Auburn Bancorp 10-Q 2011 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: March 31, 2011

or

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

For the transition period from ___________ to ____________

000-53370

(Commission File Number)

Auburn Bancorp, Inc.

(Exact name of registrant as specified in its charter)

United States	26-2139168
(State or other jurisdiction of incorporation)	(IRS Employer Identification No.)

256 Court Street, P.O. Box 3157, Auburn, Maine 04212

(Address and zip code of principal executive offices)

(207) 782-0400

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  oYes  o 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.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	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 o  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common Stock, $0.01 par value, 503,284 shares outstanding as of May 12, 2011.

1

AUBURN BANCORP, INC. AND SUBSIDIARY

QUARTERLY REPORT ON FORM 10-Q

March 31, 2011

TABLE OF CONTENTS

		Page
	PART I. FINANCIAL INFORMATION (Unaudited)
Item 1.	Financial Statements
	Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and June 30, 2010	3
	Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2011 and 2010	4
	Consolidated Statements of Operations (Unaudited) for the Nine Months Ended March 31, 2011 and 2010	5
	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Nine Months Ended March 31, 2011 and 2010	6
	Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended March 31, 2011 and 2010	7
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	quantitative and qualitative disclosures about market risk	32
Item 4.	Controls and Procedures	32
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	[removed and reserved]	33
Item 5.	other information	33
Item 6.	exhibits	34
	Signatures	35

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUBURN BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

March 31, 2011 (Unaudited) and June 30, 2010

	March 31, 2011			June 30, 2010
	(Unaudited)
ASSETS
Cash and due from banks	$	2,058,690		$	1,573,526
Interest-earning deposits		4,905,543			3,705,910
Total cash and cash equivalents		6,964,233			5,279,436
Certificates of deposit		745,000			845,000
Investment securities available for sale, at fair value		1,518,754			1,112,507
Federal Home Loan Bank stock, at cost		1,251,700			1,251,700
Loans		69,242,941			69,374,825
Less allowance for loan losses		(937,771	)		(492,112	)
Net loans		68,305,170			68,882,713
Property and equipment, net		1,810,538			1,852,414
Foreclosed real estate, net of allowance of $15,226 at March 31, 2011
and $50,333 at June 30, 2010		972,602			680,712
Accrued interest receivable
Investments		11,511			13,820
Mortgage-backed securities		426			573
Loans		261,511			263,353
Prepaid expenses and other assets		416,592			405,246
Total assets	$	82,258,037		$	80,587,474
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits	$	57,275,746		$	55,769,248
Federal Home Loan Bank advances		18,671,319			18,430,662
Accrued interest and other liabilities		222,287			337,611
Total liabilities		76,169,352			74,537,521
Stockholders’ Equity
Preferred stock, 1,000,000 shares authorized, no shares issued or outstanding		-			-
Common stock, $.01 par value per share, 10,000,000 shares authorized, 503,284 shares issued and outstanding at March 31, 2011 and         June 30, 2010		5,033			5,033
Additional paid-in-capital		1,466,159			1,468,928
Retained earnings		4,740,594			4,719,099
Accumulated other comprehensive income		13,011			1,368
Unearned compensation (ESOP shares)		(136,112	)		(144,475	)
Total stockholders’ equity		6,088,685			6,049,953
Total liabilities and stockholders’ equity	$	82,258,037		$	80,587,474

The accompanying notes are an integral part of these consolidated financial statements.

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AUBURN BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Operations

Three Months Ended March 31, 2011 and 2010

	Three Months Ended March 31,
	2011			2010
	(Unaudited)
Interest and dividend income:
Interest on loans	$	1,021,160		$	1,017,086
Interest on investments and other interest-earning deposits		12,556			9,526
Dividends on Federal Home Loan Bank stock		946			-
Total interest and dividend income		1,034,662			1,026,612
Interest expense:
Interest on deposits and escrow accounts		208,318			243,442
Interest on Federal Home Loan Bank advances		138,522			168,146
Total interest expense		346,840			411,588
Net interest income		687,822			615,024
Provision for loan losses		232,928			3,985
Net interest income after provision for loan losses		454,894			611,039
Non-interest income:
Net gain on sales of loans		7,595			16,510
Net gain on investment securities        Other non-interest income		1,029 41,604			- 37,431
Total non-interest income		50,228			53,941
Non-interest expenses:
Salaries and employee benefits		258,887			256,297
Occupancy expense		24,716			23,463
Depreciation		23,642			22,800
Federal deposit insurance premiums		35,662			29,114
Computer charges		46,735			47,280
Advertising expense		9,129			20,043
Consulting expense		26,774			13,073
Net provision for losses on foreclosed real estate		-			57,549
Other operating expenses		186,319			138,950
Total non-interest expenses		611,864			608,569
Income (loss) before income taxes		(106,742	)		56,411
Income tax expense (benefit)		(36,039	)		18,820
Net income (loss)	$	(70,703	)	$	37,591
Net income (loss) per common share	$	( .14	)	$	.08

The accompanying notes are an integral part of these consolidated financial statements.

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AUBURN BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Operations

Nine Months Ended March 31, 2011 and 2010

	Nine Months Ended March 31,
	2011			2010
	(Unaudited)
Interest and dividend income:
Interest on loans	$	3,142,312		$	3,002,841
Interest on investments and other interest-earning deposits		40,445			89,616
Dividends on Federal Home Loan Bank stock		946			-
Total interest and dividend income		3,183,703			3,092,457
Interest expense:
Interest on deposits and escrow accounts		660,891			760,340
Interest on Federal Home Loan Bank advances		434,891			534,322
Total interest expense		1,095,782			1,294,662
Net interest income		2,087,921			1,797,795
Provision for loan losses		536,942			49,446
Net interest income after provision for loan losses		1,550,979			1,748,349
Non-interest income:
Net gain on sales of loans		100,500			59,209
Net loss on sale of other assets		(14,096	)		-
Net gain (loss) on investment securities		1,029			(126,269	)
Other non-interest income		122,175			107,962
Total non-interest income		209,608			40,902
Non-interest expenses:
Salaries and employee benefits		745,413			723,163
Occupancy expense		73,991			74,049
Depreciation		71,461			73,200
Federal deposit insurance premiums		73,446			104,670
Computer charges		131,444			132,926
Advertising expense		51,290			50,225
Consulting expense		58,446			36,546
Net provision for losses on foreclosed real estate		11,084			67,549
Other operating expenses		505,300			435,676
Total non-interest expenses		1,721,875			1,698,004
Income before income taxes		38,712			91,247
Income tax expense		17,217			35,744
Net income	$	21,495		$	55,503
Net income per common share	$	.04		$	.11

The accompanying notes are an integral part of these consolidated financial statements.

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AUBURN BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

Nine Months Ended March 31, 2011 and 2010 (Unaudited)

								Accumulated
								Other			Unearned
	Common		Additional Paid-			Retained		Comprehensive			Compensation
	Stock		in-Capital			Earnings		Income (Loss)			(ESOP Shares)			Total
Balance, June 30, 2009	$	5,033	$	1,470,790		$	4,611,470	$	(26,225	)	$	(157,189	)	$	5,903,879
Comprehensive income
Net income		-		-			55,503		-			-			55,503
Other comprehensive income
Unrealized holding gain on securities, net of taxes of $12,640		-		-			-		24,537			-			24,537
Total comprehensive income		-		-			55,503		24,537			-			80,040
Common stock held by ESOP committed to be released (983 shares)		-		(1,394	)		-		-			9,825			8,431
Balance, March 31, 2010	$	5,033	$	1,469,396		$	4,666,973	$	(1,688	)	$	(147,364	)	$	5,992,350
Balance, June 30, 2010	$	5,033	$	1,468,928		$	4,719,099	$	1,368		$	(144,475	)	$	6,049,953
Comprehensive income
Net income		-		-			21,495		-			-			21,495
Other comprehensive income Unrealized holding gain on securities, net of taxes of $5,998		-		-			-		11,643			-			11,643
Total comprehensive income		-		-			21,495		11,643			-			33,138
Common stock held by ESOP committed to be released (836 shares)		-		(2,769	)		-		-			8,363			5,594
Balance, March 31, 2011	$	5,033	$	1,466,159		$	4,740,594	$	13,011		$	(136,112	)	$	6,088,685

The accompanying notes are an integral part of these consolidated financial statements.

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AUBURN BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Nine Months Ended March 31, 2011 and 2010 (Unaudited)

	Nine Months Ended
	March 31,
	2011			2010
Cash flows from operating activities:
Net income	$	21,495		$	55,503
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		71,461			73,200
Net accretion of discounts on investment securities available for sale		(26,144	)		(1,044	)
Provision for loan losses		536,942			49,446
Net provision for losses on foreclosed real estate		11,084			67,549
Deferred income tax benefit		-			(11,380	)
Net loss (gain) on investment securities available for sale		(1,029	)		126,269
Gain on sales of loans		(100,500	)		(59,209	)
Proceeds from sale of loans		2,226,310			2,604,191
Originations of loans sold		(2,127,000	)		(2,609,200	)
Loss on foreclosed real estate		14,096			-
ESOP compensation expense		5,900			8,431
Net increase in prepaid expenses and other assets		(11,346	)		(320,613	)
Net(increase) decrease in accrued interest receivable		4,298			(904	)
Net increase (decrease) in accrued interest payable and other liabilities		(121,322	)		6,327
Net cash provided by (used in) operating activities		504,245			(11,434	)
Cash flows from investing activities:
Purchase of investment securities available for sale		(708,594	)		(263,370	)
Proceeds from sales of investment securities available for sale		265,620			800,499
Proceeds from maturities and principal paydowns on investment securities available for sale		81,541			89,777
Proceeds from sale of other real estate owned		103,380			-
Net change in certificates of deposit		100,000			4,253,000
Net increase in loans to customers		(378,659	)		(7,036,709	)
Purchase of Federal Home Loan Bank stock		-			(104,700	)
Capital expenditures		(29,585	)		(22,687	)
Net cash used in investing activities		(566,297	)		(2,284,190	)
Cash flows from financing activities:
Advances from Federal Home Loan Bank		2,500,000			3,500,000
Repayment of advances from Federal Home Loan Bank		(2,150,000	)		(3,750,000	)
Net change in short-term borrowings		(109,343	)		(2,333,354	)
Net increase in deposits		1,506,498			7,279,027
Redemption of ESOP shares		(306	)		-
Net cash provided by financing activities		1,746,849			4,695,673
Net increase in cash and cash equivalents		1,684,797			2,400,049
Cash and cash equivalents, beginning of period		5,279,436			2,374,636
Cash and cash equivalents, end of period	$	6,964,233		$	4,774,685
Supplementary cash flow information:
Cash paid during the period for:
Interest	$	1,098,100		$	1,301,106
Taxes	$	103,713		$	26,177
Transfer of loans to foreclosed real estate	$	420,450		$	344,858

The accompanying notes are an integral part of these consolidated financial statements.

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AUBURN BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

1.        Basis of Presentation

The financial information included herein presents the consolidated financial condition and results of operations for Auburn Bancorp, Inc. and its wholly-owned subsidiary, Auburn Savings Bank, FSB, as of March 31, 2011 and June 30, 2010, and for the interim periods ended March 31, 2011 and 2010.  Except for the June 30, 2010 Consolidated Balance Sheet, the financial information is unaudited; however, in the opinion of management, the information reflects all adjustments, consisting of normal recurring adjustments, that are necessary to make the financial statements not misleading.  The results shown for the nine months ended March 31, 2011 and 2010 are not necessarily indicative of the results to be obtained for a full fiscal year. The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and with the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly they do not include all of the information and footnotes required for complete financial statements. These interim financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2010 included in the Company’s Annual Report on Form 10-K (File No. 000-53370) filed at the Securities and Exchange Commission on September 28, 2010.

In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and valuation of foreclosed real estate. In connection with the determination of these estimates, management obtains independent appraisals for significant properties.

2.        Reorganization

On January 11, 2008, Auburn Savings Bank, FSB (the “Bank”) reorganized into the mutual holding company structure. As part of the reorganization, the Bank converted to a federal stock savings bank and became a wholly-owned subsidiary of Auburn Bancorp, Inc. (the “Company”), and the Company became a majority-owned subsidiary of Auburn Mutual Holding Company (the “MHC”). In addition, the Company conducted a stock offering.  Immediately following completion of the reorganization and stock offering, the MHC owned 55.0% of the outstanding common stock of the Company and the minority public shareholders owned 45.0%.  So long as the MHC is in existence, the MHC will be required to own at least a majority of the voting stock of the Company.

In conjunction with the stock offering, the Company loaned $173,000 to a trust for the Employee Stock Ownership Plan (the “ESOP”), enabling the ESOP to purchase 17,262 shares of common stock in the stock offering, equal to 3.43% of the shares of common stock sold in the stock offering, for the benefit of the Bank’s employees.

The Company may not declare or pay a cash dividend on any of its common stock, if the effect thereof would cause the regulatory capital of the Bank to be reduced below the amount required under OTS rules and regulations.

Auburn Bancorp, Inc.’s common stock is quoted on the OTC Bulletin Board under the symbol “ABBB.”

8

3.        Impact of Recent Accounting Standards

In June 2009, the Financial Accounting Standards Board (FASB) issued amended guidance with respect to accounting for transfers of financial assets to improve the reporting for the transfer of financial assets resulting from concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. This Statement was effective for the Company on July 1, 2010.  The Company has reviewed the requirements of this Statement and complies with its requirements.  The adoption of this Statement has not had a material effect on the Company’s consolidated financial statements.

In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance is effective for the Company with the reporting period beginning July 1, 2010, except for the disclosure on the roll forward activities for any Level 3 fair value measurements, which will become effective for the Company with the reporting period beginning July 1, 2011. Other than requiring additional disclosures, adoption of this new guidance will not have a material effect on the Company’s consolidated financial statements.

In July 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The guidance is effective for interim and annual reporting periods ending after December 15, 2010. Other than requiring additional disclosures, adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Trouble Debt Restructuring.  This ASU provides guidance on determining whether a restructuring of a receivable meets the criteria to be considered a Troubled Debt Restructuring (“TDR”).  The new guidance is required to be adopted for the first interim or annual reporting period beginning after June 15, 2011, and is to be applied retrospectively to the beginning of the annual reporting period of adoption.  Early adoption is permitted.  The Company intends to adopt the provisions of this ASU when required, and is evaluating its potential impact on the Company’s consolidated financial statements.

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4.       Securities

The amortized cost and fair value of investment securities available for sale, with gross unrealized gains and losses, are as follows:

March 31, 2011

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Municipal bond	$	178,773	$	1,286	$	-		$	180,059
Corporate bonds		1,220,924		24,829		(7,500	)		1,238,253
FNMA mortgage-backed securities		89,341		1,566		(1,236	)		89,671
U.S. Government sponsored enterprise securities		2		769		-			771
Corporate common stock		10,000		-		-			10,000
Total investment securities available for sale	$	1,499,040	$	28,450	$	(8,736	)	$	1,518,754

June 30, 2010

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Corporate bonds	$	982,415	$	13,366	$	(15,640	)	$	980,141
FNMA mortgage-backed securities		118,017		3,499		-			121,516
U.S. Government sponsored enterprise securities		2		848		-			850
Corporate common stock		10,000		-		-			10,000
Total investment securities available for sale	$	1,110,434	$	17,713	$	(15,640	)	$	1,112,507

Investments with a fair value of $1,518,754 and $1,112,507 at March 31, 2011 and June 30, 2010, respectively, are held in a custody account to collateralize certain deposits.

The amortized cost and fair value of debt securities by contractual maturity follow. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	March 31, 2011				June 30, 2010
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
One year or less	$	514,355	$	517,933	$	-	$	-
Over 1 year through 5 years		506,569		499,867		782,415		766,775
After 5 years through 10 years		200,000		220,453		200,000		213,366
After 10 years		178,773		180,059		-		-
		1,399,697		1,418,312		982,415		980,141
Mortgage-backed securities		89,341		89,671		118,017		121,516
	$	1,489,038	$	1,507,983	$	1,100,432	$	1,101,657

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Information pertaining to securities with gross unrealized losses at March 31, 2011 and June 30, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	Less Than 12 Months				12 Months or Greater				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
March 31, 2011
Corporate bonds	$	-	$	-	$	242,500	$	7,500	$	242,500	$	7,500
FNMA mortgage-backed securities		-		-		48,988		1,236		48,988		1,236
Total	$	-	$	-	$	291,488	$	8,736	$	291,488	$	8,736
June 30, 2010
Corporate bonds	$	530,525	$	1,890	$	236,250	$	13,750	$	766,775	$	15,640
Total	$	530,525	$	1,890	$	236,250	$	13,750	$	766,775	$	15,640

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At March 31, 2011, two debt securities with unrealized losses had depreciated 3% in total from the amortized cost basis.  At June 30, 2010, three debt securities with unrealized losses had depreciated 2% in total from the amortized cost basis. These unrealized losses related principally to current interest rates for similar types of securities compared to the underlying yields on these securities.  In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition and the Company’s ability to hold such securities. The Company did not record an other-than-temporary impairment loss during the nine months ended March 31, 2011, but did record $126,269 for the nine months ended March 31, 2010.

5.        Credit Quality and Allowance for Credit Losses

One of the Bank’s most important operating objectives is to maintain a high level of asset quality.  Management uses a number of strategies in furtherance of this goal including maintaining sound credit standards in loan originations, monitoring the loan portfolio through internal and third-party loan reviews, and employing active collection and workout processes for delinquent or problem loans.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized over the contractual life of the loans as an adjustment of the related loan yield using the interest method.

Loans past due 30 days or more are considered delinquent. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection.  Consumer loans are typically charged off when they are no more than 180 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

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All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. Cash payments on these loans are applied to principal balances until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Credit risk arises from the inability of a borrower to meet its obligations. The Bank attempts to manage the risk characteristics of the loan portfolio through various control processes defined in part through the Loan Policy, such as credit evaluation of borrowers, establishment of lending limits, and application of lending procedures, including the holding of adequate collateral and the maintenance of compensating balances. Loan origination processes include evaluation of the risk profile of the borrower, repayment sources, the nature of the underlying collateral, and other support given current events, conditions, and expectations. The Bank seeks to rely primarily on the cash flow of borrowers as the principal source of repayment.

Although credit policies and evaluation processes are designed to minimize risk, Management recognizes that loan losses will occur and the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio, as well as general and regional economic conditions.

The Bank provides for loan losses through the establishment of an allowance for loan losses which represents an estimated reserve for existing losses in the loan portfolio. On an on-going basis, loans are monitored by loan officers and are subject to periodic independent outsourced loan reviews, and delinquency and watch lists are regularly reviewed. At the end of each quarter, the Bank deploys a systematic methodology for determining credit quality that includes formalization and documentation of this review process. In particular, any bankruptcy and foreclosure activity is reviewed along with delinquency watch list issues. Management also classifies the loan portfolio specifically by loan type and monitors credit risk separately as discussed under Credit Quality Indicators below. Management evaluates the adequacy of our allowance continually based on a review of all significant loans, via delinquency reports and a watch list that strives to identify, track and monitor credit risk, historical losses and current economic conditions.

The allowance calculation includes general reserves as well as specific reserves and valuation allowances for individual credits. The specific component relates to loans that are classified as impaired, whereby an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan.  The general component relates to pools of non-impaired loans. On a quarterly basis, management assesses the adequacy of the general reserve allowances based on 1) national, state and local economic factors; 2) interest rate environment and trends; 3) delinquency metrics, including the Bank’s historical loss experience; 4) Bank-specific factors such as changes in lending personnel; 5) changes in the loan review system and related ratings; 6) the Bank’s current underwriting standards; and 7) peer statistics.

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The following tables provide information relative to credit quality and allowance for credit losses as of and for the three and nine months ended March 31, 2011.

	Commercial
	Non-Real			Commercial			Residential
	Estate			Real Estate			Real Estate			Consumer			Unallocated		Total
Three months ended March 31, 2011
Allowance for credit losses:
Beginning balance	$	83,528		$	244,114		$	354,576		$	8,328		$	27,216	$	717,762
Charge-offs		-			(7,072	)		(7,149	)		(483	)		-		(14,704	)
Recoveries		900			-			-			885			-		1,785
Provision		37,902			226,590			(51,393	)		1,549			18,280		232,928
Ending balance	$	122,330		$	463,632		$	296,034		$	10,279		$	45,496	$	937,771
Nine months ended March 31, 2011
Allowance for credit losses:
Beginning balance	$	65,874		$	157,173		$	261,246		$	7,819		$	-	$	492,112
Charge-offs		(42,290	)		(14,972	)		(30,957	)		(6,149	)		-		(94,368	)
Recoveries		900			-			-			2,185			-		3,085
Provision		97,846			321,431			65,745			6,424			45,496		536,942
Ending balance	$	122,330		$	463,632		$	296,034		$	10,279		$	45,496	$	937,771
As of March 31, 2011
Allowance for credit losses:
Ending balance	$	122,330		$	463,632		$	296,034		$	10,279		$	45,496	$	937,771
Individually evaluated for impairment		57,300			7,072			19,944			2,277			-		86,593
Collectively evaluated for impairment		65,030			456,560			276,090			8,002			45,496		851,178
Loans
Ending balance:	$	4,766,786		$	16,209,988		$	47,390,413		$	875,754		$	-	$	69,242,941
Individually evaluated for impairment		57,300			207,072			127,944			2,277			-		394,593
Collectively evaluated for impairment		4,709,486			16,002,916			47,262,469			873,477			-		68,848,348

The Bank’s provision for loan losses was $536,942 and $49,446 for the nine months ended March 31, 2011 and 2010, respectively.  The increase to the provision is the result of an increase in specific reserves of $76,000 and an increase in general valuation reserve of $418,000 due largely to current economic conditions, including declining real estate values and loan performance challenges across all segments of the loan portfolio. The Bank has completed a comprehensive review of the loan portfolio and related allowance for loan losses, and has increased its allowance for loan losses to $937,771 at March 31, 2011 which now represents 1.35% of total loans, compared to an allowance of $492,112, representing 0.71% of total loans at June 30, 2010.

Risk by Portfolio Segment

One- to Four-Family Residential Loans. The Bank’s primary lending activity consists of the origination of one- to four-family residential mortgage loans, substantially all of which are secured by properties located in its primary market area.  The Bank offers fixed-rate mortgage loans, which generally have terms of 15, 20 or 30 years.  The Bank no longer offers adjustable-rate mortgage loans (“ARMs”).

Home Equity Loans.  Home equity lines of credit and loans are secured by a mixture of first and second mortgages on one- to four-family owner occupied properties.  The procedures for underwriting home equity lines of credit and loans include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan.  All properties securing second mortgage loans are generally required to be appraised by a board-approved independent appraiser unless the first mortgage is also held by Auburn Savings Bank.  Home equity lines of credit and loans are made in amounts such that the combined first and second mortgage balances do not exceed 90% of value.

Commercial and Multi-Family Real Estate Loans. The Bank offers commercial real estate loans, including commercial business, and multi-family real estate loans that are generally secured by five or more unit apartment buildings and properties used for business purposes such as small office buildings or retail facilities substantially all of which are located in its primary market area.

Commercial and multi-family real estate loan amounts generally do not exceed 80% of the lesser of the property’s appraised value or sales price.

The Bank generally requires title insurance for commercial and multi-family real estate loans, an appraisal on all such loans if the total amount of loans with that borrower is in excess of $250,000, and an evaluation of the property by an approved appraiser for loans between $100,000 and $250,000.  We may require a full appraisal on property securing any loan less than $250,000.

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Loans secured by commercial real estate, including multi-family properties, generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate, including multi-family properties, are often dependent on successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy.

Construction Loans. The Bank offers construction loans for the development of one- to four-family residential properties located in the Bank’s primary market area.  Residential construction loans are generally offered to individuals for construction of their personal residences.

Residential construction loans can be made with a maximum loan-to-value ratio of 95%, provided that the borrower obtains private mortgage insurance on the loan if the loan balance exceeds 80% of the appraised value of the secured property.

Construction and development financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if the estimate of value proves to be inaccurate, the Bank may be confronted with a project, when completed, having a value which is insufficient to assure full repayment.  

Commercial Loans.  The Bank makes commercial business loans primarily in its market area to a variety of small businesses, professionals and sole proprietorships.  Commercial lending products include term loans and revolving lines of credit. Commercial business loans are generally used for longer-term working capital purposes such as purchasing equipment or furniture. When making commercial loans, the Bank considers the financial statements of the borrower, its lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value of the collateral. Commercial loans are generally secured by a variety of collateral, primarily accounts receivable, inventory and equipment, and the Bank also requires the business principals to execute such loans in their individual capacities. Depending on the amount of the loan and the collateral used to secure the loan, commercial loans are made in amounts of up to 50-80% of the value of the collateral securing the loan, or up to 100% of the value of the collateral securing the loan if the collateral consists of cash or cash equivalents. The Bank generally does not make unsecured commercial loans.  The Bank requires adequate insurance coverage including, where applicable, title insurance, flood insurance, builder’s risk insurance and environmental insurance.

Commercial loans generally have greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. The Bank seeks to minimize these risks through its underwriting standards.

Consumer Loans. The Bank offers a limited range of consumer loans, primarily to customers residing in its primary market area.  Consumer loans generally consist of loans on new and used automobiles, loans secured by deposit accounts and unsecured personal loans.

Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as motor vehicles. In the latter case, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

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Credit Quality Indicators – Loan Rating Methodology

The Bank’s Loan Review Policy contains a rating system for credit risk. Loans reviewed are graded based on both risk of default as well as risk of loss. The policy defines risk of default as the risk that the borrower will not be able to make timely payments. This risk is assessed based on the capacity to service debt as structured, repayment history, and current status. The policy defines risk of loss as the assessment of the probability that the Bank will incur a loss of capital on a loan due to repayment default. This risk is assessed based on collateral position and net worth of the borrowing and supporting entities.

The rating system is based on the following categories. Loans included as acceptable in the table below represent an aggregation of loans from four categories;

1)	Superior - Well established national companies and loans secured by cash or marketable securities;
2)	Excellent - Well established local companies and loans secured by cash or marketable securities;
3)	Good – Assets secured by well to recently established businesses whose performance is average and   whose industry conditions are fair to good; and
4)	Pass - Assets secured by well to recently established businesses whose performance is average and whose industry conditions are fair to good.  Borrower’s financial condition shows deterioration.
The other line items in the table are defined within the Loan Review Policy as follows;

- Pass/Watch: Cash flow may be temporarily inadequate to cover the debt, projected primary source of repayment has not been verified or a deterioration in the financial condition of the customer that is not yet reflected in the status of the loan.

- Special Mention: Assets are protected but potentially weak. Borrower is experiencing adverse trends or balance sheet issues which have not yet reached a point of jeopardizing loan repayment.

- Substandard: Inadequately protected assets that exhibit one or more well defined weaknesses that jeopardize full collection or liquidation of assets.

- Doubtful: Same standards as “substandard” with added characteristics that current facts, conditions and values make full collection highly improbable.

- Loss: Assets that are considered uncollectible and are not warranted as a bank asset.

Credit Quality Indicators

As of March 31, 2011

Commercial Credit Exposure

Credit Risk Profile by Internally Assigned Grade

	Commercial Non-Real Estate		Commerical Real Estate Other
Grade:
Acceptable	$	3,122,836	$	11,377,990
Pass/Watch		1,167,718		2,955,804
Special mention		-		1,141,365
Substandard		118,932		243,614
Doubtful		300,000		484,143
Loss		57,300		7,072
Total	$	4,766,786	$	16,209,988

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Residential/Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

	Residential Real Estate		Consumer
Grade:
Acceptable	$	46,052,475	$	858,507
Pass/Watch		464,488		14,970
Special mention		551,948		-
Substandard		301,558		-
Doubtful		-		-
Loss		19,944		2,277
Total	$	47,390,413	$	875,754

Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Management considers factors including payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due when determining impairment. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Impaired Loans

As of and for the Three and Nine Months Ended March 31, 2011

							Three months ended				Nine months ended
							March 31, 2011				March 31, 2011
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial non-real estate	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial real estate		-		-		-		-		-		-		-
Residential real estate		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-
With an allowance recorded:
Commercial non-real estate	$	57,300	$	57,300	$	57,300	$	57,600	$	2,274	$	58,200	$	2,274
Commercial real estate		207,072		207,072		7,072		207,072		-		207,072		-
Residential real estate		127,944		127,944		19,944		127,944		-		127,944		-
Consumer		2,277		2,277		2,277		2,351		10		2,520		52
Total:
Commercial non-real estate	$	57,300	$	57,300	$	57,300	$	57,600	$	2,274	$	58,200	$	2,274
Commercial real estate		207,072		207,072		7,072		207,072		-		207,072		-
Residential real estate		127,944		127,944		19,944		127,944		-		127,944		-
Consumer		2,277		2,277		2,277		2,351		10		2,520		52
	$	394,593	$	394,593	$	86,593	$	394,967	$	2,284	$	395,736	$	2,326

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Non-performing Loans

Loans are placed on non-accrual status when reasonable doubt exists as to the full timely collection of interest and principal or when a loan becomes 90 days past due unless an evaluation clearly indicates that the loan is well-secured and in the process of collection.  When a loan is placed on non-accrual status, unpaid interest credited to income is reversed. Interest received on nonaccrual loans generally is applied against principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt. These policies apply to all types of loans, including commercial and residential/consumer.

Real estate acquired as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold.  When property is acquired, it is recorded at fair value at the date of foreclosure.  Holding costs and declines in fair value after acquisition of the property result in charges against income.

As of March 31, 2011, the Bank did not have any troubled debt restructurings that involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates or any accruing loans past due 90 days or more.

Age Analysis of Past Due Loans

As of March 31, 2011

													Recorded
													Investment		Recorded
					90 Days or								Loans ≥ 90		Investment
	30-59 Days		60-89 Days		Greater Past		Total Past						Days and		Loans on Non-
	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing		Accrual Status
Commercial non-real estate	$	110,534	$	-	$	-	$	110,534	$	4,656,252	$	4,766,786	$	-	$	58,910
Commercial real estate		43,614		83,966		318,204		445,784		15,764,204		16,209,988		-		318,203
Residential real estate		676,727		70,337		193,243		940,307		46,450,106		47,390,413		-		193,242
Consumer		18,840		-		2,278		21,118		854,636		875,754		-		2,278
	$	849,715	$	154,303	$	513,725	$	1,517,743	$	67,725,198	$	69,242,941	$	-	$	572,633

6.         Earnings Per Share

Basic income (loss) per common share is determined by dividing net income (loss) by the adjusted weighted average number of common shares outstanding during the period. The adjusted outstanding common shares equals the gross number of common shares issued less unallocated shares of the ESOP. Net income (loss) per common share for the three months and nine months ended March 31, 2011 and 2010 is based on the following:

	Three Months Ended March 31,						Nine Months Ended March 31,
	2011			2010			2011			2010
Net income (loss)	$	(70,703	)	$	37,591		$	21,495		$	55,503
Weighted average common shares outstanding		503,284			503,284			503,284			503,284
Less: Average unallocated ESOP shares		(13,708	)		(14,833	)		(13,989	)		(15,157	)
Adjusted weighted average common shares outstanding		489,576			488,451			489,295			488,127
Net income (loss) per common share	$	(0.14	)	$	0.08		$	0.04		$	0.11

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7.         Comprehensive Income or Loss

GAAP requires that recognized revenue, expenses, gains, and losses be included in net income (loss).  Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income (loss), are components of comprehensive income or loss.

The components of total comprehensive income and related tax effects for the three and nine months ended March 31, 2011 and 2010 are as follows:

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2011			2010			2011			2010
Net income (loss)	$	(70,703	)	$	37,591		$	21,495		$	55,503
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available for sale arising during the period		14,411			1,741			18,670			(89,092	)
(Gain) loss on securities available for sale included in net income or loss		(1,029	)		-			(1,029	)		126,269
Tax effect		4,550			(592	)		5,998			12,640
Other comprehensive income, net of tax		17,932			1,149			23,639			49,817
Total comprehensive income (loss)	$	(52,771	)	$	38,740		$	45,134		$	105,320

8.         Employee Stock Ownership Plan

Shares of the Company’s common stock purchased by the ESOP are held in a suspense account until released for allocation to participants.  Shares released are allocated to each eligible participant based on the ratio of each such participant’s compensation, as defined in the ESOP, to the total compensation of all eligible plan participants.  As the unearned shares are released from suspense, the Company recognizes compensation expense equal to the fair value of the ESOP shares committed to be released during the period.  To the extent that the fair value of the ESOP shares differs from the cost of such shares, the difference is charged or credited to equity as additional paid-in capital. Expense related to the ESOP for the three months ended March 31, 2011 and 2010 approximated $2,000 for both periods and for the nine months ended March 31, 2011 and 2010 approximated $6,000 and $8,000 respectively.  The fair value of the unallocated shares as of March 31, 2011 and 2010 was $136,000 and $144,000, respectively.

9.         Fair Value Measurement

GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

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Level 1: Quoted prices (unadjusted) or identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The balances of assets and liabilities measured at fair value on a recurring basis are as follows:

			Fair Value Measurements Using
	Total		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2011
Assets:
Investment securities available for sale
Municipal bond	$	180,059	$	-	$	180,059	$	-
Corporate bonds		1,238,253		-		1,238,253		-
FNMA mortgage-backed securities		89,671		-		89,671		-
U.S. Government sponsored enterprise securities		771		-		771		-
Corporate common stock		10,000		-		10,000		-
June 30, 2010
Assets:
Investment securities available for sale
Corporate bonds	$	980,141	$	-	$	980,141	$	-
FNMA mortgage-backed securities		121,516		-		121,516		-
U.S. Government sponsored enterprise securities		850		-		850		-
Corporate common stock		10,000		-		10,000		-

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The balances of assets and liabilities measured at fair value on a nonrecurring basis are as follows:

			Fair Value Measurements Using
	Total		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2011
Assets:
Impaired loans	$	308,000	$	-	$	308,000	$	-
Foreclosed real estate		972,602		-		972,602		-
June 30, 2010
Assets:
Impaired loans	$	328,939	$	-	$	328,939	$	-
Foreclosed real estate		680,712		-		680,712		-

Impaired loans were reduced from their carrying amount of $394,593 to their fair value of $308,000 and  $372,307 to their fair value of $328,939 at March 31, 2011 and June 30, 2010, respectively, resulting in an impairment reserve through the allowance for loan losses.   Foreclosed real estate was reduced from its carrying amount of $987,828 to its fair value of $972,602 and $731,045 to its fair value of $680,712 at March 31, 2011 and June 30, 2010, respectively.

GAAP requires disclosure of estimated fair values of all financial instruments where it is practicable to estimate such values. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The disclosure requirements exclude certain financial instruments and all nonfinancial instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Cash and cash equivalents and certificates of deposit: The carrying amounts of cash, due from banks, deposits with the FHLB, federal funds sold and certificates of deposit approximate fair values as these financial instruments have short maturities.

Securities: The fair value of securities available for sale, excluding Federal Home Loan Bank stock, are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities.  The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the FHLB.

Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of similar remaining maturity.

Federal Home Loan Bank advances: The fair values of these borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

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Accrued interest: The carrying amounts of accrued interest approximate fair value.

Off-balance-sheet instruments: The Company’s off-balance-sheet instruments consist of loan commitments. Fair values for loan commitments have not been presented as the future revenue derived from such financial instruments is not significant.

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows:

	March 31, 2011				June 30, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
			(In thousands)
Financial assets
Cash and cash equivalents	$	6,964	$	6,964	$	5,279	$	5,279
Certificates of deposit		745		745		845		845
Securities available for sale		1,519		1,519		1,113		1,113
Federal Home Loan Bank stock		1,252		1,252		1,252		1,252
Loans, net		68,305		71,167		68,883		71,067
Accrued interest receivable		273		273		278		278
Financial liabilities
Deposits		57,276		56,507		55,769		55,396
Federal Home Loan Bank advances		18,671		19,038		18,431		19,010

10.       Regulatory Matters

On January 26, 2011, the Bank entered into a Memorandum of Understanding with the Office of Thrift Supervision (the “OTS”).  On that same date, the Company and the MHC jointly entered into a separate Memorandum of Understanding with the OTS.  The Memoranda require the Bank, the Company and the MHC to take certain measures to improve their safety and soundness but impose no fines or penalties upon the Bank, the Company or the MHC.  Management is addressing the requirements of the Memoranda and has communicated progress to the OTS.

11.       Subsequent Events

Subsequent events represent events or transactions occurring after the balance sheet date but before the financial statements are issued. Financial statements are considered “issued” when they are widely distributed to stockholders and others for general use and reliance in a form and format that complies with GAAP.

Specifically, there are two types of subsequent events:

● Those comprising events or transactions providing additional evidence about conditions that existed at the balance sheet date, including estimates inherent in the financial statement preparation process (referred to as recognized subsequent events).

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● Those comprising events that provide evidence about conditions not existing at the balance sheet date but, rather, that arose after such date (referred to as non-recognized subsequent events).

Subsequent events have been evaluated and management  determined there were no subsequent events to be recorded or disclosed in these consolidated financial statements.

ITEM 2.                  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Our principal business is to acquire deposits from individuals and businesses in the communities surrounding our offices and to use these deposits to fund loans. We focus on providing our products and services to two segments of customers: individuals and businesses.

         Income. Our primary source of income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Changes in levels of interest rates affect our net interest income. A secondary source of income is non-interest income, which includes revenue that we receive from providing products and services. The majority of our non-interest income generally comes from loan servicing fees and service charges on deposit accounts, as well as gains on sales of loans.

         Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a regular basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.

Expenses. The non-interest expenses we incur in operating our business consist of expenses for salaries and employee benefits, occupancy and equipment, data processing, marketing and advertising, professional services, FDIC insurance premiums and various other miscellaneous expenses. Our largest non-interest expense is salaries and employee benefits, which consist primarily of salaries and wages paid to our employees, payroll taxes, and expenses for health insurance, retirement plans and other employee benefits.

Forward-Looking Statements

         Certain statements herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like “believe”, “expect”, “anticipate”, “estimate”, and “intend” or future or conditional verbs such as “will”, “would”, “should”, “could”, or “may.”  These forward-looking statements are based on the beliefs and expectations of management, as well as the assumptions made using information currently available to management. Since these statements reflect the views of management concerning future events, these statements involve risks, uncertainties and assumptions. As a result, actual results may differ from those contemplated by these forward-looking statements as a result of any number of factors.  These factors include, but are not limited to, risks related to the Company’s continued ability to originate quality loans, fluctuation in interest rates, real estate conditions in the Company’s lending areas, changes in the securities or financial markets, changes in loan delinquency and charge-off rates, general and local economic conditions, the Company’s continued ability to attract and retain deposits, the Company’s ability to control costs, new accounting pronouncements, and changing regulatory requirements.  For more information about these factors, please see our Annual Report on Form 10-K filed on September 28, 2010.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. The Company does not undertake and specifically disclaims any obligation to publicly release updates or revisions to any such forward-looking statements as a result of new information, future events or otherwise.

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Critical Accounting Policies

         We consider accounting policies that require management to exercise significant judgment or discretion, or make significant assumptions that have or could have a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We consider the following to be our critical accounting policies.

         Allowance for loan losses.  The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.  The allowance for loan losses is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

         The allowance consists of specific and general components.  The specific component relates to loans that are classified as impaired, whereby an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan.  The general component relates to pools of non-impaired loans and is based on historical loss experience adjusted for qualitative factors.

         A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Management considers factors including payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due when determining impairment. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.  The allowance for loan losses includes specific reserve amounts assigned to individual loans on the basis of loan impairment. Certain loans are evaluated individually and are judged to be impaired when management believes it is probable that not all of the contractual interest and principal payments will be collected as scheduled in the loan agreement.  Under this method, loans are selected for evaluation based on internal risk ratings or non-accrual status. A specific reserve is allocated to an individual loan when that loan has been deemed impaired and when the amount of a probable loss is estimable on the basis of its collateral value, the present value of anticipated future cash flows, or its net realizable value. As of March 31, 2011, four impaired loans were assigned a specific reserve of $87,000.  Specific reserves totaling $11,000 have been assigned as of June 30, 2010.

Management believes that, based on information currently available, the allowance for loan losses is sufficient to cover losses inherent in our loan portfolio at this time.  However, no assurances can be given that the level of the allowance will be sufficient to cover loan losses or that future adjustments to the allowance will not be necessary if economic and/or other conditions differ substantially from the economic and other conditions considered by management in evaluating the appropriate level of the allowance.

Actual loan losses may be significantly more than the allowance we have established, which could have a material negative effect on our financial results.

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Securities.  We classify our investments as available for sale. These assets are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income or loss.  Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of individual equity securities that are deemed to be other than temporary are reflected in earnings when identified. For individual debt securities where the Bank does not intend to sell the security and it is not more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis, the other-than-temporary decline in the fair value of the debt security related to 1) credit loss is recognized in earnings and 2) other factors is recognized in other comprehensive income or loss. Credit loss is deemed to exist if the present value of expected future cash flows using the effective rate at date of acquisition is less than the amortized cost basis of the debt security. For individual debt securities where the Bank intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost, the other-than-temporary impairment is recognized in earnings equal to the entire difference between the security’s cost basis and its fair value at the balance sheet date.  Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

         Loans.  Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized over the contractual life of the loans as an adjustment of the related loan yield using the interest method.

         Loans past due 30 days or more are considered delinquent. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection.  Consumer loans are typically charged off when they are no more than 180 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

         All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. Cash payments on these loans are applied to principal balances until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Comparison of Financial Condition at March 31, 2011 and June 30, 2010

         Total Assets. Total assets increased by $1.7 million, or 2.1%, from $80.6 million at June 30, 2010 to $82.3 million at March 31, 2011. This increase was largely the result of an increase of $1.7 million in cash and cash equivalents.

Cash and Cash Equivalents. Cash and correspondent bank balances increased by $1.7 million, or 31.9%, from $5.3 million at June 30, 2010 to $7.0 million at March 31, 2011.  This increase was primarily the result of an increase in deposits.

Certificates of Deposit.Certificate of deposit balances decreased $100,000, or 11.8% from $845,000 at June 30, 2010 to $745,000 at March 31, 2011.  This decrease was the result of one certificate of deposit maturity.

Securities Available for Sale. Securities available for sale totaled $1.5 million at March 31, 2011, an increase of $406,000, or 36.5%, from $1.1 million at June 30, 2010. The increase was primarily due to the purchase of two corporate bonds and one municipal bond.

Net Loans.  Net loans decreased $578,000 or 0.8%, from $68.9 million at June 30, 2010 to $68.3 million at March 31, 2011. The majority of loan growth has been in 1-4 family real estate loans and commercial real estate loans which increased $444,000, or 1.2%, and $1.3 million, or 2.5%, respectively.   The increases were primarily due to the market demand for fixed rate consumer and commercial real estate loans.  Construction loans decreased $326,000, or 79.5%, home equity loans decreased $649,000, or 5.7%, and commercial installment loans decreased $501,000, or 9.5%, from June 30, 2010 to March 31, 2011.  There was also an increase of $446,000, or 90.6% in allowance for loan losses due to the comprehensive review of the loan portfolio.   

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Deposits and Borrowed Funds. Deposits increased $1.5 million, or 2.7%, from $55.8 million at June 30, 2010 to $57.3 million at March 31, 2011. Demand accounts decreased $35,000, or 1.1%.  NOW checking accounts increased $835,000, or 28.8%, and certificates of deposit increased $1.3 million, or 3.9%. Money market accounts decreased $902,000, or 6.5% and savings accounts increased $352,000 or 8.9%.  The increase in certificates of deposit resulted from a special rate offered on one and two year maturities in anticipation of a $1 million withdrawal of a certificate maturing in April, 2011.  The decrease in money market accounts resulted from a large withdrawal upon the death of a customer with a substantial deposit relationship.

Total borrowings from the Federal Home Loan Bank of Boston (“FHLB”) increased $241,000, or 1.3%, from $18.4 million at June 30, 2010 to $18.7 million at March 31, 2011.

Total Stockholders’ Equity. Total equity increased $39,000 during the nine months ended March 31, 2011, primarily as a result of net income of $21,000 and an increase in unrealized gain on investment securities, net of tax, of $12,000.

Comparison of Operating Results for the Three Months Ended March 31, 2011 and March 31, 2010

         Net Income (Loss). Net income decreased $108,000 to a net loss of $71,000 for the three months ended March 31, 2011 compared to net income of $38,000 for the three months ended March 31, 2010.   The decrease was the result of higher provision for loan losses.

Net Interest Income.  Net interest income increased $73,000, or 11.8%, from $615,000 for the three months ended March 31, 2010 to $688,000 for the three months ended March 31, 2011.  The increase was primarily due to the increase in interest and dividend income of $8,000 and decrease in interest expense of $65,000.  The interest rate spread increased from 3.26% for the three months ended March 31, 2010 to 3.54% for the three months ended March 31, 2011.  Net interest margin increased from 3.41% for the three months ended March 31, 2010 to 3.65% for the three months ended March 31, 2011.

Interest and Dividend Income. Interest income increased $8,000, or 0.8%, from $1.02 million for the three months ended March 31, 2010 to $1.03 million for the three months ended March 31, 2011.  This increase was due principally to an increase in the average balance of interest-earning assets, partly offset by a decrease in yield.  Interest income increased by $4,000 on loans and increased $4,000 on investment securities and other interest-earning deposits, including Federal Home Loan Bank stock.  The average yield on the loan portfolio decreased from 6.02% for the three months ended March 31, 2010 to 5.90% for the three months ended March 31, 2011 in the generally lower interest rate environment. The average yield on investments, including securities, FHLB stock and interest-bearing deposits increased from .83% for the three months ended March 31, 2010 to 0.88% for the three months ended March 31, 2011.

Interest Expense. Interest expense decreased by $65,000, or 15.7%, to $347,000 for the three months ended March 31, 2011 from $412,000 for the three months ended March 31, 2010.  The decrease was due primarily to lower cost of funds.  While average deposit balances increased, the average cost of these deposits decreased from 2.43% to 1.95% in the generally lower market interest rate environment. Average borrowings from FHLB increased with the average cost of the borrowings decreasing from 3.67% to 2.90%.

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). Changes due to the interaction between volume and rate were allocated pro rata between volume and rate.

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	Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
	Volume			Rate			Net change
Interest-earning assets:
Loans	$	25,000		$	(21,000	)	$	4,000
Investment securities		8,000			(3,000	)		5,000
Federal Home Loan Bank stock		-			1,000			1,000
Interest-earning deposits		1,000			(3,000	)		(2,000	)
Total interest-earning assets	$	34,000		$	(26,000	)	$	8,000
Interest-bearing liabilities:
Savings deposits	$	1,000		$	(4,000	)	$	(3,000	)
NOW accounts		1,000			(1,000	)		-
Money market accounts		(5,000	)		(21,000	)		(26,000	)
Certificates of deposit		18,000			(24,000	)		(6,000	)
Total deposits		15,000			(50,000	)		(35,000	)
Federal Home Loan Bank of Boston advances		7,000			(37,000	)		(30,000	)
Total interest-bearing liabilities	$	22,000		$	(87,000	)	$	(65,000	)
Change in net interest income	$	12,000		$	61,000		$	73,000

Provision for Loan Losses. The Company’s provision for loan losses was $233,000 and $4,000 for the three months ended March 31, 2011 and 2010, respectively.  Loan write-downs totaled $27,000 for the three months ended March 31, 2011.  There were no write-downs during the comparable period in 2010.  The Bank has completed a comprehensive review of the loan portfolio and related allowance for loan losses, and has increased its allowance for loan losses to $938,000 at March 31, 2011 which now represents 1.35% of total loans, compared to an allowance of $492,000, representing 0.71% of total loans at June 30, 2010.  Our analysis of the adequacy of the allowance considers economic conditions, historical losses and management’s estimate of losses inherent in the portfolio. For further discussion of our current methodology, please refer to “Critical Accounting Policies—Allowance for Loan Losses.”

Non-interest Income. Total non-interest income decreased $30,000, or 54.8%, to $24,000 for the three months ended March 31, 2011, from $54,000 for the three months ended March 31, 2010. This decrease was primarily a result of losses recognized on foreclosed real estate for the three months ended March 31, 2011.  There were no such losses for the three months ended March 31, 2010.

Non-interest Expenses.Non-interest expenses decreased $23,000, or 3.7%, to $586,000 for the three months ended March 31, 2011, compared to $609,000 for the three months ended March 31, 2010. The decrease was primarily the result of $57,000 in provision for losses on real estate owned for the three months ended March 31, 2011 and a decrease of $11,000 in advertising, offset by an increase in Federal deposit insurance premiums of $7,000, $6,000 in increased legal fees, an increase of $10,000 in accounting expenses, and an increase in other operating expenses of $22,000.

 Income Taxes. Income tax expense decreased by $55,000, to a tax benefit  of $36,000 for the three months ended March 31, 2011, reflecting an effective tax rate of 33.8%, compared to a tax expense of $19,000 for the three months ended March 31, 2010, reflecting an effective tax rate of 33.4%.

Average Daily Balance Sheet.  The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated.  All average balances are daily average balances.  The yields set forth below include the effect of deferred fees, and discounts and premiums that are amortized or accreted to interest income or expense.  We do not accrue interest on loans in non-accrual status, however, the balance of these loans is included in the total average balance, which has the effect of lowering average loan yields.

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	For the Three Months Ended March 31,
	2011								2010
	Average								Average
	Outstanding								Outstanding
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
						(Dollars in Thousands)
Interest-earning assets:
Loans	$	69,219		$	1,021		5.90	%	$	67,534		$	1,017	$	6.02	%
Investment securities(1)		1,780			11		2.47	%		599			6		4.19	%
Federal Home Loan Bank stock		1,252			1		0.30	%		1,252			-		0.00	%
Interest-earning deposits		3,108			2		0.20	%		2,749			3		0.47	%
Total interest-earning assets		75,359		$	1,035		5.49	%		72,134		$	1,026		5.69	%
Non-interest-earning assets		5,279								5,063
Total assets	$	80,638							$	77,197
Interest-bearing liabilities:
Savings deposits	$	4,245		$	5		0.49	%	$	3,927		$	8		0.87	%
NOW accounts		3,355			5		0.56	%		2,581			5		0.76	%
Money market accounts		12,279			24		0.77	%		13,745			49		1.43	%
Certificates of deposit		32,166			174		2.17	%		29,157			181		2.48	%
Total interest-bearing deposits		52,045			208		1.60	%		49,410			243		1.97	%
FHLB advances		19,136			139		2.90	%		18,324			168		3.67	%
Total interest-bearing liabilities	$	71,181		$	347		1.95	%	$	67,734		$	411		2.43	%
Non-interest-bearing liabilities:
Demand deposits	$	2,929							$	3,145
Other non-interest-bearing
liabilities		247								243
Total liabilities		74,357								71,122
Total capital		6,281								6,075
Total liabilities and capital	$	80,638							$	77,197
Net interest income				$	688							$	615
Net interest rate spread(2)							3.54	%							3.26	%
Net interest-earning assets(3)	$	4,178							$	4,400
Net interest margin(4)							3.65	%							3.41	%
Average of interest-earning assets to interest-bearing liabilities		105.87	%							106.50	%

(1) Consists of taxable investment securities and one municipal bond.  The municipal bond is presented on a fully taxable basis as the tax equivalent adjustment is not material to the yield.

(2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average total interest-earning assets.

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Comparison of Operating Results for the Nine Months Ended March 31, 2011 and March 31, 2010

            Net Income. Net income decreased $35,000 to $21,000 for the nine months ended March 31, 2011 compared to net income of $56,000 for the nine months ended March 31, 2010. The decrease was primarily the result of higher provision for loan losses, partially offset by higher net interest income and higher non-interest income.

Net Interest Income.  Net interest income increased $290,000, or 16.1%, from $1.8 million for the nine months ended March 31, 2010 to $2.1 million for the nine months ended March 31, 2011.  The increase was primarily due to an increase in interest and dividend income of $91,000 and a decrease in interest expense of $199,000.  The interest rate spread increased from 3.15% for the nine months ended March 31, 2010 to 3.55% for the nine months ended March 31, 2011.  Net interest margin increased from 3.32% for the nine months ended March 31, 2010 to 3.68% for the nine months ended March 31, 2011.

 Interest and Dividend Income. Interest and dividend income increased $91,000, or 3.0%, from $3.1 million for the nine months ended March 31, 2010 to $3.2 million for the nine months ended March 31, 2011.  This increase was due principally to an increase in the average balance of interest-earning assets, partly offset by a decrease in yield.  Interest income increased by $139,000 on loans and decreased $48,000 on investment securities and other interest-earning deposits, including Federal Home Loan Bank stock.  The average yield on the loan portfolio decreased from 6.09% for the nine months ended March 31, 2010 to 5.98% for the nine months ended March 31, 2011 in the generally lower interest rate environment. The average yield on investments, including securities, FHLB stock and interest-bearing deposits decreased from 1.89% for the nine months ended March 31, 2010 to 0.99% for the nine months ended March 31, 2011.

Interest Expense. Interest expense decreased by $199,000, or 15.4%, to $1.1 million for the nine months ended March 31, 2011 from $1.3 million for the nine months ended March 31, 2010.  The decrease was due primarily to lower cost of funds.  While average deposit balances increased, the average cost of these deposits decreased from 2.15% to 1.70% in the generally lower market interest rate environment. Average borrowings from FHLB decreased with the average cost of the borrowings decreasing from 3.59% to 3.02%.

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). Changes due to the interaction between volume and rate were allocated pro rata between volume and rate.

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	Nine Months Ended March 31, 2011 Compared to Nine Months Ended March 31, 2010
	Volume			Rate			Net change
Interest-earning assets:
Loans	$	192,000		$	(53,000	)	$	139,000
Investment securities		21,000			(16,000	)		5,000
Federal Home Loan Bank stock		-			1,000			1,000
Interest-earning deposits		(17,000	)		(37,000	)		(54,000	)
Total interest-earning assets	$	196,000		$	(105,000	)	$	91,000
Interest-bearing liabilities:
Savings deposits	$	4,000		$	(8,000	)	$	(4,000	)
NOW accounts		2,000			(4,000	)		(2,000	)
Money market accounts		3,000			(65,000	)		(62,000	)
Certificates of deposit		63,000			(95,000	)		(32,000	)
Total deposits		72,000			(172,000	)		(100,000	)
Federal Home Loan Bank of Boston advances		(17,000	)		(82,000	)		(99,000	)
Total interest-bearing liabilities	$	55,000		$	(254,000	)	$	(199,000	)
Change in net interest income	$	141,000		$	149,000		$	290,000

Provision for Loan Losses . The Company’s provision for loan losses was $537,000 and $49,000 for the nine months ended March 31, 2011 and 2010, respectively.  There was an increase in general valuation reserve of $446,000, or 90.6% from June 30, 2010 to March 31, 2011, due largely to the current economic conditions, including declining real estate values and loan performance challenges across all segments of the loan portfolio. The Bank has completed a comprehensive review of the loan portfolio and related allowance for loan losses, and has increased its allowance for loan losses to $938,000 at March 31, 2011 which now represents 1.35% of total loans, compared to an allowance of $434,000, representing 0.63% of total loans at March 31, 2010.  Our analysis of the adequacy of the allowance considers economic conditions, historical losses and management’s estimate of losses inherent in the portfolio. For further discussion of our current methodology, please refer to “Critical Accounting Policies—Allowance for Loan Losses.”

Non-interest Income. Total non-interest income increased $118,000, or 287.5%, to $159,000 for the nine months ended March 31, 2011, from $41,000 for the nine months ended March 31, 2010. This increase was the result of having recognized no other than temporary impairment of investment securities for the nine months ended March 31, 2011 compared to $126,000 loss for the nine months ended March 31, 2010.

Non-interest Expenses.Non-interest expenses decreased $27,000, or 1.6%, to $1.67 million for the nine months ended March 31, 2011, compared to $1.70 million for the nine months ended March 31, 2010. The decrease was primarily due to a decrease of $31,000 in federal deposit insurance premiums and a decrease of $56,000 in the provision for losses on real estate owned, partially offset by increases of $22,000 in salaries and benefits, $22,000 in consulting expense and $18,000 in other operating expenses.

Income Taxes. Income tax expense decreased by $19,000, to $17,000 for the nine months ended March 31, 2011, reflecting an effective tax rate of 44.5%, compared to a tax expense of $36,000 for the nine months ended March 31, 2010, reflecting an effective tax rate of 39.2%.

Average Daily Balance Sheet.  The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated.  All average balances are daily average balances.  The yields set forth below include the effect of deferred fees, and discounts and premiums that are amortized or accreted to interest income or expense.  We do not accrue interest on loans in non-accrual status, however, the balance of these loans is included in the total average balance, which has the effect of lowering average loan yields.

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	For the Nine Months Ended March 31,
	2011								2010
	Average								Average
	Outstanding								Outstanding
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
						(Dollars in Thousands)
Interest-earning assets:
Loans	$	70,047		$	3,143		5.98	%	$	65,775		$	3,002		6.09	%
Investment securities(1)		1,784			34		2.56	%		891			30		4.45	%
Federal Home Loan Bank stock		1,252			1		0.10	%		1,224			-		0.00	%
Interest-earning deposits		2,552			6		0.32	%		4,213			60		1.89	%
Total interest-earning assets		75,635		$	3,184		5.61	%		72,103		$	3,092		5.72	%
Non-interest-earning assets		5,141								4,500
Total assets	$	80,776							$	76,603
Interest-bearing liabilities:
Savings deposits	$	4,212		$	19		0.60	%	$	3,557		$	23		0.87	%
NOW accounts		2,959			12		0.56	%		2,578			15		0.77	%
Money market accounts		12,764			78		0.81	%		12,491			140		1.49	%
Certificates of deposit		31,947			552		2.30	%		28,626			582		2.71	%
Total interest-bearing deposits		51,882			661		1.70	%		47,252			760		2.15	%
FHLB advances		19,173			435		3.02	%		19,829			534		3.59	%
Total interest-bearing liabilities	$	71,055		$	1,096		2.06	%	$	67,081		$	1,294		2.57	%
Non-interest-bearing liabilities:
Demand deposits	$	3,249							$	3,293
Other non-interest-bearing liabilities		239								210
Total liabilities		74,543								70,584
Total capital		6,233								6,019
Total liabilities and capital	$	80,776							$	76,603
Net interest income				$	2,088							$	1,798
Net interest rate spread(2)							3.55	%							3.15	%
Net interest-earning assets(3)	$	4,581							$	5,022
Net interest margin(4)							3.68	%							3.32	%
Average of interest-earning assets
to interest-bearing liabilities		106.45	%							107.49	%

(1) Consists of taxable investment securities and one municipal bond.  The municipal bond is presented on a fully taxable basis as the tax equivalent adjustment is not material to the yield.

(2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average total interest-earning assets.

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Liquidity

 Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, loan sales and maturities of investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage and mortgage-backed security prepayments are greatly influenced by general interest rates, economic conditions and competition.

         We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and federal funds sold. Our most liquid assets are cash and cash equivalents and interest-earning deposits. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2011, cash and cash equivalents totaled $7.0 million, including interest-earning deposits of $4.9 million. Securities classified as available for sale, which provide additional sources of liquidity, totaled $1.5 million at March 31, 2011, and certificates of deposit at other banks totaled $745,000. At March 31, 2011, we had $18.7 million of outstanding borrowings from FHLB, and the ability to borrow an additional $5.6 million.  

         At March 31, the Company had $136,000 in loan commitments outstanding and $4.1 million in unused lines of credit, letters of credit and unadvanced portions of construction loans.

         Certificates of deposit due to mature within one year of March 31, 2011 totaled $19.7 million, or 34.4% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and lines of credit. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us.

         Our primary investing activities are the origination of loans and the purchase of securities. Our primary financing activity consists of activity in deposit accounts. However, we may from time to time utilize borrowings to fund a portion of our operations where the cost of such borrowings is more favorable than that of deposits of a similar duration. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposits. Occasionally, we offer promotional rates to attract certain deposit products.

Other than those discussed above, we are not aware of any known trends, events or uncertainties that will have or are reasonably likely to have a material effect on our liquidity, capital or operations, nor are we aware of any current recommendations by regulatory authorities, which if implemented, would have a material effect on liquidity, capital or operations.

Capital Resources

The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2011, the Bank exceeded all of its regulatory capital requirements. The Bank is considered “well-capitalized” under regulatory guidelines.

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The actual and minimum capital amounts and ratios for the Bank are presented in the following table:

											Minimum
											To Be Well
						Minimum					Capitalized Under
						Capital					Prompt Corrective
	Actual					Requirement					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
						(In Thousands)
March 31, 2011
Total capital to risk weighted assets	$	6,112		12.12	%	$	4,034		8.00	%	$	5,042		10.00	%
Tier 1 risked-based capital to risk weighted assets	$	5,479		10.87	%	$	2,017		4.00	%	$	3,025		6.00	%
Tier 1 capital to total assets	$	5,899		7.18	%	$	3,294		4.00	%	$	4,118		5.00	%
June 30, 2010
Total capital to risk weighted assets	$	5,933		11.67	%	$	4,069		8.00	%	$	5,086		10.00	%
Tier 1 risked-based capital to risk weighted assets	$	5,838		11.48	%	$	2,034		4.00	%	$	3,052		6.00	%
Tier 1 capital to total assets	$	5,838		7.24	%	$	3,224		4.00	%	$	4,031		5.00	%

         The capital from the recent stock offering increased the Bank’s liquidity and capital resources. The initial level of liquidity is being reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of loan originations and repaying a portion of our borrowings. Due to the increase in equity resulting from the capital raised in the stock offering, return on equity has been adversely affected as a result of the reorganization.

Memorandum of Understanding

           On January 26, 2011, the Bank entered into a Memorandum of Understanding with the Office of Thrift Supervision (the “OTS”).  On that same date, the Company and its mutual holding company parent, Auburn Bancorp, MHC (the “MHC”), jointly entered into a separate Memorandum of Understanding with the OTS.  The Memoranda require the Bank, the Company and the MHC to take certain measures to improve their safety and soundness but impose no fines or penalties upon the Bank, the Company or the MHC.  The Company filed a current report on Form 8K on January 31, 2011, with additional details of the Memoranda, which Form 8K is incorporated by reference herein.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

         The Company’s chief executive officer and principal financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report (the “Evaluation Date”), have concluded that as of the Evaluation Date the Company’s disclosure controls and procedures were effective and designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

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         During the period covered by this quarterly report, there were no changes in the Company’s internal control that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        Neither the Company nor the Bank is involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, involve amounts believed by management to be immaterial to the consolidated financial condition and results of operations of the Company.

ITEM 1A. RISK FACTORS

Not applicable for smaller reporting companies.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company did not repurchase any shares during the quarter ended March 31, 2011.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        None.

ITEM 4. [REMOVED AND RESERVED]

ITEM 5. OTHER INFORMATION

(a) None.

(b) There were no material changes to the procedures by which security holders may recommend nominees to the Company’s board of directors during the period covered by the Form 10Q.

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ITEM 6. EXHIBITS

Exhibit Number	Exhibit Description
2.1	Plan of Reorganization from Mutual Savings Bank to Mutual Holding Company and Stock Issuance Plan **
3.1	Charter of Auburn Bancorp, Inc. **
3.2	Bylaws of Auburn Bancorp, Inc. **
4.1 10.1 10.2 10.3	Stock Certificate of Auburn Bancorp, Inc. ** Form of Auburn Savings Bank Employee Stock Ownership Plan and Trust ** Form of ESOP Loan Commitment Letter and ESOP Loan Documents ** Form of Employment Agreement between Auburn Savings Bank and Allen T. Sterling **
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of the Company
31.2	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer of the Company
32.1	Section 1350 Certification of Chief Executive Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Section 1350 Certification of Principal Financial Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002

** Incorporated by reference into this document from the Exhibits filed with the Securities and Exchange Commission on the Company’s Registration Statement on Form S-1, as amended, initially filed on March 14, 2008 and declared effective on May 13, 2008 (File Number 333-149723).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

		Auburn Bancorp, Inc.
		(Registrant)
Date:  May 12, 2011	By:	/s/  Allen T. Sterling
		Allen T. Sterling
		President and Chief Executive Officer (Principal Executive Officer)
Date:  May 12, 2011	By:	/s/  Rachel A. Haines
		Rachel A. Haines
		Senior Vice President and Treasurer (Principal Accounting and Financial Officer)

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