##### Table of Contents





United States

Securities and Exchange Commission

Washington, D. C. 20549





FORM 10-Q





(Mark One)

|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

for the quarterly period ended March 31, 2010



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number: 0-28032





PATAPSCO BANCORP, INC.

(Exact name of registrant as specified in its charter)







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

1301 Merritt Boulevard, Dundalk, Maryland 21222-2194

(Address of Principal Executive Offices)

(410) 285-1010

Registrants Telephone Number, Including Area Code





Check whether the issuer (1) 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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

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



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large Accelerated Filer |  |  ̈                                                |  | Accelerated Filer         |  |  ̈
|                        |  |                                                  | 
|Non-Accelerated Filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller Reporting Company |  | x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   ̈     No  x

As of May 10, 2010, the issuer had 1,884,968 shares of Common Stock issued and outstanding.









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##### Table of Contents

TABLE OF CONTENTS



|                              |  |                                                                                                                                        |  |     
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                                        |  | PAGE
|                              | 
|PART I. FINANCIAL INFORMATION |  |                                                                                                                                       
|                              |  |                                                                                                                                       
|Item 1.                       |  | Financial Statements                                                                                                                   |  |     
|                              |  |                                                                                                                                       
|                              |  | Consolidated Statements of Financial Condition at March 31, 2010 and June 30, 2009
(Unaudited)                                         |  | 3   
|                              |  |                                                                                                                                       
|                              |  | Consolidated Statements of Operations for the Nine and Three Month Periods Ended March 31, 2010 and 2009 (Unaudited)                   |  | 4   
|                              |  |                                                                                                                                       
|                              |  | Consolidated Statements of Comprehensive Income/(Loss) for the Nine and Three Month Periods Ended March 31,
 2010 and 2009 (Unaudited) |  | 5   
|                              |  |                                                                                                                                       
|                              |  | Consolidated Statements of Cash Flows for the Nine Month Periods Ended March 31, 2010 and 2009 (Unaudited)                             |  | 6   
|                              |  |                                                                                                                                       
|                              |  | Notes to Consolidated Financial Statements (Unaudited)                                                                                 |  | 7   
|                              |  |                                                                                                                                       
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                  |  | 16  
|                              |  |                                                                                                                                       
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                             |  | 26  
|                              |  |                                                                                                                                       
|Item 4.                       |  | Controls and Procedures                                                                                                                |  | 26  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                                       
|                              |  |                                                                                                                                       
|Item 1.                       |  | Legal Proceedings                                                                                                                      |  | 27  
|                              |  |                                                                                                                                       
|Item 1A.                      |  | Risk Factors                                                                                                                           |  | 27  
|                              |  |                                                                                                                                       
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                            |  | 27  
|                              |  |                                                                                                                                       
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                                        |  | 27  
|                              |  |                                                                                                                                       
|Item 4.                       |  | Removed and Reserved                                                                                                                   |  | 27  
|                              |  |                                                                                                                                       
|Item 5.                       |  | Other Information                                                                                                                      |  | 27  
|                              |  |                                                                                                                                       
|Item 6.                       |  | Exhibits                                                                                                                               |  | 27  
|                              | 
|Signatures                    |  | 28                                                                                                                                    
|                              | 
|Certifications                |  | 29                                                                                                                                    



2



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##### Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Patapsco Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(unaudited)

($ in thousands
except for share data)



|                                                                                                                                                                                |  |               |         |   |              |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                                                |  | March 31,2010 |         |   | June 30,2009 |  
|Assets:                                                                                                                                                                         |  |               |         |   |              |   |         |  
|Cash and cash equivalents:                                                                                                                                                      |  |               |         |   |              |   |         |  
|Cash on hand and due from banks                                                                                                                                                 |  | $             | 6,698   |   |              | $ | 6,143   |  
|Interest bearing deposits in other banks                                                                                                                                        |  |               | 13,579  |   |              |   | 13,651  |  
|                                                                                                                                                                                |  |               |         |   |              |   |         |  
|Total cash and cash equivalents                                                                                                                                                 |  |               | 20,277  |   |              |   | 19,794  |  
|Securities available for sale                                                                                                                                                   |  |               | 15,832  |   |              |   | 16,084  |  
|Loans receivable, net of allowance for loan losses of $5,307 and $3,023, respectively                                                                                           |  |               | 206,023 |   |              |   | 216,927 |  
|Investment in securities required by law, at cost                                                                                                                               |  |               | 2,848   |   |              |   | 2,817   |  
|Real estate acquired through foreclosure, net of allowance for losses of $837 and $0, respectively                                                                              |  |               | 3,540   |   |              |   | 1,265   |  
|Property and equipment, net                                                                                                                                                     |  |               | 3,819   |   |              |   | 3,965   |  
|Core deposit intangible                                                                                                                                                         |  |               | 207     |   |              |   | 246     |  
|Accrued interest and other assets                                                                                                                                               |  |               | 10,694  |   |              |   | 7,269   |  
|                                                                                                                                                                                |  |               |         |   |              |   |         |  
|Total assets                                                                                                                                                                    |  | $             | 263,240 |   |              | $ | 268,367 |  
|                                                                                                                                                                                |  |               |         |   |              |   |         |  
|                                                                                                                                                                                |  |              
|Liabilities and Stockholders Equity                                                                                                                                            |  |               |         |   |              |   |         |  
|                                                                                                                                                                                |  |              
|Liabilities:                                                                                                                                                                    |  |               |         |   |              |   |         |  
|Deposits:                                                                                                                                                                       |  |               |         |   |              |   |         |  
|Non-interest bearing deposits                                                                                                                                                   |  | $             | 11,211  |   |              | $ | 11,287  |  
|Interest bearing deposits                                                                                                                                                       |  |               | 210,516 |   |              |   | 196,508 |  
|                                                                                                                                                                                |  |               |         |   |              |   |         |  
|Total deposits                                                                                                                                                                  |  |               | 221,727 |   |              |   | 207,795 |  
|Long-term debt                                                                                                                                                                  |  |               | 17,100  |   |              |   | 34,300  |  
|Junior subordinated debentures                                                                                                                                                  |  |               | 5,000   |   |              |   | 5,000   |  
|Accrued expenses and other liabilities                                                                                                                                          |  |               | 1,670   |   |              |   | 1,580   |  
|                                                                                                                                                                                |  |               |         |   |              |   |         |  
|Total liabilities                                                                                                                                                               |  |               | 245,497 |   |              |   | 248,675 |  
|                                                                                                                                                                                |  |               |         |   |              |   |         |  
|                                                                                                                                                                                |  |              
|Stockholders equity:                                                                                                                                                           |  |               |         |   |              |   |         |  
|Preferred Stock  Series A Cumulative perpetual; $0.01 par value; authorized 1,000,000 shares with a liquidation preference
of $1,000 per share; 6,000 shares outstanding       |  |               | 5,749   |   |              |   | 5,698   |  
|Warrant Preferred stock  Series B Cumulative perpetual; $0.01 par value; authorized 1,000,000 shares with a liquidation
preference of $1,000 per share; 300 shares outstanding |  |               | 328     |   |              |   | 334     |  
|Common stock$0.01 par value; authorized 4,000,000 shares; issued and outstanding 1,884,968 and 1,864,974 shares,
respectively                                                  |  |               | 19      |   |              |   | 19      |  
|Additional paid in capital                                                                                                                                                      |  |               | 7,466   |   |              |   | 7,411   |  
|Obligation under deferred compensation                                                                                                                                          |  |               | 454     |   |              |   | 454     |  
|Deferred compensation contra                                                                                                                                                    |  |               | (78     | ) |              |   | (78     | )
|Retained income, substantially restricted                                                                                                                                       |  |               | 3,687   |   |              |   | 5,866   |  
|Accumulated other comprehensive income (loss), net of income taxes (benefit)                                                                                                    |  |               | 118     |   |              |   | (12     | )
|                                                                                                                                                                                |  |               |         |   |              |   |         |  
|Total stockholders equity                                                                                                                                                      |  |               | 17,743  |   |              |   | 19,692  |  
|                                                                                                                                                                                |  |               |         |   |              |   |         |  
|Total liabilities and stockholders equity                                                                                                                                      |  | $             | 263,240 |   |              | $ | 268,367 |  
|                                                                                                                                                                                |  |               |         |   |              |   |         |  

See accompanying notes to consolidated financial statements.



3



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Patapsco Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

($ in thousands
except for per share data)



|                                                                             |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  
|---------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | -------------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ----- | -
|                                                                             |  | For Nine Months 
EndedMarch 31, |        |   | For Three Months 
EndedMarch 31, |  
|                                                                             |  | 2010                            |        |   | 2009                             |   |        | 2010 |  |   | 2009   |  
|Interest income:                                                             |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  
|Loans receivable, including fees                                             |  | $                               | 10,103 |   |                                  | $ | 11,628 |      |  | $ | 3,190  |   |  | $ | 3,644 |  
|Securities, including securities required by law                             |  |                                 | 473    |   |                                  |   | 400    |      |  |   | 148    |   |  |   | 128   |  
|Federal funds sold and other investments                                     |  |                                 | 21     |   |                                  |   | 32     |      |  |   | 6      |   |  |   | 5     |  
|                                                                             |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  
|Total interest income                                                        |  |                                 | 10,597 |   |                                  |   | 12,060 |      |  |   | 3,344  |   |  |   | 3,777 |  
|                                                                             |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  
|Interest expense:                                                            |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  
|Deposits                                                                     |  |                                 | 3,217  |   |                                  |   | 4,009  |      |  |   | 970    |   |  |   | 1,270 |  
|Short-term debt                                                              |  |                                 | 6      |   |                                  |   | 89     |      |  |   |       |   |  |   | 23    |  
|Long-term debt and subordinated debentures                                   |  |                                 | 921    |   |                                  |   | 1,297  |      |  |   | 287    |   |  |   | 425   |  
|                                                                             |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  
|Total interest expense                                                       |  |                                 | 4,144  |   |                                  |   | 5,395  |      |  |   | 1,257  |   |  |   | 1,718 |  
|                                                                             |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  
|Net interest income                                                          |  |                                 | 6,453  |   |                                  |   | 6,665  |      |  |   | 2,087  |   |  |   | 2,059 |  
|Provision for loan losses                                                    |  |                                 | 3,375  |   |                                  |   | 2,451  |      |  |   | 2,583  |   |  |   | 891   |  
|                                                                             |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  
|Net interest income/(loss) after provision for loan losses                   |  |                                 | 3,078  |   |                                  |   | 4,214  |      |  |   | (496   | ) |  |   | 1,168 |  
|                                                                             |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  
|Non-interest income:                                                         |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  
|Fees and service charges                                                     |  |                                 | 506    |   |                                  |   | 545    |      |  |   | 149    |   |  |   | 181   |  
|Net gain on sale of securities available for sale                            |  |                                 | 71     |   |                                  |   |       |      |  |   | 71     |   |  |   |      |  
|Gain on sale of other repossessed assets                                     |  |                                 |       |   |                                  |   | 10     |      |  |   |       |   |  |   |      |  
|Other                                                                        |  |                                 | 96     |   |                                  |   | 72     |      |  |   | 48     |   |  |   | 20    |  
|                                                                             |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  
|Total non-interest income                                                    |  |                                 | 673    |   |                                  |   | 627    |      |  |   | 268    |   |  |   | 201   |  
|Non-interest expense:                                                        |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  
|Compensation and employee benefits                                           |  |                                 | 3,217  |   |                                  |   | 3,514  |      |  |   | 1,090  |   |  |   | 1,063 |  
|Professional fees                                                            |  |                                 | 461    |   |                                  |   | 262    |      |  |   | 200    |   |  |   | 120   |  
|Federal deposit insurance assessments                                        |  |                                 | 378    |   |                                  |   | 202    |      |  |   | 124    |   |  |   | 184   |  
|Equipment expense                                                            |  |                                 | 161    |   |                                  |   | 235    |      |  |   | 54     |   |  |   | 65    |  
|Net occupancy expense                                                        |  |                                 | 441    |   |                                  |   | 457    |      |  |   | 158    |   |  |   | 156   |  
|Advertising                                                                  |  |                                 | 33     |   |                                  |   | 49     |      |  |   | 11     |   |  |   | 15    |  
|Data processing                                                              |  |                                 | 323    |   |                                  |   | 309    |      |  |   | 122    |   |  |   | 83    |  
|Amortization of core deposit intangible                                      |  |                                 | 39     |   |                                  |   | 39     |      |  |   | 13     |   |  |   | 13    |  
|Telephone, postage & delivery                                                |  |                                 | 220    |   |                                  |   | 218    |      |  |   | 79     |   |  |   | 79    |  
|Provision for losses on and cost of real estate acquired through foreclosure |  |                                 | 1,024  |   |                                  |   |       |      |  |   | 982    |   |  |   |      |  
|Other                                                                        |  |                                 | 608    |   |                                  |   | 664    |      |  |   | 254    |   |  |   | 202   |  
|                                                                             |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  
|Total non-interest expense                                                   |  |                                 | 6,905  |   |                                  |   | 5,949  |      |  |   | 3,087  |   |  |   | 1,980 |  
|                                                                             |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  
|Loss before benefit for income taxes                                         |  |                                 | (3,154 | ) |                                  |   | (1,108 | )    |  |   | (3,315 | ) |  |   | (611  | )
|Benefit for income taxes                                                     |  |                                 | (1,265 | ) |                                  |   | (447   | )    |  |   | (1,321 | ) |  |   | (244  | )
|                                                                             |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  
|Net loss                                                                     |  | $                               | (1,889 | ) |                                  | $ | (661   | )    |  | $ | (1,994 | ) |  | $ | (367  | )
|Preferred stock dividends                                                    |  |                                 | 245    |   |                                  |   | 51     |      |  |   | 82     |   |  |   | 38    |  
|                                                                             |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  
|Net loss available for common shareholders                                   |  | $                               | (2,134 | ) |                                  | $ | (712   | )    |  | $ | (2,076 | ) |  | $ | (405  | )
|                                                                             |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  
|Basic loss per common share                                                  |  | $                               | (1.11  | ) |                                  | $ | (0.37  | )    |  | $ | (1.07  | ) |  | $ | (0.21 | )
|                                                                             |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  
|Diluted loss per common share                                                |  | $                               | (1.11  | ) |                                  | $ | (0.37  | )    |  | $ | (1.07  | ) |  | $ | (0.21 | )
|                                                                             |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  
|Cash dividends declared per common share                                     |  | $                               |       |   |                                  | $ | 0.09   |      |  | $ |       |   |  | $ | 0.02  |  
|                                                                             |  |                                 |        |   |                                  |   |        |      |  |   |        |   |  |   |       |  

See accompanying notes to consolidated financial statements.



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Patapsco Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(unaudited)

($ in thousands)



|                                                                                                                                             |  |                                 |        |   |                                  |   |      |      |  |   |        |   |  |   |      |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | -------------------------------- | - | ---- | ---- |  | - | ------ | - |  | - | ---- | -
|                                                                                                                                             |  | For Nine Months 
EndedMarch 31, |        |   | For Three Months 
EndedMarch 31, |  
|                                                                                                                                             |  | 2010                            |        |   | 2009                             |   |      | 2010 |  |   | 2009   |  
|Net loss                                                                                                                                     |  | $                               | (1,889 | ) |                                  | $ | (661 | )    |  | $ | (1,994 | ) |  | $ | (367 | )
|Other comprehensive income/(loss), net of income taxes/(benefit):                                                                            |  |                                 |        |   |                                  |   |      |      |  |   |        |   |  |   |      |  
|Unrealized net holding gain/(loss) on securities available-for-sale, net of income taxes/(benefit) of $85, $70, $33, and $(33),
respectively |  |                                 | 130    |   |                                  |   | 107  |      |  |   | 51     |   |  |   | (51  | )
|                                                                                                                                             |  |                                 |        |   |                                  |   |      |      |  |   |        |   |  |   |      |  
|Comprehensive loss                                                                                                                           |  | $                               | (1,759 | ) |                                  | $ | (554 | )    |  | $ | (1,943 | ) |  | $ | (418 | )
|                                                                                                                                             |  |                                 |        |   |                                  |   |      |      |  |   |        |   |  |   |      |  

See accompanying notes to consolidated financial statements.



5



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Patapsco Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

($ in thousands)



|                                                                                             |  |                                     |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                             |  | For the Nine Months 
EndedMarch 31, |        
|                                                                                             |  | 2010                                |         |   | 2009 |  
|Cash flows from operating activities:                                                        |  |                                     |         |   |      |   |         |  
|Net loss                                                                                     |  | $                                   | (1,889  | ) |      | $ | (661    | )
|Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:    |  |                                     |         |   |      |   |         |  
|Amortization of premiums and discounts, net                                                  |  |                                     | 222     |   |      |   | 39      |  
|Gain on sale of securities available for sale                                                |  |                                     | (71     | ) |      |   |        |  
|Amortization of deferred loan origination costs                                              |  |                                     | 5       |   |      |   | 1       |  
|Provision for loan losses                                                                    |  |                                     | 3,375   |   |      |   | 2,451   |  
|Provision for loss on real estate acquired through foreclosure                               |  |                                     | 837     |   |      |   |        |  
|Depreciation                                                                                 |  |                                     | 207     |   |      |   | 249     |  
|Amortization of core deposit intangible                                                      |  |                                     | 39      |   |      |   | 39      |  
|Increase in cash surrender value of bank owned life insurance                                |  |                                     | (76     | ) |      |   | (53     | )
|Increase in accrued interest receivable and other assets                                     |  |                                     | (3,399  | ) |      |   | (840    | )
|Non-cash compensation under stock-based benefit plan                                         |  |                                     | 34      |   |      |   | 63      |  
|Increase in accrued expenses and other liabilities                                           |  |                                     | 79      |   |      |   | 91      |  
|                                                                                             |  |                                     |         |   |      |   |         |  
|Net cash provided by/(used in) operating activities                                          |  |                                     | (637    | ) |      |   | 1,379   |  
|                                                                                             |  |                                     |         |   |      |   |         |  
|                                                                                             |  |                                    
|Cash flows from investing activities:                                                        |  |                                     |         |   |      |   |         |  
|Proceeds from maturity of investments and principal repayments on mortgage-backed securities |  |                                     | 8,929   |   |      |   | 2,957   |  
|Purchase of securities available for sale                                                    |  |                                     | (9,639  | ) |      |   | (4,681  | )
|Proceeds from sale of securities available for sale                                          |  |                                     | 1,050   |   |      |   |        |  
|Net change in loans                                                                          |  |                                     | 4,325   |   |      |   | (2,970  | )
|Funds received in sale of real estate owned                                                  |  |                                     | 60      |   |      |   |         |  
|Net change in investments required by law                                                    |  |                                     | (31     | ) |      |   | (167    | )
|Purchase of property and equipment                                                           |  |                                     | (61     | ) |      |   | (100    | )
|                                                                                             |  |                                     |         |   |      |   |         |  
|Net cash provided by/(used in) investing activities                                          |  |                                     | 4,633   |   |      |   | (4,961  | )
|                                                                                             |  |                                     |         |   |      |   |         |  
|                                                                                             |  |                                    
|Cash flows from financing activities:                                                        |  |                                     |         |   |      |   |         |  
|Net increase in deposits                                                                     |  |                                     | 14,482  |   |      |   | 183     |  
|Decrease in advance payments by borrowers                                                    |  |                                     | (550    | ) |      |   | (494    | )
|Net increase in short-term borrowings                                                        |  |                                     |        |   |      |   | 3,000   |  
|Proceeds from long-term borrowings                                                           |  |                                     |        |   |      |   | 17,500  |  
|Payments on long-term borrowings                                                             |  |                                     | (17,200 | ) |      |   | (17,500 | )
|Cash received from issuance of preferred stock                                               |  |                                     |        |   |      |   | 5,661   |  
|Cash received from issuance of warrant preferred stock                                       |  |                                     |        |   |      |   | 338     |  
|Dividends paid                                                                               |  |                                     | (245    | ) |      |   | (348    | )
|                                                                                             |  |                                     |         |   |      |   |         |  
|Net cash provided by/(used in) financing activities                                          |  |                                     | (3,513  | ) |      |   | 8,340   |  
|                                                                                             |  |                                     |         |   |      |   |         |  
|                                                                                             |  |                                    
|Net increase in cash and cash equivalents                                                    |  |                                     | 483     |   |      |   | 4,758   |  
|Cash and cash equivalents at beginning of period                                             |  |                                     | 19,794  |   |      |   | 7,090   |  
|                                                                                             |  |                                     |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                   |  | $                                   | 20,277  |   |      | $ | 12,574  |  
|                                                                                             |  |                                     |         |   |      |   |         |  
|                                                                                             |  |                                    
|Supplemental cash flow information:                                                          |  |                                     |         |   |      |   |         |  
|Interest paid on deposits and borrowed funds                                                 |  | $                                   | 4,271   |   |      | $ | 5,538   |  
|Income taxes paid                                                                            |  |                                     | 198     |   |      |   | 380     |  
|                                                                                             |  |                                    
|Non-cash disclosures:                                                                        |  |                                     |         |   |      |   |         |  
|Loans transferred to real estate acquired through foreclosure, net                           |  | $                                   | 3,172   |   |      | $ |        |  

See accompanying notes to
consolidated financial statements.



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Patapsco Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 1: Principles of Consolidation

The
consolidated financial statements include the accounts of Patapsco Bancorp, Inc. (the Company or Patapsco Bancorp) and its wholly-owned subsidiary, The Patapsco Bank (the Bank), the Banks wholly owned
subsidiaries Prime Business Leasing and Patapsco Financial Services, Inc. All inter-company accounts and transactions have been eliminated in the accompanying consolidated financial statements.

Note 2: The Patapsco Bank

The Bank, the
primary operating unit of the Company, is regulated by The Federal Reserve Bank of Richmond (the Federal Reserve Bank) and The State of Maryland. The primary business of the Bank is to attract deposits from individual and corporate
customers and to originate residential and commercial mortgage loans, consumer loans and commercial business loans. The Bank competes with other financial and mortgage institutions in attracting and retaining deposits and originating loans.

Note 3: FASB Launched Accounting Standards Codification

The Financial Accounting Standards Board (FASB) has issued the FASB Accounting Standards Codification
(Codification or ASC). The Codification establishes the single source of authoritative U.S. generally accepted accounting principles (GAAP) to be applied by nongovernmental entities. All other nongrandfathered
accounting literature not included in the Codification will become nonauthoritative. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it issues Accounting
Standards Updates, which display an issue date expressed as the year with a sequential number for each update and serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the
changes to the Codification. GAAP is not intended to be changed as a result of the FASBs Codification project, but it changed the way the guidance is organized and presented. As a result, these changes have a significant impact on how
companies reference GAAP in their financial statements and in their accounting policies for financial statements issued for interim and annual periods ending after September 15, 2009.

Note 4: Basis of Presentation

The
accompanying consolidated statement of financial condition at June 30, 2009, which has been derived from audited statements, and the unaudited interim consolidated financial statements have been prepared in accordance with instructions for Form
10-Q and therefore, do not include all disclosures necessary for a complete presentation of the financial statements in conformity with GAAP. However, all adjustments that are, in the opinion of management, necessary for the fair presentation of the
interim financial statements have been included. Such adjustments were of a normal recurring nature. The results of operations for the three and nine months ended March 31, 2010 are not necessarily indicative of the results that may be expected
for the entire year. For additional information, refer to the consolidated financial statements and footnotes thereto included in the Companys Annual report on Form 10-K for the year ended June 30, 2009.

Note 5: Subsequent Events

In accordance
with ASC Topic 855, Subsequent Events, management has evaluated potential subsequent events through the date the financial statements were issued and has determined that this guidance did not have an impact on the Companys
financial position, results of operations or earnings per share. See Notes 8 and 9 for a discussion of deferral of interest payments on trust preferred securities and dividends on Series A and Series B preferred stock.

Note 6: Recent Accounting Pronouncements

ASC Topics 810 and 860

In June 2009, the FASB
issued ASC Topic 810, Accounting for Transfers of Financial Assets, and ASC Topic 860, Amendments to FASB Interpretation No. 46(R). These standards are effective for fiscal years beginning after November 15, 2009. ASC
Topic 860 eliminates the concept of a qualifying special-purpose entity (QSPE) and changes some of the requirements for derecognizing financial assets. ASC Topic 810 amends the consolidation guidance related to QSPEs. Specifically,
the amendments will (a) eliminate the exemption for QSPEs from the new



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##### Table of Contents

guidance, (b) shift the determination of which enterprise should consolidate a variable interest entity (VIE) to a current control approach, such that an entity that has both the
power to make decisions and right to receive benefits or absorb losses that could potentially be significant, will consolidate a VIE, and (c) change when it is necessary to reassess who should consolidate a VIE. The Company is evaluating the
impact that these standards will have on its financial statements. We have not determined the effect that the adoption of ASC Topics 810 and 860 will have on our financial position or results of operations.

International Financial Reporting Standards

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

Note 7: Securities Available for Sale

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



|                           |  |                |        |                 |   |                  |  |   |           |   |  |   |       
|-------------------------- |  | -------------- | ------ | --------------- | - | ---------------- |  | - | --------- | - |  | - | ------
|                           |  | March 31, 2010
|(In thousands)             |  | AmortizedCost  |        | UnrealizedGains |   | UnrealizedLosses |  |   | FairValue
|                           |  |                |        |                
|Corporate Bonds            |  | $              | 1,500  |                 | $ | 15               |  | $ | (23       | ) |  | $ | 1,492 
|U.S. Government agencies   |  |                | 8,550  |                 |   | 8                |  |   | (3        | ) |  |   | 8,555 
|Mortgage-backed securities |  |                | 5,591  |                 |   | 197              |  |   | (3        | ) |  |   | 5,785 
|                           |  |                |        |                 |   |                  |  |   |           |   |  |   |       
|                           |  | $              | 15,641 |                 | $ | 220              |  | $ | (29       | ) |  | $ | 15,832
|                           |  |                |        |                 |   |                  |  |   |           |   |  |   |       



|                           |  |               |        |                 |   |                  |  |    |           |   |  |   |       
|-------------------------- |  | ------------- | ------ | --------------- | - | ---------------- |  | -- | --------- | - |  | - | ------
|                           |  | June 30, 2009
|(In thousands)             |  | AmortizedCost |        | UnrealizedGains |   | UnrealizedLosses |  |    | FairValue
|Corporate Bonds            |  | $             | 2,980  |                 | $ | 5                |  | ($ | 167       | ) |  | $ | 2,818 
|U.S. Government agencies   |  |               | 6,586  |                 |   | 3                |  |    | (13       | ) |  |   | 6,576 
|Mortgage-backed securities |  |               | 6,539  |                 |   | 155              |  |    | (4        | ) |  |   | 6,690 
|                           |  |               |        |                 |   |                  |  |    |           |   |  |   |       
|                           |  | $             | 16,105 |                 | $ | 163              |  | ($ | 184       | ) |  | $ | 16,084
|                           |  |               |        |                 |   |                  |  |    |           |   |  |   |       

The scheduled maturities of securities available for sale at
March 31, 2010 are as follows:



|                                 |  |               |        |           |   |       
|-------------------------------- |  | ------------- | ------ | --------- | - | ------
|(In thousands)                   |  | AmortizedCost |        | FairValue
|Due in less than one year        |  | $             | 501    |           | $ | 516   
|Due in one to five years         |  |               |       |           |   |      
|Due after five through ten years |  |               | 6,535  |           |   | 6,512 
|Due after ten years              |  |               | 3,014  |           |   | 3,019 
|Mortgage-backed securities       |  |               | 5,591  |           |   | 5,785 
|                                 |  |               |        |           |   |       
|                                 |  | $             | 15,641 |           | $ | 15,832
|                                 |  |               |        |           |   |       



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



|                                      |  |                     |       |                  |                   |    |           |       |                  |     |  |           |     |                  |  |   |       |  |   |     |  
|------------------------------------- |  | ------------------- | ----- | ---------------- | ----------------- | -- | --------- | ----- | ---------------- | --- |  | --------- | --- | ---------------- |  | - | ----- |  | - | --- | -
|                                      |  | March 31, 2010      |      
|                                      |  | Less than 12 Months |       |                  | 12 Months or More |    |           | Total |                 
|                                      |  | FairValue           |       | UnrealizedLosses |                   |    | FairValue |       | UnrealizedLosses |     |  | FairValue |     | UnrealizedLosses | 
|(In thousands)                        |  |                     |      
|                                      |  |                     |       |                  |                   |   
|U.S. Government agencies              |  | $                   | 997   |                  | $                 | (3 | )         |       | $                |    |  | $         |    |                  |  | $ | 997   |  | $ | (3  | )
|Corporate Bonds                       |  |                     |      |                  |                   |   |           |       |                  | 976 |  |           | (23 | )                |  |   | 976   |  |   | (23 | )
|Mortgage-backed securities            |  |                     | 764   |                  |                   | (3 | )         |       |                  |    |  |           |    |                  |  |   | 764   |  |   | (3  | )
|                                      |  |                     |       |                  |                   |    |           |       |                  |     |  |           |     |                  |  |   |       |  |   |     |  
|Total Temporarily Impaired Securities |  | $                   | 1,761 |                  | $                 | (6 | )         |       | $                | 976 |  | $         | (23 | )                |  | $ | 2,737 |  | $ | (29 | )
|                                      |  |                     |       |                  |                   |    |           |       |                  |     |  |           |     |                  |  |   |       |  |   |     |  



|                                      |  |                     |       |                  |                   |     |           |       |                  |       |  |           |      |                  |  |   |       |  |   |      |  
|------------------------------------- |  | ------------------- | ----- | ---------------- | ----------------- | --- | --------- | ----- | ---------------- | ----- |  | --------- | ---- | ---------------- |  | - | ----- |  | - | ---- | -
|                                      |  | June 30, 2009       |      
|                                      |  | Less than 12 Months |       |                  | 12 Months or More |     |           | Total |                 
|                                      |  | FairValue           |       | UnrealizedLosses |                   |     | FairValue |       | UnrealizedLosses |       |  | FairValue |      | UnrealizedLosses | 
|(In thousands)                        |  |                     |      
|                                      |  |                     |       |                  |                   |    
|U.S. Government agencies              |  | $                   | 3,565 |                  | $                 | (13 | )         |       | $                |      |  | $         |     |                  |  | $ | 3,565 |  | $ | (13  | )
|Corporate Bonds                       |  |                     |      |                  |                   |    |           |       |                  | 2,311 |  |           | (167 | )                |  |   | 2,311 |  |   | (167 | )
|Mortgage-backed securities            |  |                     |      |                  |                   |    |           |       |                  | 1,077 |  |           | (4   | )                |  |   | 1,077 |  |   | (4   | )
|                                      |  |                     |       |                  |                   |     |           |       |                  |       |  |           |      |                  |  |   |       |  |   |      |  
|Total Temporarily Impaired Securities |  | $                   | 3,565 |                  | $                 | (13 | )         |       | $                | 3,388 |  | $         | (171 | )                |  | $ | 6,953 |  | $ | (184 | )
|                                      |  |                     |       |                  |                   |     |           |       |                  |       |  |           |      |                  |  |   |       |  |   |      |  

During the nine months ended March 31, 2010 and 2009, $1.1 million and $0 in securities were sold at a gross gain of
$71,000 and $0, respectively, using the specific identification method. During the three months ended March 31, 2010 and 2009, $1.1 million and $0 in securities were sold at a gross gain of $71,000 and $0, respectively, using the specific
identification method.

At March 31, 2010, the Company had three securities in an unrealized loss position. Unrealized losses detailed
above relate to one corporate bond and two agency securities. The decline in fair value is considered temporary and is primarily due to interest rate fluctuations. The Company does not have the intent to sell these securities, and it is more likely
than not that it will not be required to sell the securities prior to their recovery. None of the individual unrealized losses are significant.

The carrying amount of Federal Reserve Bank and Federal Home Loan Bank stocks totals $2.8 million and are considered restricted as to marketability.
Management evaluates the Companys restricted stock in the FHLB for impairment in accordance with ASC Topic 350, Accounting by Certain Entities (Including With Trade Receivables) That Lend to or Finance The Activities of Others.
Managements determination of whether this investment is impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects
the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted,
(2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and,
accordingly, on the customer base of the FHLB. The Company has concluded that the restricted stock investment is not impaired as of March 31, 2010.



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Note 8: Junior Subordinated Debentures

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

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

Note 9: Preferred Stock

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

The Series A preferred stock qualifies as Tier 1
capital and pays cumulative dividends at a rate of 5% per annum until February 15, 2014. Beginning February 15, 2014, the dividend rate will increase to 9% per annum. Under the original terms of the Purchase Agreement, the
Company is prohibited from redeeming the Series A preferred stock within the first three years unless it completed a qualified equity offering whereby it received aggregate gross proceeds of not less than $6.0 million. However, the provisions
introduced by the American Recovery and Reinvestment Act of 2009 indicate that once the Company notifies Treasury that it would like to redeem the Series A preferred stock, the Treasury must permit the Company to do so subject to consultation with
the Federal Reserve Bank of Richmond. The Company will be subject to existing supervisory procedures for approving redemption requests for capital instruments. The Federal Reserve Bank of Richmond will weigh the Companys desire
to redeem the Series A preferred stock against the contribution of Treasury capital to the Companys overall soundness, capital adequacy and ability to lend, including confirming that the Company has a comprehensive internal capital assessment
process.

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

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

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



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Note 10: Regulatory Capital Requirements

At March 31, 2010, the Bank met each of the three minimum regulatory capital requirements. The following table summarizes the Banks regulatory
capital position at March 31, 2010.



|                                         |  |        |        |   |                              |   |                                                         |   |        |  |        |  |   |        |  |       |   |  | 
|---------------------------------------- |  | ------ | ------ | - | ---------------------------- | - | ------------------------------------------------------- | - | ------ |  | ------ |  | - | ------ |  | ----- | - |  | 
|                                         |  | Actual |        |   | For CapitalAdequacy Purposes |   | Well Capitalized UnderPrompt CorrectiveAction Provision |  
|($ in thousands)                         |  | Amount |        | % |                              |   | Amount                                                  |   | %      |  | Amount |  | % |       
|                                         |  |        |        |   |                              |  
|Total Capital (to Risk Weighted Assets)  |  | $      | 23,180 |   | 11.69                        | % |                                                         | $ | 16,098 |  | 8.00%  |  | $ | 20,123 |  | 10.00 | %
|                                         |  |        |        |   |                              |  
|Tier 1 Capital (to Risk Weighted Assets) |  | $      | 20,665 |   | 10.43                        | % |                                                         | $ | 8,049  |  | 4.00%  |  | $ | 12,074 |  | 6.00  | %
|                                         |  |        |        |   |                              |  
|Tier 1 Capital (to Average Assets)       |  | $      | 20,665 |   | 7.85                         | % |                                                         | $ | 10,525 |  | 4.00%  |  | $ | 13,157 |  | 5.00  | %

The following table summarizes
the Banks regulatory capital position at June 30, 2009.





|                                         |  |        |        |   |                            |   |        |                                                          |        |  |      |        |  |   |        |  |       |  
|---------------------------------------- |  | ------ | ------ | - | -------------------------- | - | ------ | -------------------------------------------------------- | ------ |  | ---- | ------ |  | - | ------ |  | ----- | -
|                                         |  | Actual |        |   | For CapitalPrompt Purposes |   |        | Well Capitalized UnderPrompt 
CorrectiveAction Provision |       
|($ in thousands)                         |  | Amount |        | % |                            |   | Amount |                                                          | %      |  |      | Amount |  | % |       
|Total Capital (to Risk Weighted Assets)  |  | $      | 23,933 |   | 11.58                      | % |        | $                                                        | 16,536 |  | 8.00 | %      |  | $ | 20,670 |  | 10.00 | %
|Tier 1 Capital (to Risk Weighted Assets) |  | $      | 21,359 |   | 10.33                      | % |        | $                                                        | 8,268  |  | 4.00 | %      |  | $ | 12,402 |  | 6.00  | %
|Tier 1 Capital (to Average Assets)       |  | $      | 21,359 |   | 7.98                       | % |        | $                                                        | 10,701 |  | 4.00 | %      |  | $ | 13,377 |  | 5.00  | %

Note 11: Loss Per Share

The following table presents a summary of per share data and amounts for the periods indicated.



|                                            |  |                            |        |   |                             |   |       |      |  |   |        |   |  |   |       |  
|------------------------------------------- |  | -------------------------- | ------ | - | --------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                            |  | Nine Months EndedMarch 31, |        |   | Three Months EndedMarch 31, |  
|                                            |  | 2010                       |        |   | 2009                        |   |       | 2010 |  |   | 2009   |  
|(in thousands except for per share data)    |  |                            |        |   |                             |   |       |      |  |   |        |  
|                                            |  |                            |        |  
|Net loss available for common shareholders  |  | $                          | (2,134 | ) |                             | $ | (712  | )    |  | $ | (2,076 | ) |  | $ | (405  | )
|                                            |  |                            |        |  
|Basic weighted average shares outstanding   |  |                            | 1,927  |   |                             |   | 1,921 |      |  |   | 1,933  |   |  |   | 1,922 |  
|Basic loss per share                        |  | $                          | (1.11  | ) |                             | $ | (0.37 | )    |  | $ | (1.07  | ) |  | $ | (0.21 | )
|                                            |  |                            |        |  
|Dilutive shares                             |  |                            |       |   |                             |   |      |      |  |   |       |   |  |   |      |  
|Diluted weighted average shares outstanding |  |                            | 1,927  |   |                             |   | 1,921 |      |  |   | 1,933  |   |  |   | 1,922 |  
|Diluted loss per share                      |  | $                          | (1.11  | ) |                             | $ | (0.37 | )    |  | $ | (1.07  | ) |  | $ | (0.21 | )

At March 31, 2010, there were 20,832
stock options outstanding all of which had exercise prices above the market price of the Companys common stock on the same date.



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Note 12: Guarantees

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit issued by the
Bank. Standby letters of credit are conditional written commitments issued by the Bank to guarantee the performance of a customer to a third party. Generally, all letters of credit when issued have expiration dates within one year. The credit risk
involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Bank, generally, holds collateral and/or personal guarantees supporting these commitments. The Bank had
$1,717,000 of standby letters of credit as of March 31, 2010 and $1,392,000 outstanding as of June 30, 2009. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be
sufficient to cover the potential amount of future payment required under the corresponding guarantees. The amount of the liability as of March 31, 2010 and June 30, 2009 for guarantees under standby letters of credit issued is not
material.

Note 13: Goodwill and Intangible Assets

ASC Topic 350, Intangibles - Goodwill and Other requires that goodwill no longer be amortized, but rather that it be tested for impairment on
an annual basis at the reporting unit level, which is either at the same level or one level below an operating segment. Other acquired intangible assets with finite lives, such as purchased customer accounts, are required to be amortized over their
estimated lives. Other intangible assets are amortized using the straight-line method over estimated useful lives of 10 years. The Company periodically assesses whether events or changes in circumstances indicate that the carrying amounts of
goodwill and other intangible assets may be impaired.

Note 14: Share-Based Compensation

Stock Options

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

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

A summary of share option activity for the nine month period ended March 31, 2010 follows:



|                              |  |        |  |                              |      |                                                  |     |                                |   |  
|----------------------------- |  | ------ |  | ---------------------------- | ---- | ------------------------------------------------ | --- | ------------------------------ | - | -
|                              |  | Shares |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractualTerm in Years |     | AggregateIntrinsicValue (000s)
|Outstanding at June 30, 2009  |  | 20,832 |  | $                            | 6.29 |                                                  | 2.1 |                                | $ | 
|Granted                       |  |       |  |                              |     |                                                  |    |                                |   |  
|Exercised                     |  |       |  |                              |     |                                                  |    |                                |   |  
|Forfeited or expired          |  |       |  |                              |     |                                                  |    |                                |   |  
|                              |  |        |  |                              |      |                                                  |     |                                |   |  
|Outstanding at March 31, 2010 |  | 20,832 |  | $                            | 6.29 |                                                  | 1.4 |                                | $ | 
|                              |  |        |  |                              |      |                                                  |     |                                |   |  
|Exercisable at March 31, 2010 |  | 20,832 |  | $                            | 6.29 |                                                  |     |                                |   |  
|                              |  |        |  |                              |      |                                                  |     |                                |   |  

Stock Incentive Plan

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



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As of March 31, 2010, there are 57,255 deferred shares under this plan of which 12,906 are issued and
outstanding. These deferred shares are allocated in lieu of cash compensation to Directors of the Company. These shares are included in shares outstanding for the purposes of computing earnings per share. Additionally, as of March 31, 2010
there are 3,250 non-vested shares outstanding under this plan.

A summary of the status of the Companys non-vested shares as of
March 31, 2010 is presented below:



|                               |  |              |  |                                       |      
|------------------------------ |  | ------------ |  | ------------------------------------- | -----
|                               |  | CommonShares |  | Weighted 
AverageGrant-DateFair Value
|Non-vested as of June 30, 2009 |  | 13,484       |  | $                                     | 12.12
|Awards Granted                 |  |             |  |                                       |     
|Vested                         |  | 10,234       |  |                                       | 13.71
|Forfeited                      |  |             |  |                                       |     
|                               |  |              |  |                                       |      
|Non-vested at March 31, 2010   |  | 3,250        |  | $                                     | 7.10 
|                               |  |              |  |                                       |      

As of March 31, 2010 there was $10,000 of total unrecognized compensation costs related to non-vested
share-based compensation. The cost is expected to be recognized over a weighted average period of 15 months. At grant date, vesting of the shares was cliff vesting at the end of either a two or three year period. Compensation expense
totaling $2,000, $22,000, $14,000 and $51,000 has been recognized in the three and nine month periods ended March 31, 2010 and 2009, respectively, as a result of these awards.

Note 15: Termination of Merger Agreement

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

On August 28, 2009, Bradford Bank, a wholly owned subsidiary of Bradford Mid-Tier Company, was closed by the Office of Thrift Supervision
(OTS) and the FDIC was appointed receiver. As a result of Bradford Bank being placed into receivership, the OTS was appointed statutory trustee of Bradford Mid-Tier Company and a bankruptcy trustee was appointed. The bankruptcy trustee
demanded that the Company remit the balance of the prepaid interest payment noted above. This created a default of the note. The Company pursued collection from the FDIC. The FDIC has made two quarterly interest payments that were due on
October 1, 2009 and January 4, 2010. On April 1, 2010, the FDIC paid the note in full including accrued interest.

Note 16:
Fair Value Measurements

Effective July 1, 2008, the Company adopted ASC Topic 820, Fair Value Measurements and
Disclosures. These standards defined the concept of fair value, established a framework for measuring fair value in accordance with GAAP, and expand disclosure about fair value measurements. ASC Topic 820 applies only to fair value
measurements required or permitted under current accounting pronouncements, and does not require any new fair value measurements. Fair value is defined as the price to sell an asset or to transfer a liability in an orderly transaction between
willing market participants as of the measurement date. The statement also expands disclosures about financial instruments that are measured at fair value and eliminates the use of large position discounts for financial instruments quoted in active
markets. The disclosures emphasis is on the inputs used to measure fair value and the effect of the measurement on earnings for the period. The adoption did not have any effect on the Companys consolidated financial position or results
of operations. Fair value estimates, methods, and assumptions are set forth below for the Companys financial instruments as of March 31, 2010 and June 30, 2009.



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As permitted by GAAP, the Company began applying provisions of ASC Topic 820 to certain nonfinancial assets
and nonfinancial liabilities for its fiscal year beginning July 1, 2009.

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

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



|                                         |  |                |         |               |   |                |  |            |         |  |   |        
|---------------------------------------- |  | -------------- | ------- | ------------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                                         |  | March 31, 2010 |         | June 30, 2009
|(In thousands)                           |  | Carryingamount |         | Fair value    |   | Carryingamount |  | Fair value
|Assets:                                  |  |                |         |               |   |                |  |            |         |  |   |        
|Cash and cash equivalents                |  | $              | 20,277  |               | $ | 20,277         |  | $          | 19,794  |  | $ | 19,794 
|Securities available for sale            |  |                | 15,832  |               |   | 15,832         |  |            | 16,084  |  |   | 16,084 
|Loans receivable, net                    |  |                | 206,023 |               |   | 209,269        |  |            | 216,927 |  |   | 223,991
|Investment in securities required by law |  |                | 2,848   |               |   | 2,848          |  |            | 2,817   |  |   | 2,817  
|Accrued interest receivable              |  |                | 1,464   |               |   | 1,464          |  |            | 1,596   |  |   | 1,596  
|Liabilities:                             |  |                |         |               |   |                |  |            |         |  |   |        
|Deposits                                 |  |                | 221,727 |               |   | 222,236        |  |            | 207,795 |  |   | 208,571
|Long-term debt                           |  |                | 22,100  |               |   | 20,823         |  |            | 39,300  |  |   | 40,539 
|Accrued interest payable                 |  |                | 309     |               |   | 309            |  |            | 436     |  |   | 436    
|Off balance sheet instruments:           |  |                |         |               |   |                |  |            |         |  |   |        
|Commitments to extend credit             |  |                |        |               |   |               |  |            |        |  |   |       

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

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

Securities Available for Sale

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

Loans Receivable

Loans receivable were segmented into portfolios with similar financial characteristics. Loans were also segmented by type such as residential and
nonresidential, construction and land, second mortgage loans, commercial, and consumer. Each loan category was further segmented by fixed and adjustable rate interest terms. The fair value of loans was calculated by discounting anticipated cash
flows based on weighted average contractual maturity, weighted average coupon and market rates.

Impaired Loans

The Company considers loans to be impaired when it becomes probable that the Company will be unable to collect all amounts due in accordance with the
contractual terms of the loan agreement. All non-accrual loans are considered impaired. The measurement of impaired loans is based on the present value of the expected cash flows discounted at the historical effective interest rate, the market price
of the loan, or the fair value of the underlying collateral. Collateral values are estimated utilizing methods such as appraisals, broker price opinions and taking into consideration the timing of the valuation, the nature of the collateral and such
other information as is deemed appropriate. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances of $13.7 million and
$3.1 million less their specific valuation allowances of $942,000 and $382,000 as determined in accordance with ASC 310-10-35 (formerly SFAS 114, Accounting by Creditors for Impairment of a Loan) at March 31, 2010 and June 30,
2009, respectively. The change in the allowance to $942,000 at March 31, 2010 resulted in an impairment credit of $57,000 for the three month period ended March 31, 2010 and an impairment charge of $560,000 for the nine month period ended
March 31, 2010, respectively, which was included in earnings for the three months and nine months ended March 31, 2010.



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Real Estate Acquired Through Foreclosure (OREO)

Real estate acquired through foreclosure is initially recorded at market value less cost to sell which is determined typically by utilizing an outside
appraiser. Management evaluates the value of OREO at least annually. Any declines in value are reflected by establishing an OREO valuation allowance with an offsetting charge to operating expense. Any increases in the value of the property may be
recognized only to the extent of the valuation allowance when the property value has recovered.

Securities Required by Law

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

Accrued Interest Receivable

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

Deposits

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

Long-Term Debt

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

Accrued Interest Payable

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

Off-Balance Sheet Financial Instruments

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

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

Fair Value Disclosures

In April
2009, the FASB issued ASC 820-10-65, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. ASC 820-10-65 defines fair value
as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. ASC
820-10-65 provides additional guidance in determining when the volume and level of activity for the asset or liability has significantly decreased. ASC 820-10-65 also includes guidance on identifying circumstances when a transaction may not be
considered orderly.

ASC 820-10-65 provides a list of factors that a reporting entity should evaluate to determine whether there has been a
significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level
of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with GAAP.

This ASC 820-10-65 clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some
transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. ASC 820-10-65 provides a list of circumstances that may indicate that a transaction is not
orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.



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

ASC Topic 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based on the inputs
used to value the particular asset or liability at the measurement date. The three levels are defined as follows:



| |  |  | Level 1  inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Level 3  inputs to the valuation methodology are unobservable and significant to the fair value measurement.
| | - |  | -------------------------------------------------------------------------------------------------------------

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

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



|                                                |  |                   |        |         |   |         |  |         |        |  |   |       
|----------------------------------------------- |  | ----------------- | ------ | ------- | - | ------- |  | ------- | ------ |  | - | ------
|                                                |  | At March 31, 2010
|(In thousands)                                  |  | Total             |        | Level 1 |   | Level 2 |  | Level 3
|Measured at fair value on a recurring basis:    |  |                   |        |         |   |         |  |         |        |  |   |       
|Securities available for sale                   |  | $                 | 15,832 |         | $ |        |  | $       | 15,832 |  | $ |      
|                                                |  |                   |        |         |   |         |  |         |        |  |   |       
|Measured at fair value on a nonrecurring basis: |  |                   |        |         |   |         |  |         |        |  |   |       
|                                                |  |                   |        |         |   |         |  |         |        |  |   |       
|Impaired loans                                  |  | $                 | 12,745 |         | $ |        |  | $       |       |  | $ | 12,745
|Real estate acquired through foreclosure        |  |                   | 3,819  |         |   |        |  |         |       |  |   | 3,819 
|                                                |  |                   |        |         |   |         |  |         |        |  |   |       
|Total                                           |  | $                 | 17,506 |         | $ |        |  | $       |       |  | $ | 17,506
|                                                |  |                   |        |         |   |         |  |         |        |  |   |       



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

Note 17: Reclassification

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

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

General

The Companys results of
operations depend primarily on its level of net interest income, which is the difference between interest earned on interest-earning assets, consisting primarily of loans, investment securities, mortgage- backed



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

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

Forward-Looking Statements

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

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

Critical Accounting Policies

The Companys consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of
America (GAAP) and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated
financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, the financial statements
could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be
materially different than originally reported. These estimates, assumptions and judgments are necessary when financial instruments are required to be recorded at fair value or when the decline in the value of an asset carried on the statement of
financial condition at historic cost requires an impairment write-down or a valuation reserve to be established.

The allowance for loan
losses (allowance) represents an amount, that in the judgment of management, will be adequate to absorb probable losses on outstanding loans and leases that may become uncollectible. The allowance represents an estimate made based upon
two principles of accounting: (1) ASC Topic 855, Accounting for Contingencies, that requires losses to be accrued when their occurrence is probable and estimable, and (2) ASC 310-10-35, Accounting by Creditors for
Impairment of a Loan, that requires losses be accrued when it is probable that the lender will not collect all principal and interest due under the original terms of the loan. The adequacy of the allowance is determined through careful
evaluation of the loan portfolio. This determination is inherently subjective and requires significant estimates, including estimated losses on pools of homogeneous loans based on historical loss experience and consideration of the current economic
environment that may be subject to change. Loans and leases deemed uncollectible are charged against the allowance and recoveries of previously charged-off amounts are credited to it. The level of the allowance is adjusted through the provision for
loan losses that is recorded as a current period expense.



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

In accordance with the provisions of ASC 310-10-35, the Company determines and recognizes impairment of certain loans. A loan is determined to be
impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is not considered impaired during a period of delay in
payment if the Company expects to collect all amounts due, including past-due interest. The Company generally considers a period of delay in payment to include delinquency up to and including 90 days. ASC Topic 310 requires that impairment in a loan
be measured at the present value of its expected future cash flows discounted at the loans effective interest rate, or at the loans observable market price or the fair value of the collateral if the loan is collateral dependent.

ASC Topic 310 is generally applicable for all loans except large groups of smaller-balance homogeneous loans that are evaluated collectively
for impairment, including residential first and second mortgage loans and consumer installment loans. Impaired loans are therefore generally comprised of commercial mortgage, real estate development, and certain restructured residential loans. In
addition, impaired loans are generally loans which management has placed in non-accrual status since loans are placed in non-accrual status on the earlier of the date that management determines that the collection of principal and/or interest is in
doubt or the date that principal or interest is 90 days or more past-due.

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

Real estate acquired through foreclosure and other repossessed assets are initially recorded at the estimated fair value, net of estimated selling costs,
and subsequently at the lower of carrying cost or fair value less estimated costs to sell. Costs relating to holding such property are charged against income in the current period, while costs relating to improving such real estate are capitalized
until a salable condition is reached.

Comparison of Financial Condition at March 31, 2010 and June 30, 2009

Patapsco Bancorps assets decreased by $5.1 million, or 1.9% to $263.2 million at March 31, 2010 from $268.4 million at June 30, 2009. Net
loans declined $10.9 million or 5.0% to $206.0 million at March 31, 2010 from $216.9 million at June 30, 2009. Growth in commercial mortgages of $3.5 million and in commercial business loans of $134,000 were more than offset by decreases
in commercial leases of $4.7 million, construction loans of $3.5 million, residential mortgage loans of $2.2 million and consumer loans of $1.9 million due primarily to soft loan demand.

Securities available for sale decreased $252,000 to $15.8 million at March 31, 2010 from $16.1 million at June 30, 2009 as maturities of $8.0
million, sales of $1.1 million and pay-downs of the mortgage-backed securities of $0.9 million were replaced by new purchases of investment securities of $9.6 million. Accrued interest and other assets grew $3.4 million due to the prepayment of FDIC
deposit insurance premiums and a $1.2 million increase in the deferred tax asset.

Real estate acquired through foreclosure increased $2.3
million to $3.5 million as of March 31, 2010 as there were $3.2 million in additions, offset in part by an $837,000 allowance for losses established as of March 31, 2010. During the nine months ended March 31, 2010, three properties
were acquired through foreclosure while one property was sold.

Total deposits grew $13.9 million, or 6.7%, to $221.7 million at
March 31, 2010 from $207.8 million at June 30, 2009. Interest-bearing deposits increased $14.0 million, or 7.1%, to $210.5 million at March 31, 2010 from $196.5 million at June 30, 2009. Noninterest-bearing deposits were flat at
$11.2 million at March 31, 2010. Long-term debt decreased $17.2 million to $17.1 million at March 31, 2010 from $34.3 million at June 30, 2009. This reduction was funded primarily by the growth in deposits and secondarily by the
decline in loans.



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Stockholders equity decreased by $1.9 million from $19.7 million at June 30, 2009 to $17.7
million at March 31, 2010 due to the $2.1 million loss available to common shareholders recorded for the nine months ended March 31, 2010.

Comparison of Operating Results for the Quarter and Nine Months Ended March 31, 2010 and 2009

Net Income.Patapsco Bancorp recorded a net loss available to common shareholders of $2.1 million, or $1.07 per share, for the quarter ended
March 31, 2010 compared to a net loss of $405,000 or $0.21 per share for the quarter ended March 31, 2009. The increase in the net loss available to common shareholders in the current quarter resulted from the loan loss provision being
$1.7 million higher than the same quarter in 2009 as well as a $1.0 increase in the provision for losses on and cost of real estate acquired through foreclosure. The increase in the provision for loan losses reflects a $2.5 million increase in
non-performing loans to $12.9 million at March 31, 2010. The increase in the provision for losses on and cost of real estate acquired through foreclosure is primarily due to a reserve for losses of $837,000 being set up for an acquisition and
development loan in real estate acquired through foreclosure. The Company declared and paid $82,000 in dividends on preferred and warrant preferred stock during the current quarter versus $38,000 in the previous years quarter due to the timing
of preferred stock issuance.

For the nine months ended March 31, 2010, the Company recorded a net loss applicable to common shareholders
of $2.1 million compared to a loss of $712,000 for the same period in 2009 for the same reasons cited above. The Company declared and paid $245,000 in dividends on preferred and warrant preferred stock during the nine months ended March 31,
2010 versus $51,000 in the same period of the previous year.

Net Interest Income. Patapsco Bancorps net interest income
increased by $28,000, or 1.4%, to $2.1 million for the quarter ended March 31, 2010 compared to $2.1 million for the same quarter in 2009. The slight increase in net interest income during the comparable three-month period was due to a 16 basis
point improvement in the net interest margin to 3.46% in the quarter ended March 31, 2010 from 3.30% in the quarter ended March 31, 2009, which was almost completely offset by an $8.9 million decline in the volume of interest earning
assets to $244.4 million for the quarter ended March 31, 2010 versus $253.3 million for the quarter ended March 31, 2009. The increase in the net interest margin was the result of funding costs falling by 84 basis points versus a 50 basis
point decline in the yield on average earning assets.

For the nine months ended March 31, 2010 net interest income declined $212,000 as
the net interest margin decreased 9 basis points and the level of interest earning assets declined $1.3 million. The decline in the net interest margin was due to a shift in the mix of earning assets from higher yielding loans to lower yielding
investments due to a considerable drop in loan demand over the past year.

Interest Income. Total interest income
decreased by $433,000, or 12%, to $3.3 million for the quarter ended March 31, 2010 from $3.8 million for the quarter ended March 31, 2009. Total interest income for the nine months ended March 31, 2010 decreased $1.5 million to $10.6
million from $12.1 million in the comparable period of the prior year. The decreases in interest income during the comparable three and nine month periods were due to lower rates of interest earned, in addition to the lower level of earning assets.
The impact of lower market interest rates in the current three and nine month periods had a negative effect on the yields on earning assets. In addition, a shift in the mix of earning assets from loans to lower yielding investments and a decline in
the yield on loans negatively affected the yield on average earning assets.

Interest income on loans receivable decreased by $454,000, or
13%, to $3.2 million for the quarter ended March 31, 2010 from $3.6 million for the quarter ended March 31, 2009. For the nine months ended March 31, 2010, interest income on loans declined $1.5 million to $10.1 million from $11.6
million in the same period of the previous year. The decreases in interest income on loans for both the three and nine months periods were due to lower yields as well as lower average loan balances. The lower yields were due to the decline in market
interest rates mentioned above. In addition, the increase in the level of non-accrual loans also contributed to the declines in yields. The lower loan volumes were due to a considerable drop in loan demand over the previous year.

Interest income on investment securities, including investments required by law, increased $20,000, or 16%, to $148,000 and by $73,000, or 18%, to
$473,000 in the three and nine month periods ended March 31, 2010, respectively as the increase in volumes for the respective periods more than offset the declines in the yield over the same periods.



19



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Interest income on federal funds sold and other investments increased $1,000 to $6,000, in the three month
period ended March 31, 2010 as the increase in average balances slightly more than offset the decline in yields. For the nine month period ended March 31, 2010, interest income on federal funds sold and other investments decreased $11,000,
or 34%, to $21,000 as the decline in yields more than offset the impact of the growth in average balances.

Interest Expense.Total interest expense decreased by $461,000, or 27%, to $1.3 million for the quarter ended March 31, 2010 from $1.7 million for the quarter ended March 31, 2009. Total interest expense decreased $1.3 million, or 23%, to $4.1
million for the nine month period ended March 31, 2010 from $5.4 million for the nine month period ended March 31, 2009. The decline in interest expense during the comparable three and nine month periods was due to lower rates paid on
interest-bearing liabilities which more than offset the higher level of balances.

Interest expense on deposits decreased by $300,000, or 24%,
to $1.0 million in the current quarter from $1.3 million in the previous years comparable quarter. For the nine months ended March 31, 2010 interest expense on deposits decreased $792,000, or 20%, to $3.2 million. The decrease in interest
expense on deposits in both the quarterly and year to date periods was due to a decline in rates paid on deposits which had a larger impact than the growth in average deposit balances. The lower rates paid on deposits reflect the lower rate
environment in the current periods as well as a moderation of the competitive pressures that existed in the previous year.

Interest expense
on short-term borrowings decreased $23,000, or 100%, for the current quarter from $23,000 for the three months ended March 31, 2009 due to the complete run-off of these borrowings. For the nine months ended March 31, 2010, interest expense
on short-term borrowings decreased $83,000, or 93%, to $6,000 due to lower volumes as well as a decline in rates.

Interest expense on
long-term borrowings decreased $138,000, or 33%, to $287,000 for the quarter ended March 31, 2010. For the nine months ended March 31, 2010, interest expense on long-term borrowings decreased $376,000, or 29%, to $921,000. The decreases in
interest expense in the comparable three and nine month periods were due to lower average balances outstanding which more than offset the slightly higher rates of interest paid. The average rates paid were higher as lower rate borrowings matured and
were not replaced.

Average Balance, Interest and Average Yields and Rates

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

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



20



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|                                                                                 |  |                             |         |          |      |                 |  |        |                |  |          |         |                 |   |        |  |        |  
|-------------------------------------------------------------------------------- |  | --------------------------- | ------- | -------- | ---- | --------------- |  | ------ | -------------- |  | -------- | ------- | --------------- | - | ------ |  | ------ | -
|                                                                                 |  | Nine Months Ended March 31, |        
|                                                                                 |  | 2010                        |         |          | 2009 |                
|                                                                                 |  | AverageBalance              |         | Interest |      | AverageRate (1) |  |        | AverageBalance |  | Interest |         | AverageRate (1) |  
|                                                                                 |  | (Dollars in thousands)      |        
|Interest-earning assets:                                                         |  |                             |         |          |      |                 |  |        |                |  |          |         |                 |   |        |  |        |  
|Loans receivable, including fees (2)                                             |  | $                           | 217,373 |          | $    | 10,103          |  | 6.15   | %              |  | $        | 233,213 |                 | $ | 11,628 |  | 6.60   | %
|Securities, including securities required by law                                 |  |                             | 18,967  |          |      | 473             |  | 3.33   | %              |  |          | 12,029  |                 |   | 400    |  | 4.43   | %
|Federal funds sold and other investments                                         |  |                             | 12,295  |          |      | 21              |  | 0.22   | %              |  |          | 4,730   |                 |   | 32     |  | 0.90   | %
|                                                                                 |  |                             |         |          |      |                 |  |        |                |  |          |         |                 |   |        |  |        |  
|Total interest-earning assets                                                    |  |                             | 248,635 |          |      | 10,597          |  | 5.64   | %              |  |          | 249,972 |                 |   | 12,060 |  | 6.38   | %
|                                                                                 |  |                             |         |          |      |                 |  |        |                |  |          |         |                 |   |        |  |        |  
|Non-interest-earning assets                                                      |  |                             | 16,405  |          |      |                 |  |        |                |  |          | 15,452  |                 |   |        |  |        |  
|                                                                                 |  |                             |         |          |      |                 |  |        |                |  |          |         |                 |   |        |  |        |  
|Total assets                                                                     |  | $                           | 265,040 |          |      |                 |  |        |                |  | $        | 265,424 |                 |   |        |  |        |  
|                                                                                 |  |                             |         |          |      |                 |  |        |                |  |          |         |                 |   |        |  |        |  
|                                                                                 |  |                             |         |          |      |                
|Interest-bearing liabilities:                                                    |  |                             |         |          |      |                 |  |        |                |  |          |         |                 |   |        |  |        |  
|Interest-bearing deposits                                                        |  | $                           | 203,267 |          |      | 3,217           |  | 2.11   | %              |  | $        | 185,007 |                 |   | 4,009  |  | 2.89   | %
|Short-term borrowings                                                            |  |                             | 1,971   |          |      | 6               |  | 0.43   | %              |  |          | 4,285   |                 |   | 89     |  | 2.73   | %
|Long-term borrowings                                                             |  |                             | 27,779  |          |      | 921             |  | 4.36   | %              |  |          | 41,278  |                 |   | 1,297  |  | 4.13   | %
|                                                                                 |  |                             |         |          |      |                 |  |        |                |  |          |         |                 |   |        |  |        |  
|Total interest-bearing liabilities                                               |  |                             | 233,017 |          |      | 4,144           |  | 2.36   | %              |  |          | 230,570 |                 |   | 5,395  |  | 3.11   | %
|                                                                                 |  |                             |         |          |      |                 |  |        |                |  |          |         |                 |   |        |  |        |  
|Non-interest-bearing liabilities                                                 |  |                             | 11,874  |          |      |                 |  |        |                |  |          | 13,345  |                 |   |        |  |        |  
|                                                                                 |  |                             |         |          |      |                 |  |        |                |  |          |         |                 |   |        |  |        |  
|Total liabilities                                                                |  |                             | 244,891 |          |      |                 |  |        |                |  |          | 243,915 |                 |   |        |  |        |  
|Stockholders equity                                                             |  |                             | 20,149  |          |      |                 |  |        |                |  |          | 21,509  |                 |   |        |  |        |  
|                                                                                 |  |                             |         |          |      |                 |  |        |                |  |          |         |                 |   |        |  |        |  
|Total liabilities and stockholders equity                                       |  | $                           | 265,040 |          |      |                 |  |        |                |  | $        | 265,424 |                 |   |        |  |        |  
|                                                                                 |  |                             |         |          |      |                 |  |        |                |  |          |         |                 |   |        |  |        |  
|                                                                                 |  |                             |         |          |      |                
|Net Interest Income                                                              |  |                             |         |          | $    | 6,453           |  |        |                |  |          |         |                 | $ | 6,665  |  |        |  
|                                                                                 |  |                             |         |          |      |                 |  |        |                |  |          |         |                 |   |        |  |        |  
|                                                                                 |  |                             |         |          |      |                
|Interest rate spread                                                             |  |                             |         |          |      |                 |  | 3.28   | %              |  |          |         |                 |   |        |  | 3.27   | %
|                                                                                 |  |                             |         |          |      |                 |  |        |                |  |          |         |                 |   |        |  |        |  
|Net interest margin                                                              |  |                             |         |          |      |                 |  | 3.46   | %              |  |          |         |                 |   |        |  | 3.55   | %
|                                                                                 |  |                             |         |          |      |                 |  |        |                |  |          |         |                 |   |        |  |        |  
|                                                                                 |  |                             |         |          |      |                
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                             |         |          |      |                 |  | 106.70 | %              |  |          |         |                 |   |        |  | 108.41 | %
|                                                                                 |  |                             |         |          |      |                 |  |        |                |  |          |         |                 |   |        |  |        |  



|(1) | Yields and rates are annualized.
|--- | --------------------------------

|(2) | Includes nonaccrual loans.
|--- | --------------------------



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|                                                                                 |  |                              |         |          |      |                 |  |        |                |  |          |         |                 |   |       |  |        |  
|-------------------------------------------------------------------------------- |  | ---------------------------- | ------- | -------- | ---- | --------------- |  | ------ | -------------- |  | -------- | ------- | --------------- | - | ----- |  | ------ | -
|                                                                                 |  | Three Months Ended March 31, |        
|                                                                                 |  | 2010                         |         |          | 2009 |                
|                                                                                 |  | AverageBalance               |         | Interest |      | AverageRate (1) |  |        | AverageBalance |  | Interest |         | AverageRate
(1) |  
|                                                                                 |  | (Dollars in thousands)       |        
|Interest-earning assets:                                                         |  |                              |         |          |      |                 |  |        |                |  |          |         |                 |   |       |  |        |  
|Loans receivable, including fees (2)                                             |  | $                            | 213,171 |          | $    | 3,190           |  | 5.98   | %              |  | $        | 234,103 |                 | $ | 3,644 |  | 6.23   | %
|Securities, including securities required by law                                 |  |                              | 19,081  |          |      | 148             |  | 3.12   | %              |  |          | 12,720  |                 |   | 128   |  | 4.02   | %
|Federal funds sold and other investments                                         |  |                              | 12,136  |          |      | 6               |  | 0.19   | %              |  |          | 6,463   |                 |   | 5     |  | 0.31   | %
|                                                                                 |  |                              |         |          |      |                 |  |        |                |  |          |         |                 |   |       |  |        |  
|Total interest earning assets                                                    |  |                              | 244,388 |          |      | 3,344           |  | 5.47   | %              |  |          | 253,286 |                 |   | 3,777 |  | 5.97   | %
|                                                                                 |  |                              |         |          |      |                 |  |        |                |  |          |         |                 |   |       |  |        |  
|Non-interest-earning assets                                                      |  |                              | 19,664  |          |      |                 |  |        |                |  |          | 14,368  |                 |   |       |  |        |  
|                                                                                 |  |                              |         |          |      |                 |  |        |                |  |          |         |                 |   |       |  |        |  
|Total assets                                                                     |  | $                            | 264,052 |          |      |                 |  |        |                |  | $        | 267,654 |                 |   |       |  |        |  
|                                                                                 |  |                              |         |          |      |                 |  |        |                |  |          |         |                 |   |       |  |        |  
|                                                                                 |  |                              |         |          |      |                
|Interest-bearing liabilities:                                                    |  |                              |         |          |      |                 |  |        |                |  |          |         |                 |   |       |  |        |  
|Interest bearing deposits                                                        |  | $                            | 207,479 |          |      | 970             |  | 1.90   | %              |  | $        | 184,936 |                 |   | 1,270 |  | 2.79   | %
|Short-term borrowings                                                            |  |                              |        |          |      |                |  |       |                |  |          | 3,011   |                 |   | 23    |  | 3.06   | %
|Long-term borrowings                                                             |  |                              | 25,545  |          |      | 287             |  | 4.49   | %              |  |          | 42,300  |                 |   | 425   |  | 4.02   | %
|                                                                                 |  |                              |         |          |      |                 |  |        |                |  |          |         |                 |   |       |  |        |  
|Total interest-bearing liabilities                                               |  |                              | 233,024 |          |      | 1,257           |  | 2.18   | %              |  |          | 230,247 |                 |   | 1,718 |  | 3.02   | %
|                                                                                 |  |                              |         |          |      |                 |  |        |                |  |          |         |                 |   |       |  |        |  
|Non-interest-bearing liabilities                                                 |  |                              | 11,148  |          |      |                 |  |        |                |  |          | 12,504  |                 |   |       |  |        |  
|                                                                                 |  |                              |         |          |      |                 |  |        |                |  |          |         |                 |   |       |  |        |  
|Total liabilities                                                                |  |                              | 244,172 |          |      |                 |  |        |                |  |          | 242,751 |                 |   |       |  |        |  
|Stockholders equity                                                             |  |                              | 19,880  |          |      |                 |  |        |                |  |          | 24,903  |                 |   |       |  |        |  
|                                                                                 |  |                              |         |          |      |                 |  |        |                |  |          |         |                 |   |       |  |        |  
|Total liabilities and stockholders equity                                       |  | $                            | 264,052 |          |      |                 |  |        |                |  | $        | 267,654 |                 |   |       |  |        |  
|                                                                                 |  |                              |         |          |      |                 |  |        |                |  |          |         |                 |   |       |  |        |  
|Net Interest Income                                                              |  |                              |         |          | $    | 2,087           |  |        |                |  |          |         |                 | $ | 2,059 |  |        |  
|                                                                                 |  |                              |         |          |      |                 |  |        |                |  |          |         |                 |   |       |  |        |  
|Interest rate spread                                                             |  |                              |         |          |      |                 |  | 3.29   | %              |  |          |         |                 |   |       |  | 2.95   | %
|                                                                                 |  |                              |         |          |      |                 |  |        |                |  |          |         |                 |   |       |  |        |  
|Net interest margin                                                              |  |                              |         |          |      |                 |  | 3.46   | %              |  |          |         |                 |   |       |  | 3.30   | %
|                                                                                 |  |                              |         |          |      |                 |  |        |                |  |          |         |                 |   |       |  |        |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                              |         |          |      |                 |  | 104.88 | %              |  |          |         |                 |   |       |  | 110.01 | %
|                                                                                 |  |                              |         |          |      |                 |  |        |                |  |          |         |                 |   |       |  |        |  



|(1) | Yields and rates are annualized.
|--- | --------------------------------

|(2) | Includes nonaccrual loans.
|--- | --------------------------



22



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Provision for Loan Losses. Provisions for loan losses are charged to earnings to maintain the
total allowance for loan losses at a level considered adequate by management to provide for loan losses. The components of the allowance for loan losses represent an estimation done pursuant to ASC Topic 855 and ASC 310-10-35. The adequacy of the
allowance for loan losses is determined through a continuous review of the loan and lease portfolio and considers factors such as prior loss experience, type of collateral, industry standards, amount and type of past due loans in Patapsco
Bancorps loan portfolio, current economic conditions, both national and local, and other factors unique to particular loans and leases in the portfolio. Patapsco Bancorps management periodically monitors and adjusts its allowance for
loan losses based upon its analysis of the loan portfolio.

The following table shows the activity in the allowance for loan
losses.



|                                                                                     |  |                  |       |   |                   |   |       |      |  |   |       |   |  |   |       |  
|------------------------------------------------------------------------------------ |  | ---------------- | ----- | - | ----------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                                     |  | Nine MonthsEnded |       |   | Three MonthsEnded |  
|                                                                                     |  | March 31,        |       |   | March 31,         |  
|($ in thousands)                                                                     |  | 2010             |       |   | 2009              |   |       | 2010 |  |   | 2009  |  
|Allowance for loan losses, beginning of period                                       |  | $                | 3,023 |   |                   | $ | 1,834 |      |  | $ | 3,333 |   |  | $ | 2,900 |  
|Provision for loan losses                                                            |  |                  | 3,375 |   |                   |   | 2,451 |      |  |   | 2,583 |   |  |   | 891   |  
|Loans Charged Off:                                                                   |  |                  |       |   |                   |   |       |      |  |   |       |   |  |   |       |  
|Consumer                                                                             |  |                  | 417   |   |                   |   | 413   |      |  |   | 115   |   |  |   | 130   |  
|Real Estate                                                                          |  |                  | 3     |   |                   |   | 1     |      |  |   |      |   |  |   |      |  
|Commercial Loan                                                                      |  |                  | 110   |   |                   |   | 80    |      |  |   |      |   |  |   | 80    |  
|Commercial Lease                                                                     |  |                  | 680   |   |                   |   | 302   |      |  |   | 522   |   |  |   | 22    |  
|                                                                                     |  |                  |       |   |                   |   |       |      |  |   |       |   |  |   |       |  
|Total Charge-Offs                                                                    |  |                  | 1,210 |   |                   |   | 796   |      |  |   | 637   |   |  |   | 232   |  
|                                                                                     |  |                  |       |  
|Recoveries:                                                                          |  |                  |       |   |                   |   |       |      |  |   |       |   |  |   |       |  
|Consumer                                                                             |  |                  | 58    |   |                   |   | 55    |      |  |   | 15    |   |  |   | 17    |  
|Real Estate                                                                          |  |                  |      |   |                   |   |      |      |  |   |      |   |  |   |      |  
|Commercial Loan                                                                      |  |                  | 20    |   |                   |   | 48    |      |  |   | 1     |   |  |   | 46    |  
|Commercial Lease                                                                     |  |                  | 41    |   |                   |   | 43    |      |  |   | 12    |   |  |   | 13    |  
|                                                                                     |  |                  |       |   |                   |   |       |      |  |   |       |   |  |   |       |  
|Total Recoveries                                                                     |  |                  | 119   |   |                   |   | 146   |      |  |   | 28    |   |  |   | 76    |  
|                                                                                     |  |                  |       |   |                   |   |       |      |  |   |       |   |  |   |       |  
|Allowance for loan losses, end of period                                             |  | $                | 5,307 |   |                   | $ | 3,635 |      |  | $ | 5,307 |   |  | $ | 3,635 |  
|                                                                                     |  |                  |       |   |                   |   |       |      |  |   |       |   |  |   |       |  
|                                                                                     |  |                  |       |  
|Ratio of net charge-offs (annualized) to average loans outstanding during the period |  |                  | 0.67  | % |                   |   | 0.37  | %    |  |   | 1.14  | % |  |   | 0.27  | %
|                                                                                     |  |                  |       |   |                   |   |       |      |  |   |       |   |  |   |       |  
|Ratio of allowance to nonperforming loans                                            |  |                  | 41.08 | % |                   |   | 30.62 | %    |  |   |       |   |  |   |       |  
|                                                                                     |  |                  |       |   |                   |   |       |      |  |   |       |   |  |   |       |  

The provision for loan losses was $2.6 million in the quarter ended March 31, 2010, compared to $891,000 for
the quarter ended March 31, 2009. The increase in the provision is primarily due to the increase in the level of non-accrual loans as well as recent economic and portfolio trends. Patapsco Bancorps allowance for loan losses as a
percentage of total loans outstanding was 2.51% as of March 31, 2010 versus 1.37% at June 30, 2009. Patapsco Bancorps allowance for loan losses as a percentage of nonperforming loans was 41.08% at March 31, 2010 as compared to
26.89% at June 30, 2009. Setting the allowance at this level takes into consideration that 95% of non-performing loans are collateralized by real estate or guaranteed by the SBA at March 31, 2010. In consideration of the appropriate level
for the allowance for loan losses, downward adjustments were made to values established by real estate appraisals, where warranted, taking into consideration the age of the appraisal and the nature of the collateral. These adjusted appraisal values,
which required managements judgment, were used to develop estimated losses and related specific loss reserves within the allowance for loan losses. Patapsco Bancorp has concluded, after a thorough analysis of the nonperforming loan portfolio,
watch list loans, delinquencies and other factors, that the allowance is adequate at March 31, 2010.



23



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##### Table of Contents

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



|                                                               |  |           |        |   |          |   |        |  
|-------------------------------------------------------------- |  | --------- | ------ | - | -------- | - | ------ | -
|                                                               |  | March 31, |        |   | June 30, |  
|($ in thousands)                                               |  | 2010      |        |   | 2009     |  
|Loans accounted for on a non-accrual basis (1)                 |  |           |        |   |          |   |        |  
|Real Estate:                                                   |  |           |        |   |          |   |        |  
|Residential                                                    |  | $         | 473    |   |          | $ | 134    |  
|Commercial                                                     |  |           | 3,556  |   |          |   | 2,302  |  
|Construction                                                   |  |           | 2,715  |   |          |   | 3,232  |  
|Consumer                                                       |  |           | 104    |   |          |   | 146    |  
|Commercial Loan/Lease                                          |  |           | 5,614  |   |          |   | 5,427  |  
|                                                               |  |           |        |   |          |   |        |  
|Total                                                          |  |           | 12,462 |   |          |   | 11,241 |  
|Accruing loans that are contractually past due 90 days or more |  |           | 458    |   |          |   |       |  
|                                                               |  |           |        |   |          |   |        |  
|Total non-performing loans                                     |  |           | 12,920 |   |          |   | 11,241 |  
|Other non-performing assets (2)                                |  |           | 3,540  |   |          |   | 1,265  |  
|                                                               |  |           |        |   |          |   |        |  
|Total non-performing assets                                    |  | $         | 16,460 |   |          | $ | 12,506 |  
|                                                               |  |           |        |   |          |   |        |  
|                                                               |  |          
|Nonperforming loans to total loans                             |  |           | 6.11   | % |          |   | 5.11   | %
|                                                               |  |           |        |   |          |   |        |  
|Troubled debt restructurings: (3)                              |  |           |        |   |          |   |        |  
|Accruing                                                       |  | $         | 2,171  |   |          | $ | 1,124  |  
|Non-accruing                                                   |  |           | 4,477  |   |          |   | 2,988  |  
|                                                               |  |           |        |   |          |   |        |  
|Total                                                          |  | $         | 6,648  |   |          | $ | 4,112  |  
|                                                               |  |           |        |   |          |   |        |  



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

|(2) | Other nonperforming assets represent property acquired by Patapsco Bancorp through foreclosure or repossession.
|--- | ---------------------------------------------------------------------------------------------------------------

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

At March 31, 2010, nonaccrual construction loans totaled $2.7 million and consisted of a $1.1 million condominium conversion project and $1.6
million in residential construction and development loans. Nonaccrual commercial real estate consists of a $1.5 million office building loan, an $857,000 warehouse building loan, an $816,000 office/retail building loan and $398,000 in residential
investor property loans. The $1.5 million office building loan paid off on April 2, 2010. All commercial real estate and construction loans are considered well securitized. Commercial loans/leases include a $3.3 million loan supporting a
borrowers various business interests including commercial properties. In addition, this category includes five loans amounting to $1.1 million to borrowers operating retail businesses. Of the $5.6 million in commercial non-accrual
loans/leases, $1.1 million have an SBA guarantee.

The Company accepted a $2.0 million note receivable from Bradford Mid-Tier Company as
payment for a merger termination fee. On August 28, 2009, Bradford Bank, a wholly owned subsidiary of Bradford Mid-Tier Company, was closed by the Office of Thrift Supervision (OTS) and the FDIC was appointed receiver. As a
result of Bradford Bank being placed into receivership, the OTS was appointed statutory trustee of Bradford Mid-Tier Company. Repayment of this debt is guaranteed by the FDIC under the FDICs Temporary Liquidity Guarantee Program. The FDIC paid
this note in full on April 1, 2010. See Note 14, Termination of Merger Agreement, to the consolidated financial statements for further discussion of this issue.

Non-interest Income. Patapsco Bancorps non-interest income consists of deposit fees, service charges, income from bank owned life
insurance (BOLI) and gains. Total non-interest income increased by $67,000, or 33.3%, to $268,000 and by $46,000, or 7.3%, to $673,000 in the three and nine month periods ended March 31, 2010 due to $71,000 in gains on the sale of
securities available for sale in the current quarter compared to no gains in the prior years comparable periods.

Non-interest
Expenses. Total non-interest expenses increased by $1.1 million, or 55.9%, to $3.1 million for the quarter ended March 31, 2010 from $2.0 million for the quarter ended March 31, 2009. The provision for losses on and cost of real
estate acquired through foreclosure totaled $982,000 in the current quarter and was primarily attributable to an $837,000 allowance for losses established on a land, acquisition and development property acquired through foreclosure. Compensation
costs increased $27,000 or 2.5% as severance costs were offset by lower staff costs associated with the closing of a branch in December, 2009. Data processing costs were $39,000, or



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47%, higher in the quarter ended March 31, 2010 primarily due to the conversion of an ancillary application system. In addition, professional fees were higher due to higher loan collection
costs, increased compliance costs associated with the Sarbanes-Oxley Act of 2002 as well as employee recruitment fees. For the nine months ended March 31, 2010, non-interest expenses increased $956,000 or 16.1% to $6.9 million from $5.9 million
in the same period of the prior year. Similar trends as in the current quarter were prevalent in the nine month period. In addition, compensation and benefit costs were $297,000, or 8.5%, lower due to lower incentive costs. Federal deposit insurance
assessments were $176,000 higher due to significantly higher FDIC deposit insurance premiums due to higher premium rates prevalent in the banking industry.

Income Taxes. Income tax benefit was $1.3 million (or 39.8% of pre-tax loss) versus a tax benefit of $244,000 (or 39.9% of pre-tax loss)
for the three month periods ended March 31, 2010 and 2009, respectively. For the nine months ended March 31, 2010 the Company recorded a tax benefit of $1.3 million (or 40.1% of pre-tax loss) versus a benefit of $447,000 (or 40.3% of
pre-tax loss) in the same period last year.

Liquidity and Capital Resources

An important component of the Companys asset/liability structure is the level of liquidity available to meet the needs of customers and creditors.
The Companys Asset/Liability Management Committee has established general guidelines for the maintenance of prudent levels of liquidity. The Committee continually monitors the amount and source of available liquidity, the time to acquire it
and its cost. Management of the Company seeks to maintain a relatively high level of liquidity in order to retain flexibility in terms of investment opportunities and deposit pricing. Because liquid assets generally provide lower rates of return,
the Companys relatively high liquidity will, to a certain extent, result in lower rates of return on assets.

The Companys most
liquid assets are cash on hand, interest-bearing deposits and Federal funds sold, which are short-term, highly liquid investments with original maturities of less than three months that are readily convertible to known amounts of cash. The levels of
these assets are dependent on the Companys operating, financing and investing activities during any given period. At March 31, 2010, the Companys cash on hand and interest-bearing deposits totaled $20.3 million. In addition, the
Company has approximately $15.8 million of investment securities classified as available for sale, $4.5 million of which are pledged as collateral for the Companys federal funds line of credit.

The Company anticipates that it will have sufficient funds available to meet its current loan commitments of $13.6 million and unused lines of credit of
$10.1 million. Certificates of deposit that are scheduled to mature in less than one year at March 31, 2010 totaled $69.0 million. Historically, a high percentage of maturing deposits have remained with the Company.

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

The Company, as the holding company for the Bank, has an annual cash requirement of approximately
$654,000 for the payment of preferred dividends, as well as, interest payments on the $5.0 million in junior subordinated debentures. The only source of funds for the holding company is dividends from the Bank. The amount of dividends that can be
paid to the holding company from the Bank is limited by the earnings of the Bank. At March 31, 2010 the holding company had cash on hand and interest bearing deposits of $1.4 million.

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

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



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The Bank had $51.5 million in borrowing capacity with the Federal Home Loan Bank of Atlanta, with $17.1
million in borrowings outstanding, at March 31, 2010. These borrowings are secured by the Banks stock in the Federal Home Loan Bank of Atlanta and other eligible assets. In addition, the Bank has a $4.0 million line of credit, none of
which was outstanding at March 31, 2010, with Pacific Coast Bankers Bank.

Under the terms of its trust preferred securities and its
Series A and Series B preferred stock, while it has defers dividends on the trust preferred securities and suspends dividends on its Series A and Series B preferred stock, it generally may not declare or pay any dividends or distributions on, or
repurchase, its common stock.

As discussed in Note 10 - Regulatory Capital Requirements, the Bank exceeded all regulatory minimum capital
requirements.

Contingencies and Off-Balance Sheet Items

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

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



|                                    |  |                  |        |               |   |       
|----------------------------------- |  | ---------------- | ------ | ------------- | - | ------
|                                    |  | March 31, 2010   |        | June 30, 2009
|                                    |  | ($ in thousands)
|Commitments to originate new loans  |  | $                | 13,607 |               | $ | 19,516
|Undisbursed lines of credit         |  |                  | 10,104 |               |   | 6,564 
|Financial standby letters of credit |  |                  | 1,717  |               |   | 1,392 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

Changes to Internal Control Over Financial Reporting

There were no changes in the Companys internal control over financial reporting during the three months ended March 31, 2010 that have
materially affected, or are reasonable likely to materially affect, the Companys internal control over financial reporting.



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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There has been no update to the risk factors, except as set forth below:

The Company has elected to defer the payment of the dividends on its trust preferred securities and suspend regular quarterly cash dividends on its
Series A and Series B preferred stock issued to the US Treasury. Accordingly, the Company may not pay cash dividends on or repurchase its common stock.

On May 6, 2010, the Companys Board of Directors determined to suspend dividend payments on its trust preferred securities. In addition, on
May 6, 2010, the Companys Board of Directors determined to suspend regular quarterly cash dividends on the $6.0 million in Series A Preferred Stock and $300,000 in Series B Preferred Stock it issued to the US Treasury. The Companys
Board of Directors took these actions in consultation with the Federal Reserve Bank of Richmond as required by recent regulatory policy guidance. The Company currently has sufficient capital and liquidity to pay the scheduled interest and dividend
payments; however, the Company believes this decision will better support the capital position of the Bank. Under the terms of its trust preferred securities and its Series A and Series B Preferred Stock, while it defers dividends on the trust
preferred securities and suspends dividends on its Series A and Series B Preferred Stock, the Company generally may not declare or pay any dividends or distributions on, or repurchase, its common stock. See Notes 8 and 9 of Notes to Consolidated
Financial Statements.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.
Defaults Upon Senior Securities

On May 6, 2010, the Companys Board of Directors determined to suspend regular quarterly cash
dividends on the $6.0 million in Series A Preferred Stock and $300,000 in Series B Preferred Stock. The Companys Board of Directors took this action in consultation with the Federal Reserve Bank of Richmond as required by recent regulatory
policy guidance. The amount of dividends suspended to date is $0. On May 17, 2010, dividend payments on Series A and Series B Preferred Stock totaling $81,750 are due.

Item 4. Removed and Reserved

N/A

Item 5.
Other Information

None

Item 6. Exhibits

(a) Exhibits

The following exhibits are filed herewith:



|              |  |                                                                                                            
|------------- |  | -----------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Title                                                                                                      
|              | 
|31.1          |  | Rule 13a-14(a) Certification of Chief Executive Officer                                                    
|31.2          |  | Rule 13a-14(a) Certification of Chief Financial Officer                                                    
|32            |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to §906 of Sarbanes Oxley Act



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Signatures

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



|                   |  |                            |  |                                                  
|------------------ |  | -------------------------- |  | -------------------------------------------------
|                   |  |                            |  | PATAPSCO BANCORP, INC.                           
|                   | 
|Date: May 12, 2010 |  | /s/ Michael
J. Dee        
|                   |  |                            |  | Michael J. Dee                                   
|                   |  |                            |  | President and Chief Executive Officer            
|                   | 
|                   |  | /s/ William
C. Wiedel, Jr.
|                   |  |                            |  | William C. Wiedel, Jr.                           
|                   |  |                            |  | Senior Vice President and Chief Financial Officer



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