##### Table of Contents





United States

Securities and Exchange Commission

Washington, D. C. 20549





FORM 10 - Q





(Mark One)

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

for the quarterly period ended September 30, 2010



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

For the transition period from  to

Commission File Number: 0-28032





PATAPSCO BANCORP, INC.

(Exact name of registrant as specified in its charter)







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

1301 Merritt Boulevard, Dundalk,
Maryland 21222-2194

(Address of Principal Executive Offices)

(410) 285-1010

Registrants Telephone Number, Including Area Code





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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

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



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

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

As of
November 10, 2010, the issuer had 1,939,593 shares of Common Stock issued and outstanding.









---

##### Table of Contents



TABLE OF CONTENTS



|               |  |                                                                                                                       |    |      |    | 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|               |  |                                                                                                                       |    | PAGE |   
|               |  |                                                                                                                      
|PART I.        |  | FINANCIAL INFORMATION                                                                                                 |    |      |    | 
|               |  |                                                                                                                      
|Item 1.        |  | Financial Statements                                                                                                  |    |      |    | 
|               |  |                                                                                                                      
|               |  | Consolidated Statements of Financial Condition at September 30, 2010 and June 30, 2010
(Unaudited)                    |    |      | 3  | 
|               |  |                                                                                                                      
|               |  | Consolidated Statements of Operations for Three Month Periods Ended September 30, 2010 and 2009
(Unaudited)           |    |      | 4  | 
|               |  |                                                                                                                      
|               |  | Consolidated Statements of Comprehensive Income for Three Month Periods Ended September 30, 2010 and 2009 (Unaudited) |    |      | 5  | 
|               |  |                                                                                                                      
|               |  | Consolidated Statements of Cash Flows for Three Month Periods Ended September 30, 2010 and 2009
(Unaudited)           |    |      | 6  | 
|               |  |                                                                                                                      
|               |  | Notes to Consolidated Financial Statements (Unaudited)                                                                |    |      | 7  | 
|               |  |                                                                                                                      
|Item 2.        |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                                 |    |      | 18 | 
|               |  |                                                                                                                      
|Item 3.        |  | Quantitative and Qualitative Disclosures About Market Risk                                                            |    |      | 25 | 
|               |  |                                                                                                                      
|Item 4.        |  | Controls and Procedures                                                                                               |    |      | 25 | 
|               |  |                                                                                                                      
|PART II.       |  | OTHER INFORMATION                                                                                                     |    |      |    | 
|               |  |                                                                                                                      
|Item 1.        |  | Legal Proceedings                                                                                                     |    |      | 26 | 
|               |  |                                                                                                                      
|Item 1A.       |  | Risk Factors                                                                                                          |    |      | 26 | 
|               |  |                                                                                                                      
|Item 2.        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                           |    |      | 26 | 
|               |  |                                                                                                                      
|Item 3.        |  | Defaults Upon Senior Securities                                                                                       |    |      | 26 | 
|               |  |                                                                                                                      
|Item 4.        |  | (Removed and Reserved)                                                                                                |    |      | 26 | 
|               |  |                                                                                                                      
|Item 5.        |  | Other Information                                                                                                     |    |      | 26 | 
|               |  |                                                                                                                      
|Item 6.        |  | Exhibits                                                                                                              |    |      | 26 | 
|               | 
|Signatures     |  |                                                                                                                       | 27 |     
|               | 
|Certifications |  |                                                                                                                       |    |     



2



---

##### Table of Contents



Part I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

Patapsco Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(unaudited)

($ in thousands
except for share and per share data)



|                                                                                                                                                                                |  |                   |         |  |              |   |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- |  | ------------ | - | ------- | 
|                                                                                                                                                                                |  | September 30,2010 |         |  | June 30,2010 |  
|Assets:                                                                                                                                                                         |  |                   |         |  |              |   |         | 
|Cash and cash equivalents:                                                                                                                                                      |  |                   |         |  |              |   |         | 
|Cash on hand and due from banks                                                                                                                                                 |  | $                 | 7,219   |  |              | $ | 6,811   | 
|Interest bearing deposits in other banks                                                                                                                                        |  |                   | 25,331  |  |              |   | 21,232  | 
|                                                                                                                                                                                |  |                   |         |  |              |   |         | 
|Total cash and cash equivalents                                                                                                                                                 |  |                   | 32,550  |  |              |   | 28,043  | 
|Securities available for sale                                                                                                                                                   |  |                   | 24,054  |  |              |   | 25,482  | 
|Loans receivable, net of allowance for loan losses of $3,791 and $3,527, respectively                                                                                           |  |                   | 196,841 |  |              |   | 197,169 | 
|Investment in securities required by law, at cost                                                                                                                               |  |                   | 2,684   |  |              |   | 2,848   | 
|Real estate acquired through foreclosure, net of allowance for losses of $19 and $19, respectively                                                                              |  |                   | 2,813   |  |              |   | 2,875   | 
|Property and equipment, net                                                                                                                                                     |  |                   | 3,753   |  |              |   | 3,759   | 
|Core deposit intangible                                                                                                                                                         |  |                   | 180     |  |              |   | 193     | 
|Accrued interest and other assets                                                                                                                                               |  |                   | 8,476   |  |              |   | 9,354   | 
|                                                                                                                                                                                |  |                   |         |  |              |   |         | 
|Total assets                                                                                                                                                                    |  | $                 | 271,351 |  |              | $ | 269,723 | 
|                                                                                                                                                                                |  |                   |         |  |              |   |         | 
|                                                                                                                                                                                |  |                  
|Liabilities and Stockholders Equity                                                                                                                                            |  |                   |         |  |              |   |         | 
|                                                                                                                                                                                |  |                  
|Liabilities:                                                                                                                                                                    |  |                   |         |  |              |   |         | 
|Deposits:                                                                                                                                                                       |  |                   |         |  |              |   |         | 
|Non-interest bearing deposits                                                                                                                                                   |  | $                 | 9,151   |  |              | $ | 11,554  | 
|Interest bearing deposits                                                                                                                                                       |  |                   | 220,050 |  |              |   | 217,235 | 
|                                                                                                                                                                                |  |                   |         |  |              |   |         | 
|Total deposits                                                                                                                                                                  |  |                   | 229,201 |  |              |   | 228,789 | 
|Long-term debt                                                                                                                                                                  |  |                   | 17,100  |  |              |   | 17,100  | 
|Junior subordinated debentures                                                                                                                                                  |  |                   | 5,000   |  |              |   | 5,000   | 
|Accrued expenses and other liabilities                                                                                                                                          |  |                   | 2,609   |  |              |   | 1,464   | 
|                                                                                                                                                                                |  |                   |         |  |              |   |         | 
|Total liabilities                                                                                                                                                               |  |                   | 253,910 |  |              |   | 252,353 | 
|                                                                                                                                                                                |  |                   |         |  |              |   |         | 
|                                                                                                                                                                                |  |                  
|Stockholders equity:                                                                                                                                                           |  |                   |         |  |              |   |         | 
|Preferred Stock  Series A Cumulative perpetual; $0.01 par value; authorized 1,000,000 shares with a liquidation preference
of $1,000 per share; 6,000 shares outstanding       |  |                   | 5,783   |  |              |   | 5,766   | 
|Warrant Preferred stock  Series B Cumulative perpetual; $0.01 par value; authorized 1,000,000 shares with a liquidation
preference of $1,000 per share; 300 shares outstanding |  |                   | 324     |  |              |   | 326     | 
|Common stock  $0.01 par value; authorized 4,000,000 shares; issued and outstanding 1,939,593 and 1,930,317 shares,
respectively                                                |  |                   | 19      |  |              |   | 19      | 
|Additional paid in capital                                                                                                                                                      |  |                   | 7,871   |  |              |   | 7,847   | 
|Retained income, substantially restricted                                                                                                                                       |  |                   | 3,304   |  |              |   | 3,212   | 
|Accumulated other comprehensive income, net of income taxes                                                                                                                     |  |                   | 140     |  |              |   | 200     | 
|                                                                                                                                                                                |  |                   |         |  |              |   |         | 
|Total stockholders equity                                                                                                                                                      |  |                   | 17,441  |  |              |   | 17,370  | 
|                                                                                                                                                                                |  |                   |         |  |              |   |         | 
|Total liabilities and stockholders equity                                                                                                                                      |  | $                 | 271,351 |  |              | $ | 269,723 | 
|                                                                                                                                                                                |  |                   |         |  |              |   |         | 

See accompanying notes to consolidated financial statements.



3



---

##### Table of Contents



Patapsco Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



|                                                                             |  |                        |       |  |      |   |       |  
|---------------------------------------------------------------------------- |  | ---------------------- | ----- |  | ---- | - | ----- | -
|($ in thousands except for per share data)                                   |  | For Three Months Ended |      
|                                                                             |  | September 30,          |      
|                                                                             |  | 2010                   |       |  | 2009 |  
|Interest income:                                                             |  |                        |       |  |      |   |       |  
|                                                                             |  |                       
|Loans receivable, including fees                                             |  | $                      | 3,083 |  |      | $ | 3,556 |  
|                                                                             |  |                       
|Securities, including securities required by law                             |  |                        | 206   |  |      |   | 162   |  
|                                                                             |  |                       
|Federal funds sold and other investments                                     |  |                        | 14    |  |      |   | 10    |  
|                                                                             |  |                        |       |  |      |   |       |  
|                                                                             |  |                       
|Total interest income                                                        |  |                        | 3,303 |  |      |   | 3,728 |  
|                                                                             |  |                        |       |  |      |   |       |  
|                                                                             |  |                       
|Interest expense:                                                            |  |                        |       |  |      |   |       |  
|                                                                             |  |                       
|Deposits                                                                     |  |                        | 949   |  |      |   | 1,208 |  
|Short-term debt                                                              |  |                        |      |  |      |   | 6     |  
|Long-term debt and subordinated debentures                                   |  |                        | 264   |  |      |   | 330   |  
|                                                                             |  |                        |       |  |      |   |       |  
|                                                                             |  |                       
|Total interest expense                                                       |  |                        | 1,213 |  |      |   | 1,544 |  
|                                                                             |  |                        |       |  |      |   |       |  
|                                                                             |  |                       
|Net interest income                                                          |  |                        | 2,090 |  |      |   | 2,184 |  
|                                                                             |  |                       
|Provision for loan losses                                                    |  |                        | 304   |  |      |   | 394   |  
|                                                                             |  |                        |       |  |      |   |       |  
|Net interest income after provision for loan losses                          |  |                        | 1,786 |  |      |   | 1,790 |  
|                                                                             |  |                        |       |  |      |   |       |  
|                                                                             |  |                       
|Non-interest income:                                                         |  |                        |       |  |      |   |       |  
|                                                                             |  |                       
|Fees and service charges                                                     |  |                        | 154   |  |      |   | 188   |  
|Gain on sale of securities available for sale                                |  |                        | 67    |  |      |   |      |  
|Gain on sale of other repossessed assets                                     |  |                        | 4     |  |      |   |      |  
|                                                                             |  |                       
|Other                                                                        |  |                        | 19    |  |      |   | 26    |  
|                                                                             |  |                        |       |  |      |   |       |  
|                                                                             |  |                       
|Total non-interest income                                                    |  |                        | 244   |  |      |   | 214   |  
|                                                                             |  |                        |       |  |      |   |       |  
|                                                                             |  |                       
|Non-interest expense:                                                        |  |                        |       |  |      |   |       |  
|                                                                             |  |                       
|Compensation and employee benefits                                           |  |                        | 989   |  |      |   | 1,081 |  
|                                                                             |  |                       
|Professional fees                                                            |  |                        | 139   |  |      |   | 116   |  
|Federal deposit insurance assessments                                        |  |                        | 137   |  |      |   | 132   |  
|                                                                             |  |                       
|Equipment expense                                                            |  |                        | 53    |  |      |   | 56    |  
|                                                                             |  |                       
|Net occupancy expense                                                        |  |                        | 140   |  |      |   | 145   |  
|                                                                             |  |                       
|Advertising                                                                  |  |                        | 10    |  |      |   | 15    |  
|                                                                             |  |                       
|Data processing                                                              |  |                        | 97    |  |      |   | 99    |  
|                                                                             |  |                       
|Amortization of core deposit intangible                                      |  |                        | 13    |  |      |   | 13    |  
|                                                                             |  |                       
|Telephone, postage & delivery                                                |  |                        | 66    |  |      |   | 72    |  
|Provision for losses on and cost of real estate acquired through foreclosure |  |                        | 34    |  |      |   | 8     |  
|                                                                             |  |                       
|Other                                                                        |  |                        | 183   |  |      |   | 181   |  
|                                                                             |  |                        |       |  |      |   |       |  
|                                                                             |  |                       
|Total non-interest expense                                                   |  |                        | 1,861 |  |      |   | 1,918 |  
|                                                                             |  |                        |       |  |      |   |       |  
|Income before provision for income taxes                                     |  |                        | 169   |  |      |   | 86    |  
|                                                                             |  |                       
|Provision for income taxes                                                   |  |                        | 62    |  |      |   | 30    |  
|                                                                             |  |                        |       |  |      |   |       |  
|                                                                             |  |                       
|Net Income                                                                   |  | $                      | 107   |  |      | $ | 56    |  
|Preferred stock dividends                                                    |  |                        | 97    |  |      |   | 82    |  
|                                                                             |  |                        |       |  |      |   |       |  
|Net income/(loss) available for common shareholders                          |  | $                      | 10    |  |      | $ | (26   | )
|                                                                             |  |                        |       |  |      |   |       |  
|                                                                             |  |                       
|Basic earnings/(loss) per common share                                       |  | $                      | 0.01  |  |      | $ | (0.01 | )
|                                                                             |  |                        |       |  |      |   |       |  
|Diluted earnings/(loss) per common share                                     |  | $                      | 0.01  |  |      | $ | (0.01 | )
|                                                                             |  |                        |       |  |      |   |       |  
|                                                                             |  |                       
|Cash dividends declared per common share                                     |  | $                      |      |  |      | $ |      |  
|                                                                             |  |                        |       |  |      |   |       |  

See accompanying notes to consolidated financial statements.



4



---

##### Table of Contents



Patapsco Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

($ in thousands)



|                                                                     |  |                        |     |   |      |   |      |  
|-------------------------------------------------------------------- |  | ---------------------- | --- | - | ---- | - | ---- | -
|                                                                     |  | For Three Months
Ended |    
|                                                                     |  | September 30,          |    
|                                                                     |  | 2010                   |     |   | 2009 |  
|                                                                     |  |                       
|Net income                                                           |  | $                      | 107 |   |      | $ | 56   |  
|Reclassification adjustment for gains realized in income             |  |                        | (67 | ) |      |   |     |  
|Change in unrealized gains/(losses) on securities available-for-sale |  |                        | (32 | ) |      |   | 301  |  
|Tax effect                                                           |  |                        | 39  |   |      |   | (119 | )
|                                                                     |  |                        |     |   |      |   |      |  
|Comprehensive income                                                 |  | $                      | 47  |   |      | $ | 238  |  
|                                                                     |  |                        |     |   |      |   |      |  

See accompanying notes to consolidated financial statements.



5



---

##### Table of Contents



Patapsco Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                                             |  |                            |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | -
|($ in thousands)                                                                             |  | For the Three Months Ended |        
|                                                                                             |  | September 30,              |        
|                                                                                             |  | 2010                       |         |   | 2009 |  
|                                                                                             |  |                           
|Cash flows from operating activities:                                                        |  |                            |         |   |      |   |         |  
|Net income                                                                                   |  | $                          | 107     |   |      | $ | 56      |  
|Adjustments to reconcile net income to net cash provided by operating activities:            |  |                            |         |   |      |   |         |  
|Amortization of premiums and discounts, net                                                  |  |                            | 57      |   |      |   | 63      |  
|Gain on sale of securities available for sale                                                |  |                            | (67     | ) |      |   |        |  
|Amortization of deferred loan origination costs (fees)                                       |  |                            | (26     | ) |      |   | (1      | )
|Provision for loan losses                                                                    |  |                            | 304     |   |      |   | 394     |  
|Provision for loss on real estate acquired through foreclosure                               |  |                            |        |   |      |   |        |  
|Gain on sale of real estate acquired through foreclosure and other repossessed assets        |  |                            | (4      | ) |      |   |        |  
|Depreciation                                                                                 |  |                            | 68      |   |      |   | 73      |  
|Amortization of core deposit intangible                                                      |  |                            | 13      |   |      |   | 13      |  
|Increase in cash surrender value of bank owned life insurance                                |  |                            | (16     | ) |      |   | (17     | )
|Decrease in accrued interest receivable and other assets                                     |  |                            | 957     |   |      |   | 244     |  
|Non-cash compensation under stock-based benefit plan                                         |  |                            | 1       |   |      |   | 19      |  
|Increase/(decrease) in accrued expenses and other liabilities                                |  |                            | 1,145   |   |      |   | (60     | )
|                                                                                             |  |                            |         |   |      |   |         |  
|Net cash provided by operating activities                                                    |  |                            | 2,539   |   |      |   | 784     |  
|                                                                                             |  |                            |         |   |      |   |         |  
|                                                                                             |  |                           
|Cash flows from investing activities:                                                        |  |                            |         |   |      |   |         |  
|Proceeds from maturity of investments and principal repayments on mortgage-backed securities |  |                            | 10,469  |   |      |   | 3,339   |  
|Purchase of securities available for sale                                                    |  |                            | (10,650 | ) |      |   | (3,082  | )
|Proceeds from sale of securities available for sale                                          |  |                            | 1,526   |   |      |   |        |  
|Net change in loans                                                                          |  |                            | 43      |   |      |   | (1,633  | )
|Funds received in sale of real estate owned                                                  |  |                            | 66      |   |      |   | 50      |  
|Net change in investments required by law                                                    |  |                            | 164     |   |      |   | (30     | )
|Purchase of property and equipment                                                           |  |                            | (62     | ) |      |   | (6      | )
|                                                                                             |  |                            |         |   |      |   |         |  
|Net cash provided by/(used in) investing activities                                          |  |                            | 1,556   |   |      |   | (1,362  | )
|                                                                                             |  |                            |         |   |      |   |         |  
|                                                                                             |  |                           
|Cash flows from financing activities:                                                        |  |                            |         |   |      |   |         |  
|Net increase in deposits                                                                     |  |                            | 1,708   |   |      |   | 5,307   |  
|Decrease in advance payments by borrowers                                                    |  |                            | (1,296  | ) |      |   | (1,289  | )
|Payments on long-term borrowings                                                             |  |                            |        |   |      |   | (12,200 | )
|Dividends paid                                                                               |  |                            |        |   |      |   | (82     | )
|                                                                                             |  |                            |         |   |      |   |         |  
|Net cash provided by/(used in) financing activities                                          |  |                            | 412     |   |      |   | (8,264  | )
|                                                                                             |  |                            |         |   |      |   |         |  
|                                                                                             |  |                           
|Net increase/(decrease) in cash and cash equivalents                                         |  |                            | 4,507   |   |      |   | (8,842  | )
|Cash and cash equivalents at beginning of period                                             |  |                            | 28,043  |   |      |   | 19,794  |  
|                                                                                             |  |                            |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                   |  | $                          | 32,550  |   |      | $ | 10,952  |  
|                                                                                             |  |                            |         |   |      |   |         |  
|                                                                                             |  |                           
|Supplemental cash flow information:                                                          |  |                            |         |   |      |   |         |  
|Interest paid on deposits and borrowed funds                                                 |  | $                          | 1,140   |   |      | $ | 1,622   |  
|Income taxes paid                                                                            |  |                            |        |   |      |   |        |  

See accompanying notes to
consolidated financial statements.



6



---

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

Note 2: The Patapsco Bank

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

Note 3: Basis of Presentation

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

Note 4: Subsequent Events

In accordance
with ASC Topic 855, Subsequent Events, management has evaluated potential subsequent events through the date the financial statements were issued for potential recognition or disclosure in the consolidated financial statements.

Note 5: Recent Accounting Pronouncements

ASC Topic 860

In October 2009, the FASB issued Topic 860, Accounting for Transfers of
Financial Assets. The amendments in this Update improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain
mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its
continuing involvement in transferred financial assets. Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of
financial assets that are eligible for sale accounting.

This Update is effective at the start of a reporting entitys first fiscal year
beginning after November 15, 2009. Early application is not permitted. Adoption of this ASC did not have a material impact on the Companys financial condition or results of operations.

ASC Topic 810

In October 2009, the FASB issued
Topic 810, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This Update amends the Codification for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R).



7



---

##### Table of Contents



The amendments in this Update replace
the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to
direct the activities of a variable interest entity that most significantly impact the entitys economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An
approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this Update also require additional disclosures
about a reporting entitys involvement in variable interest entities, which will enhance the information provided to users of financial statements.

This Update is effective at the start of a reporting entitys first fiscal year beginning after November 15, 2009. Early application is not permitted. Adoption of this ASC did not have a
material impact on the Companys financial condition or results of operations.

ASC Topic 820

The FASB has issued Topic 820, Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements. This ASC requires
some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASBs objective is to improve these disclosures and, thus, increase the transparency in
financial reporting. Specifically, ASC 820 amends

Codification Subtopic 820-10 to now require:



| |  |  | A reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe
the reasons for the transfers; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about
purchases, sales, issuances, and settlements.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, Topic 820 clarifies the requirements of the following existing
disclosures:



| |  |  | For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the
appropriate classes of assets and liabilities; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring
fair value measurements.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Topic 820 is effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASC did not have a material impact on the Companys financial condition or results of operations.

ASU 2010-18

Topic 310, Receivables, codifies the consensus reached in EITF Issue
No. 09-I, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset. The amendments to the Codification provide that modifications of loans that are accounted for within a pool under
Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of
assets in which the loan is included is impaired if expected cash flows for the pool change. ASU 2010-18 does not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for
individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40.

Topic 310 is effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual
period ending on or after July 15, 2010. Early application is permitted. Upon initial adoption of Topic 310, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. This election may be applied
on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. Adoption of this ASC will not have a material impact on the Companys financial condition or
results of operations.



8



---

##### Table of Contents



ASU 2010-20

ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, will help
investors assess the credit risk of a companys receivables portfolio and the adequacy of its allowance for credit losses held against the portfolios by expanding credit risk disclosures.

This ASU requires more information about the credit quality of financing receivables in the disclosures to financial statements, such as aging
information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages
its credit exposure.

The amendments in this Update apply to all public and nonpublic entities with financing receivables. Financing
receivables include loans and trade account receivables. However, short-term trade accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure amendments.

The effective date of ASU 2010-20 differs for public and nonpublic companies. For public companies, the amendments that require disclosures as of the end
of a reporting period are effective for periods ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after
December 15, 2010. For nonpublic companies, the amendments are effective for annual reporting periods ending on or after December 15, 2011. Adoption of this ASC is not expected to have a material impact on the Companys financial
condition or results of operations.

International Financial Reporting Standards

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

Note 6: Securities Available for Sale

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



|                                        |  |                    |        |  |                 |   |     |                  |  |    |           |   |  |   |        | 
|--------------------------------------- |  | ------------------ | ------ |  | --------------- | - | --- | ---------------- |  | -- | --------- | - |  | - | ------ | 
|                                        |  | September 30, 2010 |       
|(In thousands)                          |  | AmortizedCost      |        |  | UnrealizedGains |   |     | UnrealizedLosses |  |    | FairValue |  
|                                        |  |                    |        | 
|Corporate Bonds                         |  | $                  | 3,500  |  |                 | $ | 13  |                  |  | ($ | 7         | ) |  | $ | 3,506  | 
|U.S. Government agencies                |  |                    | 7,572  |  |                 |   | 7   |                  |  |    | (1        | ) |  |   | 7,578  | 
|Mortgage-backed securities, residential |  |                    | 4,972  |  |                 |   | 211 |                  |  |    | (3        | ) |  |   | 5,180  | 
|Collateralized mortgage obligations     |  |                    | 7,780  |  |                 |   | 34  |                  |  |    | (24       | ) |  |   | 7,790  | 
|                                        |  |                    |        |  |                 |   |     |                  |  |    |           |   |  |   |        | 
|                                        |  | $                  | 23,824 |  |                 | $ | 265 |                  |  | ($ | 35        | ) |  | $ | 24,054 | 
|                                        |  |                    |        |  |                 |   |     |                  |  |    |           |   |  |   |        | 
|                                        | 
|                                        |  | June 30, 2010      |       
|(In thousands)                          |  | AmortizedCost      |        |  | UnrealizedGains |   |     | UnrealizedLosses |  |    | FairValue |  
|                                        |  |                    |        | 
|Corporate Bonds                         |  | $                  | 1,500  |  |                 | $ | 11  |                  |  | ($ |          | ) |  | $ | 1,511  | 
|U.S. Government agencies                |  |                    | 13,600 |  |                 |   | 40  |                  |  |    | (3        | ) |  |   | 13,637 | 
|Mortgage-backed securities, residential |  |                    | 6,737  |  |                 |   | 291 |                  |  |    | (4        | ) |  |   | 7,024  | 
|Collateralized mortgage obligations     |  |                    | 3,314  |  |                 |   |    |                  |  |    | (4        | ) |  |   | 3,310  | 
|                                        |  |                    |        |  |                 |   |     |                  |  |    |           |   |  |   |        | 
|                                        |  | $                  | 25,151 |  |                 | $ | 342 |                  |  | ($ | 11        | ) |  | $ | 25,482 | 
|                                        |  |                    |        |  |                 |   |     |                  |  |    |           |   |  |   |        | 



9



---

##### Table of Contents



The scheduled maturities of securities
available for sale at September 30, 2010 are as follows:



|                                        |  |               |        |  |           |   |        | 
|--------------------------------------- |  | ------------- | ------ |  | --------- | - | ------ | 
|(In thousands)                          |  | AmortizedCost |        |  | FairValue |  
|Due in less than one year               |  | $             | 1,500  |  |           | $ | 1,500  | 
|Due in one to five years                |  |               | 1,500  |  |           |   | 1,499  | 
|Due after five through ten years        |  |               | 4,999  |  |           |   | 5,008  | 
|Due after ten years                     |  |               | 3,073  |  |           |   | 3,077  | 
|Mortgage-backed securities, residential |  |               | 4,972  |  |           |   | 5,180  | 
|Collateralized Mortgage Obligations     |  |               | 7,780  |  |           |   | 7,790  | 
|                                        |  |               |        |  |           |   |        | 
|                                        |  | $             | 23,824 |  |           | $ | 24,054 | 
|                                        |  |               |        |  |           |   |        | 

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



|                                        |  |                     |       |  |                   |   |     |           |  |   |                  |  |  |           |   |  |                  |   |       |  |  |   |     |  
|--------------------------------------- |  | ------------------- | ----- |  | ----------------- | - | --- | --------- |  | - | ---------------- |  |  | --------- | - |  | ---------------- | - | ----- |  |  | - | --- | -
|                                        |  | September 30, 2010  |      
|                                        |  | Less than 12 Months |       |  | 12 Months or More |   |     | Total     | 
|                                        |  | FairValue           |       |  | UnrealizedLosses  |   |     | FairValue |  |   | UnrealizedLosses |  |  | FairValue |   |  | UnrealizedLosses |  
|(In thousands)                          |  |                     |       |  |                   |   |     |           |  |   |                  |  |  |           |   |  |                  |  
|                                        |  |                     |       |  |                   |  
|U.S. Government agencies                |  | $                   | 1,499 |  |                   | $ | (1  | )         |  | $ |                 |  |  | $         |  |  |                  | $ | 1,499 |  |  | $ | (1  | )
|Corporate Bonds                         |  |                     | 993   |  |                   |   | (7  | )         |  |   |                 |  |  |           |  |  |                  |   | 993   |  |  |   | (7  | )
|Mortgage-backed securities, residential |  |                     | 572   |  |                   |   | (3  | )         |  |   |                 |  |  |           |  |  |                  |   | 572   |  |  |   | (3  | )
|Collateralized Mortgage Obligations     |  |                     | 3,541 |  |                   |   | (24 | )         |  |   |                 |  |  |           |  |  |                  |   | 3,541 |  |  |   | (24 | )
|                                        |  |                     |       |  |                   |   |     |           |  |   |                  |  |  |           |   |  |                  |   |       |  |  |   |     |  
|Total Temporarily Impaired Securities   |  | $                   | 6,605 |  |                   | $ | (35 | )         |  | $ |                 |  |  | $         |  |  |                  | $ | 6,605 |  |  | $ | (35 | )
|                                        |  |                     |       |  |                   |   |     |           |  |   |                  |  |  |           |   |  |                  |   |       |  |  |   |     |  
|                                        | 
|                                        |  | June 30, 2010       |      
|                                        |  | Less than 12 Months |       |  | 12 Months or More |   |     | Total     | 
|                                        |  | FairValue           |       |  | UnrealizedLosses  |   |     | FairValue |  |   | UnrealizedLosses |  |  | FairValue |   |  | UnrealizedLosses |  
|(In thousands)                          |  |                     |       |  |                   |   |     |           |  |   |                  |  |  |           |   |  |                  |  
|                                        |  |                     |       |  |                   |  
|U.S. Government agencies                |  | $                   | 1,586 |  |                   | $ | (3  | )         |  | $ |                 |  |  | $         |  |  |                  | $ | 1,586 |  |  | $ | (3  | )
|Corporate Bonds                         |  |                     | 662   |  |                   |   | (4  | )         |  |   |                 |  |  |           |  |  |                  |   | 662   |  |  |   | (4  | )
|Mortgage-backed securities, residential |  |                     | 3,310 |  |                   |   | (4  | )         |  |   |                 |  |  |           |  |  |                  |   | 3,310 |  |  |   | (4  | )
|                                        |  |                     |       |  |                   |   |     |           |  |   |                  |  |  |           |   |  |                  |   |       |  |  |   |     |  
|Total Temporarily Impaired Securities   |  | $                   | 5,558 |  |                   | $ | (11 | )         |  | $ |                 |  |  | $         |  |  |                  | $ | 5,558 |  |  | $ | (11 | )
|                                        |  |                     |       |  |                   |   |     |           |  |   |                  |  |  |           |   |  |                  |   |       |  |  |   |     |  

All collateralized mortgage obligations in the portfolio were comprised of securities issued by non-Government issuers for
which the collateral consists of securities issued by U.S. Government agencies.

Securities, issued by agencies of the federal government,
with a carrying value of $4.8 million and $5.1 million on September 30, 2010 and June 30, 2010, respectively, were pledged to secure the Banks federal funds accommodation.

During the three months ended September 30, 2010 and 2009, $1.5 million and $0 in securities were sold at a gross gain of $67,000 and $0, respectively, using the specific identification method.



10



---

##### Table of Contents



At September 30, 2010, the
Company had six securities in an unrealized loss position. Unrealized losses detailed above relate to three collateralized mortgage obligations, one mortgage-backed security, one corporate bond and one agency security. The declines in fair value are
considered temporary and are primarily due to interest rate fluctuations. The Company does not have the intent to sell these securities, and it is more likely than not that it will not be required to sell the securities prior to their recovery. None
of the individual unrealized losses are significant.

The carrying amount of Federal Reserve Bank and Federal Home Loan Bank stocks totals
$2.7 million and $2.8 million at September 30, 2010 and June 30, 2010, respectively, and such securities are considered restricted as to marketability. Management evaluates the Companys restricted stock in the FHLB for impairment in
accordance with ASC Topic 350, Accounting by Certain Entities (Including With Trade Receivables) That Lend to or Finance The Activities of Others. Managements determination of whether this investment is impaired is based on their
assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the
significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the
level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB. The Company has concluded that the
restricted stock investment is not impaired as of September 30, 2010.

Note 7: Junior Subordinated Debentures

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

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

Note 8: Preferred Stock

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

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



11



---

##### Table of Contents



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

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

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

Note 9: Regulatory Capital Requirements

At September 30, 2010, the Bank met each of the three minimum regulatory capital requirements. The following table summarizes the Banks regulatory capital position at September 30, 2010.



|                                         |  |        |        |  |                               |  |       |                                                         |  |   |        |  |  |        |      |   |   |   |        |  |  |  |       |  
|---------------------------------------- |  | ------ | ------ |  | ----------------------------- |  | ----- | ------------------------------------------------------- |  | - | ------ |  |  | ------ | ---- | - | - | - | ------ |  |  |  | ----- | -
|                                         |  | Actual |        |  | For CapitalAdequacy 
Purposes |  |       | Well Capitalized UnderPrompt
CorrectiveAction Provision | 
|($ in thousands)                         |  | Amount |        |  | %                             |  |       | Amount                                                  |  |   | %      |  |  | Amount |      |   | % |  
|                                         |  |        |        |  |                               | 
|Total Capital (to Risk Weighted Assets)  |  | $      | 23,095 |  |                               |  | 12.87 | %                                                       |  | $ | 14,472 |  |  |        | 8.00 | % |   | $ | 18,091 |  |  |  | 10.00 | %
|                                         |  |        |        |  |                               | 
|Tier 1 Capital (to Risk Weighted Assets) |  | $      | 20,833 |  |                               |  | 11.61 | %                                                       |  | $ | 7,236  |  |  |        | 4.00 | % |   | $ | 10,854 |  |  |  | 6.00  | %
|                                         |  |        |        |  |                               | 
|Tier 1 Capital (to Average Assets)       |  | $      | 20,833 |  |                               |  | 7.75  | %                                                       |  | $ | 10,757 |  |  |        | 4.00 | % |   | $ | 13,446 |  |  |  | 5.00  | %

The following table summarizes the
Banks regulatory capital position at June 30, 2010.



|                                         |  |        |        |  |                               |  |       |                                                         |  |   |        |  |  |        |      |   |   |   |        |  |  |  |       |  
|---------------------------------------- |  | ------ | ------ |  | ----------------------------- |  | ----- | ------------------------------------------------------- |  | - | ------ |  |  | ------ | ---- | - | - | - | ------ |  |  |  | ----- | -
|                                         |  | Actual |        |  | For CapitalAdequacy 
Purposes |  |       | Well Capitalized UnderPrompt
CorrectiveAction Provision | 
|($ in thousands)                         |  | Amount |        |  | %                             |  |       | Amount                                                  |  |   | %      |  |  | Amount |      |   | % |  
|                                         |  |        |        |  |                               | 
|Total Capital (to Risk Weighted Assets)  |  | $      | 23,009 |  |                               |  | 12.35 | %                                                       |  | $ | 15,000 |  |  |        | 8.00 | % |   | $ | 18,750 |  |  |  | 10.00 | %
|                                         |  |        |        |  |                               | 
|Tier 1 Capital (to Risk Weighted Assets) |  | $      | 20,663 |  |                               |  | 11.09 | %                                                       |  | $ | 7,500  |  |  |        | 4.00 | % |   | $ | 11,250 |  |  |  | 6.00  | %
|                                         |  |        |        |  |                               | 
|Tier 1 Capital (to Average Assets)       |  | $      | 20,663 |  |                               |  | 7.76  | %                                                       |  | $ | 10,649 |  |  |        | 4.00 | % |   | $ | 13,311 |  |  |  | 5.00  | %



12



---

##### Table of Contents



Note 10: Earnings (Loss) Per Share

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



|                                                    |  |                                  |       |  |      |   |       |  
|--------------------------------------------------- |  | -------------------------------- | ----- |  | ---- | - | ----- | -
|                                                    |  | Three Months 
EndedSeptember 30, |      
|                                                    |  | 2010                             |       |  | 2009 |  
|(in thousands except for per share data)            |  |                                  |       |  |      |  
|                                                    |  |                                 
|Net income/(loss) available for common shareholders |  | $                                | 10    |  |      | $ | (26   | )
|Basic weighted average shares outstanding           |  |                                  | 1,941 |  |      |   | 1,929 |  
|Basic earnings (loss) per share                     |  | $                                | 0.01  |  |      | $ | (0.01 | )
|Dilutive shares                                     |  |                                  |      |  |      |   |      |  
|Diluted weighted average shares outstanding         |  |                                  | 1,941 |  |      |   | 1,929 |  
|Diluted earnings (loss) per share                   |  | $                                | 0.01  |  |      | $ | (0.01 | )

At September 30, 2010, there were
20,832 stock options outstanding all of which had exercise prices above the market price of the Companys common stock on the same date.

Note 11: Guarantees

The Company does
not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit issued by the Bank. Standby letters of credit are conditional written commitments issued by the Bank to guarantee the
performance of a customer to a third party. Generally, all letters of credit when issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending
loan facilities to customers. The Bank, generally, holds collateral and/or personal guarantees supporting these commitments. The Bank had $1,430,000 of standby letters of credit as of September 30, 2010 and $1,349,000 outstanding as of
June 30, 2010. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required under the corresponding guarantees.
The amount of the liability as of September 30, 2010 and June 30, 2010 for guarantees under standby letters of credit issued is not material.

Note 12: Core Deposit Intangible Asset

ASC Topic 350, Intangibles - Goodwill and
Other requires that other acquired intangible assets with finite lives, such as purchased customer accounts, 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 other intangible assets may be impaired.

Note 13: Share-Based Compensation

Stock Options

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

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



13



---

##### Table of Contents



A summary of share option activity for
the three month period ended September 30, 2010 follows:



|                                  |  |        |        |  |                              |   |      |                                                  |  |  |                                |  |  |   |   | 
|--------------------------------- |  | ------ | ------ |  | ---------------------------- | - | ---- | ------------------------------------------------ |  |  | ------------------------------ |  |  | - | - | 
|                                  |  | Shares |        |  | WeightedAverageExercisePrice |   |      | WeightedAverageRemainingContractualTerm in Years |  |  | AggregateIntrinsicValue (000s) | 
|                                  |  |        |        | 
|Outstanding at June 30, 2010      |  |        | 20,832 |  |                              | $ | 6.29 |                                                  |  |  | 1.11                           |  |  | $ |  | 
|                                  |  |        |        | 
|Granted                           |  |        |       |  |                              |   |     |                                                  |  |  |                               |  |  |   |   | 
|                                  |  |        |        | 
|Exercised                         |  |        |       |  |                              |   |     |                                                  |  |  |                               |  |  |   |   | 
|                                  |  |        |        | 
|Forfeited or expired              |  |        |       |  |                              |   |     |                                                  |  |  |                               |  |  |   |   | 
|                                  |  |        |        |  |                              |   |      |                                                  |  |  |                                |  |  |   |   | 
|                                  |  |        |        | 
|Outstanding at September 30, 2010 |  |        | 20,832 |  |                              | $ | 6.29 |                                                  |  |  | 0.85                           |  |  | $ |  | 
|                                  |  |        |        |  |                              |   |      |                                                  |  |  |                                |  |  |   |   | 
|                                  |  |        |        | 
|Exercisable at September 30, 2010 |  |        | 20,832 |  |                              | $ | 6.29 |                                                  |  |  |                                |  |  |   |   | 
|                                  |  |        |        |  |                              |   |      |                                                  |  |  |                                |  |  |   |   | 

Stock Incentive Plan

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

In May 2009, the Board of Directors voted to terminate the directors deferred
compensation portion of the Plan. Accordingly, 57,255 deferred shares were distributed to the respective directors in May 2010, and are now included as issued shares. The remaining portion of the Plan continues to remain in effect. As of
June 30, 2010 there are 2,250 non-vested shares outstanding under this plan.

A summary of the status of the Companys non-vested
shares as of September 30, 2010 is presented below:



|                                 |  |              |       |  |                                     |   |      | 
|-------------------------------- |  | ------------ | ----- |  | ----------------------------------- | - | ---- | 
|                                 |  | CommonShares |       |  | WeightedAverageGrant-DateFair Value |  
|                                 |  |             
|Non-vested as of June 30, 2010   |  |              | 2,250 |  |                                     | $ | 7.10 | 
|Awards Granted                   |  |              |      |  |                                     |   |     | 
|Vested                           |  |              |      |  |                                     |   |     | 
|Forfeited                        |  |              |      |  |                                     |   |     | 
|                                 |  |              |       |  |                                     |   |      | 
|Non-vested at September 30, 2010 |  |              | 2,250 |  |                                     | $ | 7.10 | 
|                                 |  |              |       |  |                                     |   |      | 

As of September 30, 2010 there was $4,000 of total unrecognized compensation costs related to non-vested
share-based compensation. The cost is expected to be recognized over a weighted average period of 9 months. At grant date, vesting of the shares was cliff vesting at the end of either a two or three year period. Compensation expense
totaling $1,000 and $14,000 has been recognized in the three month periods ended September 30, 2010 and 2009, respectively, as a result of these awards.

Note 14: Fair Value Measurements

Effective July 1, 2008, the Company adopted ASC
Topic 820, Fair Value Measurements and Disclosures. These standards defined the concept of fair value, established a framework for measuring fair value in accordance with GAAP, and expand disclosure about fair value measurements. ASC
Topic 820 applies only to fair value measurements required or permitted under current accounting pronouncements, and does not require any new fair value measurements. Fair value is defined as the price to sell an asset or to transfer a liability in
an orderly transaction between willing market participants as of the measurement date. The statement also expands disclosures about financial instruments that are measured at fair value and eliminates the use of large position discounts for



14



---

##### Table of Contents

financial instruments quoted in active markets. The disclosures emphasis is on the inputs used to measure fair value and the effect of the measurement on earnings for the period. The
adoption did not have any effect on the Companys consolidated financial position or results of operations. Fair value estimates, methods, and assumptions are set forth below for the Companys financial instruments as of September 30,
2010 and June 30, 2010.

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

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

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



|                                         |  |                    |         |  |               |   |         |                |  |   |            |  |  |   |         | 
|---------------------------------------- |  | ------------------ | ------- |  | ------------- | - | ------- | -------------- |  | - | ---------- |  |  | - | ------- | 
|                                         |  | September 30, 2010 |         |  | June 30, 2010 |  
|(In thousands)                           |  | Carryingamount     |         |  | Fair value    |   |         | Carryingamount |  |   | Fair value | 
|Assets:                                  |  |                    |         |  |               |   |         |                |  |   |            |  |  |   |         | 
|Cash and cash equivalents                |  | $                  | 32,550  |  |               | $ | 32,550  |                |  | $ | 28,043     |  |  | $ | 28,043  | 
|Securities available for sale            |  |                    | 24,054  |  |               |   | 24,054  |                |  |   | 25,482     |  |  |   | 25,482  | 
|Loans receivable, net                    |  |                    | 196,841 |  |               |   | 204,802 |                |  |   | 197,169    |  |  |   | 205,092 | 
|Investment in securities required by law |  |                    | 2,684   |  |               |   | 2,684   |                |  |   | 2,848      |  |  |   | 2,848   | 
|Accrued interest receivable              |  |                    | 1,647   |  |               |   | 1,647   |                |  |   | 1,482      |  |  |   | 1,482   | 
|Liabilities:                             |  |                    |         |  |               |   |         |                |  |   |            |  |  |   |         | 
|Deposits                                 |  |                    | 229,201 |  |               |   | 230,064 |                |  |   | 228,789    |  |  |   | 228,846 | 
|Long-term debt                           |  |                    | 22,100  |  |               |   | 21,234  |                |  |   | 22,100     |  |  |   | 21,084  | 
|Accrued interest payable                 |  |                    | 465     |  |               |   | 465     |                |  |   | 392        |  |  |   | 392     | 
|Off balance sheet instruments:           |  |                    |         |  |               |   |         |                |  |   |            |  |  |   |         | 
|Commitments to extend credit             |  |                    |        |  |               |   |        |                |  |   |           |  |  |   |        | 

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

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

Securities Available for Sale

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

Loans Receivable

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

Impaired Loans

The Company considers loans to be impaired when it becomes probable that the Company will be unable to collect all amounts due in accordance with the
contractual terms of the loan agreement. All non-accrual loans are considered impaired. The measurement of impaired loans is based on the present value of the expected cash flows discounted at the historical effective interest rate, the market price
of the loan, or the fair value of the underlying collateral. Collateral values are estimated utilizing methods such as appraisals, broker price opinions and taking into consideration the timing of the valuation, the nature of the collateral and such
other information as is deemed



15



---

##### Table of Contents

appropriate. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan
balances of $4.6 million and $4.0 million less their specific valuation allowances of $1.2 million and $668,000 as determined in accordance with ASC 310-10-35 (formerly SFAS 114, Accounting by Creditors for Impairment of a Loan) at
September 30, 2010 and June 30, 2010, respectively.

Real Estate Acquired Through Foreclosure (REO)

Real estate acquired through foreclosure is initially recorded at fair value less cost to sell which is determined typically by
utilizing an outside appraiser. Management evaluates the value of REO at least annually. Any declines in value are reflected by establishing an REO valuation allowance with an offsetting charge to operating expense. Any increases in the value of the
property may be recognized only to the extent of the valuation allowance when the property value has recovered. The fair value consists of REO balances of $2.8 million and $2.9 million less their specific valuation allowances of $19,000 and $19,000
at September 30, 2010 and June 30, 2010, respectively.

Securities Required by Law

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

Accrued Interest Receivable

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

Deposits

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

Long-Term Debt

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

Accrued Interest Payable

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

Off-Balance Sheet Financial Instruments

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

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

Fair Value Disclosures

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

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

This ASC 820-10-65 clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the
entity must evaluate the weight



16



---

##### Table of Contents

of the evidence to determine whether the transaction is orderly. ASC 820-10-65 provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is
not associated with an orderly transaction is given little, if any, weight when estimating fair value.

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

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



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



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



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

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

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



|                                                |  |                       |        |  |         |   |   |         |  |   |         |  |  |   |       | 
|----------------------------------------------- |  | --------------------- | ------ |  | ------- | - | - | ------- |  | - | ------- |  |  | - | ----- | 
|                                                |  | At September 30, 2010 |       
|(In thousands)                                  |  | Total                 |        |  | Level 1 |   |   | Level 2 |  |   | Level 3 | 
|Measured at fair value on a recurring basis:    |  |                       |        |  |         |   |   |         |  |   |         |  |  |   |       | 
|Securities available for sale                   |  | $                     | 24,054 |  |         | $ |  |         |  | $ | 24,054  |  |  | $ |      | 
|                                                |  |                       |        |  |         |   |   |         |  |   |         |  |  |   |       | 
|                                                |  |                       |        | 
|Measured at fair value on a nonrecurring basis: |  |                       |        |  |         |   |   |         |  |   |         |  |  |   |       | 
|Impaired loans                                  |  | $                     | 3,468  |  |         | $ |  |         |  | $ |        |  |  | $ | 3,468 | 
|                                                |  |                       |        |  |         |   |   |         |  |   |         |  |  |   |       | 
|Real estate acquired through foreclosure        |  | $                     | 2,813  |  |         | $ |  |         |  | $ |        |  |  | $ | 2,813 | 
|                                                |  |                       |        |  |         |   |   |         |  |   |         |  |  |   |       | 
|                                                | 
|                                                |  | At June 30, 2010      |       
|(In thousands)                                  |  | Total                 |        |  | Level 1 |   |   | Level 2 |  |   | Level 3 | 
|Measured at fair value on a recurring basis:    |  |                       |        |  |         |   |   |         |  |   |         |  |  |   |       | 
|Securities available for sale                   |  | $                     | 25,482 |  |         | $ |  |         |  | $ | 25,482  |  |  | $ |      | 
|                                                |  |                       |        |  |         |   |   |         |  |   |         |  |  |   |       | 
|                                                |  |                       |        | 
|Measured at fair value on a nonrecurring basis: |  |                       |        |  |         |   |   |         |  |   |         |  |  |   |       | 
|Impaired loans                                  |  | $                     | 3,353  |  |         | $ |  |         |  | $ |        |  |  | $ | 3,353 | 
|                                                |  |                       |        |  |         |   |   |         |  |   |         |  |  |   |       | 
|Real estate acquired through foreclosure        |  | $                     | 2,875  |  |         | $ |  |         |  | $ |        |  |  | $ | 2,875 | 
|                                                |  |                       |        |  |         |   |   |         |  |   |         |  |  |   |       | 

Note 15: Reclassification

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



17



---

##### Table of Contents



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

General

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

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

Forward-Looking Statements

When used in this Form 10-Q, the words or phrases will likely result, are expected to, will continue, is
anticipated, estimate, project or similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are
subject to certain risks and uncertainties including changes in economic conditions in the Companys market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Companys market area,
competition and the Risk Factors described in Item 1A of the Companys Annual Report on Form 10-K for the year ended June 30, 2010, that could cause actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect
the Companys financial performance and could cause the Companys actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

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

Critical Accounting Policies

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

The allowance for loan losses (allowance) represents an amount, that in the judgment of management, will be adequate to absorb probable
losses on outstanding loans and leases that may become uncollectible. The allowance represents an estimate made based upon two principles of accounting: (1) ASC Topic 855, Accounting for



18



---

##### Table of Contents

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

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 are
probable but have yet to be recognized in either the specific allowance or the formula allowance. The factors used in determining the nonspecific allowance include trends in delinquencies, trends in volumes and terms of loans, the size of loans
relative to the allowance, concentration of credits, the quality of the risk identification system and credit administration and local and national economic trends.

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

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

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

Real estate acquired through
foreclosure and other repossessed assets are initially recorded at the estimated fair value, net of estimated selling costs, and subsequently at the lower of carrying cost or fair value less estimated costs to sell. Costs relating to holding such
property are charged against income in the current period. Costs relating to improving such real estate are capitalized, subject to the propertys carrying cost not exceeding its fair value, until a salable condition is reached.

Comparison of Financial Condition at September 30, 2010 and June 30, 2010

Patapsco Bancorps assets increased by $1.6 million, or 0.6% to $271.4 million at September 30, 2010 from $269.7 million at June 30, 2010. Net loans declined $328,000 or 0.2% to $196.8
million at September 30, 2010 from $197.2 million at June 30, 2010. Growth in commercial mortgages of $6.7 million was more than offset by decreases in residential mortgage loans of $3.2 million, construction loans of $2.2 million,
commercial leases of $1.0 million, consumer loans of $435,000 and commercial business loans of $40,000. Such decreases were due primarily to soft loan demand.

Securities available for sale decreased $1.4 million to $24.1 million at September 30, 2010 from $25.5 million at June 30, 2010 as maturities of $8.0 million, sales of $1.5 million and pay-downs
of the mortgage-backed securities of $0.5 million were replaced by new purchases of investment securities of $8.6 million.

Real estate
acquired through foreclosure decreased $62,000 to $2.8 million as of September 30, 2010 as there were no additions and one property sold at a $4,000 gain.



19



---

##### Table of Contents



Total deposits grew $412,000, or 0.2%,
to $229.2 million at September 30, 2010 from $228.8 million at June 30, 2010 including $1.4 million in property tax payments out of escrow during the quarter. Escrow accounts are included in deposits. Interest-bearing deposits increased
$2.8 million, or 1.3%, to $220.1 million at September 30, 2010 from $217.2 million at June 30, 2010. Noninterest-bearing deposits declined $2.4 million to $9.1 million at September 30, 2010. Long-term debt was flat at $17.1 million at
September 30, 2010 and June 30, 2010.

Stockholders equity increased by $71,000 from $17.37 million at June 30, 2010 to
$17.44 million at September 30, 2010 primarily reflecting retained earnings during the current quarter.

Comparison of Operating
Results for the Quarter Ended September 30, 2010 and 2009

Net Income. Patapsco Bancorp recorded net income available to
common shareholders of $10,000, or $0.01 per share, for the quarter ended September 30, 2010 compared to a net loss of $26,000, or $(0.01) per share for the quarter ended September 30, 2009. The net income available to common shareholders
in the current quarter resulted from a lower loan loss provision and operating expenses, offset, in part, by lower net interest income.

Net Interest Income. Patapsco Bancorps net interest income decreased by $94,000, or 4.3%, to $2.1 million for the quarter ended
September 30, 2010 compared to $2.2 million for the same quarter in 2009. The decrease in net interest income during the comparable three-month periods was due to a 12 basis point decrease in the net interest margin to 3.31% in the quarter
ended September 30, 2010 from 3.43% in the quarter ended September 30, 2009. The decline in the net interest margin was driven by a 63 basis point decline in the average rate earned on interest earning assets which more than offset the 59
basis point decrease in the average rate paid on interest bearing liabilities. In addition, interest earning assets declined $2.0 million from $252.3 million for the quarter ended September 30, 2009 to $250.3 million in the current quarter.

Interest Income. Total interest income decreased by $425,000, or 11.4%, to $3.3 million for the quarter ended
September 30, 2010 from $3.7 million for the quarter ended September 30, 2009. The yield on earning assets decreased by 63 basis points to 5.21% in the quarter ended September 30, 2010 compared to 5.84% in the quarter ended
September 30, 2009 due to several factors. The impact of lower market interest rates in the current quarter had a negative effect on the yields on earning assets. In addition, a shift in the mix of earning assets from loans to lower yielding
investments negatively affected the yield on average earning assets.

Interest income on loans receivable decreased by $473,000, or 13.3%, to
$3.1 million for the quarter ended September 30, 2010 from $3.6 million for the quarter ended September 30, 2009. The decrease in interest income on average loans was due to a 32 basis point decline in the yield earned on the loan
portfolio as well as a $19.8 million decline in average loan balances from $219.7 million in the quarter ended September 30, 2009 to $199.9 million for quarter ended September 30, 2010. The lower yield was due to the decline in market
interest rates mentioned above.

Interest income on investment securities, including investments required by law, increased $44,000 or 27.2%
as the average balance increased $9.4 million from $18.0 million for the quarter ended September 30, 2009 to $27.4 million in the current quarter. The increase in balances more than offset the 58 basis point decline in the yield over the same
period.

Interest income on federal funds sold and other investments increased $4,000 or 40.0% to $14,000, as average balances grew $8.4
million to $23.1 million for the quarter ending September 30, 2010 which more than offset the 5 basis point decline in yield.

Interest Expense. Total interest expense decreased by $331,000, or 21.4%, to $1.2 million for the quarter ended September 30, 2010
from $1.5 million for the quarter ended September 30, 2009 due to lower rates paid on interest-bearing liabilities. Interest expense on deposits decreased by $259,000 or 21.4% to $949,000 in the current quarter from $1.2 million in the previous
years quarter due to a 69 basis point decline in rates paid on deposits. This had a larger impact than the $19.0 million, or 9.6% growth in average deposit balances to $218.2 million for the quarter ended September 30, 2010 versus $199.2
million for the previous years corresponding quarter. The lower rates paid on deposits reflects the lower rate environment in the current quarter as well as a moderation of the competitive pressures that existed in the previous years
corresponding quarter.

Interest expense on short-term borrowings decreased $6,000, or 100%, to $0 for the three months ended
September 30, 2010 from $6,000 for the three months ended September 30, 2009 due to the pay-down of short-term borrowings. Interest expense on long-term borrowings decreased $66,000, or 20.0%, as the average balance declined $8.5 million,
or 27.9%, to $22.1 million for the quarter ended September 30, 2010, which more than offset 47 basis point increase in the average rate paid. The increase in the rate occurred as shorter term borrowings matured over the past 12 months leaving
higher rate longer term borrowings. No new long-term borrowings were issued during the current year.



20



---

##### Table of Contents



Average Balance, Interest and
Average Yields and Rates

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

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



|                                                                                 |  |                                  |         |  |          |   |       |                 |  |  |                |   |  |          |         |  |                 |   |       |  |  |  |        |  
|-------------------------------------------------------------------------------- |  | -------------------------------- | ------- |  | -------- | - | ----- | --------------- |  |  | -------------- | - |  | -------- | ------- |  | --------------- | - | ----- |  |  |  | ------ | -
|                                                                                 |  | Three Months Ended September 30, |        
|                                                                                 |  | 2010                             |         |  | 2009     |  
|                                                                                 |  | AverageBalance                   |         |  | Interest |   |       | AverageRate (1) |  |  | AverageBalance |   |  | Interest |         |  | AverageRate (1) |  
|                                                                                 |  | (Dollars in thousands)           |        
|Interest-earning assets:                                                         |  |                                  |         |  |          |   |       |                 |  |  |                |   |  |          |         |  |                 |   |       |  |  |  |        |  
|Loans receivable, including fees (1)                                             |  | $                                | 199,882 |  |          | $ | 3,083 |                 |  |  | 6.08           | % |  | $        | 219,696 |  |                 | $ | 3,556 |  |  |  | 6.40   | %
|Investment and mortgage-backed securities                                        |  |                                  |         |  |          |   |       |                 |  |  |                |   |  |          |         |  |                 |   |       |  |  |  |        |  
|Securities, including securities required by law                                 |  |                                  | 27,410  |  |          |   | 206   |                 |  |  | 3.01           | % |  |          | 17,984  |  |                 |   | 162   |  |  |  | 3.59   | %
|Federal funds sold and other investments                                         |  |                                  | 23,054  |  |          |   | 14    |                 |  |  | 0.23           | % |  |          | 14,639  |  |                 |   | 10    |  |  |  | 0.28   | %
|                                                                                 |  |                                  |         |  |          |   |       |                 |  |  |                |   |  |          |         |  |                 |   |       |  |  |  |        |  
|Total interest-earning assets                                                    |  |                                  | 250,346 |  |          |   | 3,303 |                 |  |  | 5.21           | % |  |          | 252,319 |  |                 |   | 3,728 |  |  |  | 5.84   | %
|                                                                                 |  |                                  |         |  |          |   |       |                 |  |  |                |   |  |          |         |  |                 |   |       |  |  |  |        |  
|Non-interest-earning assets                                                      |  |                                  | 18,749  |  |          |   |       |                 |  |  |                |   |  |          | 15,632  |  |                 |   |       |  |  |  |        |  
|                                                                                 |  |                                  |         |  |          |   |       |                 |  |  |                |   |  |          |         |  |                 |   |       |  |  |  |        |  
|Total assets                                                                     |  | $                                | 269,095 |  |          |   |       |                 |  |  |                |   |  | $        | 267,951 |  |                 |   |       |  |  |  |        |  
|                                                                                 |  |                                  |         |  |          |   |       |                 |  |  |                |   |  |          |         |  |                 |   |       |  |  |  |        |  
|                                                                                 |  |                                  |         |  |          |  
|Interest-bearing liabilities:                                                    |  |                                  |         |  |          |   |       |                 |  |  |                |   |  |          |         |  |                 |   |       |  |  |  |        |  
|Interest-bearing deposits (2)                                                    |  | $                                | 218,246 |  |          |   | 949   |                 |  |  | 1.72           | % |  | $        | 199,220 |  |                 |   | 1,208 |  |  |  | 2.41   | %
|Short-term borrowings                                                            |  |                                  |        |  |          |   |      |                 |  |  |               |   |  |          | 5,871   |  |                 |   | 6     |  |  |  | 0.43   | %
|Long-term borrowings                                                             |  |                                  | 22,100  |  |          |   | 264   |                 |  |  | 4.68           | % |  |          | 30,645  |  |                 |   | 330   |  |  |  | 4.21   | %
|                                                                                 |  |                                  |         |  |          |   |       |                 |  |  |                |   |  |          |         |  |                 |   |       |  |  |  |        |  
|Total interest-bearing liabilities                                               |  |                                  | 240,346 |  |          |   | 1,213 |                 |  |  | 2.00           | % |  |          | 235,736 |  |                 |   | 1,544 |  |  |  | 2.59   | %
|                                                                                 |  |                                  |         |  |          |   |       |                 |  |  |                |   |  |          |         |  |                 |   |       |  |  |  |        |  
|Non-interest-bearing liabilities                                                 |  |                                  | 11,026  |  |          |   |       |                 |  |  |                |   |  |          | 12,410  |  |                 |   |       |  |  |  |        |  
|                                                                                 |  |                                  |         |  |          |   |       |                 |  |  |                |   |  |          |         |  |                 |   |       |  |  |  |        |  
|Total liabilities                                                                |  |                                  | 251,372 |  |          |   |       |                 |  |  |                |   |  |          | 248,146 |  |                 |   |       |  |  |  |        |  
|Stockholders equity                                                             |  |                                  | 17,723  |  |          |   |       |                 |  |  |                |   |  |          | 19,805  |  |                 |   |       |  |  |  |        |  
|                                                                                 |  |                                  |         |  |          |   |       |                 |  |  |                |   |  |          |         |  |                 |   |       |  |  |  |        |  
|Total liabilities and stockholders equity                                       |  | $                                | 269,095 |  |          |   |       |                 |  |  |                |   |  | $        | 267,951 |  |                 |   |       |  |  |  |        |  
|                                                                                 |  |                                  |         |  |          |   |       |                 |  |  |                |   |  |          |         |  |                 |   |       |  |  |  |        |  
|                                                                                 |  |                                  |         |  |          |  
|Net Interest Income                                                              |  |                                  |         |  |          | $ | 2,090 |                 |  |  |                |   |  |          |         |  |                 | $ | 2,184 |  |  |  |        |  
|                                                                                 |  |                                  |         |  |          |   |       |                 |  |  |                |   |  |          |         |  |                 |   |       |  |  |  |        |  
|                                                                                 |  |                                  |         |  |          |  
|Interest rate spread                                                             |  |                                  |         |  |          |   |       |                 |  |  | 3.21           | % |  |          |         |  |                 |   |       |  |  |  | 3.25   | %
|                                                                                 |  |                                  |         |  |          |   |       |                 |  |  |                |   |  |          |         |  |                 |   |       |  |  |  |        |  
|Net interest margin                                                              |  |                                  |         |  |          |   |       |                 |  |  | 3.31           | % |  |          |         |  |                 |   |       |  |  |  | 3.43   | %
|                                                                                 |  |                                  |         |  |          |   |       |                 |  |  |                |   |  |          |         |  |                 |   |       |  |  |  |        |  
|                                                                                 |  |                                  |         |  |          |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                                  |         |  |          |   |       |                 |  |  | 104.16         | % |  |          |         |  |                 |   |       |  |  |  | 107.03 | %
|                                                                                 |  |                                  |         |  |          |   |       |                 |  |  |                |   |  |          |         |  |                 |   |       |  |  |  |        |  



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

|(2) | Includes interest bearing escrow accounts
|--- | -----------------------------------------



21



---

##### Table of Contents



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

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



|                                                                                     |  |                    |       |   |      |   |       |  
|------------------------------------------------------------------------------------ |  | ------------------ | ----- | - | ---- | - | ----- | -
|                                                                                     |  | Three Months Ended |      
|                                                                                     |  | September 30,      |      
|($ in thousands)                                                                     |  | 2010               |       |   | 2009 |  
|                                                                                     |  |                   
|Allowance for loan losses, beginning of period                                       |  | $                  | 3,527 |   |      | $ | 3,023 |  
|Provision for loan losses                                                            |  |                    | 304   |   |      |   | 394   |  
|Loans Charged Off:                                                                   |  |                    |       |   |      |   |       |  
|Consumer                                                                             |  |                    | 90    |   |      |   | 146   |  
|Real Estate                                                                          |  |                    | 69    |   |      |   | 3     |  
|Commercial Loan                                                                      |  |                    |      |   |      |   |      |  
|Commercial Lease                                                                     |  |                    | 35    |   |      |   | 103   |  
|                                                                                     |  |                    |       |   |      |   |       |  
|Total Charge-Offs                                                                    |  |                    | 194   |   |      |   | 252   |  
|                                                                                     |  |                   
|Recoveries:                                                                          |  |                    |       |   |      |   |       |  
|Consumer                                                                             |  |                    | 31    |   |      |   | 31    |  
|Real Estate                                                                          |  |                    |      |   |      |   |      |  
|Commercial Loan                                                                      |  |                    | 9     |   |      |   | 1     |  
|Commercial Lease                                                                     |  |                    | 114   |   |      |   | 23    |  
|                                                                                     |  |                    |       |   |      |   |       |  
|Total Recoveries                                                                     |  |                    | 154   |   |      |   | 55    |  
|                                                                                     |  |                    |       |   |      |   |       |  
|Allowance for loan losses, end of period                                             |  | $                  | 3,791 |   |      | $ | 3,220 |  
|                                                                                     |  |                    |       |   |      |   |       |  
|                                                                                     |  |                   
|Ratio of net charge-offs (annualized) to average loans outstanding during the period |  |                    | 0.08  | % |      |   | 0.36  | %
|                                                                                     |  |                    |       |   |      |   |       |  
|Ratio of allowance to nonperforming loans                                            |  |                    | 34.24 | % |      |   | 30.26 | %
|                                                                                     |  |                    |       |   |      |   |       |  

The provision for loan losses was $304,000 in the quarter ended September 30, 2010, compared to $394,000 for the
quarter ended September 30, 2009. The decrease in the provision is primarily due to a lower provision associated with commercial leases as this portfolio has been running off over the past 21 months. The balance at September 30, 2010 was
$4.1 million, a $5.1 million, or 55%, decline from $9.2 million at September 30, 2009. In addition, total lease delinquencies were $294,000 at September 30, 2010, a $550,000, or 65%, drop from $844,000 at September 30, 2009. Patapsco
Bancorps allowance for loan losses as a percentage of total loans outstanding was 1.89% as of September 30, 2010, versus 1.76% at June 30, 2010. Patapsco Bancorps allowance for loan losses as a percentage of nonperforming loans
was 34.2% at September 30, 2010, as compared to 36.3% at June 30, 2010. Setting the allowance at this level takes into consideration that 95% of non-performing loans are collateralized by real estate or guaranteed by the SBA at
September 30, 2010. In considering the appropriate level for the allowance for loan losses, in some cases when the age of the real estate appraisal was more than one year old, adjustments were made to the appraisals taking into consideration
the age of the appraisal and the nature of the collateral. These adjusted appraisal values, which required managements judgment, were used to develop estimated losses and related specific loss reserves within the allowance for loan losses. In
other cases, brokers price opinions or firm purchase offers were used to obtain more current indications of the value of collateral. The valuation method used differs based on the individual circumstances involved for each loan. Another factor
in the level of the allowance for loan losses to non-performing loans was $1.1 million in cumulative partial charge-offs on loans in the portfolio as of September 30, 2010. If specific reserves had been set up as opposed to taking partial
charge-offs, the allowance would have been $4.9 million and the ratio of the allowance for loan losses to non-performing loans would have been 40.2% and the allowance for loan losses to total loans would have been 2.41%.



22



---

##### Table of Contents



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



|                                                               |  |               |        |   |          |   |        |  
|-------------------------------------------------------------- |  | ------------- | ------ | - | -------- | - | ------ | -
|                                                               |  | September 30, |        |   | June 30, |  
|($ in thousands)                                               |  | 2010          |        |   | 2010     |  
|Loans accounted for on a non-accrual basis (1)                 |  |               |        |   |          |   |        |  
|Real Estate:                                                   |  |               |        |   |          |   |        |  
|Residential                                                    |  | $             | 116    |   |          | $ | 116    |  
|Commercial                                                     |  |               | 4,380  |   |          |   | 2,737  |  
|Construction                                                   |  |               | 1,474  |   |          |   | 1,763  |  
|Consumer                                                       |  |               | 60     |   |          |   | 46     |  
|Commercial Loan/Lease                                          |  |               | 5,042  |   |          |   | 5,066  |  
|                                                               |  |               |        |   |          |   |        |  
|Total                                                          |  |               | 11,072 |   |          |   | 9,728  |  
|Accruing loans that are contractually past due 90 days or more |  |               |       |   |          |   |       |  
|                                                               |  |               |        |   |          |   |        |  
|Total non-performing loans                                     |  |               | 11,072 |   |          |   | 9,728  |  
|Other non-performing assets (2)                                |  |               | 2,813  |   |          |   | 2,875  |  
|                                                               |  |               |        |   |          |   |        |  
|Total non-performing assets                                    |  | $             | 13,885 |   |          | $ | 12,603 |  
|                                                               |  |               |        |   |          |   |        |  
|                                                               |  |              
|Nonperforming loans to total loans                             |  |               | 5.52   | % |          |   | 4.85   | %
|Nonperforming assets to total assets                           |  |               | 5.12   | % |          |   | 4.67   | %
|Troubled debt restructurings: (3)                              |  |               |        |   |          |   |        |  
|Accruing                                                       |  | $             | 2,171  |   |          | $ | 2,171  |  
|Non-accruing                                                   |  |               | 4,001  |   |          |   | 4,327  |  
|                                                               |  |               |        |   |          |   |        |  
|Total                                                          |  | $             | 6,172  |   |          | $ | 6,498  |  
|                                                               |  |               |        |   |          |   |        |  



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

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

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

The following table reflects the activity in non-performing loans for the three months ended September 30, 2010:



|                                                                                  |  |   |        |  
|--------------------------------------------------------------------------------- |  | - | ------ | -
|Balance June 30, 2010, in thousands                                               |  | $ | 9,728  |  
|Added to non-accrual during the year                                              |  |   | 2,855  |  
|Paid off/down                                                                     |  |   | (500   | )
|Brought to accrual status                                                         |  |   | (1,099 | )
|Transferred to real estate acquired through foreclosure                           |  |   | 1      |  
|Charged-Off                                                                       |  |   | (64    | )
|Net change in non-accrual Leases, Consumer & Residential Mortgages, and all other |  |   | 151    |  
|                                                                                  |  |   |        |  
|Balance September 30, 2010                                                        |  | $ | 11,072 |  
|                                                                                  |  |   |        |  

At September 30, 2010, non-accrual construction loans totaled $1.5 million and consisted of a $700,000 condominium
conversion project and $770,000 in residential construction and development loans. Non-accrual commercial real estate increased $1.6 million due to one $2.0 million retail strip shopping center loan. Other non-accrual commercial real estate loans
consist of an $857,000 warehouse building loan, a $384,000 office/retail building loan and $839,000 in residential investor property loans. All commercial real estate and construction loans are considered well securitized. Commercial loans/leases
include a $3.3 million loan supporting a borrowers various business interests including commercial properties. In addition, this category includes four loans amounting to $782,000 to borrowers operating retail businesses. Of the $5.0 million
in commercial loan/leases non-accrual loans/leases, $768,000 have an SBA guarantee.

Non-interest Income. Patapsco
Bancorps non-interest income consists of deposit fees, service charges, income from bank owned life insurance (BOLI) and gains. Total non-interest income increased by $30,000, or 14.0%, to $244,000 in the three month period ended
September 30, 2010 due to a $67,000 gain on the sale of securities available for sale in the current quarter compared to no gains in the prior years comparable periods. Fees and service charges declined $34,000, or 18.1%, to $154,000 in
the current quarter due to the impact of the implementation of Regulation E on overdraft fees.



23



---

##### Table of Contents



Non-interest Expenses.
Total noninterest expenses decreased by $57,000, or 3.0%, to $1.86 million for the quarter ended September 30, 2010 from $1.92 million for the quarter ended September 30, 2009. Compensation costs decreased $92,000 or 8.5% due to the
closing of the Parkville branch in December, 2009 and the reduction in loan production staff in the fourth quarter of fiscal year 2010. This decline was partially offset by a $23,000 increase in professional fees which were higher due to higher loan
collection costs. In addition, the provision for losses on and cost of real estate acquired through foreclosure increased $26,000, or 325%, to $34,000 due to a $1.6 million, or 132% increase in real estate acquired through foreclosure from $1.2
million at September 30, 2009 to $2.8 million at September 30, 2010.

Income Taxes. Income tax expense was $62,000 (or
36.7% of pre-tax income) and $30,000 (or 34.9% of pre-tax income) for the periods ended September 30, 2010 and 2009, respectively. The increase in the effective tax rate is a result of the impact of bank owned life insurance income on a higher
level of pre-tax income.

Liquidity and Capital Resources

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

The Companys most liquid assets are cash on hand, interest-bearing
deposits and Federal funds sold, which are short-term, highly liquid investments with original maturities of less than three months that are readily convertible to known amounts of cash. The levels of these assets are dependent on the Companys
operating, financing and investing activities during any given period. At September 30, 2010, the Companys cash on hand and interest-bearing deposits totaled $32.6 million. In addition, the Company has approximately $24.1 million of
investment securities classified as available for sale, $4.8 million of which are pledged as collateral for the Companys federal funds line of credit.

The Company anticipates that it will have sufficient funds available to meet its current loan commitments of $15.6 million and unused lines of credit of $10.2 million. Certificates of deposit that are
scheduled to mature in less than one year at September 30, 2010 totaled $55.0 million. Historically, a high percentage of maturing deposits have remained with the Company.

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

The Company, as the holding company for the Bank, has an annual cash requirement of approximately $654,000 for the payment of preferred dividends, as
well as, interest payments on the $5.0 million in junior subordinated debentures. The only source of funds for the holding company is dividends from the Bank. The amount of dividends that can be paid to the holding company from the Bank is limited
by the earnings of the Bank. At September 30, 2010 the holding company had cash on hand and interest bearing deposits of $2.0 million. This balance includes approximately $800,000 in an intercompany payable to settle income tax refunds owed to
subsidiary companies.

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

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



24



---

##### Table of Contents



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

The Bank had $58.2 million in borrowing capacity with the Federal Home Loan Bank of
Atlanta, with $17.1 million in borrowings outstanding, at September 30, 2010. These borrowings are secured by the Banks stock in the Federal Home Loan Bank of Atlanta and other eligible assets. In addition, the Bank has a $4.0 million
line of credit, none of which was outstanding at September 30, 2010, with Pacific Coast Bankers Bank.

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

Contingencies and Off-Balance Sheet Items

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

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



|                                    |  |                    |        |  |               |   |        | 
|----------------------------------- |  | ------------------ | ------ |  | ------------- | - | ------ | 
|                                    |  | September 30, 2010 |        |  | June 30, 2010 |  
|                                    |  | ($ in thousands)   |       
|                                    |  |                   
|Commitments to originate new loans  |  | $                  | 15,561 |  |               | $ | 11,911 | 
|Undisbursed lines of credit         |  |                    | 10,206 |  |               |   | 10,132 | 
|Financial standby letters of credit |  |                    | 1,430  |  |               |   | 1,349  | 



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

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



|Item 4. | Controls and Procedures
|------- | -----------------------

Disclosure
Controls and Procedures

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

Changes to Internal Control Over Financial Reporting

There were no changes in the Companys internal control over financial reporting during the three months ended September 30, 2010 that have
materially affected, or are reasonable likely to materially affect, the Companys internal control over financial reporting.



25



---

##### Table of Contents



Part II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

None.



|Item  1A. | Risk Factors
|--------- | ------------

There has been no update to
the risk factors set forth in our annual report on Form 10-K for the year ended June 30, 2010.



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

None.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



|Item 4. | (Removed and Reserved)
|------- | ----------------------

N/A



|Item 5. | Other Information
|------- | -----------------

None



|Item 6. | Exhibits
|------- | --------

(a) Exhibits

The following exhibits are filed herewith:



|              |  |                                                                                                                             
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Title                                                                                                                       
|              | 
|3.1           |  | Articles of Incorporation of Patapsco Bancorp, Inc. and Articles Supplementary (1)                                          
|              | 
|3.2           |  | Bylaws of Patapsco Bancorp, Inc., as amended (2)                                                                            
|              | 
|4.1           |  | Form of Common Stock Certificate of Patapsco Bancorp, Inc. (3)                                                              
|              | 
|4.2           |  | Articles Supplementary establishing Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of Patapsco Bancorp, Inc. (4)
|              | 
|4.3           |  | Form of stock certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A (4)                                 
|              | 
|4.4           |  | Form of warrant to purchase 300.003 shares of common stock of Patapsco Bancorp, Inc. (4)                                    
|              | 
|4.5           |  | Articles Supplementary establishing Fixed Rate Cumulative Perpetual Preferred Stock, Series B, of Patapsco Bancorp, Inc. (4)
|              | 
|4.6           |  | Form of stock certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series B (4)                                 
|              | 
|31.1          |  | Rule 13a-14(a) Certification of Chief Executive Officer                                                                     
|              | 
|31.2          |  | Rule 13a-14(a) Certification of Chief Financial Officer                                                                     
|              | 
|32            |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to §906 of Sarbanes Oxley Act                 



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

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

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

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



26



---

##### Table of Contents



Signatures

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



|                        |  |                                                  
|----------------------- |  | -------------------------------------------------
|                        |  | PATAPSCO BANCORP, INC.                           
|                        | 
|Date: November 15, 2010 |  | /s/ Michael J. Dee                               
|                        |  | Michael J. Dee                                   
|                        |  | President and Chief Executive Officer            
|                        | 
|                        |  | /s/ William C. Wiedel, Jr.                       
|                        |  | William C. Wiedel, Jr.                           
|                        |  | Senior Vice President and Chief Financial Officer



27