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United States

Securities and Exchange Commission

Washington, D C 20549



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FORM 10-QSB



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(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, 2006



| ̈ | 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



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PATAPSCO BANCORP, INC.

(Exact Name of Small Business Issuer as Specified in its Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Maryland                                                       |  | 52-1951797                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

1301 Merritt Boulevard, Dundalk, Maryland 21222-2194

(Address of Principal Executive Offices)

(410) 285-1010

Registrants Telephone Number, Including Area Code



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Check whether the issuer (1) filed
all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 ̈

The issuer has been subject to such filing requirements for the past 90 days.

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 9, 2006, the issuer had 1,800,351 shares of Common Stock issued and outstanding.

Transitional Small Business Disclosure Format (check one):    Yes ̈No  x



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##### Table of Contents

CONTENTS



|                              |  |                                                                                                                               |  |     
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                               |  | PAGE
|                              | 
|PART I. FINANCIAL INFORMATION |  |                                                                                                                              
|                              |  |                                                                                                                              
|Item 1.                       |  | Financial Statements                                                                                                          |  |     
|                              |  |                                                                                                                              
|                              |  | Consolidated Statements of Financial Condition at March 31, 2006 (unaudited) and June 30, 2005                                |  | 3   
|                              |  |                                                                                                                              
|                              |  | Consolidated Statements of Operations for the Nine and Three-Month Periods Ended March 31, 2006 and 2005 (unaudited)          |  | 4   
|                              |  |                                                                                                                              
|                              |  | Consolidated Statements of Comprehensive Income for the Nine and Three-Month Periods Ended March 31, 2006 and 2005(unaudited) |  | 5   
|                              |  |                                                                                                                              
|                              |  | Consolidated Statements of Cash Flows for the Nine-Month Periods Ended March 31, 2006 and 2005(unaudited)                     |  | 6   
|                              |  |                                                                                                                              
|                              |  | Notes to Consolidated Financial Statements                                                                                    |  | 7   
|                              |  |                                                                                                                              
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operation                                          |  | 11  
|                              |  |                                                                                                                              
|Item. 3.                      |  | Controls and procedures                                                                                                       |  | 19  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                              
|                              |  |                                                                                                                              
|Item 1.                       |  | Legal Proceedings                                                                                                             |  | 19  
|                              |  |                                                                                                                              
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                   |  | 19  
|                              |  |                                                                                                                              
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                               |  | 20  
|                              |  |                                                                                                                              
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                           |  | 20  
|                              |  |                                                                                                                              
|Item 5.                       |  | Other Information                                                                                                             |  | 20  
|                              |  |                                                                                                                              
|Item 6.                       |  | Exhibits                                                                                                                      |  | 20  
|                              |  |                                                                                                                              
|                              |  | Signatures                                                                                                                    |  | 21  



2



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##### Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Patapsco Bancorp, Inc. and Subsidiary

Dundalk, Maryland

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

($ in thousands except for per share data)



|                                                                                                                                                                                                       |  |               |         |   |              |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                                                                       |  | March 31,2006 |         |   | June 30,2005 |  
|                                                                                                                                                                                                       |  | (Unaudited)   |         |   |              |  
|Assets                                                                                                                                                                                                 |  |               |         |   |              |   |         |  
|Cash on hand and due from banks                                                                                                                                                                        |  | $             | 4,403   |   |              | $ | 5,270   |  
|Interest bearing deposits in other banks                                                                                                                                                               |  |               | 478     |   |              |   | 970     |  
|Federal funds sold                                                                                                                                                                                     |  |               | 776     |   |              |   | 1,408   |  
|                                                                                                                                                                                                       |  |               |         |   |              |   |         |  
|Cash and Cash equivalents                                                                                                                                                                              |  |               | 5,657   |   |              |   | 7,648   |  
|Time deposits at other financial institutions                                                                                                                                                          |  |               | 608     |   |              |   | 619     |  
|Securities available for sale                                                                                                                                                                          |  |               | 20,213  |   |              |   | 24,800  |  
|Loans receivable, net of allowance for loan losses of $951                                                                                                                                             |  |               |         |   |              |   |         |  
|and $945, respectively                                                                                                                                                                                 |  |               | 190,234 |   |              |   | 161,094 |  
|Investment in securities required by law, at cost                                                                                                                                                      |  |               | 2,416   |   |              |   | 1,677   |  
|Property and equipment, net                                                                                                                                                                            |  |               | 1,857   |   |              |   | 1,585   |  
|Goodwill and other intangible assets                                                                                                                                                                   |  |               | 3,367   |   |              |   | 3,406   |  
|Accrued interest and other assets                                                                                                                                                                      |  |               | 4,046   |   |              |   | 3,875   |  
|                                                                                                                                                                                                       |  |               |         |   |              |   |         |  
|Total assets                                                                                                                                                                                           |  | $             | 228,398 |   |              | $ | 204,704 |  
|                                                                                                                                                                                                       |  |               |         |   |              |   |         |  
|Liabilities and Stockholders Equity                                                                                                                                                                   |  |               |         |   |              |   |         |  
|Liabilities:                                                                                                                                                                                           |  |               |         |   |              |   |         |  
|Deposits:                                                                                                                                                                                              |  |               |         |   |              |   |         |  
|Non interest bearing deposits                                                                                                                                                                          |  | $             | 13,305  |   |              | $ | 12,072  |  
|Interest bearing deposits                                                                                                                                                                              |  |               | 154,778 |   |              |   | 152,248 |  
|                                                                                                                                                                                                       |  |               |         |   |              |   |         |  
|Total Deposits                                                                                                                                                                                         |  |               | 168,083 |   |              |   | 164,320 |  
|Accrued expenses and other liabilities                                                                                                                                                                 |  |               | 2,273   |   |              |   | 2,564   |  
|Subordinated debentures                                                                                                                                                                                |  |               | 5,000   |   |              |   |        |  
|Short-term debt                                                                                                                                                                                        |  |               | 11,000  |   |              |   |        |  
|Long term debt                                                                                                                                                                                         |  |               | 24,050  |   |              |   | 20,233  |  
|                                                                                                                                                                                                       |  |               |         |   |              |   |         |  
|Total liabilities                                                                                                                                                                                      |  |               | 210,406 |   |              |   | 187,117 |  
|                                                                                                                                                                                                       |  |              
|Temporary Equity  ESOP shares subject to put option                                                                                                                                                   |  |               | 1,255   |   |              |   | 1,266   |  
|                                                                                                                                                                                                       |  |              
|Stockholders equity:                                                                                                                                                                                  |  |               |         |   |              |   |         |  
|Preferred stock-Series A Noncumultive Convertible Perpetual $0.01 par value; authorized 1,000,000 shares with a liquidation preference of $25
per share; 0 and 93,745 shares outstanding, respectively |  |               |        |   |              |   | 1       |  
|Additional paid-in capital                                                                                                                                                                             |  |               |        |   |              |   | 2,345   |  
|Common stock $0.01 par value: authorized 4,000,000 shares: issued and outstanding 1,802,441 and 1,414,456 shares, respectively                                                                         |  |               | 18      |   |              |   | 14      |  
|Additional paid-in capital                                                                                                                                                                             |  |               | 6,769   |   |              |   | 4,332   |  
|Obligation under deferred compensation                                                                                                                                                                 |  |               | 391     |   |              |   | 440     |  
|Deferred compensation contra                                                                                                                                                                           |  |               | (78     | ) |              |   | (78     | )
|Retained earnings, substantially restricted                                                                                                                                                            |  |               | 10,008  |   |              |   | 9,438   |  
|Accumulated other comprehensive loss, net of taxes                                                                                                                                                     |  |               | (371    | ) |              |   | (171    | )
|Total stockholders equity  permanent                                                                                                                                                                 |  |               | 16,737  |   |              |   | 16,321  |  
|                                                                                                                                                                                                       |  |               |         |   |              |   |         |  
|Total stockholders equity including temporary equity                                                                                                                                                  |  |               | 17,992  |   |              |   | 17,587  |  
|                                                                                                                                                                                                       |  |               |         |   |              |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                             |  | $             | 228,398 |   |              | $ | 204,704 |  
|                                                                                                                                                                                                       |  |               |         |   |              |   |         |  

See accompanying notes to consolidated financial statements



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##### Table of Contents

Patapsco Bancorp, Inc. and Subsidiary

Dundalk, Maryland

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

($ in thousands except for per share data)

|                                                        |  |                                |        |                                 |   |       |  |      |        |  |   |       
|------------------------------------------------------- |  | ------------------------------ | ------ | ------------------------------- | - | ----- |  | ---- | ------ |  | - | ------
|                                                        |  | For Nine Months EndedMarch 31, |        | For Three Months EndedMarch 31,
|                                                        |  | 2006                           |        | 2005                            |   | 2006  |  | 2005
|Interest income:                                        |  |                                |        |                                 |   |       |  |      |        |  |   |       
|Loans receivable                                        |  | $                              | 9,076  |                                 | $ | 8,006 |  | $    | 3,238  |  | $ | 2,682 
|Securities, including securities required by law        |  |                                | 716    |                                 |   | 788   |  |      | 245    |  |   | 257   
|Federal funds sold and other investments                |  |                                | 79     |                                 |   | 117   |  |      | 15     |  |   | 38    
|                                                        |  |                                |        |                                 |   |       |  |      |        |  |   |       
|Total interest income                                   |  |                                | 9,871  |                                 |   | 8,911 |  |      | 3,498  |  |   | 2,977 
|                                                        |  |                                |        |                                 |   |       |  |      |        |  |   |       
|Interest expense:                                       |  |                                |        |                                 |   |       |  |      |        |  |   |       
|Deposits                                                |  |                                | 2,486  |                                 |   | 2,116 |  |      | 903    |  |   | 707   
|Short-term debt                                         |  |                                | 106    |                                 |   |      |  |      | 78     |  |   |      
|Long-term debt                                          |  |                                | 889    |                                 |   | 707   |  |      | 334    |  |   | 238   
|                                                        |  |                                |        |                                 |   |       |  |      |        |  |   |       
|Total interest expense                                  |  |                                | 3,481  |                                 |   | 2,823 |  |      | 1,315  |  |   | 945   
|                                                        |  |                                |        |                                 |   |       |  |      |        |  |   |       
|Net interest income                                     |  |                                | 6,390  |                                 |   | 6,088 |  |      | 2,183  |  |   | 2,032 
|Provision for losses on loans                           |  |                                | 40     |                                 |   | 185   |  |      |       |  |   | 100   
|                                                        |  |                                |        |                                 |   |       |  |      |        |  |   |       
|Net interest income after provision for losses on loans |  |                                | 6,350  |                                 |   | 5,903 |  |      | 2,183  |  |   | 1,932 
|                                                        |  |                                |        |                                
|Non-interest income:                                    |  |                                |        |                                 |   |       |  |      |        |  |   |       
|Fees and service charges                                |  |                                | 457    |                                 |   | 392   |  |      | 157    |  |   | 147   
|Net gain on sale of securities available for sale       |  |                                | 2      |                                 |   |      |  |      |       |  |   |      
|Net gain on sale of office building                     |  |                                | 64     |                                 |   |      |  |      |       |  |   |      
|Other                                                   |  |                                | 119    |                                 |   | 93    |  |      | 42     |  |   | 29    
|                                                        |  |                                |        |                                 |   |       |  |      |        |  |   |       
|Total non-interest income                               |  |                                | 642    |                                 |   | 485   |  |      | 201    |  |   | 176   
|                                                        |  |                                |        |                                 |   |       |  |      |        |  |   |       
|Non-interest expenses:                                  |  |                                |        |                                 |   |       |  |      |        |  |   |       
|Compensation and employee benefits                      |  |                                | 3,425  |                                 |   | 2,945 |  |      | 1,205  |  |   | 1,035 
|Professional fees                                       |  |                                | 161    |                                 |   | 226   |  |      | 64     |  |   | 77    
|Equipment expense                                       |  |                                | 252    |                                 |   | 201   |  |      | 78     |  |   | 77    
|Net Occupancy expense                                   |  |                                | 419    |                                 |   | 229   |  |      | 137    |  |   | 78    
|Advertising                                             |  |                                | 67     |                                 |   | 141   |  |      | 22     |  |   | 47    
|Data processing                                         |  |                                | 203    |                                 |   | 182   |  |      | 68     |  |   | 69    
|Amortization of core deposit intangible                 |  |                                | 39     |                                 |   | 39    |  |      | 13     |  |   | 13    
|Telephone, postage and delivery                         |  |                                | 208    |                                 |   | 204   |  |      | 69     |  |   | 65    
|Other                                                   |  |                                | 679    |                                 |   | 748   |  |      | 252    |  |   | 259   
|                                                        |  |                                |        |                                 |   |       |  |      |        |  |   |       
|Total non-interest expense                              |  |                                | 5,453  |                                 |   | 4,915 |  |      | 1,908  |  |   | 1,720 
|                                                        |  |                                |        |                                 |   |       |  |      |        |  |   |       
|Income before provision for income taxes                |  |                                | 1,539  |                                 |   | 1,473 |  |      | 476    |  |   | 388   
|Provision for income taxes                              |  |                                | 574    |                                 |   | 532   |  |      | 175    |  |   | 141   
|                                                        |  |                                |        |                                 |   |       |  |      |        |  |   |       
|Net Income                                              |  | $                              | 965    |                                 | $ | 941   |  | $    | 301    |  | $ | 247   
|Preferred dividends declared                            |  |                                | 123    |                                 |   | 133   |  |      | 40     |  |   | 44    
|                                                        |  |                                |        |                                 |   |       |  |      |        |  |   |       
|Net income available to common stockholders             |  | $                              | 842    |                                 | $ | 808   |  | $    | 261    |  | $ | 203   
|                                                        |  |                                |        |                                 |   |       |  |      |        |  |   |       
|Basic earnings per share                                |  | $                              | 0.57   |                                 | $ | 0.56  |  | $    | 0.17   |  | $ | 0.14  
|                                                        |  |                                |        |                                 |   |       |  |      |        |  |   |       
|Diluted earnings per share                              |  | $                              | 0.50   |                                 | $ | 0.49  |  | $    | 0.16   |  | $ | 0.13  
|                                                        |  |                                |        |                                 |   |       |  |      |        |  |   |       
|Cash dividends declared per common share                |  | $                              | 0.1875 |                                 | $ | 0.173 |  | $    | 0.0625 |  | $ | 0.0575
|                                                        |  |                                |        |                                 |   |       |  |      |        |  |   |       

See accompanying notes to consolidated financial statements.



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##### Table of Contents

Patapsco Bancorp, Inc. and Subsidiary

Dundalk, Maryland

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

($ in thousands)

|                                                                                                               |  |                                |      |                                 |      |   |       |  |   |      |   |  |   |      |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ---- | ------------------------------- | ---- | - | ----- |  | - | ---- | - |  | - | ---- | -
|                                                                                                               |  | For Nine Months EndedMarch 31, |      | For Three Months EndedMarch 31, |     
|                                                                                                               |  | 2006                           |      |                                 | 2005 |   | 2006  |  |   | 2005 |  
|Net income                                                                                                     |  | $                              | 965  |                                 |      | $ | 941   |  | $ | 301  |   |  | $ | 247  |  
|Other comprehensive income (loss), net of tax:                                                                 |  |                                |      |                                 |      |   |       |  |   |      |   |  |   |      |  
|Unrealized net holding (losses)/gains on available-for-sale securities net of taxes of ($126),$55,($29),($127) |  |                                | (199 | )                               |      |   | 87    |  |   | (46  | ) |  |   | (202 | )
|Reclassification adjustment for gains Included in net income, net of tax of $0.6, $0, $0.6,
0                  |  |                                | (1   | )                               |      |   |      |  |   | (1   | ) |  |   |     |  
|                                                                                                               |  |                                |      |                                 |      |   |       |  |   |      |   |  |   |      |  
|Comprehensive income                                                                                           |  | $                              | 765  |                                 |      | $ | 1,028 |  | $ | 254  |   |  | $ | 45   |  
|                                                                                                               |  |                                |      |                                 |      |   |       |  |   |      |   |  |   |      |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

Patapsco Bancorp, Inc. and Subsidiary

Dundalk, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

($ in thousands)

|                                                                                                                                                                                      |  |                                |         |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------ | -
|                                                                                                                                                                                      |  | For Nine Months EndedMarch 31, |        
|                                                                                                                                                                                      |  | 2006                           |         |   | 2005 |  
|Cash flows from operating activities:                                                                                                                                                 |  |                                |         |   |      |   |        |  
|Net income                                                                                                                                                                            |  | $                              | 965     |   |      | $ | 941    |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                                                                                     |  |                                |         |   |      |   |        |  
|Depreciation                                                                                                                                                                          |  |                                | 236     |   |      |   | 194    |  
|Gain on sale of available for sale securities                                                                                                                                         |  |                                | (2      | ) |      |   |       |  
|Gain on sale of office building                                                                                                                                                       |  |                                | (64     | ) |      |   |       |  
|Provision for losses on loans                                                                                                                                                         |  |                                | 40      |   |      |   | 185    |  
|Amortization of deferred loan origination fees, net of costs                                                                                                                          |  |                                | (32     | ) |      |   | (119   | )
|Amortization of premiums and discounts, net                                                                                                                                           |  |                                | 14      |   |      |   | (10    | )
|Amortization of core deposit intangible                                                                                                                                               |  |                                | 39      |   |      |   | 39     |  
|Increase in the cash value of life insurance                                                                                                                                          |  |                                | (40     | ) |      |   | (45    | )
|Increase in accrued interest and other assets                                                                                                                                         |  |                                | (5      | ) |      |   | (89    | )
|Increase (decrease) in accrued expenses and other liabilities                                                                                                                         |  |                                | 278     |   |      |   | (174   | )
|                                                                                                                                                                                      |  |                                |         |   |      |   |        |  
|Net cash provided by operating activities                                                                                                                                             |  |                                | 1,429   |   |      |   | 922    |  
|                                                                                                                                                                                      |  |                                |         |   |      |   |        |  
|Cash flows from investing activities:                                                                                                                                                 |  |                                |         |   |      |   |        |  
|Loan principal disbursements, net of repayments                                                                                                                                       |  |                                | (26,459 | ) |      |   | (5,044 | )
|Proceeds from maturing time deposit investments                                                                                                                                       |  |                                |        |   |      |   | 293    |  
|Purchase of consumer loans                                                                                                                                                            |  |                                | (2,726  | ) |      |   |       |  
|Proceeds from maturing securities available for sale and principal payments on mortgage-backed securities                                                                             |  |                                | 3,924   |   |      |   | 4,795  |  
|Proceeds from sale of securities available for sale                                                                                                                                   |  |                                | 302     |   |      |   |       |  
|Purchase of securities available-for-sale                                                                                                                                             |  |                                | (7      | ) |      |   | (1,506 | )
|Purchase of investments required by law                                                                                                                                               |  |                                | (739    | ) |      |   | (165   | )
|Redemption of investments required by law                                                                                                                                             |  |                                |        |   |      |   | 267    |  
|Purchase of property and equipment                                                                                                                                                    |  |                                | (444    | ) |      |   | (158   | )
|                                                                                                                                                                                      |  |                                |         |   |      |   |        |  
|Net cash used in investing activities                                                                                                                                                 |  |                                | (26,149 | ) |      |   | (1,518 | )
|Cash flows from financing activities:                                                                                                                                                 |  |                                |         |   |      |   |        |  
|Net increase (decrease) in deposits                                                                                                                                                   |  |                                | 3,841   |   |      |   | (4,133 | )
|Net increase in short-term debt                                                                                                                                                       |  |                                | 11,000  |   |      |   |       |  
|Proceeds from long-term debt                                                                                                                                                          |  |                                | 9,000   |   |      |   |       |  
|Repayments of long-term debt                                                                                                                                                          |  |                                | (5,183  | ) |      |   | (1,583 | )
|Proceeds from the issuance of subordinated debentures                                                                                                                                 |  |                                | 5,000   |   |      |   |       |  
|Decrease in deposits by borrowers for taxes and insurance                                                                                                                             |  |                                | (573    | ) |      |   | (628   | )
|Repurchase of preferred stock                                                                                                                                                         |  |                                | (67     | ) |      |   |       |  
|Cash received from exercise of stock options                                                                                                                                          |  |                                | 151     |   |      |   | 47     |  
|Dividends paid                                                                                                                                                                        |  |                                | (440    | ) |      |   | (370   | )
|                                                                                                                                                                                      |  |                                |         |   |      |   |        |  
|Net cash provided by (used in) financing activities                                                                                                                                   |  |                                | 22,729  |   |      |   | (6,667 | )
|                                                                                                                                                                                      |  |                                |         |   |      |   |        |  
|Net decrease in cash and cash equivalents                                                                                                                                             |  |                                | (1,991  | ) |      |   | (7,263 | )
|Cash and cash equivalents at beginning of period                                                                                                                                      |  |                                | 7,648   |   |      |   | 18,144 |  
|                                                                                                                                                                                      |  |                                |         |   |      |   |        |  
|Cash and cash equivalents end of period                                                                                                                                               |  | $                              | 5,657   |   |      | $ | 10,881 |  
|                                                                                                                                                                                      |  |                                |         |   |      |   |        |  
|Supplemental information:                                                                                                                                                             |  |                                |         |   |      |   |        |  
|Interest paid on deposits                                                                                                                                                             |  | $                              | 3,597   |   |      | $ | 2,852  |  
|Income taxes paid                                                                                                                                                                     |  |                                | 529     |   |      |   | 540    |  
|Non-cash equity transactions:                                                                                                                                                         |  |                                |         |   |      |   |        |  
|Conversion of preferred shares to common  91,069 preferred into 363,638 common and 4,345 preferred into 17,348 common in the nine months
ended March 31, 2006 and 2005, respectively |  |                                | 2,279   |   |      |   | 109    |  

See accompanying notes to financial statements.



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##### Table of Contents

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) and its wholly-owned subsidiary, The
Patapsco Bank (the Bank), the Banks wholly owned subsidiaries, Prime Business Leasing and Patapsco Financial Services. All intercompany accounts and transactions have been eliminated in the accompanying consolidated financial
statements.

Note 2: The Patapsco Bank

The Bank 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: Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance
with instructions for Form 10-QSB and therefore, do not include all disclosures necessary for a complete presentation of the consolidated financial statements, in conformity with accounting principles generally accepted in the United States of
America. However, all adjustments that are, in the opinion of management, necessary for the fair presentation of the consolidated interim financial statements have been included. Such adjustments were of a normal recurring nature. The results of
operations for the nine months ended March 31, 2006 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-KSB for the year ended June 30, 2005.

Note 4: Cash and Cash Equivalents

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

Note 5: Regulatory Capital Requirements

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

At March 31, 2006, the Bank met each of the three minimum regulatory capital requirements.



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##### Table of Contents

The following table summarizes the Banks regulatory capital position at March 31, 2006 (in thousands).



|                                         |  |        |        |   |                              |   |        |                                                         |        |  |      |        |  |   |        |  |       |  
|---------------------------------------- |  | ------ | ------ | - | ---------------------------- | - | ------ | ------------------------------------------------------- | ------ |  | ---- | ------ |  | - | ------ |  | ----- | -
|                                         |  | Actual |        |   | For CapitalAdequacy Purposes |   |        | Well Capitalized UnderPrompt CorrectiveAction Provision |       
|($ in thousands)                         |  | Amount |        | % |                              |   | Amount |                                                         | %      |  |      | Amount |  | % |       
|Total Capital (to Risk Weighted Assets)  |  | $      | 17,695 |   | 10.92                        | % |        | $                                                       | 12,959 |  | 8.00 | %      |  | $ | 16,199 |  | 10.00 | %
|Tier 1 Capital (to Risk Weighted Assets) |  | $      | 16,743 |   | 10.34                        | % |        | $                                                       | 6,480  |  | 4.00 | %      |  | $ | 9,720  |  | 6.00  | %
|Tier 1 Capital (to Average Assets)       |  | $      | 16,743 |   | 7.64                         | % |        | $                                                       | 8,769  |  | 4.00 | %      |  | $ | 10,961 |  | 5.00  | %

Note 6: Earnings Per Share

Basic per share amounts are based on the weighted average shares of common stock outstanding and shares obligated under the Rabbi trust. Diluted earnings per share assume the conversion, exercise or issuance of all potential common stock
instruments such as options and convertible securities, unless the effect is to reduce a loss or increase earnings per share. Earnings per share for the prior periods ended March 31, 2005 have been restated to reflect stock dividends and the three
for one stock split in the form of a 200% stock dividend declared in June 2005.



|                                                           |  |                                 |       |                                  |   |       |  |         |       |  |   |      
|---------------------------------------------------------- |  | ------------------------------- | ----- | -------------------------------- | - | ----- |  | ------- | ----- |  | - | -----
|                                                           |  | Nine Months EndedMarch 31, 2006 |       | Three Months EndedMarch 31, 2006
|($ in thousands except for per share data)                 |  | Basic                           |       | Diluted                          |   | Basic |  | Diluted
|Net Income                                                 |  | $                               | 965   |                                  | $ | 965   |  | $       | 301   |  | $ | 301  
|Preferred Stock Dividends                                  |  |                                 | 123   |                                  |   | 0     |  |         | 40    |  |   | 0    
|                                                           |  |                                 |       |                                  |   |       |  |         |       |  |   |      
|Net Income Available to Common Stockholders                |  | $                               | 842   |                                  | $ | 965   |  | $       | 261   |  | $ | 301  
|                                                           |  |                                 |       |                                  |   |       |  |         |       |  |   |      
|Weighted average shares outstanding                        |  |                                 | 1,485 |                                  |   | 1,485 |  |         | 1,509 |  |   | 1,509
|                                                           |  |                                 |       |                                 
|Diluted Securities:                                        |  |                                 |       |                                  |   |       |  |         |       |  |   |      
|Preferred Stock                                            |  |                                 |       |                                  |   | 353   |  |         |       |  |   | 337  
|Options                                                    |  |                                 |       |                                  |   | 82    |  |         |       |  |   | 75   
|                                                           |  |                                 |       |                                  |   |       |  |         |       |  |   |      
|Adjusted Weighted Average Shares                           |  |                                 | 1,485 |                                  |   | 1,920 |  |         | 1,509 |  |   | 1,921
|                                                           |  |                                 |       |                                 
|Per Share Amount                                           |  | $                               | 0.57  |                                  | $ | 0.50  |  | $       | 0.17  |  | $ | 0.16 
|                                                           |  |                                 |       |                                  |   |       |  |         |       |  |   |      
|                                                           |  |                                
|                                                           |  | Nine Months EndedMarch 31, 2005 |       | Three Months EndedMarch 31, 2005
|($ in thousands)($ in thousands except for per share data) |  | Basic                           |       | Diluted                          |   | Basic |  | Diluted
|Net Income                                                 |  | $                               | 941   |                                  | $ | 941   |  | $       | 247   |  | $ | 247  
|Preferred Stock Dividends                                  |  |                                 | 133   |                                  |   | 0     |  |         | 44    |  |   | 0    
|                                                           |  |                                 |       |                                  |   |       |  |         |       |  |   |      
|Net Income Available to Common Stockholders                |  | $                               | 808   |                                  | $ | 941   |  | $       | 203   |  | $ | 247  
|                                                           |  |                                 |       |                                  |   |       |  |         |       |  |   |      
|Weighted average shares outstanding                        |  |                                 | 1,431 |                                  |   | 1,431 |  |         | 1,445 |  |   | 1,445
|                                                           |  |                                 |       |                                 
|Diluted Securities:                                        |  |                                 |       |                                  |   |       |  |         |       |  |   |      
|Preferred Stock                                            |  |                                 |       |                                  |   | 374   |  |         |       |  |   | 374  
|Options                                                    |  |                                 |       |                                  |   | 102   |  |         |       |  |   | 102  
|                                                           |  |                                 |       |                                  |   |       |  |         |       |  |   |      
|Adjusted Weighted Average Shares                           |  |                                 | 1,431 |                                  |   | 1,907 |  |         | 1,445 |  |   | 1,921
|                                                           |  |                                 |       |                                 
|Per Share Amount                                           |  | $                               | 0.56  |                                  | $ | 0.49  |  | $       | 0.14  |  | $ | 0.13 
|                                                           |  |                                 |       |                                  |   |       |  |         |       |  |   |      



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##### Table of Contents

Note 7: Goodwill and Intangible Assets

SFAS No. 142, Goodwill and Other Intangible Assets 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 8: Stock Options

SFAS No. 123, Accounting for Stock-Based
Compensation, requires the Company to make certain disclosures as if the fair value method of accounting had been applied to the Companys stock option grants made subsequent to 1994. Accordingly, no stock option based employee
compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123.

($ in thousands except per share data)



|                                                                                                                                            |  |                    |      |   |          |   |      |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---- | - | -------- | - | ---- | -
|                                                                                                                                            |  | Nine Months Ended  |     
|                                                                                                                                            |  | 03/31/05           |      |   | 03/31/04 |  
|Net Income as reported                                                                                                                      |  | $                  | 965  |   |          | $ | 941  |  
|Amounts recognized as expense in the financial statements                                                                                   |  |                    | 17   |   |          |   |     |  
|Deduct: Total stock based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                    | (22  | ) |          |   | (20  | )
|                                                                                                                                            |  |                    |      |   |          |   |      |  
|Proforma Net Income                                                                                                                         |  | $                  | 961  |   |          | $ | 921  |  
|                                                                                                                                            |  |                    |      |   |          |   |      |  
|Earnings per share:                                                                                                                         |  |                    |      |   |          |   |      |  
|                                                                                                                                            |  |                   
|Basic - as reported                                                                                                                         |  | $                  | 0.57 |   |          | $ | 0.56 |  
|Basic  pro forma                                                                                                                           |  |                    | 0.56 |   |          |   | 0.55 |  
|                                                                                                                                            |  |                   
|Diluted  as reported                                                                                                                       |  | $                  | 0.50 |   |          | $ | 0.49 |  
|Diluted  pro forma                                                                                                                         |  |                    | 0.50 |   |          |   | 0.48 |  
|                                                                                                                                            | 
|                                                                                                                                            |  | Three Months Ended |     
|                                                                                                                                            |  | 03/31/05           |      |   | 03/31/04 |  
|Net Income as reported                                                                                                                      |  | $                  | 301  |   |          | $ | 247  |  
|Amounts recognized as expense in the financial statements                                                                                   |  |                    | 8    |   |          |   |     |  
|Deduct: Total stock based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                    | (9   | ) |          |   | (7   | )
|                                                                                                                                            |  |                    |      |   |          |   |      |  
|Proforma Net Income                                                                                                                         |  | $                  | 300  |   |          | $ | 240  |  
|                                                                                                                                            |  |                    |      |   |          |   |      |  
|Earnings per share:                                                                                                                         |  |                    |      |   |          |   |      |  
|                                                                                                                                            |  |                   
|Basic - as reported                                                                                                                         |  | $                  | 0.17 |   |          | $ | 0.14 |  
|Basic  pro forma                                                                                                                           |  |                    | 0.17 |   |          |   | 0.14 |  
|                                                                                                                                            |  |                   
|Diluted  as reported                                                                                                                       |  | $                  | 0.16 |   |          | $ | 0.13 |  
|Diluted  pro forma                                                                                                                         |  |                    | 0.16 |   |          |   | 0.13 |  



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##### Table of Contents

Note 9: Guarantees

The
Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance
of a customer to a third party. Generally, all letters of credit, when issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan
facilities to customers. The Company, generally, holds collateral and/or personal guarantees supporting these commitments. The Company had $1.5 million of standby letters of credit as of March 31, 2006 and $1,365,000 at June 30, 2005. 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 current amount of the
liability as of March 31, 2006 and June 30, 2005 for guarantees under standby letters of credit issued is not material.

Note 10: Subordinated Debentures:

On October 31, 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%. there after, 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 million of junior subordinated deferrable interest debentures from Patapsco Bancorp. The debentures are the sole asset of the Trust. The terms of the junior subordinated debentures are the same as the terms of
the capital securities. Patapsco Bancorp has also fully and unconditionally guaranteed the obligations of the Trust under the capital securities. The capital securities are redeemable by Patapsco Bancorp on or after October 31, 2010, at par. The
capital securities must be redeemed upon final maturity of the subordinated debentures on October 31, 2035. The Company used the proceeds pay-off the $1.8 million loan to a Bankers bank. The remaining funds are available to make capital
contributions to the Bank.

Note 11: Preferred Stock

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

A total of 82,375 of the 85,051 outstanding preferred shares elected to convert their shares into Company common stock. The remaining 2,676 shares were redeemed at $25
per share for a total of $66,900. As a result, the Companys common stock outstanding increased by 328,924 shares to 1,802,441 and shareholders equity decreased by $66,900.

Note 12: Recent Accounting Pronouncements

FAS 123(R)

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123(R), Share-Based Payment. Statement No. 123(R) revised Statement No. 123, Accounting for Stock-Based
Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. Statement No. 123(R) will require compensation costs related to share-based payment transactions to
be recognized in the financial statements (with limited exceptions). The amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost will be recognized over the
period that an employee provides service in exchange for the award.

On April 14, 2005, the Securities and Exchange Commission (SEC) adopted a
new rule that amends the compliance dates for Statement No. 123 (R). Under the new rule, the Company is required to adopt SFAS No. 123R on July 1, 2006. The Company has not yet determined the method of adoption or the effect of adopting SFAS No.
123R, and it has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.



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##### Table of Contents

SAB 107

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB No. 107), Share-Based Payment, providing guidance on option valuation methods, the accounting for income tax effects of
share-based payment arrangements upon adoption of SFAS No. 123(R), and the disclosures in MD&A subsequent to the adoption. The Company will provide SAB No. 107 required disclosures upon adoption of SFAS No. 123(R) on July 1, 2006.

FAS 155

In February 2006, the FASB issued
SFAS No. 155, Accounting for Certain Hybrid Financial Instruments. SFAS No. 155 amends FASB Statement No. 133 and FASB Statement No. 140, and improves the financial reporting of certain hybrid financial instruments by requiring more
consistent accounting that eliminates exemptions and provides a means to simplify the accounting for these instruments. Specifically, SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole
(eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an
entitys first fiscal year that begins after September 15, 2006. The Company is required to adopt the provisions of SFAS No. 155, as applicable, beginning in fiscal year 2007. Management does not believe the adoption of SFAS No. 155 will have a
material impact on the Companys financial position and results of operations.

FAS 156

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets  An Amendment of FASB Statement No. 140 (SFAS
156). SFAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The statement permits, but does not require, the subsequent measurement of servicing assets
and servicing liabilities at fair value. SFAS 156 is effective as of the beginning of an entitys first fiscal year that begins after September 15, 2006, which for the Company will be as of the beginning of fiscal 2007. The Company does not
believe that the adoption of SFAS 156 will have a significant effect on its financial statements.

Item 2. Managements Discussion and Analysis or Plan of Operation

General

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



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the Companys market area, and competition that could cause actual results to differ materially from historical
earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the
factors listed above could affect the Companys financial performance and could cause the Companys actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any
current statements.

The Company does not undertake, and specifically disclaims any obligation, to 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 balance sheet at historic cost requires an impairment write-down or a valuation reserve to be established.

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

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

In accordance with the provisions of Statement of Financial Accounting Standards No. 114, Accounting for Creditors for Impairment of a Loan, as amended by Statement 118, Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures (collectively referred to as Statement 114), Patapsco determines and recognizes impairment of certain loans. A loan is determined to be impaired when, based on current information and events, it is probable that Patapsco
will be unable to collect all amounts due according to the contractual terms of the loan agreement. Patapsco generally considers a period of delay in payment to include delinquency up to and including 90 days. Statement 114 requires that impaired
loans be measured at the present value of expected future cash flows discounted at each loans effective interest rate, or at the loans observable market price or the fair value of the collateral if the loan is collateral dependent.

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



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

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

Comparison of Financial Condition at March 31, 2006 and June 30, 2005

The Companys assets increased by $23.7 million or 11.6% to $228.4 million at March 31, 2006 compared to $204.7 million at June 30, 2005. Loans have
increased $29.1 million or 18.1% to $190.2 million at March 31, 2006 from $161.1 million at June 30, 2005. Construction loans have increased $7.8 million to $13.3 million, commercial business loans have increased $7.1 million to $35.2 million,
commercial real estate loans have increased $5.7 million to $30.8 million, residential real estate loans have increased $4.4 million to $78.9 million, consumer loans have increased $2.4 million to $17.5 million and commercial equipment leases have
increased $1.8 million to $15.4 million. Asset growth was funded with borrowings from the Federal Home Loan Bank of Atlanta and $5 million in subordinated debentures issued in October 2005 as well as cash on hand and maturities and other cash flows
from the securities portfolio.

Interest bearing deposits increased $2.6 million or 1.7% in the nine months ended March 31, 2006 to $154.8
million from $152.2 million at June 30, 2005. This increase has primarily occurred in the certificate of deposit account category where $2.2 million in brokered certificates were issued in February 2006. Non-interest bearing deposits increased by
$1.2 million or 10.2% to $13.3 million at March 31, 2006 from $12.1 million at June 30, 2005.

Total borrowings have increased by $19.8
million as loan growth has far exceeded deposit growth and cash generated by the securities portfolio. At March 31, 2006, short-term borrowings consisted of $7 million in 14 day fixed rate credits and $4 million in daily rate credits from the
Federal Home Loan Bank of Atlanta.

Comparison of Operating Results for the Quarter and Nine Months Ended March 31, 2006 and March 31, 2005

Net Income

The Companys net income increased by $54,000 or 21.9% to $301,000 for the quarter ended March 31, 2006 from $247,000 for the quarter ended March 31, 2005. The Companys net income increased by $24,000 or 2.6% to $965,000 for the
nine months ended March 31, 2006 from $941,000 for the nine months ended March 31, 2005. The increase in the Companys net income during the comparable three-month period is a result of a higher net interest income, primarily due to the
increased volume of loans, a lower provision for loan losses and higher non-interest income offsetting higher operating expenses . The increase in the Companys net income for the comparable nine-month period is a result of higher net interest
income, a lower provision for loan losses and higher non-interest income offsetting higher operating expenses

Interest
Income

Total interest income increased by $521,000 or 17.5% to $3.5 million for the quarter ended March 31, 2006 when compared to $3.0
million in the quarter ended March 31, 2005 as higher interest income due to increased loan balances, as well as higher rates earned on all asset classes offset lower balances in the investment portfolio.

Total interest income increased by $1.0 million or 10.8% to $9.9 million for the nine months ended March 31, 2006 when compared to $8.9 million in the
nine months ended March 31, 2005 as higher interest income on loans offset lower interest income on the investment portfolio.

Interest
income on loans receivable increased by $556,000 or 20.7% to $3.2 million for the quarter ended March 31, 2006 from $2.7 million for the quarter ended March 31, 2005. Interest income on loans receivable increased by $1.0 million or 13.4% to $9.0



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million for the nine months ended March 31, 2006 from $8.0 million for the nine months ended March 31, 2005. The increase
in interest income on loans receivable during both the three and nine-month periods is primarily due to higher average balances of these assets. Increased rates earned on loans also contributed to the increases in both the nine and three month
periods.

Interest income on investment and mortgage-backed securities decreased by $12,000 or 4.7% to $245,000 and by $72,000 or 9.1% to
$716,000 in the three and nine month periods ended March 31, 2006, respectively due to lower average balances offsetting higher rates earned on these assets. The Company has been reinvesting cash generated from the investment portfolio into the loan
portfolio.

Interest income on federal funds sold and other investments decreased by $23,000 or 60.5% to $15,000 for the quarter ended
March 31, 2006 from $38,000 for the quarter ended March 31, 2005. Interest income on federal funds sold and other investments decreased by $38,000 or 32.5% to $79,000 for the nine months ended March 31, 2006 from $117,000 for the nine months ended
March 31, 2005. The decrease in the three and nine-month periods are due to lower average balances of short-term investments offsetting higher rates earned on these assets.

Interest Expense

Total interest expense increased by $370,000 or 39.2% to $1.3 million for the quarter ended March 31, 2006 from $0.9 million for the quarter ended March 31, 2005. Total interest expense increased by $0.7 million or 23.3% to $3.5 million in
the nine months ended March 31, 2006 from $2.8 million. The increase in interest expense during the comparable quarterly and year-to-date periods is due to the higher average balances of borrowed money and the higher rates paid on deposits and
borrowings.

Interest expense on deposits increased by $196,000 or 27.7% to $903,000 for the quarter ended March 31, 2006 from $707,000 for
the quarter ended March 31, 2005. Interest expense on deposits increased by $370,000 or 17.5% to $2.5 million from $2.1 million for the nine months ended March 31, 2005. The increase in interest expense on deposits in both the quarterly and year to
date periods is primarily due to higher rates paid on deposits.

Interest expense on short-term borrowings increased by $78,000 from $0 for
the quarter ended March 31, 2006 and by $106,000 from $0 for the nine-month period March 31, 2006 when compared to the comparable periods ended March 31, 2005. The Company has utilized short-term borrowings to take advantage of the lower cost of
these borrowings and to provide temporary liquidity in times of increased loan fundings. Interest expense on long-term borrowings increased by $96,000 or 40.3% to $334,000 from $238,000 for the three month period ended March 31, 2006 as compared to
the three month period ended March 31, 2005 due to higher average balances and slightly higher rates paid on these borrowings. Interest expense on long-term borrowings increased by $182,000 or 25.7% to $889,000 from $707,000 for the nine month
period ended March 31, 2006 as compared to the nine month period ended March 31, 2005 due to both higher average balances and higher rates paid on these borrowings.

Net Interest Income

The Companys net interest income increased by $151,000 or 7.4% to $2.2 million for the quarter ended March 31, 2006 from $2.0 million for the quarter ended March 31, 2005. Net interest income increased by $302,000 or 5.0% to $6.4
million for the nine months ended March 31, 2006 from $6.1 million during the nine months ended March 31, 2005. The increases in net interest income during the comparable quarters and nine-month periods were primarily due to the higher volume of
earning assets.



14



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##### Table of Contents

Average Balance Sheet

The following tables sets forth certain information relating to the Companys average balance sheet and reflects the average yield on assets and cost
of liabilities for the periods indicated and the average yields earned and rates paid. Dividing annualized income or expense by the average balance of assets or liabilities, respectively, for the periods presented derives these yield and costs.
Average balances are daily balances.

The table presents information for the periods indicated with respect to the net interest margin,
which is its net interest income divided by the average balance of interest-earning assets. Also presented is the difference between the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities, or
interest rate spread, which is also used to measure the earnings power of financial institutions.



|                                                                                 |  |                             |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|-------------------------------------------------------------------------------- |  | --------------------------- | ------- | -------- | - | -------------- |  | ------ | -------------- |  | - | ------- |  | - | ----- |  | ------ | -
|                                                                                 |  | Nine Months Ended March 31, |         | Interest |   | AverageRate(1) | 
|                                                                                 |  | 2006                        |         | 2005     |   |               
|                                                                                 |  | AverageBalance              |         | Interest |   | AverageRate(1) |  |        | AverageBalance |  |  
|                                                                                 |  | (Dollars in thousands)      |        
|Interest-earning assets:                                                         |  |                             |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Loans receivable (2)                                                             |  | $                           | 172,672 |          | $ | 9,076          |  | 7.01   | %              |  | $ | 155,015 |  | $ | 8,006 |  | 6.89   | %
|Investment and mortgage-backed securities                                        |  |                             | 24,186  |          |   | 716            |  | 3.95   | %              |  |   | 28,773  |  |   | 788   |  | 3.65   | %
|Federal funds sold and other interest-earning assets                             |  |                             | 2,905   |          |   | 79             |  | 3.64   | %              |  |   | 8,540   |  |   | 117   |  | 1.83   | %
|                                                                                 |  |                             |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Total interest earning assets                                                    |  |                             | 199,763 |          |   | 9,871          |  | 6.59   | %              |  |   | 192,328 |  |   | 8,911 |  | 6.18   | %
|Noninterest-earning assets                                                       |  |                             | 13,499  |          |   |                |  |        |                |  |   | 12,533  |  |   |       |  |        |  
|                                                                                 |  |                             |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Total assets                                                                     |  | $                           | 213,262 |          |   |                |  |        |                |  | $ | 204,861 |  |   |       |  |        |  
|                                                                                 |  |                             |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Interest-bearing liabilities:                                                    |  |                             |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Deposits                                                                         |  | $                           | 152,214 |          | $ | 2,486          |  | 2.18   | %              |  | $ | 153,748 |  | $ | 2,116 |  | 1.84   | %
|Short-term borrowings                                                            |  |                             | 3,197   |          |   | 106            |  | 4.41   | %              |  |   |        |  |   |      |  |       |  
|Long-term borrowings                                                             |  |                             | 25,390  |          |   | 889            |  | 4.67   | %              |  |   | 21,433  |  |   | 707   |  | 4.40   | %
|                                                                                 |  |                             |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Total interest-bearing liabilities                                               |  |                             | 180,801 |          |   | 3,481          |  | 2.57   | %              |  |   | 175,181 |  |   | 2,823 |  | 2.15   | %
|                                                                                 |  |                             |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Noninterest-bearing liabilities                                                  |  |                             | 14,627  |          |   |                |  |        |                |  |   | 12,679  |  |   |       |  |        |  
|                                                                                 |  |                             |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Total liabilities                                                                |  |                             | 195,428 |          |   |                |  |        |                |  |   | 187,860 |  |   |       |  |        |  
|Stockholders equity                                                             |  |                             | 17,834  |          |   |                |  |        |                |  |   | 17,001  |  |   |       |  |        |  
|                                                                                 |  |                             |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Total liabilities and stockholders equity                                       |  | $                           | 213,262 |          |   |                |  |        |                |  | $ | 204,861 |  |   |       |  |        |  
|                                                                                 |  |                             |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Net interest income                                                              |  |                             |         |          | $ | 6,390          |  |        |                |  |   |         |  | $ | 6,088 |  |        |  
|                                                                                 |  |                             |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Interest rate spread                                                             |  |                             |         |          |   |                |  | 4.02   | %              |  |   |         |  |   |       |  | 4.03   | %
|                                                                                 |  |                             |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Net interest margin                                                              |  |                             |         |          |   |                |  | 4.27   | %              |  |   |         |  |   |       |  | 4.22   | %
|                                                                                 |  |                             |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                             |         |          |   |                |  | 110.49 | %              |  |   |         |  |   |       |  | 109.79 | %
|                                                                                 |  |                             |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  

---

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

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



15



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##### Table of Contents

|                                                                                 |  |                              |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|-------------------------------------------------------------------------------- |  | ---------------------------- | ------- | -------- | - | -------------- |  | ------ | -------------- |  | - | ------- |  | - | ----- |  | ------ | -
|                                                                                 |  | Three Months Ended March 31, |         | Interest |   | AverageRate(1) | 
|                                                                                 |  | 2006                         |         | 2005     |   |               
|                                                                                 |  | AverageBalance               |         | Interest |   | AverageRate(1) |  |        | AverageBalance |  |  
|                                                                                 |  | (Dollars in thousands)       |        
|Interest-earning assets:                                                         |  |                              |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Loans receivable (2)                                                             |  | $                            | 184,660 |          | $ | 3,238          |  | 7.01   | %              |  | $ | 156,561 |  | $ | 2,682 |  | 6.85   | %
|Investment and mortgage-backed securities                                        |  |                              | 22,974  |          |   | 245            |  | 4.26   | %              |  |   | 27,120  |  |   | 257   |  | 3.79   | %
|Federal funds sold and other interest-earning assets                             |  |                              | 1,759   |          |   | 15             |  | 3.54   | %              |  |   | 6,642   |  |   | 38    |  | 2.29   | %
|                                                                                 |  |                              |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Total interest earning assets                                                    |  |                              | 209,393 |          |   | 3,498          |  | 6.68   | %              |  |   | 190,323 |  |   | 2,977 |  | 6.26   | %
|Noninterest-earning assets                                                       |  |                              | 13,289  |          |   |                |  |        |                |  |   | 14,180  |  |   |       |  |        |  
|                                                                                 |  |                              |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Total assets                                                                     |  | $                            | 222,682 |          |   |                |  |        |                |  | $ | 204,503 |  |   |       |  |        |  
|                                                                                 |  |                              |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Interest-bearing liabilities:                                                    |  |                              |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Deposits                                                                         |  | $                            | 154,239 |          | $ | 903            |  | 2.34   | %              |  | $ | 152,219 |  | $ | 707   |  | 1.85   | %
|Short-term borrowings                                                            |  |                              | 6,687   |          |   | 78             |  | 4.67   | %              |  |   |        |  |   |      |  |       |  
|Long-term borrowings                                                             |  |                              | 28,836  |          |   | 334            |  | 4.64   | %              |  |   | 21,384  |  |   | 238   |  | 4.45   | %
|                                                                                 |  |                              |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Total interest-bearing liabilities                                               |  |                              | 189,762 |          |   | 1,315          |  | 2.77   | %              |  |   | 173,603 |  |   | 945   |  | 2.18   | %
|                                                                                 |  |                              |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Noninterest-bearing liabilities                                                  |  |                              | 15,080  |          |   |                |  |        |                |  |   | 13,854  |  |   |       |  |        |  
|                                                                                 |  |                              |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Total liabilities                                                                |  |                              | 204,842 |          |   |                |  |        |                |  |   | 187,457 |  |   |       |  |        |  
|Stockholders equity                                                             |  |                              | 17,840  |          |   |                |  |        |                |  |   | 17,046  |  |   |       |  |        |  
|                                                                                 |  |                              |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Total liabilities and stockholders equity                                       |  | $                            | 222,682 |          |   |                |  |        |                |  | $ | 204,503 |  |   |       |  |        |  
|                                                                                 |  |                              |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Net interest income                                                              |  |                              |         |          | $ | 2,183          |  |        |                |  |   |         |  | $ | 2,032 |  |        |  
|                                                                                 |  |                              |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Interest rate spread                                                             |  |                              |         |          |   |                |  | 3.91   | %              |  |   |         |  |   |       |  | 4.08   | %
|                                                                                 |  |                              |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Net interest margin                                                              |  |                              |         |          |   |                |  | 4.17   | %              |  |   |         |  |   |       |  | 4.27   | %
|                                                                                 |  |                              |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                              |         |          |   |                |  | 110.35 | %              |  |   |         |  |   |       |  | 109.63 | %
|                                                                                 |  |                              |         |          |   |                |  |        |                |  |   |         |  |   |       |  |        |  

---

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

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

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 either Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for
Contingencies, or (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan. 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, past due loans in the Companys loan portfolio, current economic conditions, both national and local, and other factors unique to particular loans and leases. The
Companys management periodically monitors and adjusts its allowance for loan losses based upon its analysis of the loan portfolio

The Company made no provision for loan losses in the quarter ended March 31, 2006. The provision for loan losses in the quarter ended March 31, 2005 was $100,000. The provision for loan losses decreased by $145,000 or 78.4% to $40,000 in
the nine-months ended March 31, 2006 from $185,000 in the nine-months ended March 31, 2005. The ratio of the allowance for loan losses as a percentage of total loans outstanding decreasing to 0.50% at March 31, 2006 from 0.58% at June 30, 2005. The
Companys allowance for loan losses as a percentage of non-performing loans was 408.2% at March 31, 2006 as compared to 2,486.8% at June 30, 2005. Although non-performing loans have increased since June 30, 2005, the Company does not expect to
incur any significant losses on these loans.



16



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##### Table of Contents

Activity in the allowance for loan losses is as follows (dollars in thousands):



|                                               |  |                   |     |                    |   |      |  |      |     |  |   |    
|---------------------------------------------- |  | ----------------- | --- | ------------------ | - | ---- |  | ---- | --- |  | - | ---
|                                               |  | Nine Months Ended |     | Three Months Ended
|                                               |  | March 31,        
|                                               |  | 2006              |     | 2005               |   | 2006 |  | 2005
|Allowance for loan losses, beginning of period |  | $                 | 945 |                    | $ | 936  |  | $    | 952 |  | $ | 932
|                                               |  |                   |     |                   
|Provision for loan losses                      |  |                   | 40  |                    |   | 185  |  |      |    |  |   | 100
|                                               |  |                   |     |                   
|Loans Charged Off:                             |  |                   |     |                    |   |      |  |      |     |  |   |    
|Consumer                                       |  |                   | 113 |                    |   | 109  |  |      | 17  |  |   | 16 
|Real Estate                                    |  |                   |    |                    |   |     |  |      | 0   |  |   |   
|Commercial                                     |  |                   | 29  |                    |   | 167  |  |      | 11  |  |   | 103
|                                               |  |                   |     |                    |   |      |  |      |     |  |   |    
|Total Charge-Offs                              |  |                   | 142 |                    |   | 276  |  |      | 28  |  |   | 119
|                                               |  |                   |     |                   
|Recoveries:                                    |  |                   |     |                    |   |      |  |      |     |  |   |    
|Consumer                                       |  |                   | 28  |                    |   | 47   |  |      | 6   |  |   | 14 
|Real Estate                                    |  |                   |    |                    |   |     |  |      |    |  |   |   
|Commercial                                     |  |                   | 80  |                    |   | 51   |  |      | 21  |  |   | 16 
|                                               |  |                   |     |                    |   |      |  |      |     |  |   |    
|Total Recoveries                               |  |                   | 108 |                    |   | 98   |  |      | 27  |  |   | 30 
|                                               |  |                   |     |                    |   |      |  |      |     |  |   |    
|Allowance for loan losses, end of period       |  | $                 | 951 |                    | $ | 943  |  | $    | 951 |  | $ | 943
|                                               |  |                   |     |                    |   |      |  |      |     |  |   |    

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



|                                                                |  |                  |      |   |             |   |      |  
|--------------------------------------------------------------- |  | ---------------- | ---- | - | ----------- | - | ---- | -
|                                                                |  | At March 31,     |      |   | At June 30, |  
|                                                                |  | 2006             |      |   | 2005        |  
|                                                                |  | ($ in thousands) |     
|Loans accounted for on a non-accrual basis: (1)                 |  |                  |      |   |             |   |      |  
|Real estate:                                                    |  |                  |      |   |             |   |      |  
|Residential                                                     |  | $                |     |   |             | $ |     |  
|Commercial                                                      |  |                  |     |   |             |   |     |  
|Construction                                                    |  |                  |     |   |             |   |     |  
|Consumer                                                        |  |                  | 24   |   |             |   | 16   |  
|Commercial Loan/Lease                                           |  |                  | 209  |   |             |   | 22   |  
|                                                                |  |                  |      |   |             |   |      |  
|Total                                                           |  | $                | 233  |   |             | $ | 38   |  
|                                                                |  |                 
|Accruing loans which are contractually past due 90 days or more |  | $                |     |   |             | $ |     |  
|                                                                |  |                  |      |   |             |   |      |  
|Total                                                           |  | $                |     |   |             | $ |     |  
|                                                                |  |                  |      |   |             |   |      |  
|Total non-performing loans                                      |  | $                | 233  |   |             | $ | 38   |  
|                                                                |  |                  |      |   |             |   |      |  
|Percentage of total loans                                       |  |                  | 0.12 | % |             |   | 0.02 | %
|                                                                |  |                  |      |   |             |   |      |  
|Other non-performing assets (2)                                 |  | $                |     |   |             | $ | 60   |  
|                                                                |  |                  |      |   |             |   |      |  

---

|(1) | Non-accrual status denotes loans on which, in the opinion of management, the collection of additional interest is unlikely. Payments received on a non-accrual 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 non-performing assets represent property acquired by the Company through foreclosure or repossession.
|--- | -----------------------------------------------------------------------------------------------------------

At March 31, 2006, non-accrual loans consisted of one commercial business loan with a balance of $139,000, one commercial lease with a balance of $70,000
and one home equity loan with a balance of $24,000.

Non-interest Income

The Companys non-interest income consists of deposit fees, service charges, fees on the sale of annuities and investment products, and gains and
losses on sales of securities, loans and repossessed assets. Total non-interest



17



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##### Table of Contents

income increased by $25,000 or 14.2% to $201,000 for the quarter ended March 31, 2006 from $176,000 for the quarter ended
March 31, 2005. Total non-interest income increased by $157,000 or 32.4% to $642,000 during the nine months ended March 31, 2006 from $485,000 during the nine months ended March 31, 2005. Included in the year-to-date amount is a gain on the sale of
an office building of $64,000. Non-interest income has increased due to this gain, higher sales of investment products and higher service charges on deposit accounts.

Non-interest Expenses

Total non-interest expenses increased by $188,000 or 10.9% to $1.9 million for
the quarter ended March 31, 2006 from $1.7 million for the quarter ended March 31, 2005. Total non-interest expense increased by $0.5 million or 10.9% to $5.5 million during the nine months ended March 31, 2006 from $4.9 million during the nine
months ended March 31, 2005. The primary reasons for the increases in both the three and nine-month period are the investments being made in personnel, primarily the commercial and commercial real estate lending staff, technology and facilities in
order to support future growth and the increased costs associated with regulatory compliance. The declines in advertising, other and professional fee expenses in the quarter and year to date periods is due to the management of the discretionary
portion of these expense categories.

Income Taxes

Income tax expense was $175,000 (or 36.7% of income before the provision for income taxes) and $141,000 (or 36.3% of income before the provision for income taxes) for the quarters ended March 31, 2006 and 2005,
respectively. Income tax expense was $574,000 (or 37.3% of income before the provision for income taxes) and $532,000 (or 36.1% of income before the provision for income taxes) for the nine month periods ended March 31, 2006 and 2005, respectively.

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 an adequate 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, a high level of liquidity will, to a certain extent, result in lower net interest margins and lower net
income.

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, 2006, the Companys cash on hand, interest-bearing deposits and Federal funds sold totaled $5.6 million. In addition, the Company has approximately $20.2 million of mortgage-backed and investment securities classified as
available-for-sale.

The Company anticipates that it will have sufficient funds available to meet its current loan commitments and undisbursed lines of
credit of $22.8 million. These funds will be internally generated, raised through deposit operations, or borrowed. Certificates of deposits that are scheduled to mature in less than one year at March 31, 2006 totaled $40.0 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 $775,000 for the payment of common dividends as well as interest payments on the $5.0 million in subordinated debentures outstanding. The holding company currently has cash on hand of $3.0
million. 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.

As discussed in Note 5 - Regulatory Capital Requirements, the Bank exceeded all regulatory minimum capital requirements and was well capitalized at March 31, 2006.



18



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##### Table of Contents

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, 2006         |        | June 30, 2005
|                                    |  | (dollars in thousands)
|Commitments to originate new loans  |  | $                      | 12,345 |               | $ | 9,000
|Undisbursed lines of credit         |  |                        | 10,454 |               |   | 9,799
|Financial standby letters of credit |  |                        | 1,525  |               |   | 1,365

Contractual Obligations

The following table sets forth the companys contractual obligations as of March 31, 2006:



|                                   |  |                  |        |              |   |              |  |              |        |  |   |       
|---------------------------------- |  | ---------------- | ------ | ------------ | - | ------------ |  | ------------ | ------ |  | - | ------
|                                   |  | Less than 1 year |        | 1 to 3 years |   | 4 to 5 years |  | Over 5 years
|                                   |  | ($ in thousands)
|Time Deposits                      |  | $                | 40,044 |              | $ | 22,688       |  | $            | 20,702 |  | $ | 1,978 
|Short-term borrowings              |  |                  | 11,000 |              |   |             |  |              |       |  |   |      
|Long-term borrowings               |  |                  | 2,250  |              |   | 4,700        |  |              | 8,100  |  |   | 14,000
|Lease obligations                  |  |                  | 246    |              |   | 323          |  |              | 310    |  |   | 2,450 
|                                   |  |                  |        |              |   |              |  |              |        |  |   |       
|Total Contractual Cash Obligations |  | $                | 53,540 |              | $ | 27,711       |  | $            | 29,112 |  | $ | 18,428
|                                   |  |                  |        |              |   |              |  |              |        |  |   |       

Item 3 : Controls and Procedures

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

There have been no changes in the Companys internal control over financial reporting identified in connection with the evaluation
required by paragraph (d) of Securities and Exchange Commission Rule 13a-15.

Part II. Other Information

Item 1. Legal Proceedings

None.

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

None.



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Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. 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 pursuant to 18 U.S.C. Section 1350       



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Signatures

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



|                   |  |                                      
|------------------ |  | -------------------------------------
|                   |  | PATAPSCO BANCORP, INC.               
|                   | 
|Date: May 12, 2006 |  |                                      
|                   |  | /s/ Joseph J. Bouffard               
|                   |  | Joseph J. Bouffard                   
|                   |  | President and Chief Executive Officer
|                   |  | (Principal Executive Officer)        
|                   | 
|Date: May 12, 2006 |  |                                      
|                   |  | /s/ Michael J. Dee                   
|                   |  | Michael J. Dee                       
|                   |  | Chief Financial Officer & Controller 
|                   |  | (Principal Financial Officer)        



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