~~that (the “Interagency Guidelines”) will ~~that~~ have ~~been~~a ~~adopted~~material byeffect ~~the~~on ~~federal~~its ~~banking~~lending ~~agencies~~activities.

~~Management~~Limits ~~will~~on ~~periodically~~Loans to ~~evaluate~~One ~~its~~Borrower. ~~lending~~The ~~policies~~Bank has chosen to ~~assure~~be ~~conformity~~subject to federal law with respect to limits on loans to one borrower. Generally, under federal law, the ~~Interagency~~maximum ~~Guidelines~~amount ~~and~~that ~~does~~a commercial bank may loan to one borrower at one time may not ~~anticipate~~exceed ~~that~~15% of the ~~Interagency~~unimpaired capital ~~Guidelines~~and ~~will~~surplus ~~have~~of athe ~~material~~commercial ~~effect~~bank, onplus ~~its~~an additional 10% if secured by specified “readily marketable collateral.” The Bank’s lending ~~activities~~limit to one borrower as of June 30, 2012 was $3.3 million.

~~Limits~~Transactions with onRelated ~~Loans~~Parties. toTransactions ~~One~~between ~~Borrower~~a state member bank and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. ~~The~~ ~~Bank~~An ~~has~~affiliate ~~chosen~~of toa bestate ~~subject~~member tobank ~~federal~~is ~~law~~any ~~with~~company ~~respect~~or toentity, ~~limits~~which oncontrols, ~~loans~~is tocontrolled ~~one~~by ~~borrower~~or is under common control with the state member bank. ~~Generally~~ In a holding company context, ~~under~~at ~~federal~~a ~~law~~minimum, the ~~maximum~~parent ~~amount~~holding ~~that~~company of a ~~commercial~~state member bank ~~may~~and ~~loan~~any tocompanies ~~one~~which ~~borrower~~are atcontrolled ~~one~~by ~~time~~such ~~may~~parent ~~not~~holding ~~exceed~~company ~~15%~~are affiliates of the ~~unimpaired~~state ~~capital~~member bank. Generally, Sections 23A and ~~surplus~~23B of(i) limit the ~~commercial~~extent ~~bank,~~to ~~plus~~which an ~~additional~~institution ~~10%~~or ifits ~~secured~~subsidiaries bymay ~~specified~~engage in “~~readily~~covered ~~marketable collateral.~~transactions” ~~The~~ with ~~Bank~~any one affiliate to an amount equal to 10% of such institution’s ~~lending~~capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to ~~one~~an ~~borrower~~amount equal to 20% of such capital stock and surplus, and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a nonaffiliate. The term “covered transaction” includes the making of ~~June~~loans, 30purchase of assets, ~~2011~~issuance of ~~was~~a $3guarantee and similar other types of transactions.5 ~~million~~Certain types of covered transactions must be collateralized according to a schedule set forth in the statute based on the type of collateral.

~~Transactions~~State ~~with~~member ~~Related~~banks are ~~Parties. Transactions~~also ~~between~~subject ato ~~state~~the ~~member~~restrictions ~~bank~~contained ~~and~~in ~~any~~Section ~~affiliate~~22(h) ~~are~~of ~~governed~~the byFederal ~~Sections~~Reserve ~~23A~~Act and ~~23B of~~ the Federal Reserve’s ~~Act. An~~Regulation O ~~affiliate~~on ofloans ato ~~state~~executive ~~member~~officers, ~~bank~~directors isand ~~any~~principal ~~company~~stockholders or(“insiders”). ~~entity~~Under Section 22(h), ~~which~~aggregate loans ~~controls~~to directors, isexecutive ~~controlled~~officers byand orgreater isthan ~~under~~10% ~~common~~stockholders ~~control~~may ~~with~~not exceed the ~~state~~institution’s ~~member~~unimpaired ~~bank~~capital and unimpaired surplus. In aSection ~~holding~~22(h) ~~company~~also ~~context~~prohibits loans, atabove aamounts ~~minimum,~~prescribed by the ~~parent~~appropriate ~~holding~~federal ~~company~~banking agency, to insiders of a state member bank, and ~~any~~their ~~companies~~respective ~~which~~affiliates, ~~are~~unless ~~controlled~~such byloan ~~such~~is ~~parent~~approved ~~holding~~in ~~company~~advance ~~are~~by ~~affiliates~~a majority of the board ~~state~~of ~~member~~directors ~~bank. Generally,~~of ~~Sections~~the ~~23A~~institution ~~and~~with ~~23B~~any ~~(i)~~“interested” ~~limit~~director ~~the~~not ~~extent~~participating toin ~~which~~the anvoting. ~~institution~~Regulation orO prescribes ~~its~~the ~~subsidiaries~~loan ~~may~~amount ~~engage~~(which inincludes ~~“covered~~all ~~transactions”~~other ~~with~~outstanding ~~any~~loans ~~one affiliate~~ to ansuch ~~amount~~person) ~~equal~~as to ~~10%~~which prior board of ~~such~~director ~~institution’s~~approval is ~~capital~~required ~~stock~~as ~~and~~being ~~surplus,~~the ~~and~~greater ~~contain~~of an$25,000 ~~aggregate~~or ~~limit~~5% onof ~~all~~capital ~~such~~and ~~transactions~~surplus; ~~with~~however ~~all~~loans ~~affiliates~~aggregating to an$500,000 ~~amount~~or ~~equal~~more toalways require ~~20% of~~ such ~~capital~~approval. ~~stock and surplus~~Further, ~~and~~Section 22(iih) ~~require~~requires that ~~all~~loans ~~such~~to ~~transactions~~insiders be made on terms substantially the same, oras atoffered in ~~least~~comparable astransactions ~~favorable,~~ to ~~the~~other ~~institution~~persons orwith ~~subsidiary~~an asexception ~~those~~for ~~provided~~loans made to a ~~nonaffiliate. The~~bank-wide ~~term~~benefit ~~“covered~~or ~~transaction”~~compensation ~~includes~~program ~~the~~that does ~~making~~not ofgive ~~loans,~~preference ~~purchase~~to ofinsiders. ~~assets,~~Section ~~issuance~~22(g) of athe ~~guarantee~~Federal ~~and~~Reserve ~~similar~~Act ~~other~~places ~~types~~further ofrestrictions ~~transactions. Certain~~on the types of ~~covered~~loans that ~~transactions~~can ~~must~~ be ~~collateralized~~made ~~according~~ to aexecutive ~~schedule set forth in the statute based on the type of collateral~~officers.

~~State~~Additionally, ~~member~~Maryland statutory ~~banks~~law ~~are~~imposes ~~also subject to the~~ restrictions ~~contained in Section 22(h) of the Federal Reserve Act and the Federal Reserve’s Regulation O~~ on ~~loans~~certain totransactions ~~executive~~with ~~officers,~~affiliated ~~directors~~persons ~~and~~of ~~principal~~Maryland ~~stockholders~~commercial ~~(“insiders”)~~banks. ~~Under~~ ~~Section 22(h)~~Generally, ~~aggregate~~under Maryland ~~loans~~law, toa ~~directors~~director, ~~executive~~officer ~~officers~~or ~~and~~employee ~~greater~~of ~~than~~a ~~10%~~commercial ~~stockholders~~bank may not ~~exceed~~borrow, ~~the~~directly ~~institution’s~~or ~~unimpaired~~indirectly, ~~capital~~any ~~and~~money ~~unimpaired~~from ~~surplus. Section~~the ~~22(h) also prohibits loans~~bank, unless ~~above amounts prescribed by~~ the ~~appropriate~~loan ~~federal~~has ~~banking~~been ~~agency,~~approved toby ~~insiders of~~ a ~~state~~resolution ~~member~~adopted ~~bank,~~at and ~~their~~recorded ~~respective affiliates, unless such loan is approved~~ in ~~advance~~the byminutes ~~a majority~~ of the board of directors of the ~~institution~~bank, or ~~with any “interested” director not participating in~~ the ~~voting. Regulation~~executive Ocommittee ~~prescribes~~of the ~~loan~~bank, ~~amount~~if ~~(which~~that ~~includes~~committee ~~all~~is ~~other~~authorized ~~outstanding~~to make loans. toIf such ~~person)~~a asloan ~~to which prior board of director approval~~ is ~~required~~approved asby ~~being~~ the ~~greater of $25~~executive committee,~~000~~ orthe 5%loan ~~of capital and surplus; however loans aggregating to $500,000 or more always require such~~ approval~~. Further,~~ ~~Section~~must ~~22(h)~~be ~~requires~~reported ~~that loans~~ to ~~insiders be made on terms substantially~~ the ~~same~~board asof ~~offered~~directors inat ~~comparable~~its ~~transactions~~next tomeeting. ~~other~~Certain ~~persons~~commercial ~~with an exception for~~ loans made to ~~a bank~~non-~~wide~~employee directors ~~benefit~~of ora ~~compensation~~bank ~~program~~and ~~that~~certain ~~does~~consumer ~~not~~loans ~~give~~made ~~preference~~ to ~~insiders. Section~~nonofficer ~~22(g)~~and nondirector employees of the ~~Federal~~bank ~~Reserve~~are ~~Act~~exempt ~~places~~from ~~further restrictions on~~ the ~~types of loans that can be made to executive officers~~statute’s coverage.

~~Additionally,~~Enforcement. The ~~Maryland~~Federal ~~statutory~~Reserve ~~law~~has ~~imposes~~primary ~~restrictions~~federal onenforcement ~~certain~~responsibility ~~transactions~~over ~~with~~member ~~affiliated~~banks ~~persons~~and ofhas ~~Maryland~~the ~~commercial~~authority ~~banks.~~to ~~Generally,~~bring ~~under~~actions against ~~Maryland~~the ~~law~~institution and all institution-affiliated parties, aincluding ~~director~~stockholders, ~~officer~~and any attorneys, appraisers and accountants who knowingly or ~~employee~~recklessly ofparticipate ain ~~commercial~~wrongful ~~bank~~action ~~may~~likely ~~not~~to ~~borrow,~~have ~~directly~~an oradverse ~~indirectly,~~effect ~~any~~on ~~money~~an ~~from~~insured ~~the~~institution. ~~bank,~~Formal ~~unless~~enforcement action ~~the~~may ~~loan~~range ~~has~~from ~~been~~the ~~approved~~issuance byof a ~~resolution~~capital ~~adopted~~directive, ator cease and ~~recorded~~desist inorder ~~the~~to ~~minutes~~removal of ~~the~~officers ~~board~~and/or of directors ofto institution ~~the~~or ~~bank~~receivership, conservatorship or ~~the~~termination ~~executive~~of ~~committee~~deposit insurance. Civil penalties cover a wide range of ~~the~~violations and ~~bank~~can amount to $25,000 ifper ~~that~~day, ~~committee~~or iseven ~~authorized~~$1 tomillion ~~make~~per ~~loans. If~~day ~~such~~in aespecially ~~loan~~egregious iscases. ~~approved~~The byFDIC has the ~~executive~~authority ~~committee,~~to recommend to the ~~loan~~Federal ~~approval~~Reserve ~~must~~Board bethat ~~reported~~enforcement action to ~~the~~be ~~board~~taken ofwith ~~directors~~respect atto ~~its~~a ~~next~~particular ~~meeting~~institution. ~~Certain~~ ~~commercial~~If ~~loans~~action ~~made~~is tonot ~~non-employee~~taken by ~~directors~~the ofFederal aReserve ~~bank~~Board, ~~and~~the ~~certain~~FDIC ~~consumer~~has ~~loans~~authority ~~made~~ to ~~nonofficer~~take ~~and~~such ~~nondirector~~action ~~employees~~under ofcertain ~~the~~circumstances. ~~bank~~Federal ~~are~~law ~~exempt~~also ~~from~~establishes criminal ~~the~~penalties ~~statute’s~~for ~~coverage~~certain violations.

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

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

14General. The Company, as the sole shareholder of the Bank, is a bank holding company and is registered as such with the Federal Reserve Board. Bank holding companies are subject to comprehensive regulation and examination by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and the regulations of the Federal Reserve Board. The Federal Reserve Board also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices.

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

General. The Company, as the sole shareholder of the Bank, is a bank holding company and is registered as such with the Federal Reserve Board. Bank holding companies are subject to comprehensive regulation and examination by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and the regulations of the Federal Reserve Board. The Federal Reserve Board also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices.14

~~Under~~The ~~the~~ BHCA, also prohibits a bank holding company, ~~must~~with ~~obtain~~certain ~~Federal~~exceptions, ~~Reserve~~from ~~Board approval before: (i)~~ acquiring, ~~directly~~direct or ~~indirectly,~~indirect ownership or control of ~~any~~more than 5% of the voting shares of ~~another~~any company which is not a bank or bank holding company if, ~~after~~or ~~such~~from ~~acquisition~~engaging directly or indirectly in activities other than those of banking, itmanaging ~~would~~or ~~own~~controlling banks, or ~~control~~providing ~~more~~services ~~than~~for 5%its ofsubsidiaries. ~~such~~The ~~shares~~principal ~~(unless~~exceptions to itthese ~~already~~prohibitions ~~owns~~involve orcertain ~~controls~~non-bank ~~the~~activities ~~majority~~which, ofby ~~such~~statute ~~shares);~~or ~~(ii)~~by ~~acquiring~~Federal ~~all~~Reserve Board regulation or ~~substantially~~order, ~~all~~have been ofidentified as activities closely related to the ~~assets~~business of ~~another~~banking ~~bank~~or managing or ~~bank~~controlling ~~holding~~banks. ~~company;~~The orlist ~~(iii)~~of ~~merging~~activities includes, oramong ~~consolidating~~other ~~with~~things, ~~another~~operating ~~bank~~a ~~holding~~savings ~~company. In~~institution, ~~evaluating~~mortgage ~~such~~company, ~~applications~~finance company, ~~the~~credit ~~Federal~~card ~~Reserve~~company ~~Board~~or ~~considers~~factoring company; aperforming ~~variety~~certain ofdata processing operations; providing certain investment and financial, ~~managerial~~advice; real estate and ~~competitive~~personal property ~~factors~~appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers.

The ~~BHCA~~Gramm-Leach-Bliley Act ~~also~~of ~~prohibits~~1999 aauthorized bank holding ~~company,~~companies ~~with~~that meet certain ~~exceptions~~management, ~~from~~capital ~~acquiring~~and ~~direct~~other orcriteria ~~indirect~~to ~~ownership~~choose orto ~~control~~become ~~of more than 5% of the voting shares of any company which is not~~ a ~~bank or bank~~ “financial holding company,” orand ~~from~~thereby ~~engaging~~engage ~~directly or indirectly~~ in ~~activities~~a ~~other~~broader ~~than~~array ~~those~~ of ~~banking,~~financial ~~managing~~activities orincluding ~~controlling~~insurance ~~banks,~~underwriting orand ~~providing services for its subsidiaries~~investment banking. The ~~principal~~Company ~~exceptions~~has ~~to these prohibitions involve certain non-bank activities which~~not, byup ~~statute~~to ~~or by Federal Reserve Board regulation or order~~now, ~~have~~opted ~~been identified as activities closely related~~ to ~~the~~become ~~business of banking or managing or controlling banks. The list of activities includes, among other things, operating~~ a ~~savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and~~ financial ~~advice;~~holding ~~real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers~~company.

~~The~~Acquisitions of ~~Gramm-Leach-Bliley~~Bank ~~Act~~Holding ofCompanies ~~1999~~and ~~authorized~~Banks. ~~bank~~Under ~~holding~~the ~~companies~~BHCA, ~~that~~any ~~meet~~company ~~certain~~must ~~management,~~obtain ~~capital~~approval ~~and~~of ~~other~~the ~~criteria~~Federal toReserve ~~choose~~Board prior to ~~become~~acquiring acontrol ~~“financial~~of ~~holding~~the ~~company”~~Company ~~and~~or ~~thereby~~the ~~engage~~Bank. inFor apurposes ~~broader~~of ~~array~~the BHCA, control is defined as ownership of ~~financial~~more ~~activities~~than ~~including~~25% ~~insurance~~of any ~~underwriting~~class ~~and~~of ~~investment~~voting ~~banking. The~~securities of the Company ~~has~~or ~~not~~the Bank, upthe ability to ~~now~~control the election of a majority of the directors, or ~~opted~~the toexercise ~~become~~of a ~~financial~~controlling influence over management or policies of the Company or the Bank. Any bank holding company must secure Federal Reserve Board approval prior to acquiring 5% or more of the stock of the Company or the Bank.

~~Acquisitions~~The ofChange in Bank Control ~~Holding~~Act ~~Companies~~ and ~~Banks. Under~~ the ~~BHCA,~~related ~~any~~regulations ~~company must obtain approval~~ of the Federal Reserve Board ~~prior~~require toany ~~acquiring~~person ~~control~~or ofpersons ~~the~~acting ~~Company~~in orconcert ~~the~~(except ~~Bank. For~~for companies ~~purposes~~required ofto make application under the BHCA), ~~control~~to isfile ~~defined~~a aswritten ~~ownership~~notice ofwith ~~more~~the ~~than~~Federal ~~25%~~Reserve ofBoard ~~any~~before ~~class~~such ofperson or ~~voting~~persons ~~securities~~may acquire control of the Company or the Bank,. ~~the~~The ~~ability~~Change toin ~~control~~Bank ~~the~~Control ~~election~~Act ofpresumes acontrol ~~majority~~as of the ~~directors~~power, directly or ~~the~~indirectly, ~~exercise~~to ofvote a10% ~~controlling~~or ~~influence~~more ~~over~~of ~~management~~any voting securities or ~~policies~~to ofdirect the ~~Company~~management or ~~the~~policies ~~Bank. Any~~of a bank holding company, such ~~must~~as ~~secure~~the ~~Federal~~Company, ~~Reserve~~that ~~Board~~has ~~approval~~securities ~~prior~~registered tounder ~~acquiring~~the 5%Securities orExchange ~~more~~Act of ~~the stock of the Company or the Bank~~1934.

~~The~~Under ~~Change~~Maryland inlaw, acquisitions ~~Bank~~of ~~Control~~25% ~~Act~~or ~~and~~more of the ~~related~~voting ~~regulations~~stock of ~~the~~a ~~Federal~~commercial ~~Reserve~~bank ~~Board~~or ~~require~~a ~~any~~bank ~~person~~holding orcompany ~~persons~~and ~~acting~~other inacquisitions ~~concert~~of ~~(except~~voting stock ~~for~~of ~~companies~~such ~~required~~entities which affect the power to ~~make~~direct ~~application~~or ~~under~~to cause the ~~BHCA),~~direction toof ~~file~~the management or policy of a ~~written~~commercial ~~notice~~bank or ~~with~~a ~~the~~bank ~~Federal~~holding ~~Reserve~~company ~~Board~~must ~~before~~be ~~such~~approved in advance by the Commissioner. Any person orproposing ~~persons~~to ~~may~~make ~~acquire~~such ~~control~~an ofacquisition must file an application with the ~~Company~~Commissioner orat least 60 days before the ~~Bank~~acquisition becomes effective. The ~~Change~~Commissioner inmay ~~Bank~~deny approval ~~Control~~of ~~Act~~any ~~presumes~~such ~~control~~acquisition asif the ~~power,~~Commissioner ~~directly~~determines orthat ~~indirectly,~~the toacquisition ~~vote~~is ~~10%~~anticompetitive or ~~more~~threatens the safety or soundness of ~~any~~a banking institution. Any voting ~~securities~~stock oracquired towithout ~~direct~~the approval required under the ~~management~~statute ormay ~~policies~~not ofbe voted for a period of five years. This restriction is not applicable to certain acquisitions by bank holding ~~company,~~companies ~~such~~of as5% or more of the ~~Company,~~stock ~~that~~of ~~has~~Maryland ~~securities~~banks ~~registered~~or ~~under~~Maryland ~~the~~bank ~~Securities~~holding ~~Exchange~~companies ~~Act~~which are governed by Maryland’s holding company statute and also require prior approval of ~~1934~~the Commissioner.

~~Under~~Dividends. The ~~Maryland~~Federal ~~law,~~Reserve ~~acquisitions~~Board ofhas ~~25%~~issued ora ~~more~~policy ofstatement on the ~~voting~~payment ~~stock~~ of acash ~~commercial~~dividends ~~bank~~by ~~or a~~ bank holding ~~company~~companies, ~~and~~which ~~other~~expresses the ~~acquisitions~~Federal ofReserve ~~voting~~Board’s ~~stock~~view ofthat ~~such~~a ~~entities~~bank ~~which~~holding ~~affect~~company ~~the~~should ~~power~~pay tocash ~~direct~~dividends oronly to ~~cause~~ the ~~direction~~extent ofthat the ~~management~~company’s net orincome ~~policy~~for ofthe apast ~~commercial~~year ~~bank~~is orsufficient ato ~~bank~~cover ~~holding~~both ~~company must be approved in advance by~~ the ~~Commissioner. Any~~cash ~~person~~dividends ~~proposing~~and toa ~~make~~rate ~~such~~of anearning ~~acquisition~~retention ~~must~~that ~~file~~is ~~an application~~ consistent with the ~~Commissioner~~company’s atcapital ~~least~~needs, 60asset ~~days~~quality ~~before~~and ~~the~~overall ~~acquisition~~financial ~~becomes effective~~condition. The ~~Commissioner~~Federal ~~may~~Reserve ~~deny~~Board ~~approval~~also ofindicated that ~~any~~it ~~such~~would ~~acquisition~~be ifinappropriate ~~the~~for ~~Commissioner~~a ~~determines~~company ~~that~~experiencing ~~the~~serious ~~acquisition~~financial isproblems ~~anticompetitive~~to orborrow ~~threatens~~funds ~~the~~to ~~safety~~pay ~~or soundness of a banking institution~~dividends. ~~Any~~ ~~voting stock acquired without the approval required~~ Furthermore, under the ~~statute~~prompt ~~may~~corrective ~~not~~action beregulations ~~voted~~adopted ~~for~~by athe ~~period~~Federal ofReserve ~~five~~Board ~~years. This~~pursuant ~~restriction~~to isFDICIA, ~~not~~the ~~applicable~~Federal toReserve ~~certain~~Board may ~~acquisitions~~prohibit bya bank holding ~~companies~~company offrom 5%paying orany ~~more~~dividends ofif the ~~stock of Maryland banks or Maryland bank~~ holding ~~companies which are governed by Maryland~~company’s ~~holding~~bank ~~company~~subsidiary ~~statute~~is ~~and~~classified ~~also~~as ~~require~~“undercapitalized.” See ~~prior~~“Depository ~~approval~~Institution ofRegulation — ~~the~~Prompt ~~Commissioner~~Corrective Regulatory Action.”

~~Dividends. The~~Under ~~Federal Reserve Board has issued a policy statement on~~ the ~~payment~~terms of its ~~cash~~trust ~~dividends~~preferred ~~by bank holding companies~~securities, ~~which expresses~~ the ~~Federal~~Company ~~Reserve~~may ~~Board’s~~not ~~view~~declare ~~that~~or ~~a bank holding company should~~ pay ~~cash~~ dividends ~~only~~on toits ~~the~~common ~~extent~~or ~~that~~preferred ~~the~~stock ~~company’s~~while ~~net~~it ~~income~~has ~~for~~deferred interest ~~the~~payments ~~past~~on ~~year~~its isdebentures. Under ~~sufficient~~the toterms ~~cover~~of ~~both~~ the ~~cash~~Articles ~~dividends~~Supplementary ~~and~~establishing athe ~~rate~~preferred ofshares ~~earning~~issued to ~~retention~~the ~~that~~US isTreasury, ~~consistent with~~ the ~~company’s~~Company ~~capital~~may ~~needs,~~not ~~asset~~pay ~~quality~~dividends ~~and~~on ~~overall~~its ~~financial~~common ~~condition. The~~stock ~~Federal~~unless ~~Reserve~~it ~~Board~~has ~~also~~paid ~~indicated~~all ~~that~~accrued itand ~~would~~unpaid bedividends ~~inappropriate~~on the preferred ~~for~~shares. As a ~~company~~result, ~~experiencing~~the ~~serious~~Company ~~financial~~currently ~~problems~~is tonot ~~borrow~~permitted ~~funds~~ to pay dividends~~. Furthermore,~~ ~~under~~on ~~the~~its ~~prompt~~common ~~corrective~~stock. ~~action~~See Note ~~regulations~~10 ~~adopted~~of by the ~~Federal~~Notes ~~Reserve Board pursuant~~ to ~~FDICIA,~~Consolidated ~~the~~Financial ~~Federal~~Statements ~~Reserve~~appearing ~~Board~~in ~~may~~Item ~~prohibit~~7 aof ~~bank~~this ~~holding~~Annual ~~company~~Report ~~from~~on ~~paying~~Form ~~any dividends if the holding company’s bank subsidiary is classified as “undercapitalized~~10-K.~~” See “Depository Institution Regulation — Prompt Corrective Regulatory Action.”~~

~~Under~~Capital ~~the~~Requirements. The ~~terms~~Federal ofReserve ~~its~~Board ~~trust~~has ~~preferred~~established ~~securities,~~capital requirements generally similar to the ~~Company~~capital ~~may~~requirements ~~not~~for ~~declare~~state ormember ~~pay~~banks described ~~dividends~~above, onfor ~~its~~bank ~~common~~holding orcompanies. ~~preferred~~Formerly, ~~stock~~these ~~while~~were itapplied ~~has~~to ~~deferred~~bank ~~interest~~holding ~~payments~~companies onwith ~~its~~total ~~debentures. Under~~assets of $150 million or above, including the ~~terms~~Company. ofHowever, in 2007, the ~~Articles~~Federal ~~Supplementary~~Reserve ~~establishing~~Board raised the ~~preferred~~threshold ~~shares~~for ~~issued~~the applicability of its capital requirements to ~~the~~a US$500 ~~Treasury,~~million asset size except where the ~~Company~~company ~~may~~(i) ~~not~~engages ~~pay~~in ~~dividends~~significant onnon-banking ~~its~~activities; ~~common~~(ii) conducts ~~stock~~significant ~~unless~~off itbalance sheet activities or has ~~paid~~a ~~all~~material ~~accrued~~amount ~~and~~of ~~unpaid~~debt ~~dividends~~or onequity securities outstanding registered with the ~~preferred~~ ~~shares~~Securities Exchange Commission. As aThe ~~result,~~Federal Reserve Board has reserved the ~~Company~~right ~~currently~~to isapply ~~not~~its ~~permitted~~requirements to ~~pay~~bank ~~dividends~~holding companies onof ~~its~~any ~~common~~size ~~stock~~when required for supervisory purposes. ~~See~~The ~~Note~~Dodd-Frank 11Act ofrequires the ~~Notes~~Federal Reserve Board to ~~Consolidated~~issue ~~Financial~~consolidated regulatory ~~Statements~~capital ~~appearing~~requirements infor ~~Item~~holding 7companies that are at least as stringent as those applicable to the bank. However, the Act appears to allow the Federal Reserve Board to continue to exempt bank holding companies of ~~this~~less ~~Annual~~than ~~Report~~$500 onmillion ~~Form~~in ~~10-K~~consolidated assets from the holding company capital requirements.

~~Capital~~Stock ~~Requirements~~Repurchases. ~~The~~ As ~~Federal~~a ~~Reserve~~bank ~~Board~~holding ~~has~~company, ~~established~~the ~~capital~~Company ~~requirements~~is ~~generally~~required ~~similar~~ to give the ~~capital~~Federal ~~requirements~~Reserve ~~for~~Board ~~state~~prior ~~member~~written ~~banks~~notice ~~described~~of ~~above,~~any ~~for~~purchase or ~~bank~~redemption ~~holding~~of ~~companies. Formerly,~~its ~~these~~outstanding ~~were~~equity ~~applied~~securities toif ~~bank~~the ~~holding~~gross ~~companies~~consideration ~~with~~for ~~total~~the ~~assets~~purchase ~~of $150 million~~ or ~~above~~redemption, ~~including~~when combined with the ~~Company. However,~~net inconsideration ~~2007,~~paid ~~the~~for ~~Federal~~all ~~Reserve~~such ~~Board~~purchases ~~raised~~or ~~the~~redemptions ~~threshold~~during ~~for~~ the ~~applicability~~preceding of12 ~~its~~months, ~~capital~~is ~~requirements~~equal to a10% ~~$500~~or ~~million~~more ~~asset~~of ~~size except where~~ the Company’s ~~company~~consolidated ~~(i)~~net ~~engages~~worth. inThe ~~significant~~Federal ~~non-banking~~Reserve ~~activities;~~Board ~~(ii)~~may ~~conducts~~disapprove ~~significant~~such ~~off~~a ~~balance~~purchase ~~sheet activities~~ or ~~has~~redemption aif ~~material~~it ~~amount~~determines that ofthe ~~debt~~proposal orwould ~~equity~~violate ~~securities~~any ~~outstanding~~law, ~~registered~~regulation, ~~with the Securities Exchange Commission. The~~ Federal Reserve Board ~~has~~order, ~~reserved~~directive, ~~the~~or ~~right to apply its requirements to bank holding companies of~~ any ~~size~~condition ~~when~~imposed ~~required~~by, ~~for~~or ~~supervisory~~written agreement ~~purposes. The~~with, ~~Dodd-Frank Act requires~~ the Federal Reserve Board. toThis ~~issue~~requirement ~~consolidated~~does ~~regulatory~~not ~~capital~~apply ~~requirements~~to ~~for~~bank holding companies that are ~~at least as stringent as those applicable to the bank. However~~“well-capitalized,” received ~~the~~one ~~Act~~of ~~appears to allow~~ the ~~Federal~~two ~~Reserve~~highest ~~Board~~examination toratings ~~continue~~at totheir ~~exempt~~last ~~bank~~examination ~~holding~~and ~~companies~~are ofnot ~~less than $500 million in consolidated assets from~~ the ~~holding~~subject ~~company~~of ~~capital~~any ~~requirements~~unresolved supervisory issues.

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

~~Taxation~~For fiscal year 2012, the Company’s maximum federal income tax rate was 34%. The Company and the Bank, together with the Bank’s subsidiary, to date have not filed a consolidated federal income tax return for the fiscal year ended June 30, 2012.

~~For~~The ~~fiscal year 2011, the Company~~Bank’s ~~maximum~~ federal income tax ~~rate~~returns ~~was~~have ~~34%. The~~been ~~Company~~audited ~~and~~through ~~the~~June ~~Bank~~30, ~~together~~1995. ~~with~~The ~~the Bank~~Company’s ~~subsidiary,~~tax toreturns ~~date~~ have ~~not~~never ~~filed~~been ~~a consolidated federal income tax return for the fiscal year ended June 30, 2011~~audited.

State Income Taxation. The ~~Bank’s~~State ~~federal~~of Maryland imposes an income tax ~~returns~~of ~~have~~8.25% ~~been~~on ~~audited~~income ~~through~~measured ~~June~~substantially 30the same as federally taxable income, ~~1995~~except that U.S. ~~The~~Government ~~Company’s~~interest ~~tax~~is ~~returns~~not ~~have~~fully ~~never~~taxable. ~~been~~For ~~audited~~years ended prior to July 1, 2008, the rate was 7.00%.

~~State~~For ~~Income~~additional ~~Taxation. The~~information regarding ~~State~~taxation, ofsee ~~Maryland~~Note ~~imposes~~9 ~~an income tax~~ of ~~8.25%~~Notes ~~on income measured substantially the same as federally taxable income, except that U.S. Government interest is not fully taxable. For years ended prior~~ to ~~July~~Consolidated 1,Financial ~~2008, the rate was 7~~Statements.~~00%.~~

~~For~~Executive ~~additional~~Officers ~~information~~Who ~~regarding~~Are ~~taxation,~~Not ~~see Note 10 of Notes to Consolidated Financial Statements.~~Directors

16The following sets forth information with respect to executive officers of the Bank who do not serve on the Board of Directors.

Executive Officers Who Are Not Directors

	Age at June 30,
Name	2012	Title

Dean L. Jager	46	Senior Vice President – Operations and Compliance

Jeanne R. Kelly-Rieken	51	Senior Vice President – Retail Delivery

Laurence S. Mitchell	65	Senior Vice President – Commercial Business Lending

Phillip P. Phillips	56	Executive Vice President – Lending and Loan Administration

John M. Wright	46	Senior Vice President and Chief Financial Officer of the Company and the Bank

~~The following sets forth information with respect to executive officers of the Bank who do not serve on the Board of Directors.~~16

	Age at June 30,
Name	2011	Title
Laurence S. Mitchell	64	Senior Vice President – Commercial Business Lending
Phillip P. Phillips	55	Senior Vice President – Lending and Loan Administration
William C. Wiedel, Jr.	51	Senior Vice President and Chief Financial Officer of the Company and the Bank

Dean L. Jager is a Senior Vice President who joined the company in January of 2012 and is in charge of Operations and Compliance. Mr. Jager has over 20 years of professional experience. Prior to Patapsco, Mr. Jager held the position of Chief Compliance Officer with the Lafayette Federal Credit Union from 2007 until 2011 and previously worked with various other Federal Credit Unions in the Baltimore - Washington D.C. Area. Mr. Jager earned his Masters of Arts in Business from the Notre Dame of Maryland University and holds a certification in bank compliance and the Bank Secrecy Act.

~~Laurence~~Jeanne S.Kelly-Rieken was ~~Mitchell~~appointed ~~is a~~ Senior Vice President ~~who~~and ~~joined~~in ~~the~~charge ~~Company~~of Retail Delivery in ~~November~~April of2012. Mrs. ~~1999~~Rieken ashas aover ~~commercial~~33 ~~lending~~years ~~officer.~~of experience ~~Prior~~in tobanking, ~~joining~~including ~~Patapsco~~Operations, MrCredit, and Branch Leadership. She ~~Mitchell~~started ~~held~~her ~~positions~~career inat ~~various~~Equitable ~~banks~~Bank, ~~relating~~which merged towith ~~commercial~~Maryland ~~lending~~National Bank and ~~business~~then ~~development~~NationsBank. He Mrs. isRieken ancontinued ~~active~~her ~~member~~career ofwith ~~the~~Citizens ~~Harford~~Bank ~~County Chamber~~ of ~~Commerce~~Maryland, which amerged ~~Board~~with ~~member~~Crestar ofand ~~the~~then ~~Baltimore~~Suntrust. Most ~~County~~recently, ~~Chamber~~Mrs. ofRieken ~~Commerce,~~was aRegional ~~member~~Manager ofat PNC Bank, through the ~~Leadership~~Citizens National ~~and~~Bank ~~Development~~(Mercantile ~~Committee~~Bancshares) ofmerger. She ~~the~~taught ~~Maryland~~Principals ~~Bankers~~of ~~Association~~Banking ~~and~~as an ~~instructor~~Instructor for the Center for Financial Training Mid-Atlantic, formerly known as the American Institute of Banking. ~~Formerly,~~ She ~~Mr.~~is ~~Mitchell~~a ~~was~~graduate aof ~~member~~Maryland Banking School and served as Chair of the ~~Town~~Maryland ofBankers ~~Bel~~Association ~~Air~~Leadership ~~Economic~~and Development Committee. Mrs. Rieken has also served on several community Boards, primarily in Anne Arundel and ~~Community~~Prince ~~Development~~George’s ~~Commission~~Counties.

~~Phillip~~Laurence PS. ~~Phillips~~Mitchell is ~~was~~a ~~appointed~~ Senior Vice President ~~upon~~who ~~joining~~joined the Company in ~~March~~November ~~2010. Prior~~of to1999 ~~that,~~as ~~Mr.~~a ~~Phillips~~commercial ~~was~~lending aofficer. ~~Senior~~Prior ~~Vice~~to ~~President~~joining ~~and~~Patapsco, Mr. ~~Manager~~Mitchell ofheld ~~Special~~positions ~~Assets~~in atvarious ~~Provident~~banks ~~Bank,~~relating ~~and~~to ~~M&T~~commercial ~~Bank~~lending ~~through~~and ~~merger,~~business ~~from~~development. ~~July~~He ~~2008~~is toan ~~March~~active ~~2010.~~member ~~From~~of the ~~January~~Harford ~~2007~~County ~~until~~Chamber ~~rejoining~~of ~~Provident Bank~~Commerce, ~~he was~~ a ~~Senior~~Board ~~Vice~~member ~~President~~of ~~and~~the ~~Regional~~Baltimore ~~Senior~~County ~~Credit~~Chamber ~~Officer~~of ~~for~~Commerce, ~~Wells~~a ~~Fargo~~member ~~Bank~~of ~~where~~the heLeadership and ~~assisted~~Development inCommittee ~~establishing~~of the Maryland ~~Commercial~~Bankers ~~Lending~~Association ~~Office.~~and ~~Mr.~~an ~~Phillips’~~instructor ~~banking~~for ~~experience~~the ~~spans~~Center 32for ~~years~~Financial ~~and~~Training aMid-Atlantic, formerly ~~variety~~known ofas ~~Credit~~the ~~and~~American ~~Lending~~Institute ~~positions~~of atBanking. ~~Maryland National Bank~~Formerly, ~~NationsBank,~~Mr. ~~Signet~~Mitchell ~~Bank~~was ~~and~~a ~~Provident~~member ~~Bank. Mr.~~of ~~Phillips~~the isTown ~~also~~of anBel ~~Adjunct~~Air ~~Professor~~Economic atand ~~Towson~~Community Development ~~University~~Commission.

~~William~~Phillip CP. ~~Wiedel, Jr.~~ Phillips was ~~appointed~~promoted ~~Senior~~to Executive Vice President in April 2012 and ~~Chief~~was ~~Financial~~appointed ~~Officer~~Senior ofVice ~~the~~President ~~Company~~upon ~~and~~joining the ~~Bank~~Company in March ~~2008~~2010. ~~From~~ Prior ~~April 1986~~ to ~~March 2008~~that, Mr. ~~Wiedel~~Phillips was ~~employed~~a bySenior ~~Provident~~Vice ~~Bank~~President ~~where~~and heManager ~~held a variety~~ of ~~financial~~Special ~~positions.~~Assets ~~From~~at ~~January~~Provident ~~2001 to March 2008~~Bank, ~~Mr.~~and M&T ~~Wiedel~~Bank ~~was~~through ~~Senior~~merger, ~~Vice~~from ~~President~~July of2008 ~~Financial~~to ~~Planning~~March ~~and Analysis~~2010. From January ~~1993~~2007 tountil ~~December~~rejoining ~~2000~~Provident Bank, ~~Mr.~~he ~~Wiedel~~ was ~~Chief~~a ~~Financial~~Senior ~~Officer~~Vice President ofand ~~Provident~~Regional ~~Mortgage~~Senior ~~Corp.,~~Credit aOfficer ~~wholly~~for ~~owned~~Wells ~~subsidiary~~Fargo ofBank ~~Provident~~where ~~Bank.~~he ~~From~~assisted ~~April~~in ~~1986~~establishing tothe ~~January~~Maryland ~~1993,~~Commercial MrLending Office. ~~Wiedel was Vice President and Assistant Controller of Provident Bank~~Mr. ~~From~~Phillips’ ~~September~~banking ~~1981~~experience tospans ~~April~~32 ~~1986,~~years ~~Mr.~~and ~~Wiedel~~a ~~was~~variety ~~employed~~of byCredit ~~Ernst~~ and ~~Whinney~~Lending ~~(currently~~positions ~~known~~at asMaryland ~~Ernst~~National Bank, ~~and Young)~~NationsBank, ~~advancing~~Signet toBank ~~the~~and ~~level~~Provident ~~of audit manager~~Bank. Mr. ~~Wiedel~~Phillips is aalso ~~Certified~~an ~~Public~~Adjunct ~~Accountant~~Professor ~~(“CPA”).~~at HeTowson ~~is a member of the American Institute of Certified Public Accountants and the Maryland Association of Certified Public Accountants~~University.

~~Item~~John 1AM. ~~Risk~~ ~~Factors~~Wright was appointed Senior Vice President and Chief Financial Officer of the Company and the Bank in April 2012. Mr. Wright has over 20 years of banking experience, having served as Deputy Chief Executive Officer and Chief Financial Officer of CGI North America, a subsidiary of Societe Generale, from April 2008 to September 2011, and as Senior Vice President and Chief Financial Officer of American Bank, Rockville, Maryland, from November 1997 through April 2008. Mr. Wright was a financial consultant from September 2011 to April 2012.

AItem ~~continuation~~1A. ofRisk ~~recent turmoil in the financial markets could have an adverse effect on our financial position or results of operations.~~Factors

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

17Beginning in 2008, United States and global markets have experienced severe disruption and volatility, and general economic conditions have declined significantly. Adverse developments in credit quality, asset values and revenue opportunities throughout the financial services industry, as well as general uncertainty regarding the economic and regulatory environment, have had a marked negative impact on the industry. The United States and the governments of other countries have taken steps to try to stabilize the financial system, including investing in financial institutions, and have also been working to design and implement programs to improve general economic conditions. There can be no assurances that these efforts will be successful in restoring industry, economic or market conditions and that they will not result in adverse unintended consequences. Factors that could continue to pressure financial services companies, including the Company, are numerous and include: (1) worsening credit quality, leading among other things to increases in loan losses and reserves; (2) continued or worsening disruption and volatility in financial markets, leading among other things to continuing reductions in asset values; (3) capital and liquidity concerns regarding financial institutions generally; (4) limitations resulting from or imposed in connection with governmental actions intended to stabilize or provide additional regulation of the financial system; and/or (5) recessionary conditions that are deeper or last longer than currently anticipated.

Changes in interest rates may hurt our earnings.

Short-term market interest rates (which we use as a guide to price our deposits) have until recently risen from historically low levels, while longer-term market interest rates (which we use as a guide to price our longer-term loans) have not. This “flattening” of the market yield curve had a negative impact on our net interest margin, which reduced our profitability. Our net interest margin was 3.3234% for the year ended June 30, ~~2011~~2012 compared to 3.4032% for the year ended June 30, ~~2010~~2011. The U.S. Federal Reserve has decided to maintain the federal funds rate at 0 to .25%. Decreases in interest rates can result in increased prepayments of loans, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such loan proceeds into lower-yielding assets, which might also negatively impact our income. Additionally, if short-term interest rates rise, and if rates on our deposits reprice upwards faster than the rates on our long-term loans and investments, we would experience compression of our net interest margin, which would have a negative effect on our profitability. For further discussion of how changes in interest rates could impact us, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations―Risk Management―Interest Rate Risk Management” in the ~~2011~~2012 Annual Report, filed as Exhibit 13 to this Form 10-K.

We may be more susceptible to increases in interest rates because of the relatively small amount of adjustable-rate loans currently in our portfolio and our heavy reliance on core deposits, especially our money market accounts, which reprice frequently. At June 30, 2011, $71.5 million, or 38.1% of our total loan portfolio, consisted of adjustable-rate loans. We attempt to limit our exposure to rises in interest rates through: offering adjustable-rate one-to-four family residential real estate loans; an increased focus on multi-family and commercial real estate lending, which emphasizes the origination of shorter-term adjustable-rate loans; and efforts to originate shorter-term fixed-rate loans. Our inability to successfully originate adjustable-rate multi-family and commercial real estate loans or shorter-term fixed-rate loans could result in further compression of our net interest margin in a rising interest rate environment, which could hurt our profits.17

~~Our~~We ~~emphasis~~may be more susceptible to increases in interest rates because of the relatively small amount of adjustable-rate loans currently in our portfolio and our heavy reliance on core deposits, especially our money market accounts, which reprice frequently. At June 30, 2012, $56.1 million, or 31.5% of our total loan portfolio, consisted of adjustable-rate loans. We attempt to limit our exposure to rises in interest rates through: offering adjustable-rate one-to-four family residential real estate loans; an increased focus on multi-family and commercial real estate lending, ~~may~~which ~~expose~~emphasizes usthe origination of shorter-term adjustable-rate loans; and efforts to ~~increased~~originate shorter-term ~~lending~~fixed-rate ~~risks~~loans. Our inability to successfully originate adjustable-rate multi-family and commercial real estate loans or shorter-term fixed-rate loans could result in further compression of our net interest margin in a rising interest rate environment, which could hurt our profits.

AtOur ~~June 30, 2011, $56.4 million, or 30.1%, of our loan portfolio consisted of multi-family and commercial real estate loans. We intend to continue our~~ emphasis on ~~these types of higher~~multi-~~yielding loans to provide us with the opportunity to increase profits. However, these types of loans generally expose a lender to greater risk of non-payment and loss than one- to- four-~~family ~~residential real estate loans because repayment of the loans often depends on the successful operation of the property~~ and the income stream of borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to- four-family residential real estate loans. Also, many of our commercial ~~borrowers~~lending ~~have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can~~ may expose us to aincreased ~~significantly~~lending ~~greater risk of loss compared to an adverse development with respect to a one- to- four-family residential real estate loan~~risks.

~~Our~~At ~~level~~June 30, 2012, $54.0 million, or 30.4%, of ~~nonperforming~~our loan portfolio consisted of multi-family and commercial real estate loans. ~~expose~~We intend to continue our emphasis on these types of higher-yielding loans to provide us with the opportunity to ~~increased~~increase ~~lending~~profits. ~~risks~~However, these types of loans generally expose a lender to greater risk of non-payment and loss than one- to- four-family residential real estate loans because repayment of the loans often depends on the successful operation of the property and the income stream of borrowers. ~~Further~~ Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to- four-family residential real estate loans. Also, many of our ~~allowance~~commercial ~~for~~borrowers have more than one loan ~~losses~~outstanding ~~may~~with ~~prove~~us. Consequently, an adverse development with respect to beone ~~insufficient~~loan or one credit relationship can expose us to ~~absorb~~a ~~losses~~significantly ingreater ~~our~~risk ~~loan~~of ~~portfolio~~loss compared to an adverse development with respect to a one- to- four-family residential real estate loan.

AtOur ~~June~~level ~~30, 2011, our non-performing loans totaled $9.9 million, representing 5.33%~~ of ~~total~~nonperforming loans~~. If~~ ~~these~~expose ~~loans~~us ~~continue~~ to ~~not~~increased lending ~~perform~~risks. ~~according to their terms and the collateral is insufficient to pay any remaining loan balance~~Further, ~~we may experience loan losses, which could have a material effect on~~ our ~~operating results. Like all financial institutions, we maintain an~~ allowance for loan losses ~~to provide for loans in our portfolio that~~ may ~~not~~prove to be ~~repaid~~insufficient ~~in their entirety. We believe that our allowance for loan losses is maintained at a level adequate~~ to absorb ~~probable~~ losses ~~inherent~~ in our loan portfolio ~~as of the corresponding balance sheet date~~. ~~However, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results.~~

18At June 30, 2012, our non-performing loans totaled $8.9 million, representing 5.10% of total loans. If these loans continue to not perform according to their terms and the collateral is insufficient to pay any remaining loan balance, we may experience loan losses, which could have a material effect on our operating results. Like all financial institutions, we maintain an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. We believe that our allowance for loan losses is maintained at a level adequate to absorb probable losses inherent in our loan portfolio as of the corresponding balance sheet date. However, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results.

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

At June 30, ~~2011~~2012, our allowance for loan losses as a percentage of total loans was 2.2511%. Our regulators, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to increase our allowance for loan losses by recognizing additional provisions for loan losses charged to expense, or to decrease our allowance for loan losses by recognizing loan charge-offs, net of recoveries. Any such additional provisions for loan losses or charge-offs, as required by these regulatory agencies, could have a material adverse effect on our financial condition and results of operations.

The Company may be forced to accept administrative decisions with respect to certain participation loans that might not be in the Company’s best interests and that could cause it to experience losses with respect to such loans that might be larger than it might otherwise incur on a similar portfolio of distressed loans where it was the lead lender.18

AtA ~~June~~downturn ~~30, 2011, the Company had approximately $1.5 million~~ in ~~participation loans originated by a bank that has since been placed into receivership, with~~ the ~~FDIC~~local ~~appointed~~economy asor receiver. Approximately $41,000 of these loans were classified as nonaccrual loans at June 30, 2011. The assets and liabilities of that bank, including the loan participations in which the Company has participation interests, have been sold to a ~~successor~~decline ~~bank. That successor bank may have financial interests that differ from those of the Company with respect to the participation loans, and~~ in ~~$311,000~~real ofestate values those loans has the sole right to administer the loan, which includes the right to make decisions with respect to the disposition of collateral securing the loans. As a result the Company may be forced to accept administrative decisions with respect to such loans that might not be in the Company’s best interests and that could ~~cause~~hurt itour ~~to experience losses with respect to such loans that might be larger than it might otherwise incur on a similar portfolio of distressed loans where it was the lead lender~~profits.

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

~~Nearly~~Strong ~~all~~competition ofwithin our ~~real~~market ~~estate loans are secured by real estate in the Baltimore metropolitan~~ area~~. As~~ ~~a result of this concentration, a downturn in the local economy~~ could ~~cause significant increases in non-performing loans, which would~~ hurt our profits~~. Additionally,~~ aand ~~decrease~~slow ~~in asset quality could require additions to our allowance for loan losses through increased provisions for loan losses, which would hurt our profits~~growth. Several years ago, there had been significant increases in real estate values in our market area. As a result of rising home prices, our loans have been well collateralized. However, in the next few years, these real estate values have declined, in some cases dramatically, which could cause some of our mortgage loans to become inadequately collateralized, which would expose us to a greater risk of loss. For a discussion of our market area, see “Business―Market Area.”

~~Strong~~We face intense competition both ~~within~~in making loans and attracting deposits. This competition has made it more difficult for us to make new loans and has occasionally forced us to offer higher deposit rates. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which reduces net interest income. As of December 31, 2011, we held 1.45% of the deposits in the Baltimore County, Maryland Metropolitan Statistical Area, which was the 16th largest market share of deposits out of the 41 financial institutions in the metropolitan statistical area. ~~could~~Some ~~hurt~~of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our ~~profits~~continued ability to compete successfully in our market area. For more information about our market area and ~~slow~~the ~~growth~~competition we face, see “Business―Market Area” and “Business―Competition.”

WeThe ~~face~~limitations intense competition both in making loans and attracting deposits. This competition has made it more difficult for us to make new loans and has occasionally forced us to offer higher deposit rates. Price competition for loans and deposits might result in us earning less on ~~our~~executive ~~loans~~compensation imposed ~~and~~through ~~paying more on~~ our ~~deposits,~~participation ~~which reduces net interest income. As of June 30, 2011, we held 0.40% of the deposits~~ in the ~~Baltimore-Towson,~~TARP ~~Maryland~~Capital ~~Metropolitan~~Purchase ~~Statistical~~Program Area, which was the 28th largest market share of deposits out of the 84 financial institutions in the metropolitan statistical area. Some of the institutions with which we compete have substantially greater resources and lending limits than we have and may ~~offer~~restrict ~~services~~our ~~that~~ability ~~we do not provide. We expect competition~~ to ~~increase in the future as a result of legislative~~attract, ~~regulatory~~retain and ~~technological~~motivate key ~~changes~~employees, ~~and~~which ~~the~~could ~~continuing~~adversely ~~trend~~affect ~~of consolidation in the financial services industry. Our profitability depends upon~~ our ~~continued ability to compete successfully in our market area~~operations. ~~For more information about our market area and the competition we face, see “Business―Market Area” and “Business―Competition.”~~

19As part of our participation in the TARP Capital Purchase Program, we agreed to be bound by certain executive compensation restrictions, including limitations on severance payments and the clawback of any bonus and incentive compensation that were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria. Subsequent to the issuance of the preferred stock, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was enacted, which provides more stringent limitations on severance pay and the payment of bonuses. To the extent that any of these compensation restrictions do not permit us to provide a comprehensive compensation package to our key employees that is competitive in our market area, we have difficulty in attracting, retaining and motivating our key employees, which could have an adverse effect on our results of operations.

~~The~~Future ~~limitations~~dividend onpayments ~~executive~~and ~~compensation~~common stock ~~imposed~~repurchases ~~through~~are ~~our~~restricted ~~participation~~by in the ~~TARP~~terms ~~Capital~~of ~~Purchase~~the ~~Program~~U.S. ~~may~~Treasury’s ~~restrict~~equity ~~our~~investment ~~ability~~in ~~to attract, retain and motivate key employees, which could adversely affect our operations~~us.

AsUnder ~~part~~the ofterms ~~our participation in~~ of the TARP Capital Purchase Program, weuntil ~~agreed~~the toearlier beof ~~bound~~the bythird ~~certain~~anniversary ~~executive~~of ~~compensation~~the ~~restrictions,~~date ~~including~~of ~~limitations~~issuance onof ~~severance~~the ~~payments~~Company’s ~~and~~Series A ~~the~~Cumulative ~~clawback~~Perpetual ofPreferred ~~any~~Stock ~~bonus~~ and ~~incentive~~the ~~compensation~~date ~~that~~on ~~were~~which ~~based~~the onSeries ~~materially~~A ~~inaccurate~~Cumulative ~~financial~~Perpetual ~~statements~~Preferred orStock ~~any~~has ~~other~~been ~~materially~~redeemed in ~~inaccurate~~whole ~~performance~~or ~~metric~~the ~~criteria~~U.S. ~~Subsequent~~Treasury tohas ~~the~~transferred ~~issuance~~all of the ~~preferred~~Series ~~stock,~~A ~~the~~Cumulative ~~American~~Perpetual ~~Recovery~~Preferred ~~and~~Stock ~~Reinvestment~~to ~~Act~~third ofparties, ~~2009~~we ~~(“ARRA”)~~are prohibited ~~was~~from ~~enacted,~~increasing ~~which~~dividends ~~provides~~on ~~more~~our ~~stringent~~common ~~limitations~~stock onfrom ~~severance~~the ~~pay~~last ~~and~~quarterly ~~the~~cash ~~payment~~dividend ofper ~~bonuses~~share ($0.07) Todeclared on the common ~~extent~~stock ~~that~~prior ~~any~~to ofDecember ~~these~~5, ~~compensation~~2008, ~~restrictions~~as doadjusted ~~not~~for ~~permit~~subsequent usstock todividends ~~provide~~and aother ~~comprehensive~~similar ~~compensation~~actions, ~~package~~and tofrom making certain repurchases of equity securities, including our ~~key~~common ~~employees~~stock, ~~that~~without isthe ~~competitive~~consent inof ~~our~~the ~~market~~U.S. ~~area~~Treasury. Furthermore, weas ~~have~~long ~~difficulty~~as the inSeries ~~attracting~~A Cumulative Perpetual Preferred Stock is outstanding, ~~retaining~~dividend payments and ~~motivating~~repurchases or redemptions relating to certain equity securities, including our ~~key~~common ~~employees~~stock, ~~which~~are ~~could~~prohibited ~~have~~until anall ~~adverse~~accrued ~~effect~~and unpaid dividends are paid on ~~our~~such ~~results~~preferred stock, ofsubject ~~operations~~to certain limited exceptions.

~~Future dividend payments and common stock repurchases are restricted by the terms of the U.S. Treasury’s equity investment in us.~~19

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

The terms ~~governing~~of the ~~issuance~~Securities Purchase ofAgreement ~~the~~in ~~preferred~~which ~~stock~~we entered into with U.S. Treasury pursuant to the TARP Capital Purchase Program provides that the U.S. Treasury may beunilaterally ~~changed,~~amend ~~the~~any ~~effect~~provision of ~~which~~the Purchase Agreement to the extent required to comply with any changes in applicable federal law that may occur in the future. We have anno ~~adverse~~assurances ~~effect~~that changes in the terms of the transaction will not occur in the future. Such changes may place restrictions on our ~~operations~~business or results of operation, which may adversely affect the market price of our common stock.

The ~~terms~~Standard of& ~~the~~Poor’s ~~Securities~~downgrade ~~Purchase Agreement~~ in ~~which~~the ~~we entered into with~~ U.S. government’s ~~Treasury~~sovereign ~~pursuant~~credit torating, ~~the~~and ~~TARP~~in ~~Capital Purchase Program provides that~~ the ~~U.S.~~credit ~~Treasury~~ratings ~~may unilaterally amend any provision~~ of ~~the~~instruments ~~Purchase~~issued, ~~Agreement~~insured toor ~~the~~guaranteed ~~extent~~by ~~required~~certain torelated institutions, ~~comply~~agencies ~~with~~and ~~any~~instrumentalities, ~~changes~~could result in ~~applicable~~risks ~~federal~~to ~~law that may occur in~~ the ~~future.~~Company Weand ~~have~~general noeconomic ~~assurances~~conditions that ~~changes~~we ~~in the terms of the transaction will~~ are not ~~occur~~able into ~~the future~~predict. ~~Such changes may place restrictions on our business or results of operation, which may adversely affect the market price of our common stock.~~

~~The~~On August 5, 2011, Standard & Poor’s ~~downgrade~~downgraded in the ~~U.S.~~United ~~government’s~~States ~~sovereign~~long-term ~~credit~~debt rating from its AAA rating to AA+. On August 8, ~~and~~2011, inStandard & Poor’s downgraded the credit ratings of certain long-term debt instruments issued, ~~insured~~by orFannie Mae ~~guaranteed~~and byFreddie ~~certain~~Mac ~~related~~and other U.S. government agencies linked to long-term U.S. debt. Instruments of this nature are key assets on the balance sheets of financial institutions, ~~agencies~~including the Bank. These downgrades could adversely affect the market value of such instruments, and ~~instrumentalities~~could adversely impact our ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding when it is available. We cannot predict if, when or how these changes to the credit ratings will affect economic conditions. These ratings downgrades could result in a significant adverse impact to the Company, and could exacerbate the other risks to which the Company ~~and~~is ~~general~~subject, ~~economic~~including ~~conditions~~those ~~that~~described weunder ~~are~~this ~~not~~Item ~~able~~1A. toRisk ~~predict~~Factors.

On August 5, 2011, Standard & Poor’s downgraded the United States long-term debt rating from its AAA rating to AA+. On August 8, 2011, Standard & Poor’s downgraded the credit ratings of certain long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies linked to long-term U.S. debt. Instruments of this nature are key assets on the balance sheets of financial institutions, including the Bank. These downgrades could adversely affect the market value of such instruments, and could adversely impact our ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding when it is available. We cannot predict if, when or how these changes to the credit ratings will affect economic conditions. These ratings downgrades could result in a significant adverse impact to the Company, and could exacerbate the other risks to which the Company is subject, including those described under this Item 1A1B. ~~Risk~~Unresolved ~~Factors.~~ Staff Comments

20Not applicable.

Item 1B2. ~~Unresolved~~ ~~Staff Comments~~Properties

~~Not~~The ~~applicable~~following table sets forth the location and certain additional information regarding the Bank’s offices at June 30, 2012.

Item 2. Properties

Net Book Value

Year

Owned or

at June 30,

Approximate

Opened

Leased

2012

Square Footage

(Dollars in thousands)

Headquarters and Branch Office

1301 Merritt Boulevard

1970

Owned

292

9,600

Dundalk, Maryland 21222

Branch Office

2028 Joppa Road

Baltimore, Maryland 21234

2007

Leased

2,570

7,000

Branch Office

821 W. 36^th Street

Baltimore, Maryland 21211

1988

Owned

1,100

Branch Office

12128 Long Green Pike

Glen Arm, Maryland 21057

1988

Leased

1,400

Branch Office

11630 Glen Arm Road

Glen Arm, Maryland 21057

2006

Leased

400

~~The following table sets forth the location and certain additional information regarding the Bank’s offices at June 30, 2011.~~20

Net Book Value

Year

Owned or

at June 30,

Approximate

Opened

Leased

2011

Square Footage

(Dollars in thousands)

Headquarters and Branch Office

1301 Merritt Boulevard

1970

Owned

310

9,600

Dundalk, Maryland 21222

Branch Office

2028 Joppa Road

Baltimore, Maryland 21234

2007

Leased

2,676

7,000

Branch Office

821 W. 36th Street

Baltimore, Maryland 21211

1988

Owned

1,100

Branch Office

12128 Long Green Pike

Glen Arm, Maryland 21057

1988

Leased

1,400

Branch Office

11630 Glen Arm Road

Glen Arm, Maryland 21057

2006

Leased

400

The net book value of the Bank’s investment in premises and equipment totaled $3.4 million at June 30, 2012. See Note 5 of Notes to Consolidated Financial Statements. The branch office located at 7802 Harford Rd, Baltimore, Maryland 21234 was closed in December, 2009 and is included in other assets at June 30, 2012.

~~The~~Item ~~net book value of the Bank’s investment in premises and equipment totaled $~~3.6 ~~million~~Legal at June 30, 2011. See Note 6 of Notes to Consolidated Financial Statements. The branch office located at 7802 Harford Rd, Baltimore, Maryland 21234 was closed in December, 2009 and is included in other assets at June 30, 2011.Proceedings

~~Item~~From 3time to time, the Company is a party to various legal proceedings incident to its business. ~~Legal~~At ~~Proceedings~~June 30, 2012, there were no legal proceedings to which the Company was a party, or to which any of their property was subject, which were expected by management to result in a material loss to the Company. There are no pending regulatory proceedings to which the Company is a party or to which any of their properties is subject which are currently expected to result in a material loss.

~~From~~Item ~~time to time, the Company is a party to various legal proceedings incident to its business~~4. At ~~June~~Mine ~~30,~~Safety 2011, there were no legal proceedings to which the Company was a party, or to which any of their property was subject, which were expected by management to result in a material loss to the Company. There are no pending regulatory proceedings to which the Company is a party or to which any of their properties is subject which are currently expected to result in a material loss.Disclosures

~~Item~~Not 4applicable. ~~Removed and Reserved~~

~~Not~~PART ~~applicable.~~II

~~PART~~(a) The IIinformation contained under the section captioned “Market Information” in the Company’s Annual Report to Stockholders for the Fiscal Year Ended June 30, 2012 (the “Annual Report”) filed as Exhibit 13 hereto is incorporated herein by reference.

~~Item~~(b) Not 5applicable. ~~Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities~~

(ac) The ~~information~~Company did ~~contained~~not ~~under~~repurchase ~~the~~any ~~section~~shares ~~captioned~~of ~~“Market~~its ~~Information”~~common instock during the ~~Company’s~~fourth ~~Annual~~quarter ~~Report~~of ~~to Stockholders for~~ the ~~Fiscal~~fiscal ~~Year~~year ~~Ended~~ended June 30, ~~2011~~2012 ~~(the~~and ~~“Annual~~does ~~Report”)~~not have ~~filed~~any aspending ~~Exhibit~~stock 13repurchase ~~hereto is incorporated herein by reference~~programs.

~~(b) Not~~Item ~~applicable~~6. Selected Financial Data

~~(c) The~~This ~~Company~~item ~~did~~is not ~~repurchase~~applicable as ~~any shares of its common stock during~~ the ~~fourth~~Company ~~quarter~~is ofa ~~the~~smaller ~~fiscal~~reporting ~~year ended June 30, 2011 and does not have any pending stock repurchase programs~~company.

Item 67. ~~Selected~~ Management’s Discussion and Analysis of Financial ~~Data~~Condition and Results of Operations

~~This~~The ~~item~~information iscontained in ~~not~~the ~~applicable~~section ascaptioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the ~~Company~~Annual Report is aincorporated ~~smaller~~herein ~~reporting~~by ~~company~~reference.

Item 77A. ~~Management’s~~ ~~Discussion~~Quantitative and ~~Analysis~~Qualitative ofDisclosures ~~Financial~~About ~~Condition~~Market ~~and Results of Operations~~Risk

~~The~~This ~~information~~item ~~contained~~is innot ~~the~~applicable as ~~section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in~~ the ~~Annual~~Company ~~Report~~ is ~~incorporated~~a ~~herein~~smaller byreporting ~~reference~~company.

Item 7A8. ~~Quantitative~~ ~~and~~Financial ~~Qualitative~~Statements ~~Disclosures~~and ~~About~~Supplementary ~~Market Risk~~Data

~~This~~The ~~item~~financial isstatements contained ~~not~~in ~~applicable~~the asAnnual ~~the~~Report ~~Company~~and islisted ain ~~smaller~~Item ~~reporting~~15 ~~company~~hereof are incorporated herein by reference.

Item 89. ~~Financial~~ ~~Statements~~Changes in and ~~Supplementary~~Disagreements ~~Data~~With Accountants on Accounting and Financial Disclosure

~~The financial statements contained in the Annual Report and listed in Item 15 hereof are incorporated herein by reference~~None.

~~Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure~~21

~~None~~Item 9A. Controls and Procedures

~~Item~~(a) ~~9A.~~ Disclosure Controls and Procedures

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

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

22MANAGEMENT’S ANNUAL REPORT ON

~~(b)~~INTERNAL ~~Internal~~CONTROL ~~Controls~~OVER ~~Over~~FINANCIAL ~~Financial Reporting~~REPORTING

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

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

Management assessed ofthe ~~Patapsco~~effectiveness ~~Bancorp,~~of ~~Inc. (~~the Company)’s isinternal ~~responsible~~control ~~for~~over ~~the~~financial ~~preparation,~~reporting ~~integrity,~~as ~~and fair presentation~~ of ~~the~~June ~~consolidated~~30, ~~financial~~2012 ~~statements~~based ~~included~~upon incriteria set ~~this~~forth ~~annual report. The Company’s consolidated financial statements have been prepared~~ in ~~accordance~~Internal ~~with~~Control ~~accounting~~– ~~principles~~Integrated ~~generally~~Framework ~~accepted~~issued inby the ~~United~~Committee ~~States~~ of ~~America~~Sponsoring ~~and,~~Organizations asof ~~such, include some amounts that are based on~~ the ~~best~~Treadway Commission ~~estimates and judgments of management~~(COSO).

~~The~~Based ~~Company’s~~on ~~management~~this assessment ~~is responsible for establishing~~ and ~~maintaining~~on ~~adequate~~the ~~internal~~forgoing ~~control~~criteria, ~~over financial reporting. This internal control system is designed to provide reasonable assurance to~~ management ~~and~~has ~~the~~concluded ~~Board~~that, as of ~~Directors~~June ~~regarding~~30, ~~the~~2012, ~~reliability of~~ the Company’s financial reporting and the preparation and presentation of financial statements for external reporting purposes in conformity with accounting principles generally accepted in the United States of America, as well as to safeguard assets from unauthorized use or disposition. The system of internal control over financial reporting is evaluated for effectiveness by management and tested for reliability through a program of internal audit with actions taken to correct potential deficiencies as they are identified. Because of inherent limitations in any internal control system, no matter how well designed, misstatements due to error or fraud may occur and not be detected, including the possibility of the circumvention or overriding of controls. Accordingly, even an effective ~~internal control system can provide only reasonable assurance with respect to financial statement preparation~~. ~~Further because of changes in conditions, internal control effectiveness may vary over time.~~

~~Management~~This ~~assessed~~annual report ~~the~~does ~~effectiveness~~not include an attestation report of the Company’s ~~internal~~independent registered public accounting firm regarding internal control over financial reporting. asManagement’s ofreport ~~June~~was ~~30,~~not ~~2011~~subject ~~based~~to ~~upon~~attestation ~~criteria~~by ~~set~~the ~~forth~~Company’s inindependent ~~Internal~~registered public ~~Control~~accounting –firm ~~Integrated~~pursuant ~~Framework~~to ~~issued~~rules byof the ~~Committee~~SEC ofthat ~~Sponsoring~~permit ~~Organizations~~us ofto ~~the~~provide ~~Treadway~~only ~~Commission~~management’s ~~(COSO)~~report in this annual report..

~~Based~~/s/ onMichael ~~this~~J. ~~assessment~~Dee ~~and~~/s/ onJohn ~~the~~M. ~~forgoing~~Wright ~~criteria,~~Michael ~~management~~J. ~~has~~Dee ~~concluded~~John ~~that,~~M. asWright ofPresident ~~June~~and ~~30,~~Chief ~~2011,~~Executive ~~the~~Officer ~~Company’s~~Senior ~~internal~~Vice ~~control~~President ~~over~~and ~~financial~~Chief ~~reporting~~Financial ~~is effective.~~Officer

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this annual report..22

~~/s/~~(c) ~~Michael~~Changes J.to ~~Dee~~Internal ~~/s/~~Control ~~William~~Over ~~C. Wiedel, Jr. Michael J. Dee William C. Wiedel, Jr. President and Chief Executive Officer Senior Vice President and Chief~~ Financial ~~Officer~~Reporting

~~(c)~~There ~~Changes~~were no changes in the Company’s internal control over financial reporting during the year ended June 30, 2012 that have materially affected, or are reasonable likely to ~~Internal~~materially ~~Control~~affect, ~~Over~~the ~~Financial~~Company’s ~~Reporting~~internal control over financial reporting.

~~There~~Item ~~were~~9B. noOther changes in the Company’s internal control over financial reporting during the year ended June 30, 2011 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.Information

~~Item~~Not 9Bapplicable. ~~Other Information~~

~~Not~~PART ~~applicable.~~III

23Item 10. Directors, Executive Officers and Corporate Governance

~~PART III~~Directors

The information relating to the directors of the Company is incorporated herein by reference to the section captioned “Items to be Voted on by Stockholders – Item ~~10.~~ 1 – Election of Directors,” ~~Executive~~in ~~Officers~~the ~~and~~Company’s ~~Corporate~~Proxy ~~Governance~~Statement for the 2012 Annual Meeting of Stockholders (the “Proxy Statement”).

~~Directors~~Executive Officers

The information relating to ~~the~~executive ~~directors~~officers of the Company is incorporated herein by reference to ~~the~~Item ~~section~~1. ~~captioned~~ “~~Items~~Business ~~to be Voted on by Stockholders~~ – ~~Item~~Executive 1Officers Who –Are ~~Election~~Not of Directors” in the ~~Company’s~~ Proxy Statement ~~for the 2011 Annual Meeting of Stockholders (the “Proxy Statement”)~~.

~~Executive~~Corporate ~~Officers~~Governance

~~The~~Information ~~information~~regarding the ~~relating~~Company’s toAudit ~~executive~~Committee ~~officers~~and ofaudit ~~the~~committee ~~Company~~financial expert is incorporated herein by reference to ~~Item~~the 1.section captioned “~~Business~~Corporate –Governance ~~Executive~~and ~~Officers~~Board ~~Who~~Matters ~~Are~~– ~~Not~~Audit ~~Directors~~Committee” in the Proxy Statement.

~~Corporate~~Compliance ~~Governance~~with Section 16(a) of the Exchange Act

Information regarding compliance ~~the~~with ~~Company’s~~Section ~~Audit~~16(a) ~~Committee~~of ~~and~~the ~~audit~~Exchange ~~committee~~Act ~~financial expert~~ is incorporated herein by reference to the section captioned “~~Corporate~~Other Information ~~Governance~~Relating to Directors and ~~Board~~Executive ~~Matters~~Officers – ~~Audit~~Section ~~Committee~~16(a) Beneficial Ownership Compliance” in the Proxy Statement.

~~Compliance~~Code ~~with Section 16(a)~~ of ~~the Exchange Act~~Ethics

~~Information~~The ~~regarding~~Company ~~compliance~~has ~~with~~adopted a ~~Section~~written ~~16(a)~~code of ~~the~~ethics, ~~Exchange~~which ~~Act~~applies isto ~~incorporated~~all ~~herein~~employees byand ~~reference~~Directors. The Company intends to ~~the~~disclose ~~section~~any ~~captioned~~amendments ~~“Other~~to ~~Information~~or ~~Relating~~waivers from our Code of Ethics applicable to ~~Directors~~any ~~and~~senior ~~Executive~~financial ~~Officers~~officers –on ~~Section~~our ~~16(a)~~website ~~Beneficial~~at ~~Ownership~~http://www.patapscobank.com ~~Compliance”~~or in a report on Form 8-K. A copy of the ~~Proxy~~Code ~~Statement~~of Ethics is available, without charge, upon written request to Secretary, Patapsco Bancorp, Inc., 1301 Merritt Boulevard, Dundalk, Maryland 21222-2194.

~~Code~~Item of11. ~~Ethics~~Executive Compensation

The ~~Company~~information ~~has~~required by ~~adopted~~this aitem ~~written~~is ~~code~~incorporated ofherein ~~ethics,~~by ~~which~~reference ~~applies~~ to ~~all~~the ~~employees~~sections ~~and~~captioned ~~Directors. The~~“Corporate ~~Company~~Governance ~~intends~~and toBoard ~~disclose~~Matters ~~any~~– Director ~~amendments~~Compensation” toand or“Executive ~~waivers~~Compensation” ~~from our Code of Ethics applicable to any senior financial officers on our website at http://www.patapscobank.com or~~ in ~~a report on Form 8-K. A copy of~~ the ~~Code~~Proxy ~~of Ethics is available, without charge, upon written request to Secretary, Patapsco Bancorp, Inc~~Statement.~~, 1301 Merritt Boulevard, Dundalk, Maryland 21222-2194.~~

~~Item 11. Executive Compensation~~23

~~The~~Item ~~information~~12. ~~required~~Security byOwnership ~~this~~of ~~item~~Certain isBeneficial ~~incorporated~~Owners ~~herein by reference to the sections captioned “Corporate Governance~~ and ~~Board~~Management ~~Matters – Director Compensation”~~ and ~~“Executive~~Related ~~Compensation”~~Stockholder ~~in the Proxy Statement.~~Matters

~~Item~~(a) ~~12.~~ Security Ownership of Certain Beneficial Owners. ~~and~~Information ~~Management~~with ~~and~~respect ~~Related~~to ~~Stockholder~~security ~~Matters~~ownership of certain beneficial owners required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.

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

(bc) ~~Security~~ ~~Ownership~~Changes ofin ~~Management~~Control. ~~Information~~ ~~with~~Management ~~respect~~of tothe ~~security~~Company ~~ownership~~knows of ~~management~~no ~~required~~arrangements, byincluding ~~this~~any ~~item~~pledge isby ~~incorporated~~any ~~herein~~person byof ~~reference~~securities toof the ~~section~~Company, ~~captioned~~the ~~“Stock~~operation of ~~Ownership”~~which may at a subsequent date result in ~~the~~a ~~Proxy~~change ~~Statement~~in control of the registrant.

(cd) ~~Changes~~ inEquity ~~Control~~Compensation Plans. ~~Management~~The offollowing ~~the~~table ~~Company~~sets ~~knows~~forth ofcertain noinformation ~~arrangements,~~with ~~including~~respect ~~any~~to ~~pledge by any person of securities of~~ the Company,’s ~~the~~equity ~~operation~~compensation ~~of which may at a subsequent date result in a change in control of the registrant~~plans.

	(a) Number of securities to be issued upon exercise of outstanding options, warrants & rights		(b) Weighted-average exercise price of outstanding options, warrants and rights		(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders		-	$	-		10,114

Equity compensation plans not approved by security holders		-		-		-
Total		-	$	-		10,114

	(a)		(b)		(c)
	Number of securities to be issued upon exercise of outstanding options, warrants & rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans
approved by security holders		20,832	$	6.29		10,114
Equity compensation plans not
approved by security holders		-		-		-
Total		20,832	$	6.29		10,114

Certain Relationships and Related Transactions

~~Item~~The ~~13. Certain~~information ~~Relationships~~required by this item is incorporated herein by reference to the section captioned “Other Information Relating to Directors and Executive ~~Related~~Officers – Transactions, ~~and~~with ~~Director~~Related ~~Independence~~Persons” in the Proxy Statement.

~~Certain~~Corporate ~~Relationships and Related Transactions~~Governance

~~The~~With ~~information~~respect ~~required~~to bythe information ~~this~~regarding ~~item~~director isindependence, ~~incorporated herein by reference to~~ the section captioned “~~Other~~Corporate ~~Information~~Governance ~~Relating to Directors~~ and ~~Executive~~Board ~~Officers~~Matters – ~~Transactions with Related Persons~~Director Independence” in the Proxy Statement is incorporated herein by reference.

~~Corporate~~Item ~~Governance~~14. Principal Accounting Fees and Services

~~With~~The ~~respect~~information torequired by ~~the~~this ~~information~~item ~~regarding~~is ~~director~~incorporated ~~independence,~~herein by reference to the section captioned “~~Corporate~~Items ~~Governance~~to ~~and~~be ~~Board~~Voted ~~Matters~~on by Stockholders – Item ~~Director~~3 ~~Independence”~~– inRatification of the ~~Proxy~~Independent ~~Statement~~Registered isPublic ~~incorporated~~Accounting ~~herein~~Firm by– ~~reference~~Audit Fees” in the Proxy Statement.

~~Item 14. Principal Accounting Fees and Services~~24

~~The~~PART information required by this item is incorporated herein by reference to the section captioned “Items to be Voted on by Stockholders – Item 3 – Ratification of the Independent Registered Public Accounting Firm – Audit Fees” in the Proxy Statement.IV

~~PART~~Item IV15. Exhibits and Financial Statement Schedules

~~Item~~(a) List ~~15. Exhibits~~of Documents ~~and~~Filed ~~Financial~~as ~~Statement~~Part ~~Schedules~~of this Report

(a1) ~~List~~ Financial Statements. ofThe ~~Documents~~following ~~Filed~~consolidated asfinancial ~~Part~~statements ofare incorporated by reference from Item 8 hereof (see Exhibit 13 to this Annual Report on Form 10-K):

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

~~Report~~Consolidated Statements of ~~Registered~~Financial Condition ~~Independent~~as ~~Accounting~~of ~~Firm~~June 30, 2012 and 2011

Consolidated Statements of ~~Financial~~Operations for ~~Condition~~the asYears ofEnded June 30, ~~2011~~2012 and ~~2010~~2011

Consolidated Statements of ~~Operations~~Other Comprehensive Loss for the Years Ended June 30, ~~2011~~2012 and ~~2010~~2011

Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, ~~2011~~2012 and ~~2010~~2011

Consolidated Statements of Cash Flows for the Years Ended June 30, ~~2011~~2012 and ~~2010~~2011

Notes to Consolidated Financial Statements

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

No. Description

No.		Description
3.1		Articles of Incorporation of Patapsco Bancorp, Inc. and Articles Supplementary (1)
3.2		Bylaws of Patapsco Bancorp, Inc., as amended (2)
4.1		Form of Common Stock Certificate of Patapsco Bancorp, Inc. (3)
4.2		Articles Supplementary establishing Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of Patapsco Bancorp, Inc. (4)
4.3		Form of stock certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A (4)
4.4		Form of warrant to purchase 300.003 shares of common stock of Patapsco Bancorp, Inc. (4)
4.5		Articles Supplementary establishing Fixed Rate Cumulative Perpetual Preferred Stock, Series B, of Patapsco Bancorp, Inc. (4)
4.6		Form of stock certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series B (4)
10.1		Letter Agreement and related Securities Purchase Agreement – Standard Terms, dated December 19, 2008, between Patapsco Bancorp, Inc. and United States Department of the Treasury (4)
10.2		Form of Waiver executed by each of Michael J. Dee, John M. Wright, and Laurence S. Mitchell (4)
10.3		Form of Letter Agreement between Patapsco Bancorp, Inc. and each of Michael J. Dee, John M. Wright, and Laurence S. Mitchell (4)
10.4		Patapsco Bancorp, Inc. 1996 Stock Option and Incentive Plan† (5)
10.5		Form of Amended and Restated Severance Agreement by and between The Patapsco Bank and Laurence S. Mitchell † (6)
10.6		Patapsco Bancorp, Inc. 2000 Stock Option and Incentive Plan† (7)
10.7		Patapsco Bancorp, Inc. 2004 Stock Incentive Plan† (8)
10.8		Employment Agreement by and between The Patapsco Bank and Michael J. Dee† (9)
10.9		Form of Amendment No. 1 to the Amended and Restated Severance Agreement by and between The Patapsco Bank and Laurence S. Mitchell † (10)
10.10		Severance Agreement between The Patapsco Bank and Phillip P. Phillips †(11)
13		Annual Report to Stockholders for the Fiscal Year Ended June 30, 2012
21		Subsidiaries of the Registrant
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32		Section 1350 Certifications
99.1		31 C.F.R. § 30.15 Certification of Chief Executive Officer
99.2		31 C.F.R. § 30.15 Certification of Chief Financial Officer
101*		The following materials from Patapsco Bancorp, Inc.’s Annual Report on Form 10-K for the year ended June 30, 2012 formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Financial Condition; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Loss; (iv) Consolidated Statements of Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) related Notes, tagged as blocks of text.

~~3.1~~† ~~Articles~~Management ofcontract ~~Incorporation~~or ofcompensatory ~~Patapsco~~plan ~~Bancorp,~~or ~~Inc~~arrangement. ~~and Articles Supplementary (1)~~

~~3.2~~(1) ~~Bylaws~~Incorporated ofherein ~~Patapsco~~by ~~Bancorp,~~reference ~~Inc.,~~from asthe ~~amended~~Company’s Annual Report on Form 10-KSB for the year ended June 30, 2000 (2File No. 0-28032).

~~4.1~~(2) Incorporated herein by reference from the Company’s Current Report on Form of8-K ~~Common~~for ~~Stock~~the ~~Certificate~~event ofon ~~Patapsco~~July ~~Bancorp~~23, ~~Inc.~~2008, filed with the SEC on July 25, 2008 (3File No. 0-28032).

~~4.2~~(3) ~~Articles~~Incorporated ~~Supplementary~~herein ~~establishing~~by ~~Fixed~~reference ~~Rate~~from ~~Cumulative~~the ~~Perpetual~~Company’s ~~Preferred~~Registration ~~Stock,~~Statement ~~Series~~on Form 8-A, of(File ~~Patapsco Bancorp, Inc~~No. (40-28032).

(4.3) ~~Form~~Incorporated ofby ~~stock~~reference ~~certificate~~from the Company’s Current Report on Form 8-K for ~~Fixed~~the ~~Rate~~event ~~Cumulative~~on ~~Perpetual~~December ~~Preferred~~18, ~~Stock~~2008, ~~Series~~filed Awith the SEC on December 23, 2008 (4File No. 0-28032).

~~4.4~~(5) ~~Form~~Incorporated ofherein ~~warrant~~by toreference ~~purchase~~from ~~300.003~~the ~~shares~~Company’s ofAnnual ~~common~~Report ~~stock~~on ofForm ~~Patapsco~~10-KSB ~~Bancorp~~for the year ended June 30, ~~Inc.~~1996 (4File No. 0-28032).

~~4.5~~(6) ~~Articles~~Incorporated ~~Supplementary~~herein ~~establishing~~by ~~Fixed~~reference ~~Rate~~from ~~Cumulative~~the ~~Perpetual~~Company’s ~~Preferred~~Annual ~~Stock,~~Report ~~Series~~on BForm 10-KSB/A for the year ended June 30, of2006 ~~Patapsco~~filed ~~Bancorp~~on December 6, ~~Inc.~~2006 (4File No. 0-28032).

~~4.6~~(7) ~~Form~~Incorporated ofherein ~~stock~~by ~~certificate~~reference ~~for~~from ~~Fixed~~the ~~Rate~~Company’s ~~Cumulative~~Registration ~~Perpetual~~Statement ~~Preferred~~on ~~Stock,~~Form ~~Series~~S-8 B (4File No. 333-49908).

~~10.1~~(8) ~~Letter~~Incorporated ~~Agreement~~herein ~~and~~by ~~related~~reference ~~Securities~~from ~~Purchase~~the ~~Agreement~~Company’s –Registration ~~Standard~~Statement ~~Terms,~~on ~~dated~~Form ~~December~~S-8 ~~19,~~(File ~~2008, between Patapsco Bancorp, Inc~~No. ~~and United States Department of the Treasury (4~~333-122300).

~~10.2~~(9) ~~Form~~Incorporated ofherein ~~Waiver~~by ~~executed~~reference byfrom ~~each~~the ofCompany’s ~~Michael~~Quarterly J.Report ~~Dee,~~on ~~William~~Form C.10-QSB ~~Wiedel,~~for ~~Jr.~~the ~~and~~quarter ~~Laurence~~ended S.March ~~Mitchell~~31, 2008 (4File No. 0-28032).

(10.3) ~~Form~~Incorporated ofherein ~~Letter~~by ~~Agreement~~reference ~~between~~from ~~Patapsco~~the ~~Bancorp,~~Company’s ~~Inc.~~Quarterly ~~and~~Report ~~each~~on ofForm ~~Michael~~10-Q J.for ~~Dee,~~the ~~William~~quarter C.ended ~~Wiedel~~December 31, ~~Jr.~~2008 ~~and~~(File ~~Laurence S~~No. ~~Mitchell (4~~0-28032).

~~10.4~~(11) ~~Patapsco~~Incorporated ~~Bancorp,~~herein ~~Inc.~~by ~~1996~~reference ~~Stock~~from ~~Option~~the ~~and~~Company’s ~~Incentive~~Annual ~~Plan†~~Report on Form 10-K for the year ended June 30, 2010 (5File No. 0-28032).

~~10.5~~* ~~Form~~Furnished, ofnot ~~Severance Agreement by and between The Patapsco Bank and Francis Broccolino † (6)~~filed.

~~10.6 Form of Amended and Restated Severance Agreement by and between The Patapsco Bank and Laurence S. Mitchell † (7)~~26

~~10.7 Patapsco Bancorp, Inc. 2000 Stock Option and Incentive Plan† (8)~~SIGNATURES

~~10.8~~Pursuant ~~Patapsco~~to ~~Bancorp,~~the ~~Inc.~~requirements of ~~2004~~Section ~~Stock~~13 ~~Incentive~~or ~~Plan†~~ 15(9d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

10.9 Employment Agreement by and between The Patapsco Bank and Michael J. Dee† (9)

	PATAPSCO BANCORP, INC.
September 25, 2012
	By:	/s/ Michael J. Dee
		Michael J. Dee
		President and Chief Executive Officer
		(Duly Authorized Officer)

~~10.10~~Pursuant ~~Severance~~to ~~Agreement~~the requirements of the Securities Exchange Act of 1934, this report has been signed below by ~~and~~the ~~between~~following ~~The~~persons ~~Patapsco~~on ~~Bank~~behalf of the registrant and ~~William~~in C.the ~~Wiedel,~~capacities ~~Jr.~~and †on ~~(9)~~the dates indicated.

10.11 Form of Amendment No. 1 to the Amended and Restated Severance Agreement by and between The Patapsco Bank and Laurence S. Mitchell † (10)

/s/ Michael J. Dee		September 25, 2012
Michael J. Dee
President, Chief Executive Officer and Director
(Principal Executive Officer)

/s/ John M. Wright		September 25, 2012
John M. Wright
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

/s/ Thomas P. O’Neill		September 25, 2012
Thomas P. O’Neill
Chairman of the Board

/s/ Nicole N. Glaeser		September 25, 2012
Nicole N. Glaeser
Director

/s/ William R. Waters		September 25, 2012
William R. Waters
Director

/s/ Gary R. Bozel		September 25, 2012
Gary R. Bozel
Director

/s/ J. Thomas Hoffman		September 25, 2012
J. Thomas Hoffman
Director

~~10.12 Severance Agreement between The Patapsco Bank and Phillip P. Phillips †~~27

13 Annual Report to Stockholders for the Fiscal Year Ended June 30, 2011

21 Subsidiaries of the Registrant

23 Consent of ParenteBeard LLC

31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32 Section 1350 Certifications

99.1 31 C.F.R. § 30.15 Certification of Chief Executive Officer

99.2 31 C.F.R. § 30.15 Certification of Chief Financial Officer

† Management contract or compensatory plan or arrangement.

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

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

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

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

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

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

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

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

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

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

SIGNATURES

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

	PATAPSCO BANCORP, INC.
October 5, 2011
	By:	/s/ Michael J. Dee
		Michael J. Dee
		President and Chief Executive Officer
		(Duly Authorized Officer)

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

/s/ Michael J. Dee		October 5, 2011
Michael J. Dee
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ William C. Wiedel, Jr.		October 5, 2011
William C. Wiedel, Jr.
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Thomas P. O’Neill		October 5, 2011
Thomas P. O’Neill
Chairman of the Board
/s/ Nicole N. Glaeser		October 5, 2011
Nicole N. Glaeser
Director
/s/ William R. Waters		October 5, 2011
William R. Waters
Director
/s/ Gary R. Bozel		October 5, 2011
Gary R. Bozel
Director
/s/ J. Thomas Hoffman		October 5, 2011
J. Thomas Hoffman
Director

Filing Compare · PATAPSCO BANCORP INC