- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: September 30, 2011

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). x Yes 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 November 11, 2011.

AUBURN BANCORP, INC. AND SUBSIDIARY

QUARTERLY REPORT ON FORM 10-Q

September 30, 2011

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION (Unaudited)

Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and June 30, 2011	3

	Consolidated Statements of Operations (Unaudited) for the Three Months Ended September 30, 2011 and 2010	4

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months Ended September 30, 2011 and 2010	5

	Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended September 30, 2011 and 2010	6

	Notes to Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	quantitative and qualitative disclosures about market risk	31

Item 4.	Controls and Procedures	31

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3.	Defaults Upon Senior Securities	32

Item 4.	[removed and reserved]	32

Item 5.	other information	32

Item 6.	exhibits	33

	Signatures	35

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUBURN BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

September 30, 2011 (Unaudited) and June 30, 2011


ASSETS
	September 30, 2011			June 30, 2011
	(Unaudited)

Cash and due from banks	$	2,317,435		$	1,457,220
Interest-earning deposits		1,191,520			1,648,411
Total cash and cash equivalents		3,508,955			3,105,631

Certificates of deposit		495,000			495,000

Investment securities available for sale, at fair value		2,117,226			1,102,025

Investment securities held to maturity, fair value of $1,215,950 at September 30, 2011
and $970,907 at June 30, 2011		1,175,191			971,985

Federal Home Loan Bank stock, at cost		1,251,700			1,251,700

Loans		67,622,427			68,303,266
Less allowance for loan losses		(869,574	)		(906,989	)
Net loans		66,752,853			67,396,277

Property and equipment, net		1,778,420			1,799,455

Foreclosed real estate, net of allowance of $59,802 at
September 30, 2011 and $23,508 at June 30, 2011		875,492			1,196,183

Accrued interest receivable
Investments		21,353			16,526
Mortgage-backed securities		1,492			363
Loans		255,192			265,563

Prepaid expenses and other assets		304,350			311,456

Total assets	$	78,537,224		$	77,912,164

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities
Deposits	$	53,481,058		$	53,876,926
Federal Home Loan Bank advances		18,847,410			17,634,474
Accrued interest and other liabilities		33,819			280,552
Total liabilities		72,362,287			71,791,952

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 September 30 and June 30, 2011		5,033			5,033
Additional paid-in-capital		1,464,512			1,465,501
Retained earnings		4,844,287			4,783,236
Accumulated other comprehensive loss		(8,868	)		(641	)
Unearned compensation (ESOP shares)		(130,027	)		(132,917	)
Total stockholders’ equity		6,174,937			6,120,212

Total liabilities and stockholders’ equity	$	78,537,224		$	77,912,164

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

AUBURN BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Operations

Three Months Ended September 30, 2011 and 2010

	Three Months Ended September 30,

	2011			2010
	(Unaudited)
Interest and dividend income:
Interest on loans	$	965,937		$	1,067,571
Interest on investments and other interest-earning deposits		21,290			14,508
Dividends on Federal Home Loan Bank stock		843			-
Total interest and dividend income		988,070			1,082,079

Interest expense:
Interest on deposits and escrow accounts		171,291			234,217
Interest on Federal Home Loan Bank advances		126,192			146,180
Total interest expense		297,483			380,397

Net interest income		690,587			701,682

Provision for loan losses		29,130			278,797

Net interest income after provision for loan losses		661,457			422,885

Non-interest income:
Net gain on sales of loans		25,864			22,395
Net loss on sale of other assets		(17,570	)		(6,384	)
Net gain on sale of investment securities		583			-
Other noninterest income		55,914			39,703
Total non-interest income		64,791			55,714

Non-interest expenses:
Salaries and employee benefits		255,221			229,519
Occupancy expense		32,473			23,816
Depreciation		24,364			24,055
Federal deposit insurance premiums		59,018			13,441
Computer charges		48,217			42,113
Advertising expense		3,040			22,490
Consulting expense		40,563			16,040
Net recovery for losses on foreclosed real estate		(210	)		(4,142	)
Other operating expenses		173,506			135,903
Total non-interest expenses		636,192			503,235

Income (loss) before income taxes		90,056			(24,636	)

Income tax expense (benefit)		29,005			(7,210	)

Net income (loss)	$	61,051		$	(17,426	)

Net income (loss) per common share	$	0.12		$	(0.04	)

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

AUBURN BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

Three Months Ended September 30, 2011 and 2010 (Unaudited)

									Accumulated
									Other
			Additional Paid-			Retained			Comprehensive			Unearned
	Common Stock		in-Capital			Earnings			Income (Loss)			ESOP shares			Total

Balance, June 30, 2010	$	5,033	$	1,468,928		$	4,719,099		$	1,368		$	(144,475	)	$	6,049,953
Comprehensive loss
Net loss		-		-			(17,426	)		-			-			(17,426	)
Other comprehensive income
Unrealized holding gain on securities, net of taxes of $7,703		-		-			-			14,952			-			14,952

Total comprehensive loss		-		-			(17,426	)		14,952			-			(2,474	)

Common stock held by ESOP committed to be released (289 shares)		-		(919	)		-			-			2,890			1,971
Balance, September 30, 2010	$	5,033	$	1,468,009		$	4,701,673		$	16,320		$	(141,585	)	$	6,049,450


Balance, June 30, 2011	$	5,033	$	1,465,501		$	4,783,236		$	(641	)	$	(132,917	)	$	6,120,212
Comprehensive income
Net income		-		-			61,051			-			-			61,051
Other comprehensive income
Unrealized holding loss on securities, net of taxes of $(4,040)		-		-			-			(7,842	)		-			(7,842	)
Reclassification adjustment for items included in net income, net of taxes of $(198)		-		-			-			(385	)		-			(385	)

Total comprehensive income		-		-			61,051			(8,227	)		-			52,824

Common stock held by ESOP committed to be released (289 shares)		-		(989	)		-			-			2,890			1,901
Balance, September 30, 2011	$	5,033	$	1,464,512		$	4,844,287		$	(8,868	)	$	(130,027	)	$	6,174,937

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

AUBURN BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Three Months Ended September 30, 2011 and 2010 (Unaudited)

	Three Months Ended September 30,
	2011			2010
Cash flows from operating activities:

Net income (loss)	$	61,051		$	(17,426	)

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation		24,364			24,055
Net amortization (accretion) of discounts and premiums on investment securities		6,693			(8,589	)
Provision for loan losses		29,130			278,797
Net recovery of losses on foreclosed real estate		(210	)		(4,142	)
Deferred income tax benefit		6,765			-
Net gain on sale of investment securities available for sale		(583	)		-
Gain on sales of loans		(25,864	)		(22,395	)
Proceeds from sale of loans		479,998			335,289
Originations of loans sold		(457,500	)		(315,212	)
Loss on foreclosed real estate		17,570			6,384
ESOP compensation expense		1,901			1,971
Net (increase) decrease in prepaid expenses and other assets		7,106			(36,132	)
Net (increase) decrease in accrued interest receivable		4,415			(18,564	)
Net decrease in accrued interest payable and other liabilities		(249,260	)		(152,014	)

Net cash (used in) provided by operating activities		(94,424	)		72,022

Cash flows from investing activities:
Purchase of investment securities available for sale		(1,295,068	)		(708,594	)
Purchase of investment securities held to maturity		(203,409	)		-
Proceeds from maturities, calls and principal paydowns on investment securities available for sale		261,495			32,987
Proceeds from sale of other real estate owned		201,056			-
Net (increase) decrease in loans to customers		719,935			(2,513,555	)
Capital expenditures		(3,329	)		(17,675	)

Net cash used in investing activities		(319,320	)		(3,206,837	)

Cash flows from financing activities:
Advances from Federal Home Loan Bank		1,500,000			2,000,000
Repayment of advances from Federal Home Loan Bank		(250,000	)		(500,000	)
Net change in short-term borrowings		(37,064	)		(36,199	)
Net decrease in deposits		(395,868	)		(478,383	)

Net cash provided by financing activities		817,068			985,418

Net increase (decrease) in cash and cash equivalents		403,324			(2,149,397	)

Cash and cash equivalents, beginning of period		3,105,631			5,279,436

Cash and cash equivalents, end of period	$	3,508,955		$	3,130,039

Supplementary cash flow information:
Cash paid during the period for:
Interest	$	297,121		$	380,983
Income taxes	$	187,600		$	80,830
Transfer of loans to foreclosed real estate	$	199,686		$	123,657
Financed sale of foreclosed real estate	$	97,411		$	-

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

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 September 30, 2011 and June 30, 2011, and for the interim periods ended September 30, 2011 and 2010. Except for the June 30, 2011 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 three months ended September 30, 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, 2011 included in the Company’s Annual Report on Form 10-K (File No. 000-53370) filed at the Securities and Exchange Commission on September 27, 2011.

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.

Certain amounts in the September 30, 2010 interim financial statements have been reclassified to conform to the September 30, 2011 interim financial statement presentation.

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 stockholders 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.”

3. Impact of Recent Accounting Standards

In January 2010, the Financial Accounting Standards Board (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 markets 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 became effective for the Company with this reporting period beginning July 1, 2011. Other than requiring additional disclosures, adoption of this new guidance did 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 Troubled Debt Restructuring . This ASU provides guidance on determining whether a restructuring of a receivable meets the criteria to be considered a Troubled Debt Restructuring. 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. Adoption of this new guidance did not have a material effect on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs . This ASU is a result of joint efforts by the FASB and the International Accounting Standards Board to develop a single, converged fair value framework for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards (IFRSs). This ASU is largely consistent with existing fair value measurement principles in GAAP; however, some of the components of this ASU could change how fair value measurement guidance in ASC 820, Fair Value Measurements and Disclosures, is applied. This ASU does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011, which is January 1, 2012 for the Company, and should be applied retrospectively. Since the applicable provisions of ASU No. 2011-04 are disclosure-related, the Company’s adoption of this guidance is not expected to have an impact on consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income , which revises how entities present comprehensive income in their financial statements. The ASU requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. In a continuous statement of comprehensive income, an entity would be required to present the components of the income statement as presented today, along with the components of other comprehensive income. In the two-statement approach, an entity would be required to present a statement that is consistent with the income statement format used today, along with a second statement, which would immediately follow the income statement that would include the components of other comprehensive income. The ASU does not change the items that an entity must report in other comprehensive income. ASU No. 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, which is July 1, 2012 for the Company, and should be applied retrospectively for all periods presented in the financial statements. The Company has not yet decided which statement format it will adopt.

4. Securities

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

	September 30, 2011									June 30, 2011
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized					Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value		Cost		Gains		Losses			Fair Value
Securities available for sale
Corporate bonds and other obligations	$	1,541,572	$	3,157	$	(19,507	)	$	1,525,222	$	1,015,749	$	4,073	$	(7,500	)	$	1,012,322
Federal National Mortgage Association (FNMA) mortgage -backed securities		579,089		3,600		(1,187	)		581,502		77,244		2,812		(1,030	)		79,026
U.S. Government sponsored enterprise securities		2		500		-			502		2		675		-			677
Corporate common stock		10,000		-		-			10,000		10,000		-		-			10,000
Total	$	2,130,663	$	7,257	$	(20,694	)	$	2,117,226	$	1,102,995	$	7,560	$	(8,530	)	$	1,102,025

Securities held to maturity
Municipal bonds	$	1,175,191	$	40,759	$	-		$	1,215,950	$	971,985	$	7,800	$	(8,878	)	$	970,907
Total	$	1,175,191	$	40,759	$	-		$	1,215,950	$	971,985	$	7,800	$	(8,878	)	$	970,907

Investments with a fair value of $3,323,000 and $2,063,000 at September 30 and June 30, 2011, 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.

	September 30, 2011				June 30, 2011
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value

One year or less	$	506,730	$	508,062	$	765,749	$	769,823
Over 1 year through 5 years		1,034,842		1,017,160		250,000		242,500
After 10 years		1,175,191		1,215,950		971,985		970,906
		2,716,763		2,741,172		1,987,734		1,983,229
Mortgage-backed securities		579,089		581,502		77,244		79,026

Total debt securities	$	3,295,852	$	3,322,674	$	2,064,978	$	2,062,255

Information pertaining to securities with gross unrealized losses at September 30 and June 30, 2011, 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
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
September 30, 2011
Corporate bonds	$	-	$	-	$	765,335	$	19,507	$	765,335	$	19,507
FNMA mortgage-backed securities		-		-		41,421		1,187		41,421		1,187
Total	$	-	$	-	$	806,756	$	20,694	$	806,756	$	20,694

June 30, 2011
Municipal bonds	$	-	$	-	$	594,927	$	8,878	$	594,927	$	8,878
Corporate bonds		-		-		242,500		7,500		242,500		7,500
FNMA mortgage-backed securities		-		-		43,461		1,030		43,461		1,030
Total	$	-	$	-	$	880,888	$	17,408	$	880,888	$	17,408

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 September 30, 2011, four debt securities with unrealized losses had depreciated 3% in total from the amortized cost basis. At June 30, 2011, seven 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 three months ended September 30, 2011 and 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.

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.

The following tables provide information relative to credit quality and allowance for credit losses as of and for the three months ended September 30, 2011 and as of and for the year ended June 30, 2011.

	Commercial
	Non-Real			Commercial			Residential
	Estate			Real Estate			Real Estate			Consumer			Unallocated			Total
Three months ended September 30, 2011

Allowance for credit losses:
Beginning balance	$	167,859		$	245,897		$	327,438		$	12,633		$	153,162		$	906,989
Charge-offs		-			(25,225	)		(39,328	)		(1,992	)		-			(66,545	)
Provision (reduction)		93,789			(35,314	)		95,468			13,091			(137,904	)		29,130
Ending balance	$	261,648		$	185,358		$	383,578		$	23,732		$	15,258		$	869,574

As of September 30, 2011

Allowance for credit losses:
Ending balance	$	261,648		$	185,358		$	383,578		$	23,732		$	15,258		$	869,574
Individually evaluated for impairment		189,807			29,050			30,225			-			-			249,082
Collectively evaluated for impairment		71,841			156,308			353,353			23,732			15,258			620,492

Loans
Ending balance:	$	3,928,421		$	11,391,581		$	51,490,038		$	812,387		$	-		$	67,622,427
Individually evaluated for impairment		569,636			83,000			231,019			-			-			883,655
Collectively evaluated for impairment		3,358,785			11,308,581			51,259,019			812,387			-			66,738,772


Year ended June 30, 2011

Allowance for loan losses:
Beginning balance	$	65,874		$	157,173		$	261,246		$	7,819		$	-		$	492,112
Charge-offs		(42,290	)		(92,438	)		(14,953	)		(6,149	)		-			(155,830	)
Recoveries		1,500			-			-			2,265			-			3,765
Provision		142,775			181,162			81,145			8,698			153,162			566,942
Ending balance	$	167,859		$	245,897		$	327,438		$	12,633		$	153,162		$	906,989

As of June 30, 2011

Allowance for loss losses:
Ending balance	$	167,859		$	245,897		$	327,438		$	12,633		$	153,162		$	906,989
Individually evaluated for impairment		107,057			85,219			19,606			2,198			-			214,080
Collectively evaluated for impairment		60,802			160,678			307,832			10,435			153,162			692,909

Loans
Ending balance:	$	4,484,857		$	11,262,751		$	51,658,638		$	897,020		$	-		$	68,303,266
Individually evaluated for impairment		356,700			417,211			116,805			2,198			-			892,914
Collectively evaluated for impairment		4,128,157			10,845,540			51,541,833			894,822			-			67,410,352

The Bank’s provision for loan losses was $29,130 and $278,797 for the three months ended September 30, 2011 and 2010, respectively. The higher provision last year was 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 reduced its allowance for loan losses to $869,574 at September 30, 2011 which now represents 1.29% of total loans, compared to an allowance of $906,989, representing 1.33% of total loans at June 30, 2011.

Risk by Portfolio Segment

Commercial Non-Real Estate 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.

Commercial 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 selling 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. The Bank may require a full appraisal on property securing any loan less than $250,000.

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.

Residential Real Estate 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.

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, and 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 the 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.

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.

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.

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. Credit quality indicators are subject to ongoing monitoring by lending and credit personnel with such ratings updated annually or more frequently, if warranted.

The rating system is based on the following categories:

Excellent – Well established national company, industry in favorable condition, business compares favorably to its industry, capable management team with sufficient depth, loans secured by cash collateral and strong financial condition.

Good – well established local company, favorable industry conditions, company compares favorably to its industry, capable management team with sufficient depth, unqualified opinion on audited financial statements from a reputable CPA firm, loans secured by marketable securities, longstanding Bank customer, financial statement fully supported.

Pass/Watch –High – well to recently established business, industry conditions fair to good, above average to average performance comparisons relative to industry, capable management team, financial statement evidences ability to service debt.

3a.

Pass/Watch – Marginal - well to recently established business, industry conditions fair to good, business or individuals in this category are generally local operations, average to marginal performance comparisons relative to industry, company’s financial condition may not be fully detailed; however, performance to loan terms has and continues to be achieved; loans in this group are typically well secured when financial capacity is not documented with current and comprehensive financial data.

Special Mention – loans are currently protected but are potentially weak, borrower is affected by unfavorable economic conditions, adverse operating trends or an unbalanced financial position in the balance sheet which has not yet reached a point of jeopardizing loan payment.

Substandard – loan is inadequately protected by sound worth and paying capacity of the borrower, repayment has become increasingly reliant on collateral or other secondary sources of repayment, credit weaknesses are well defined; orderly debt liquidation from primary repayment sources is in jeopardy, distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – A loan classified in this category has all the weaknesses inherent in a “5” rated loan with the added charactistic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

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

Loan balances by rating are as follows:

Credit Quality Indicators

Commercial Credit Risk Exposure

Credit Risk Profile by Internally Assigned Grade

		As of September 30, 2011				As of June 30, 2011
		Commercial				Commercial
		Non-Real		Commerical		Non-Real		Commerical
Grade:		Estate		Real Estate		Estate		Real Estate
	Excellent/Good	$	2,237,585	$	7,916,209	$	2,587,881	$	7,469,883
	Pass/Watch		606,295		2,974,175		940,264		2,801,893
	Special Mention		169,678		-		600,012		-
	Substandard		345,227		418,197		-		573,764
	Doubtful		379,829		53,950		300,000		417,211
	Loss		189,807		29,050		56,700		-
	Total	$	3,928,421	$	11,391,581	$	4,484,857	$	11,262,751

Residential/Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

		As of September 30, 2011				As of June 30, 2011
		Residential				Residential
Grade:		(1st and 2nd)		Consumer		(1st and 2nd)		Consumer
	Excellent/Good	$	48,914,805	$	780,910	$	49,749,667	$	880,802
	Pass/Watch		658,938		28,643		561,626		14,020
	Special Mention		939,387		2,834		968,470		-
	Substandard		861,012		-		262,070		-
	Doubtful		85,671		-		116,805		-
	Loss		30,225		-		-		2,198
	Total	$	51,490,038	$	812,387	$	51,658,638	$	897,020

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 Months Ended September 30, 2011

							Three months ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized

With no related allowance recorded:
Residential real estate	$	115,123	$	115,123	$	-	$	115,123	$	-

With an allowance recorded:
Commercial non-real estate	$	569,636	$	569,636	$	189,807	$	249,398	$	-
Commercial real estate		83,000		83,000		29,050		83,125		982
Residential real estate		115,896		115,896		30,225		116,595		1,943

Total:
Commercial non-real estate	$	569,636	$	569,636	$	189,807	$	249,398	$	-
Commercial real estate		83,000		83,000		29,050		83,125		982
Residential real estate		231,019		231,019		30,225		231,718		1,943
	$	883,655	$	883,655	$	249,082	$	564,241	$	2,925

As of and for the Year Ended June 30, 2011

							Year ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized

With an allowance recorded:
Commercial non-real estate	$	356,700	$	356,700	$	107,057	$	357,780	$	12,841
Commercial real estate		417,211		417,211		85,219		417,326		28,001
Residential real estate		116,805		116,805		19,606		117,091		8,709
Consumer		2,198		2,198		2,198		2,431		77

Total:
Commercial non-real estate	$	356,700	$	356,700	$	107,057	$	357,780	$	12,841
Commercial real estate		417,211		417,211		85,219		417,326		28,001
Residential real estate		116,805		116,805		19,606		117,091		8,709
Consumer		2,198		2,198		2,198		2,431		77
	$	892,914	$	892,914	$	214,080	$	894,628	$	49,628

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 non-accrual loans generally is applied against principal. Generally, loans are restored to accrual status when the obligation is brought current, the loan 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 foreclosed real estate 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 September 30, 2011, the Bank had one troubled debt restructuring with a balance of $56,000 for which a 100% specific reserve has been provided. 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.

Information regarding aging of loans is as follows:

As of September 30, 2011

																			Recorded			Recorded
																			Investment			Investment
							Greater												Loans > 90			Loans on
	30-59 Days			60-89 Days			Than 90			Total Past									Days and			Non-Accrual
	Past Due			Past Due			Days			Due			Current			Total Loans			Accruing		Status
Commercial non-real estate		$	114,981		$	42,920		$	22,437		$	180,338		$	3,748,083		$	3,928,421		$	-		$	78,237
Commercial real estate			-			-			250,700			250,700			11,140,881			11,391,581			-			250,700
Residential real estate			627,886			238,779			854,972			1,721,637			49,768,401			51,490,038			-			854,972
Consumer			58,319			2,834			-			61,153			751,234			812,387			-			-

		$	801,186		$	284,533		$	1,128,109		$	2,213,828		$	65,408,599		$	67,622,427		$	-		$	1,183,909

As of June 30, 2011

													Recorded		Recorded
													Investment		Investment
					Greater								Loans > 90		Loans on
	30-59 Days		60-89 Days		Than 90		Total Past						Days and		Non-Accrual
	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing		Status
Commercial non-real estate	$	19,022	$	-	$	-	$	19,022	$	4,465,835	$	4,484,857	$	-	$	56,700
Commercial real estate		203,355		83,375		271,464		558,194		10,704,557		11,262,751		-		271,464
Residential real estate		633,042		305,068		137,618		1,075,728		50,582,910		51,658,638		-		357,656
Consumer		94,176		-		2,198		96,374		800,646		897,020		-		2,198

	$	949,595	$	388,443	$	411,280	$	1,749,318	$	66,553,948	$	68,303,266	$	-	$	688,018

6. Net Income (Loss) Per Share

Basic net 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 ended September 30, 2011 and 2010 is based on the following:

	Three Months Ended September 30,
	2011			2010

Net income (loss)	$	61,051		$	(17,426	)

Weighted average common shares outstanding		503,284			503,284
Less: Average unallocated ESOP shares		(13,003	)		(14,159	)

Adjusted weighted average common shares outstanding		490,281			489,125

Net income (loss) per common share	$	0.12		$	(0.04	)

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 (loss) and related tax effects for the three months ended September 30, 2011 and 2010 are as follows:

	Three Months Ended
	September 30,
	2011			2010

Net income (loss)	$	61,051		$	(17,426	)
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities available for sale arising during the period		(11,882	)		22,655

(Gain) loss on securities available for sale included in net income or loss		(583	)		-

Tax effect		4,238			(7,703	)

Other comprehensive income (loss), net of tax		(8,227	)		14,952

Total comprehensive income (loss)	$	52,824		$	(2,474	)

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 September 30, 2011 and 2010 approximated $2,000 for both periods. The fair value of the unallocated shares as of September 30, 2011 and 2010 was $130,000 and $142,000, 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:

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 measured at fair value on a recurring basis are as follows:

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
September 30, 2011
Investment securities available for sale
Corporate bonds and other obligations	$	1,525,222	$	-	$	1,525,222	$	-
FNMA mortgage-backed securities		581,502		-		581,502		-
U.S. Government sponsored enterprise securities		502		-		502		-
Corporate common stock		10,000		-		10,000		-

June 30, 2011
Investment securities available for sale
Corporate bonds and other obligations	$	1,012,322	$	-	$	1,012,322	$	-
FNMA mortgage-backed securities		79,026		-		79,026		-
U.S. Government sponsored enterprise securities		677		-		677		-
Corporate common stock		10,000		-		10,000		-

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

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
September 30, 2011
Assets:
Impaired loans	$	519,450	$	-	$	519,450	$	-
Foreclosed real estate		875,492		-		875,492		-

June 30, 2011
Assets:
Impaired loans	$	678,834	$	-	$	678,834	$	-
Foreclosed real estate		1,196,183		-		1,196,183		-

Certain impaired loans were reduced from their recorded investment of $768,532 and $892,914 to their fair value of $519,450 and $678,834 at September 30, 2011 and June 30, 2011, respectively, resulting in an impairment reserve through the allowance for loan losses. Foreclosed real estate was reduced from its recorded investment of $935,294 and $1,219,691 to its fair value of $875,492 and $1,196,183 at September 30, 2011 and June 30, 2011, 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 Federal Home Loan Bank of Boston (FHLB), federal funds sold and certificates of deposit approximate fair values as these financial instruments have short maturities.

Securities: The fair value of securities, excluding FHLB 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 FHLB 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.

FHLB 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.

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:

	September 30, 2011				June 30, 2011
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(In thousands)				(In thousands)
Financial assets
Cash and cash equivalents	$	3,509	$	3,509	$	3,106	$	3,106
Certificates of deposit		495		495		495		495
Investment securities available for sale		2,117		2,117		1,102		1,102
Investment securities held to maturity		1,175		1,216		972		971
Federal Home Loan Bank stock		1,252		1,252		1,252		1,252
Loans, net		66,753		69,513		67,396		70,381
Accrued interest receivable		278		278		282		282

Financial liabilities
Deposits		53,481		53,289		53,877		53,308
FHLB advances		18,847		19,450		17,634		18,118

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 of Understanding 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 of Understanding and has communicated progress to the Office of the Comptroller of the Currency which replaced the OTS as primary regulator of the Bank on July 21, 2011. The Federal Reserve Board is currently the primary regulator of the Company and the MHC.

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).

●

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, Federal Deposit Insurance Corporation 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 27, 2011. 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.

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 September 30, 2011, six impaired loans were assigned a specific reserve of $249,000. Specific reserves totaling $214,000 were assigned as of June 30, 2011.

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.

Securities. We classify our investments in two categories: securities available for sale and securities held to maturity. Investment securities available for sale are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income or loss. Debt securities which the Company has the positive intent and ability to hold to maturity, specifically the Company’s municipal bond holdings, are classified as held to maturity and reported at amortized cost.

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.

Foreclosed Real Estate. Real estate properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed real estate.

Comparison of Financial Condition at September 30, 2011 and June 30, 2011

Total Assets. Total assets increased by $625,000, or 0.8%, from $77.9 million at June 30, 2011 to $78.5 million at September 30, 2011. This increase was largely the result of an increase of $1.0 million in investment securities held for sale and $200,000 in investment securities held to maturity, offset by a decrease in loans of $700,000.

Cash and Cash Equivalents. Cash and correspondent bank balances increased by $400,000, or 13.0%, from $3.1 million at June 30, 2011 to $3.5 million at September 30, 2011. This increase was primarily the result of loan repayments of $700,000 offset by a reduction in deposits of $400,000.

Certificates of Deposit. Certificate of deposit balances remained unchanged at $495,000.

Securities Available for Sale. Securities available for sale totaled $2.1 million at September 30, 2011, an increase of $1.0 million, or 92.1%, from $1.1 million at June 30, 2011. The increase was primarily due to the purchase of three corporate bonds and one mortgage-backed security. These securities were purchased in light of recent relative weakness in loan demand in our market area as a means to augment income by capturing the spreads available on the securities, which were funded by short-term Federal Home Loan Bank borrowings. All three corporate bonds were rated at least A or better at the time of purchase.

Net Loans. Net loans decreased $643,000 or 1.0%, from $67.4 million at June 30, 2011 to $66.8 million at September 30, 2011 as a result of a decrease in residential mortgage loans, commercial loans, home equity and consumer loans. Residential mortgage loans decreased $118,000, or 0.3%, commercial real estate loans decreased $37,000, or 0.3%, home equity loans decreased $492,000, or 4.4%, and commercial installment loans decreased $556,000, or 12.4%, partially offset by an increase of $457,000, or 293.1%, in construction loans from June 30, 2011 to September 30, 2011.

Deposits and Borrowed Funds. Deposits decreased $396,000, or 0.7%, from $53.9 million at June 30, 2011 to $53.5 million at September 30, 2011. Demand accounts increased $305,000, or 11.7%. NOW checking accounts decreased $51,000, or 1.6%, and certificates of deposit decreased $228,000, or 0.8%. Money market accounts decreased $196,000, or 1.5% and savings accounts decreased $226,000 or 5.0%.

Total borrowings from the Federal Home Loan Bank of Boston (“FHLB”) increased $1.2 million, or 6.9%, from $17.6 million at June 30, 2011 to $18.8 million at September 30, 2011. The increase in borrowings was to fund the purchases of investment securities.

Total Stockholders’ Equity. Total equity increased $55,000 during the three months ended September 30, 2011, primarily as a result of net income of $61,000, partially offset by a decrease in unrealized gain on investment securities, net of tax, of $8,000.

Comparison of Operating Results for the Three Months Ended September 30, 2011 and September 30, 2010

Net Income (Loss). Net income increased $78,000 to a net income of $61,000 for the three months ended September 30, 2011 compared to a net loss of $17,000 for the three months ended September 30, 2010. The increase was primarily the result of a decrease in provision for loan losses of $249,000 and an increase in non-interest income of $9,000, partially offset by an increase in total non-interest expenses of $133,000, a decrease in net interest income of $11,000 and an increase in income tax expense of $36,000.

Net Interest Income. Net interest income decreased $11,000, or 1.6%, from $702,000, for the three months ended September 30, 2010 to $691,000 for the three months ended September 30, 2011. The decrease was primarily due to the decrease in interest and dividend income of $94,000 offset by a decrease in interest expense of $83,000. The interest rate spread increased from 3.57% for the three months ended September 30, 2010 to 3.69% for the three months ended September 30, 2011. Net interest margin increased from 3.71% for the three months ended September 30, 2010 to 3.79% for the three months ended September 30, 2011. The average of interest earning assets to interest bearing liabilities decreased from 106.69% to 106.31%.

Interest and Dividend Income. Interest income decreased $94,000, or 8.7%, from $1.1 million for the three months ended September 30, 2010 to $988,000 for the three months ended September 30, 2011. The decrease was due principally to a decrease in the average balance of interest-earning assets and decrease in yield. Interest income decreased by $102,000 on loans and increased $8,000 on investment securities and other interest-earning deposits, including Federal Home Loan Bank stock. The average yield on the loan portfolio decreased from 6.06% for the three months ended September 30, 2010 to 5.75% for the three months ended September 30, 2011 in the generally lower interest rate environment. The average yield on investments, including securities, FHLB stock and interest-bearing deposits, increased from 1.12% for the three months ended September 30, 2010 to 1.55% for the three months ended September 30, 2011, as the Company increased its investment in higher-yielding securities.

Interest Expense. Interest expense decreased by $83,000, or 21.8%, to $297,000 for the three months ended September 30, 2011 from $380,000 for the three months ended September 30, 2010. The decrease was due principally to a decrease in the average balance in interest-bearing deposits and the lower cost of funds. The average cost of these deposits decreased from 1.79% to 1.35% in the generally lower market interest rate environment. Average borrowings from FHLB decreased with the average cost of the borrowings decreasing from 3.16% to 2.84%.

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.

	Three Months Ended September 30, 2011 vs 2010

	Increase (Decrease) Due to
							Net Increase
	Volume			Rate			(Decrease)
Interest-earning assets:
Loans	$	(48	)	$	(54	)	$	(102	)
Investment securities		6			2			8
Federal Home Loan Bank stock		-			1			1
Interest earning deposits		-			(1	)		(1	)
Total interest-earning assets		(42	)		(52	)		(94	)

Interest-bearing liabilities:
Savings deposits		1			(4	)		(3	)
NOW accounts		-			(1	)		(1	)
Money market accounts		(1	)		(5	)		(6	)
Certificates of deposit		(11	)		(42	)		(53	)
Total deposits		(11	)		(52	)		(63	)
Federal Home Loan Bank of Boston advances		(6	)		(14	)		(20	)
Total interest-bearing liabilities		(17	)		(66	)		(83	)

Change in net interest income	$	(25	)	$	14		$	(11	)

Provision for Loan Losses. The Company’s provision for loan losses was $29,000 and $279,000 for the three months ended September 30, 2011 and 2010, respectively. Loan write-downs totaled $67,000 and $141,000 for the three months ended September 30, 2011 and 2010, respectively. During the first quarter of fiscal year 2011, the Bank had completed a comprehensive review of the loan portfolio and related allowance for loan losses. As part of that review, the increase to the provision for loan losses was the result of an increase in specific reserves of $42,000 and an increase in the general valuation reserve of $237,000 due largely to economic conditions, including declining real estate values and loan performance challenges across all segments of the loan portfolio. 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 $9,000, or 16.3%, to $65,000 for the three months ended September 30, 2011, from $56,000 for the three months ended September 30, 2010. This increase was primarily due to increases of $10,000 in deposit fee income and $3,000 in fee income from loan sales.

Non-interest Expenses. Non-interest expenses increased $133,000, or 26.4%, to $636,000 for the three months ended September 30, 2011, compared to $503,000 for the three months ended September 30, 2010. The increase was primarily the result of an increase in Federal deposit insurance premiums of $46,000, an increase in salary and employee benefits of $26,000, and an increase in provision for losses on foreclosed real estate of $62,000 for the three months ended September 30, 2011.

Income Taxes. Income tax expense increased by $36,000, to a tax expense of $29,000 for the three months ended September 30, 2011, reflecting an effective tax rate of 32.2%, compared to a tax benefit of $7,000 for the three months ended September 30, 2010, reflecting an effective tax rate of 29.3%.

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.

	For the Three Months Ended September 30,
	2011								2010
	Average								Average
	Outstanding								Outstanding					Average
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
						(Dollars in Thousands)
Interest-earning assets:
Loans	$	67,214		$	966		5.75	%	$	70,463		$	1,068		6.06	%
Investment securities (1)		2,586			20		3.08	%		1,765			12		2.76	%
Federal Home Loan Bank stock		1,252			1		0.27	%		1,252			-		0.00	%
Interest-earning deposits		1,868			1		0.29	%		2,184			2		0.42	%
Total interest-earning assets		72,920		$	988		5.42	%		75,664		$	1,082		5.72	%
Non-interest-earning assets		5,161								5,116
Total assets	$	78,081							$	80,780

Interest-bearing liabilities:
Savings deposits	$	4,468		$	5		0.42	%	$	4,192		$	8		0.81	%
NOW accounts		3,091			3		0.45	%		2,803			4		0.61	%
Money market accounts		13,291			25		0.76	%		13,562			31		0.91	%
Certificate of deposit		29,999			138		1.84	%		31,855			191		2.39	%
Total interest bearing deposits		50,849			171		1.35	%		52,412			234		1.79	%
FHLB advances		17,743			126		2.84	%		18,509			146		3.16	%
Total interest-bearing liabilities	$	68,592		$	297		1.73	%	$	70,921		$	380		2.15	%

Non-interest-bearing liabilities:
Demand deposits		3,042								3,336
Other non-interest bearing liabilities		195								304
Total liabilities		71,829								74,561
Retained earnings		6,252								6,219
Total liabilities and capital	$	78,081							$	80,780

Net interest income				$	691							$	702
Net interest rate spread (2)							3.69	%							3.57	%
Net interest earning assets (3)	$	4,328							$	4,743
Net interest margin (4)							3.79	%							3.71	%
Average of interest earning assets to interest bearing liabilities		106.31	%							106.69	%

(1)	Consists of taxable investment securities and one municipal bond. The municipal bond is not 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.

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 September 30, 2011, cash and cash equivalents totaled $3.5 million, including interest-earning deposits of $1.2 million. Securities classified as available for sale, which provide additional sources of liquidity, totaled $2.1 million at June 30, 2011, and certificates of deposit at other banks totaled $495,000. At September 30, 2011, we had $18.8 million of outstanding borrowings from FHLB, and the ability to borrow an additional $1.5 million.

At September 30, the Company had $280,000 in loan commitments outstanding and $4.3 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 September 30, 2011 totaled $15.6 million, or 29.1% 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 September 30, 2011, the Bank exceeded all of its regulatory capital requirements. The Bank is considered “well-capitalized” under regulatory guidelines .

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
September 30, 2011

Total capital to risk weighted assets	$	6,315,000		12.89	%	$	3,921,000		8.00	%	$	4,901,000		10.00	%
Tier 1 capital to risk weighted assets	$	6,039,000		12.32	%	$	1,960,000		4.00	%	$	2,940,000		6.00	%
Tier 1 capital to total assets	$	6,039,000		7.67	%	$	3,148,000		4.00	%	$	3,934,000		5.00	%

June 30, 2011

Total capital to risk weighted assets	$	6,272,000		12.79	%	$	3,922,000		8.00	%	$	4,902,000		10.00	%
Tier 1 capital to risk weighted assets	$	5,981,000		11.54	%	$	1,961,000		4.00	%	$	2,941,000		6.00	%
Tier 1 capital to total assets	$	5,981,000		7.65	%	$	3,127,000		4.00	%	$	3,909,000		5.00	%

Memoranda 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 of Understanding 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 of Understanding and has communicated progress to the Office of the Comptroller of the Currency which replaced the OTS as primary regulator of the Bank on July 21, 2011. The Federal Reserve Board is currently the primary regulator of the Company and the MHC. The Company filed a current report on Form 8-K on January 31, 2011, with additional details of the Memoranda of Understanding, which Form 8-K 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.

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 September 30, 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.

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, FSB 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

101.INSXBRL		Instance Document ***

101.SCHXBRL		Taxonomy Extension Schema Document ***

101.CALXBRL		Taxonomy Extension Calculation Linkbase Document ***

101.DEFXBRL		Taxonomy Extension Definition Linkbase Document ***

101.LABXBRL		Extension Label Linkbase Document ***

101.PREXBRL		Extension Label Linkbase Document ***

**	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).

***

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2011 and June 30, 2011, Consolidated Statements of Operations for the three months ended September 30, 2011 and 2010, Consolidated Statements of Changes to Stockholders’ Equity Comprehensive Income for the three months ended September 30, 2011 and 2010, Consolidated Statements of Cash Flows for the three months ended September 30, 2011 and 2010, Notes to Consolidated Financial Statements. In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 19 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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: November 14, 2011	By:	/s/ Allen T. Sterling
		Allen T. Sterling
		President and Chief Executive Officer (Principal Executive Officer)

Date: November 14, 2011	By:	/s/ Rachel A. Haines
		Rachel A. Haines
		Senior Vice President and Treasurer (Principal Accounting and Financial Officer)

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