Auburn Bancorp, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - Auburn Bancorp, Inc.	ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - Auburn Bancorp, Inc.	ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - Auburn Bancorp, Inc.	ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - Auburn Bancorp, Inc.	ex32-2.htm

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: December 31, 2010

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). o 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 February 8, 2011.

AUBURN BANCORP, INC. AND SUBSIDIARY

QUARTERLY REPORT ON FORM 10-Q

December 31, 2010

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION (Unaudited)

Item 1.	Financial Statements

	Consolidated Balance Sheets as of December 31, 2010 (Unaudited) and June 30, 2010	3

	Consolidated Statements of Income (Unaudited) for the Three Months Ended December 31, 2010 and 2009	4

	Consolidated Statements of Income (Unaudited) for the Six Months Ended December 31, 2010 and 2009	5

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Six Months Ended December 31, 2010 and 2009	6

	Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended December 31, 2010 and 2009	7

	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	quantitative and qualitative disclosures about market risk	31

Item 4.	Controls and Procedures	31

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults Upon Senior Securities	31

Item 4.	[removed and reserved]	31

Item 5.	other information	32

Item 6.	exhibits	32

	Signatures	33

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUBURN BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

December 31, 2010 (Unaudited) and June 30, 2010

	December 31, 2010			June 30, 2010
	(Unaudited)
ASSETS
Cash and due from banks	$	1,632,965		$	1,573,526
Interest-earning deposits		1,707,640			3,705,910
Total cash and cash equivalents		3,340,605			5,279,436

Certificates of deposit		745,000			845,000

Investment securities available for sale, at fair value		1,783,845			1,112,507

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

Loans		70,588,583			69,374,825
Less allowance for loan losses		(717,762	)		(492,112	)
Net loans		69,870,821			68,882,713

Property and equipment, net		1,828,824			1,852,414

Foreclosed real estate, net of allowance of $15,226 at
December 31, 2010 and $50,333 at June 30, 2010		903,691			680,712

Accrued interest receivable
Investments		21,932			13,820
Mortgage-backed securities		463			573
Loans		261,144			263,353

Prepaid expenses and other assets		401,597			405,246

Total assets	$	80,409,622		$	80,587,474

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities
Deposits	$	54,142,734		$	55,769,248
Federal Home Loan Bank advances		19,858,013			18,430,662
Accrued interest and other liabilities		260,339			337,611
Total liabilities		74,261,086			74,537,521

Stockholders’ Equity
Preferred stock, 1,000,000 shares authorized, no shares issued or outstanding		-			-
Common stock, $.01 par value per share, 10,000,000 shares authorized, 503,284 shares issued and outstanding at December 31 and June 30, 2010		5,033			5,033
Additional paid-in-capital		1,467,029			1,468,928
Retained earnings		4,811,297			4,719,099
Accumulated other comprehensive income		4,179			1,368
Unearned compensation (ESOP shares)		(139,002	)		(144,475	)
Total stockholders’ equity		6,148,536			6,049,953

Total liabilities and stockholders’ equity	$	80,409,622		$	80,587,474

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

AUBURN BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income

Three Months Ended December 31, 2010 and 2009


	Three Months Ended December 31,
	2010			2009
	(Unaudited)
Interest and dividend income:
Interest on loans	$	1,053,581		$	1,020,311
Interest on investments and other interest-earning deposits		13,381			33,360
Total interest and dividend income		1,066,962			1,053,671

Interest expense:
Interest on deposits and escrow accounts		218,356			248,839
Interest on Federal Home Loan Bank advances		150,189			175,243
Total interest expense		368,545			424,082

Net interest income		698,417			629,589

Provision for loan losses		25,217			27,613

Net interest income after provision for loan losses		673,200			601,976

Non-interest income:
Net gain on sales of loans		70,510			21,106
Net loss on sale of other assets		(32,942	)		(319	)
Net gain on sale of investment securities		—			32,894
Other non-interest income		40,868			34,637
Total non-interest income		78,436			88,318

Non-interest expenses:
Salaries and employee benefits		257,007			234,924
Occupancy expense		25,459			25,740
Depreciation		23,764			24,392
Federal deposit insurance premiums		24,343			23,192
Computer charges		42,596			40,178
Advertising expense		19,671			16,719
Consulting expense		15,633			9,498
Net provision for losses on foreclosed real estate		15,226			10,000
Other operating expenses		157,847			179,435
Total non-interest expenses		581,546			564,078

Income before income taxes		170,090			126,216

Income tax expense		60,466			46,573

Net income	$	109,624		$	79,643

Net income per common share	$	.22		$	.16

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

AUBURN BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income

Six Months Ended December 31, 2010 and 2009

	Six Months Ended December 31,
	2010			2009
	(Unaudited)
Interest and dividend income:
Interest on loans	$	2,121,152		$	1,985,755
Interest on investments and other interest-earning deposits		27,889			80,091
Total interest and dividend income		2,149,041			2,065,846

Interest expense:
Interest on deposits and escrow accounts		452,573			516,898
Interest on Federal Home Loan Bank advances		296,369			366,176
Total interest expense		748,942			883,074

Net interest income		1,400,099			1,182,772

Provision for loan losses		304,014			45,461

Net interest income after provision for loan losses		1,096,085			1,137,311

Non-interest income (loss):
Net gain on sales of loans		92,905			42,699
Net loss on sale of other assets		(39,326	)		(7,233	)
Net loss on sale of investment securities		—			(126,269	)
Other non-interest income		80,570			70,531
Total non-interest income (loss)		134,149			(20,272	)

Non-interest expenses:
Salaries and employee benefits		486,526			466,866
Occupancy expense		49,275			50,586
Depreciation		47,819			50,400
Federal deposit insurance premiums		37,784			75,556
Computer charges		84,709			85,646
Advertising expense		42,161			30,183
Consulting expense		31,673			23,473
Net provision for losses on foreclosed real estate		11,084			10,000
Other operating expenses		293,749			289,494
Total non-interest expenses		1,084,780			1,082,204

Income before income taxes		145,454			34,835

Income tax expense		53,256			16,924

Net income	$	92,198		$	17,911

Net income per common share	$	.19		$	.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

Six Months Ended December 31, 2010 and 2009 (Unaudited)

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

Balance, June 30, 2009	$	5,033	$	1,470,790		$	4,611,470	$	(26,225	)	$	(157,189	)	$	5,903,879

Comprehensive income
Net income		-		-			17,911		-			-			17,911
Other comprehensive income
Unrealized holding gain on
securities, net of taxes
of $12,048		-		-			-		23,388			-			23,388

Total comprehensive income		-		-			17,911		23,388			-			41,299

Common stock held by ESOP
committed to be released
(694 shares)		-		(738	)		-		-			6,935			6,197

Balance, December 31, 2009	$	5,033	$	1,470,052		$	4,629,381	$	(2,837	)	$	(150,254	)	$	5,951,375




Balance, June 30, 2010	$	5,033	$	1,468,928		$	4,719,099	$	1,368		$	(144,475	)	$	6,049,953

Comprehensive income
Net income		-		-			92,198		-			-			92,198
Other comprehensive income
Unrealized holding gain on
securities, net of taxes of
$1,448		-		-			-		2,811			-			2,811

Total comprehensive income		-		-			92,198		2,811			-			95,009

Common stock held by ESOP
committed to be released
(547 shares)		-		(1,899	)		-		-			5,473			3,574

Balance, December 31, 2010	$	5,033	$	1,467,029		$	4,811,297	$	4,179		$	(139,002	)	$	6,148,536

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

AUBURN BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Six Months Ended December 31, 2010 and 2009 (Unaudited)

	Six Months Ended
	December 31,
	2010			2009
Cash flows from operating activities:

Net income	$	92,198		$	17,911

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		47,819			50,400
Net accretion of discounts on investment securities available for sale		(17,367	)		(5,926	)
Provision for loan losses		304,014			45,461
Net provision for losses on foreclosed real estate		11,084			10,000
Deferred income tax benefit		-			(11,380	)
Net loss on sale of investment securities available for sale		-			126,269
Gain on sales of loans		(92,905	)		(42,699	)
Loss on foreclosed real estate		14,096			7,233
ESOP compensation expense		3,880			6,197
Net decrease (increase) in prepaid expenses and other assets		3,649			(334,162	)
Net decrease (increase) in accrued interest receivable		(5,793	)		20,846
Net decrease in accrued interest payable and other liabilities		(78,720	)		(15,844	)

Net cash provided by (used in) operating activities		281,955			(125,694	)

Cash flows from investing activities:
Purchase of investment securities available for sale		(708,594	)		-
Proceeds from sales of investment securities available for sale		-			800,499
Proceeds from maturities and principal paydowns on investment securities available for sale		58,882			84,615
Proceeds from sale of other real estate owned		103,380			-
Net change in certificates of deposit		100,000			3,957,105
Net increase in loans to customers		(1,550,756	)		(5,072,472	)
Purchase of Federal Home Loan Bank stock		-			(104,700	)
Capital expenditures		(24,229	)		(14,119	)

Net cash used in investing activities		(2,021,317	)		(349,072	)

Cash flows from financing activities:
Advances from Federal Home Loan Bank		2,000,000			4,250,000
Repayment of advances from Federal Home Loan Bank		(500,000	)		(2,750,000	)
Net change in short-term borrowings		(72,649	)		(3,047,497	)
Net increase (decrease) in deposits		(1,626,514	)		2,303,537
Redemption of ESOP shares		(306	)		-

Net cash provided by (used in) financing activities		(199,469	)		756,040

Net increase (decrease) in cash and cash equivalents		(1,938,831	)		281,274

Cash and cash equivalents, beginning of period		5,279,436			2,374,636

Cash and cash equivalents, end of period	$	3,340,605		$	2,655,910

Supplementary cash flow information:

Cash paid during the period for:
Interest	$	746,544		$	886,525
Taxes	$	100,930		$	6,300
Transfer of loans to foreclosed real estate	$	351,539		$	186,032

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 December 31, 2010 and June 30, 2010, and for the interim periods ended December 31, 2010 and 2009. Except for the June 30, 2010 Consolidated Balance Sheet, the financial information is unaudited; however, in the opinion of management, the information reflects all adjustments, consisting of normal recurring adjustments, that are necessary to make the financial statements not misleading. The results shown for the six months ended December 31, 2010 and 2009 are not necessarily indicative of the results to be obtained for a full fiscal year. The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and with the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly they do not include all of the information and footnotes required for complete financial statements. These interim financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2010 included in the Company’s Annual Report on Form 10-K (File No. 000-53370) filed at the Securities and Exchange Commission on September 28, 2010.

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

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

2. Reorganization

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

Net proceeds of $1.5 million were raised in the stock offering, after deduction of expenses of $766,000 and excluding $25,000 used to capitalize the MHC and $173,000 which was loaned by the Company 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, or repurchase 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 June 2009, the Financial Accounting Standards Board (FASB) issued amended guidance with respect to accounting for transfers of financial assets to improve the reporting for the transfer of financial assets resulting from concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. This Statement was effective for the Company on July 1, 2010. The Company has reviewed the requirements of this Statement and complies with its requirements. The adoption of this Statement has not had a material effect on the Company’s consolidated financial statements.

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

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

4. Securities

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

December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Municipal bond	$	178,756	$	-	$	(4,463	)	$	174,293
Corporate bonds		1,490,622		20,979		(12,450	)		1,499,151
FNMA mortgage-backed securities		98,133		1,777		(158	)		99,752
U.S. Government sponsored enterprise securities		2		647		-			649
Corporate common stock		10,000		-		-			10,000

Total investment securities available for sale	$	1,777,513	$	23,403	$	(17,071	)	$	1,783,845

June 30, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Corporate bonds	$	982,415	$	13,366	$	(15,640	)	$	980,141
FNMA mortgage-backed securities		118,017		3,499		-			121,516
U.S. Government sponsored enterprise securities		2		848		-			850
Corporate common stock		10,000		-		-			10,000

Total investment securities available for sale	$	1,110,434	$	17,713	$	(15,640	)	$	1,112,507

Investments with a fair value of $1,783,845 and $1,112,507 at December 31, 2010 and June 30, 2010, respectively, are held in a custody account to secure 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.

	December 31, 2010				June 30, 2010
	Amortized Cost		Fair Value		Amortized Cost		Fair Value

Over 1 year through 5 years	$	1,290,622	$	1,281,008	$	782,415	$	766,775
After 5 years through 10 years		200,000		218,144		200,000		213,366
After 10 years		178,756		174,292		-		-
		1,669,378		1,673,444		982,415		980,141
Mortgage-backed securities		98,133		99,752		118,017		121,516

	$	1,767,511	$	1,773,196	$	1,100,432	$	1,101,657

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

	Less Than 12 Months				12 Months or Greater				Total

	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses

December 31, 2010
Municipal bond	$	-	$	-	$	174,293	$	4,463	$	174,293	$	4,463
Corporate bonds		-		-		237,550		12,450		237,550		12,450
FNMA mortgage backed securities		-		-	$	52,101		158		52,101		158

Total	$	-	$	-	$	463,944	$	17,071	$	463,944	$	17,071

June 30, 2010
Corporate bonds	$	530,525	$	1,890	$	236,250	$	13,750	$	766,775	$	15,640

Total	$	530,525	$	1,890	$	236,250	$	13,750	$	766,775	$	15,640

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

At December 31, 2010, three debt securities with unrealized losses had depreciated 4% in total from the amortized cost basis. At June 30, 2010, three debt securities with unrealized losses had depreciated 2% in total from the amortized cost basis. These unrealized losses related principally to current interest rates for similar types of securities compared to the underlying yields on these securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition and the Company’s ability to hold such securities. The Company did not record an other-than-temporary impairment loss during the six months ended December 31, 2010 or 2009.

5. Credit Quality and Allowance for Credit Losses

In July 2010, FASB issued Accounting Standards Update 2010-20 - Receivables (Topic 310), “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. The update was 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.”

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 OREO, bankruptcy and foreclosure activity is reviewed along with delinquency watch list issues. This review is incorporated into any adjustment to the allowance. Management classifies the loan portfolio specifically by loan type and monitor credit risk separately as discussed 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 six months ended December 31, 2010.

	Commercial Non-Real Estate			Commercial Real Estate			Residential Real Estate			Consumer			Unallocated		Total
Allowance for credit losses
Beginning balance	$	65,874		$	157,173		$	261,246		$	7,819		$	-	$	492,112
Charge-offs		(42,290	)		(7,900	)		(23,808	)		(5,666	)		-		(79,664	)
Recoveries		-			-			-			1,300			-		1,300
Provision		59,944			94,841			117,138			4,875			27,216		304,014
Ending balance	$	83,528		$	244,114		$	354,576		$	8,328		$	27,216	$	717,762

Ending balance	$	83,528		$	244,114		$	354,576		$	8,328		$	27,216	$	717,762
Individually evaluated for impairment		58,200		$	7,900			5,201			2,498			-		73,799
Collectively evaluated for impairment		25,328			236,214			349,375			5,830			27,216		643,963

Loans
Ending balance	$	4,972,559		$	16,376,820		$	48,300,125		$	939,079		$	-	$	70,588,583
Individually evaluated for impairment		58,200			24,996			16,455			2,498			-		102,149
Collectively evaluated for impairment		4,914,359			16,351,824			48,283 670			936,581			-		70,486,434

The Bank’s provision for loan losses was $304,000 and $45,000 for the six months ended December 31, 2010 and 2009, respectively. The increase to the provision is the result of an increase in specific reserves of $89,000 and an increase in general valuation reserve of $215,000 due largely to current economic conditions, including declining real estate values and loan performance challenges across all segments of the loan portfolio. The Bank has completed a comprehensive review of the loan portfolio and related allowance for loan losses, and has increased its allowance for loan losses to $718,000 at December 31, 2010 which now represents 1.02% of total loans, compared to an allowance of $492,000, representing 0.71% of total loans at June 30, 2010.

Credit Quality Indicators – Loan Rating Methodology

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

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

1)	Superior - Well established national companies and loans secured by cash or marketable securities;
2)	Excellent - Well established local companies and loans secured by cash or marketable securities;
3)	Good – Assets secured by well to recently established businesses whose performance is average and whose industry conditions are fair to good; and
4)	Pass - Assets secured by well to recently established businesses whose performance is average and whose industry conditions are fair to good. Borrower’s financial condition shows deterioration.

The other line items in the table are defined within the Loan Review Policy as follows;

	-	Pass/Watch: Cash flow may be temporarily inadequate to cover the debt, projected primary source of repayment has not been verified or a deterioration in the financial condition of the customer that is not yet reflected in the status of the loan.
	-	Special Mention: Assets are protected but potentially weak. Borrower is experiencing adverse trends or balance sheet issues which have not yet reached a point of jeopardizing loan repayment.
	-	Substandard: Inadequately protected assets that exhibit one or more well defined weaknesses that jeopardize full collection or liquidation of assets.
	-	Doubtful: Same standards as “substandard” with added characteristics that current facts, conditions and values make full collection highly improbable.
	-	Loss: Assets that are considered uncollectible and are not warranted as a bank.

Credit Quality Indicators
As of December 31, 2010

	Commercial Credit Exposure
	Credit Risk Profile by Internally Assigned Grade

	Commercial		Commerical
	Non-Real		Real Estate
Grade:	Estate		Other
Acceptable	$	3,253,153	$	11,486,168
Pass/Watch *		1,361,206		3,056,473
Special mention		-		1,070,382
Substandard		300,000		721,250
Doubtful		-		34,647
Loss		58,200		7,900
Total	$	4,972,559	$	16,376,820

Commercial Non-Real Estate includes six loans with $1.3 million subject to SBA or FAME guarantees. Commercial Real Estate Other includes one loan with $440,000 subject to a FAME guaranty.

	Residential/Consumer Credit Exposure
	Credit Risk Profile by Internally Assigned Grade

	Residential
Grade:	Real Estate		Consumer
Acceptable	$	47,289,381	$	934,334
Pass/Watch		340,816		2,247
Special mention		99,497		-
Substandard		565,230		-
Doubtful		-		-
Loss		5,201		2,498
Total	$	48,300,125	$	939,079

	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
For the Six Months Ended December 31, 2010

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

With no related allowance recorded:

Commercial non-real estate	$	-	$	-	$	-	$	-	$	-
Commercial real estate		-		-		-		-		-
Residential real estate		-		-		-		-		-
Consumer		-		-		-		-		-

With an allowance recorded:

Commercial non-real estate	$	58,200	$	58,200	$	58,200	$	58,200	$	2 ,274
Commercial real estate		24,996		24,996		7,900		24,996		-
Residential real estate		16,455		16,455		5,201		16,455		-
Consumer		2,498		2,498		2,498		2,498		42

Total:

Commercial non-real estate		58,200		58,200		58,200		58,200	$	2 ,274
Commercial real estate		24,996		24,996		7,900		24,996		-
Residential real estate		16,455		16,455		5,201		16,455		-
Consumer		2,498		2,498		2,498		2,498		42
	$	102,149	$	102,149	$	73,799	$	102,149	$	2,316

	Non-performing Loans

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

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

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

Age Analysis of Past Due Loans
As of December 31, 2010
													Recorded		Recorded
													Investment Loans		Investment Loans
	30-59 Days		60-89 Days		Greater Than		Total Past						> 90 Days and		on Non-Accrual
	Past Due		Past Due		90 Days		Due		Current		Total Loans		Accruing		Status
Commercial non-real estate	$	-	$	-	$	-	$	-	$	4,972,559	$	4,972,559	$	-	$	-
Commercial real estate		378,252		162,812		59,643		600,707		15,776,113		16,376,820		-		59,643
Residential real estate		47,722		534,414		653,304		1,235,440		47,064,685		48,300,125		-		653,304
Consumer		32,576		2,247		2,498		37,321		901,758		939,079		-		2,498

	$	458,550	$	699,473	$	715,445	$	1,873,468	$	68,715,115	$	70,588,583	$	-	$	715,445

6.	Earnings Per Share

	Basic income per common share is determined by dividing net income 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 per common share for the three months and six months ended December 31, 2010 and 2009 is based on the following:

	Three Months Ended December 31,						Six Months Ended December 31,
	2010			2009			2010			2009

Net income	$	109,624		$	79,643		$	92,198		$	17,911
Weighted average common shares outstanding		503,284			503,284			503,284			503,284
Less: Average unallocated ESOP shares		(13,986	)		(15,122	)		(14,126	)		(15,315	)

Adjusted weighted average common shares outstanding		489,298			488,162			489,158			487,969

Net income per common share	$	0.22		$	0.16		$	0.19		$	0.04

7.	Comprehensive Income or Loss

	GAAP requires that recognized revenue, expenses, gains, and losses be included in net income. 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, are components of comprehensive income or loss.

	The components of total comprehensive income and related tax effects for the three and six months ended December 31, 2010 and 2009 are as follows:

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2010			2009			2010			2009
Net income	$	109,624		$	79,643		$	92,198		$	17,911
Other comprehensive income, net of tax:
Unrealized holding income (losses) on securities available for sale arising during the period		(18,395	)		(3,600	)		4,259			(90,833	)
Reclassification adjustment for items included in net income		-			(32,894	)		-			126,269
Tax effect		6,254			12,408			(1,448	)		(12,048	)
Other comprehensive income (loss), net of tax		(12,141	)		(24,086	)		2,811			23,388
Total comprehensive income	$	97,483		$	55,557		$	95,009		$	41,299

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 December 31, 2010 and 2009 approximated $2,000 and $3,000, respectively and for the six months ended December 31, 2010 and 2009 approximated $4,000 and $6,000. The fair value of the unallocated shares as of December 31, 2010 and 2009 was $139,000 and $150,300, 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 and liabilities measured at fair value on a recurring basis are as follows:

			Fair Value Measurements Using
	Total		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2010
Assets:
Investment securities available for sale
Municipal bond	$	174,293	$	---	$	174,293	$	---
Corporate bonds		1,499,151		---		1,499,151		---
FNMA mortgage-backed securities		99,752		---		99,752		---
U.S. Government sponsored enterprise securities		649		---		649		---
Corporate common stock		10,000		---		10,000		---

June 30, 2010
Assets:
Investment securities available for sale
Corporate bonds	$	980,141	$	---	$	980,141	$	---
FNMA mortgage-backed securities		121,516		---		121,516		---
U.S. Government sponsored enterprise securities		850		---		850		---
Corporate common stock		10,000		---		10,000		---

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

			Fair Value Measurements Using
	Total		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2010
Assets:
Impaired loans	$	28,350	$	---	$	28,350	$	---
Foreclosed real estate		903,691				903,691

June 30, 2010
Assets:
Impaired loans	$	328,939	$	---	$	328,939	$	---
Foreclosed real estate		680,712				680,712

Impaired loans were reduced from their carrying amount of $102,149 to their fair value of $28,350 and $372,307 to their fair value of $328,939 at December 31, 2010 and June 30, 2010, respectively, resulting in an impairment reserve through the allowance for loan losses. Foreclosed real estate was reduced from its carrying amount of $918,917 to its fair value of $903,691 and $731,045 to its fair value of $680,712 at December 31, 2010 and June 30, 2010, respectively.

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

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

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

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

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

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

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

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:

	December 31, 2010				June 30, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
			(In thousands)
Financial assets
Cash and cash equivalents	$	3,341	$	3,341	$	5,279	$	5,279
Certificates of deposit		745		745		845		845
Securities available for sale		1,784		1,784		1,113		1,113
Federal Home Loan Bank stock		1,252		1,252		1,252		1,252
Loans, net		69,871		71,811		68,883		71,067
Accrued interest receivable		284		284		278		278

Financial liabilities
Deposits		54,143		53,354		55,769		55,396
Federal Home Loan Bank advances		19,858		20,180		18,431		19,010

10. 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 identified the following for disclosure.

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

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

Overview

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

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

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

Expenses. The non-interest expenses we incur in operating our business consist of expenses for salaries and employee benefits, occupancy and equipment, data processing, marketing and advertising, professional services, FDIC insurance premiums and various other miscellaneous expenses. Our largest non-interest expense is salaries and employee benefits, which consist primarily of salaries and wages paid to our employees, payroll taxes, and expenses for health insurance, retirement plans and other employee benefits. We will recognize additional annual employee compensation expenses stemming from the adoption of a new equity benefit plan. We cannot determine the actual amount of these new stock-related compensation and benefit expenses at this time because applicable accounting practices require that they be based on the fair market value of the shares of common stock at specific points in the future.

Forward-Looking Statements

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

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 December 31, 2010, four impaired loans were assigned a specific reserve of $74,000. Specific reserves totaling $11,000 have been assigned as of June 30, 2010.

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

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

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

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

Comparison of Financial Condition at December 31, 2010 and June 30, 2010

Total Assets. Total assets decreased by $178,000, or 0.2%, from $80.6 million at June 30, 2010 to $80.4 million at December 31, 2010. This decrease was largely the result of a reduction of $1.9 million in cash and cash equivalents, partly offset by an increase of $1.0 million in loans and $700,000 in investment securities available for sale.

Cash and Cash Equivalents. Cash and correspondent bank balances decreased by $1.9 million, or 36.7%, from $5.3 million at June 30, 2010 to $3.3 million at December 31, 2010. This decrease was primarily the result of increase in loans and investment securities available for sale.

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

Securities Available for Sale. Securities available for sale totaled $1.8 million at December 31, 2010, an increase of $671,000, or 60.3%, from $1.1 million at June 30, 2010. The increase was primarily due to the purchase of two corporate bonds and one municipal bond.

Net Loans. Net loans increased $988,000, or 1.4%, from $68.9 million at June 30, 2010 to $69.9 million at December 31, 2010. The majority of loan growth has been in 1-4 family real estate loans and commercial real estate loans which increased $444,000, or 1.2%, and $1.3 million, or 8.6%, respectively. The increases were primarily due to the market demand for fixed rate consumer and commercial real estate loans. Construction loans decreased $221,000, or 53.9%, home equity loans decreased $41,000, or 0.4%, and commercial installment loans decreased $295,000, or 5.6%, from June 30, 2010 to December 31, 2010.

Deposits and Borrowed Funds. Deposits decreased $1.6 million, or 2.9%, from $55.8 million at June 30, 2010 to $54.1 million at December 31, 2010. Demand accounts decreased $683,000, or 22.0%. NOW checking accounts increased $268,000, or 1.2%, and certificates of deposit decreased $15,000, or 0.05%. Money market accounts decreased $1.6 million, or 11.5% and savings accounts increased $396,000 or 10.0%. The decrease in money market accounts resulted from a large withdrawal upon the death of a customer with a substantial deposit relationship.

Total borrowings from the Federal Home Loan Bank of Boston (“FHLB”) increased $1.4 million, or 7.7%, from $18.4 million at June 30, 2010 to $19.9 million at December 31, 2010.

Total Stockholders’ Equity. Total equity increased $99,000 during the six months ended December 31, 2010, primarily as a result of net income of $93,000 and an increase in unrealized gain on investment securities, net of tax, of $3,000.

Comparison of Operating Results for the Three Months Ended December 31, 2010 and December 31, 2009

Net Income. Net income increased $30,000 to $110,000 for the three months ended December 31, 2010 compared to net income of $80,000 for the three months ended December 31, 2009. The increase was primarily the result of higher net interest income, partially offset by higher non-interest expenses.

Net Interest Income. Net interest income increased $69,000, or 10.9%, from $630,000 for the three months ended December 31, 2009 to $698,000 for the three months ended December 31, 2010. The increase was primarily due to the increase in interest and dividend income of $13,000 and decrease in interest expense of $56,000. The interest rate spread increased from 3.30% for the three months ended December 31, 2009 to 3.55% for the three months ended December 31, 2010. Net interest margin increased from 3.48% for the three months ended December 31, 2009 to 3.68% for the three months ended December 31, 2010.

Interest and Dividend Income. Interest income increased $13,000, or 1.3%, from $1.05 million for the three months ended December 31, 2009 to $1.07 million for the three months ended December 31, 2010. This increase was due principally to an increase in the average balance of interest-earning assets, partly offset by a decrease in yield. Interest income increased by $33,000 on loans and decreased $20,000 on investment securities and other interest-earning deposits, including Federal Home Loan Bank stock. The average yield on the loan portfolio decreased from 6.16% for the three months ended December 31, 2009 to 5.98% for the three months ended December 31, 2010 in the generally lower interest rate environment. The average yield on investments, including securities, FHLB stock and interest-bearing deposits decreased from 2.19% for the three months ended December 31, 2009 to 0.98% for the three months ended December 31, 2010.

Interest Expense. Interest expense decreased by $56,000, or 13.1%, to $369,000 for the three months ended December 31, 2010 from $424,000 for the three months ended December 31, 2009. The decrease was due to lower cost of funds. While average deposit balances increased, the average cost of these deposits decreased from 2.13% to 1.71% in the generally lower market interest rate environment. Average borrowings from FHLB decreased with the average cost of the borrowings decreasing from 3.44% to 3.02%.

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

	Three Months Ended December 31, 2010 Compared to Three Months Ended December 31, 2009
	Volume			Rate			Net change
Interest-earning assets:
Loans	$	62,000		$	(29,000	)	$	33,000
Investment securities		7,000			(6,000	)		1,000
Federal Home Loan Bank stock		-			-			-
Interest-earning deposits		(7,000	)		(14,000	)		(21,000	)
Total interest-earning assets	$	62,000		$	(49,000	)	$	13,000
Interest-bearing liabilities:
Savings deposits	$	1,000		$	(4,000	)	$	(3,000	)
NOW accounts		-			(2,000	)		(2,000	)
Money market accounts		-			(24,000	)		(24,000	)
Certificates of deposit		22,000			(24,000	)		(2,000	)
Total deposits		23,000			(54,000	)		(31,000	)
Federal Home Loan Bank of Boston advances		(4,000	)		(21,000	)		(25,000	)
Total interest-bearing liabilities	$	19,000		$	(75,000	)	$	(56,000	)
Change in net interest income	$	43,000		$	26,000		$	69,000

Provision for Loan Losses. The Company’s provision for loan losses was $25,000 and $28,000 for the three months ended December 31, 2010 and 2009, respectively. There was a $3,000 personal loan charged off during the three months ended December 31, 2010 and a $1,000 writedown during the comparable period of 2009. The Bank has completed a comprehensive review of the loan portfolio and related allowance for loan losses, and has increased its allowance for loan losses to $645,000 at December 31, 2010 which now represents 0.91% of total loans, compared to an allowance of $492,000, representing 0.71% of total loans at June 30, 2010. Our analysis of the adequacy of the allowance considers economic conditions, historical losses and management’s estimate of losses inherent in the portfolio. For further discussion of our current methodology, please refer to “Critical Accounting Policies—Allowance for Loan Losses.”

Non-interest Income. Total non-interest income decreased $10,000, or 11.2%, to $78,000 for the three months ended December 31, 2010, from $88,000 for the three months ended December 31, 2009. This decrease was a result of losses taken in 2010 on foreclosed real estate, along with no net gain on sale of investments for the three months ended December 31, 2010 compared to a $33,000 net gain taken for the three months ended December 31, 2009, partly offset by an increase in net gain on sales of loans of $49,000.

Non-interest Expenses. Non-interest expenses increased $17,000, or 3.1%, to $582,000 for the three months ended December 31, 2010, compared to $564,000 for the three months ended December 31, 2009. The increase was primarily the result of increases in FDIC insurance premiums of $1,000, and increases of $3,000 in advertising, $2,000 in computer expenses, $2,000 in independent audit, and $6,000 in consulting fees. Salaries and benefits and other operating expenses also increased commensurate with the growth of the Company.

Income Taxes. Income tax expense increased by $14,000, to a tax expense of $60,000 for the three months ended December 31, 2010, reflecting an effective tax rate of 35.5%, compared to a tax expense of $80,000 for the three months ended December 31, 2009, reflecting an effective tax rate of 36.9%.

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 December 31,
	2010								2009
	Average Outstanding Balance			Interest		Yield/Rate			Average Outstanding Balance			Interest		Yield/Rate
	(Dollars in Thousands)
Interest-earning assets:
Loans	$	70,440		$	1,053		5.98	%	$	66,299		$	1,020		6.16	%
Investment securities(1)		1,808			11		2.45	%		873			10		4.41	%
Federal Home Loan Bank stock		1,252			-		0.00	%		1,237			-		0.00	%
Interest-earning deposits		2,377			2		0.39	%		3,980			24		2.39	%
Total interest-earning assets		75,877		$	1,066		5.62	%		72,389		$	1,054		5.82	%
Non-interest-earning assets		5,031								4,327
Total assets	$	80,908							$	76,716

Interest-bearing liabilities:
Savings deposits	$	4,199		$	5		0.50	%	$	3,468		$	7		0.86	%
NOW accounts		2,728			3		0.51	%		2,663			5		0.78	%
Money market accounts		12,440			23		0.75	%		12,372			48		1.53	%
Certificates of deposit		31,825			187		2.34	%		28,337			189		2.67	%
Total interest-bearing deposits		51,192			218		1.71	%		46,840			249		2.13	%
FHLB advances		19,873			150		3.02	%		20,392			175		3.44	%
Total interest-bearing liabilities	$	71,065		$	368		2.07	%	$	67,232		$	424		2.52	%

Non-interest-bearing liabilities:
Demand deposits	$	3,476							$	3,285
Other non-interest-bearing liabilities		166								178
Total liabilities		74,707								70,695
Total capital		6,201								6,021
Total liabilities and capital	$	80,908							$	76,716

Net interest income				$	698							$	630
Net interest rate spread(2)							3.55	%							3.30	%
Net interest-earning assets(3)	$	4,812							$	5,157
Net interest margin(4)							3.68	%							3.48	%
Average of interest-earning assets to interest-bearing liabilities		106.77	%							107.67	%

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

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

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

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

Comparison of Operating Results for the Six Months Ended December 31, 2010 and December 31, 2009

Net Income. Net income increased $74,000 to $92,000 for the six months ended December 31, 2010 compared to net income of $18,000 for the six months ended December 31, 2009. The increase was primarily the result of higher net interest income and higher non-interest income, partially offset by higher provision for loan losses.

Net Interest Income. Net interest income increased $217,000, or 18.4%, from $1.2 million for the six months ended December 31, 2009 to $1.4 million for the six months ended December 31, 2010. The increase was primarily due to an increase in interest and dividend income of $83,000 and a decrease in interest expense of $134,000. The interest rate spread increased from 3.09% for the six months ended December 31, 2009 to 3.56% for the six months ended December 31, 2010. Net interest margin increased from 3.28% for the six months ended December 31, 2009 to 3.70% for the six months ended December 31, 2010.

Interest and Dividend Income. Interest and dividend income increased $83,000, or 4.0%, from $2.07 million for the six months ended December 31, 2009 to $2.15 million for the six months ended December 31, 2010. This increase was due principally to an increase in the average balance of interest-earning assets, partly offset by a decrease in yield. Interest income increased by $135,000 on loans and decreased $52,000 on investment securities and other interest-earning deposits, including Federal Home Loan Bank stock. The average yield on the loan portfolio decreased from 6.12% for the six months ended December 31, 2009 to 6.02% for the six months ended December 31, 2010 in the generally lower interest rate environment. The average yield on investments, including securities, FHLB stock and interest-bearing deposits decreased from 2.23% for the six months ended December 31, 2009 to 1.05% for the six months ended December 31, 2010.

Interest Expense. Interest expense decreased by $134,000, or 15.2%, to $749,000 for the six months ended December 31, 2010 from $883,000 for the six months ended December 31, 2009. The decrease was due to lower cost of funds. While average deposit balances increased, the average cost of these deposits decreased from 2.24% to 1.75% in the generally lower market interest rate environment. Average borrowings from FHLB decreased with the average cost of the borrowings decreasing from 3.56% to 3.09%.

	Six Months Ended December 31, 2010 Compared to Six Months Ended December 31, 2009
Interest-earning assets:	Volume			Rate			Net change
Loans	$	167,000		$	(32,000	)	$	135,000
Investment securities		13,000			(13,000	)		-
Federal Home Loan Bank stock		-			-			-
Interest-earning deposits		(21,000	)		(31,000	)		(52,000	)
Total interest-earning assets	$	159,000		$	(76,000	)	$	83,000
Interest-bearing liabilities:
Savings deposits	$	3,000		$	(4,000	)	$	(1,000	)
NOW accounts		1,000			(3,000	)		(2,000	)
Money market accounts		8,000			(44,000	)		(36,000	)
Certificates of deposit		45,000			(71,000	)		(26,000	)
Total deposits		57,000			(122,000	)		(65,000	)
Federal Home Loan Bank of Boston advances		(23,000	)		(46,000	)		(69,000	)
Total interest-bearing liabilities	$	34,000		$	(168,000	)	$	(134,000	)
Change in net interest income	$	125,000		$	92,000		$	217,000

Provision for Loan Losses. The Company’s provision for loan losses was $304,000 and $45,000 for the six months ended December 31, 2010 and 2009, respectively. The increase to the provision for loan losses was the result of an increase in specific reserves of $39,000 or 0.8% to $89,000 for the six months ended December 31, 2010 compared to $50,000 for the six months ended December 31, 2009. There was an increase in general valuation reserve of $153,000 due largely to the current economic conditions, including declining real estate values and loan performance challenges across all segments of the loan portfolio. The Bank has completed a comprehensive review of the loan portfolio and related allowance for loan losses, and has increased its allowance for loan losses to $645,000 at December 31, 2010 which now represents 0.91% of total loans, compared to an allowance of $492,000, representing 0.71% of total loans at June 30, 2010. Our analysis of the adequacy of the allowance considers economic conditions, historical losses and management’s estimate of losses inherent in the portfolio. For further discussion of our current methodology, please refer to “Critical Accounting Policies—Allowance for Loan Losses.”

Non-interest Income (Loss). Total non-interest income increased $154,000, or 761.7%, to $134,000 for the six months ended December 31, 2010, from a loss of $20,000 for the six months ended December 31, 2009. This increase was the result of having recognized no other than temporary impairment of investment securities for for the six months ended December 31, 2010 compared to $84,000 loss for the six months ended December 31, 2009.

Non-interest Expenses. Non-interest expenses increased $3,000, or 0.2%, to $1.085 million for the six months ended December 31, 2010, compared to $1.082 million for the six months ended December 31, 2009. The increase was primarily the result of increases due to salaries, advertising and consulting fees, partially offset by FDIC insurance premium decreases.

Income Taxes. Income tax expense increased by $36,000, to $53,000 for the six months ended December 31, 2010, reflecting an effective tax rate of 36.6%, compared to a tax expense of $17,000 for the six months ended December 31, 2009, reflecting an effective tax rate of 48.6%. The higher effective tax rate for 2009 was the result of capital losses in the six months ended December 31, 2009 for which the Company has not received a tax benefit.

	For the Six Months Ended December 31,
	2010								2009
	Average Outstanding Balance			Interest		Yield/Rate			Average Outstanding Balance			Interest		Yield/Rate
	(Dollars in Thousands)
Interest-earning assets:
Loans	$	70,452		$	2,121		6.02	%	$	64,914		$	1,986		6.12	%
Investment securities(1)		1,786			23		2.60	%		1,034			23		4.55	%
Federal Home Loan Bank stock		1,252			-		0.00	%		1,210			-		0.00	%
Interest-earning deposits		2,280			5		0.41	%		4,930			57		2.30	%
Total interest-earning assets		75,770		$	2,149		5.67	%		72,088		$	2,066		5.73	%
Non-interest-earning assets		5,074								4,225
Total assets	$	80,844							$	76,313

Interest-bearing liabilities:
Savings deposits	$	4,196		$	14		0.65	%	$	3,376		$	15		0.88	%
NOW accounts		2,765			8		0.56	%		2,577			10		0.77	%
Money market accounts		13,001			54		0.83	%		11,877			90		1.52	%
Certificates of deposit		31,840			377		2.37	%		28,367			402		2.83	%
Total interest-bearing deposits		51,802			453		1.75	%		46,197			517		2.24	%
FHLB advances		19,191			296		3.09	%		20,565			366		3.56	%
Total interest-bearing liabilities	$	70,993		$	749		2.11	%	$	66,762		$	883		2.65	%

Non-interest-bearing liabilities:
Demand deposits	$	3,406							$	3,366
Other non-interest-bearing
liabilities		235								193
Total liabilities		74,634								70,321
Total capital		6,210								5,992
Total liabilities and capital	$	80,844							$	76,313

Net interest income				$	1,400							$	1,183
Net interest rate spread(2)							3.56	%							3.09	%
Net interest-earning assets(3)	$	4,777							$	5,326
Net interest margin(4)							3.70	%							3.28	%
Average of interest-earning assets to interest-bearing liabilities		106.73	%							107.98	%

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

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

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

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

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 December 31, 2010, cash and cash equivalents totaled $3.3 million, including interest-earning deposits of $1.7 million. Securities classified as available for sale, which provide additional sources of liquidity, totaled $1.8 million December 31, 2010, and certificates of deposit at other banks totaled $745,000. At December 31, 2010, we had $19.9 million of outstanding borrowings from FHLB, and the ability to borrow an additional $1.8 million.

At December 31, 2010, the Company had $242,000 in loan commitments outstanding and $4.0 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 December 31, 2010 totaled $21.9 million, or 40.5% 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 December 31, 2010, the Bank exceeded all of our 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:

	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(In Thousands)
December 31, 2010

Total capital to risk weighted assets	$	6,191		11.60	%	$	4,270		8.00	%	$	5,338		10.00	%

Tier 1 risked-based capital to risk weighted assets	$	5,547		10.39	%	$	2,135		4.00	%	$	3,203		6.00	%

Tier 1 capital to total assets	$	5,965		7.41	%	$	3,220		4.00	%	$	4,025		5.00	%


June 30, 2010

Total capital to risk weighted assets	$	5,933		11.67	%	$	4,069		8.00	%	$	5,086		10.00	%

Tier 1 risked-based capital to risk weighted assets	$	5,483		10.78	%	$	2,034		4.00	%	$	3,052		6.00	%

Tier 1 capital to total assets	$	5,838		7.24	%	$	3,224		4.00	%	$	4,031		5.00	%

The actual and minimum capital amounts and ratios for the Company, on a consolidated basis, are presented in the following table:

	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(In Thousands)
December 31, 2010

Total capital to risk weighted assets	$	6,363		11.92	%	$	4,270		8.00	%	$	5,338		10.00	%

Tier 1 risked-based capital to risk weighted assets	$	5,719		10.71	%	$	2,135		4.00	%	$	3,203		6.00	%

Tier 1 capital to total assets	$	6,137		7.62	%	$	3,220		4.00	%	$	4,025		5.00	%


June 30, 2010

Total capital to risk weighted assets	$	5,933		11.67	%	$	4,069		8.00	%	$	5,086		10.00	%

Tier 1 risked-based capital to risk weighted assets	$	5,483		10.78	%	$	2,034		4.00	%	$	3,052		6.00	%

Tier 1 capital to total assets	$	5,838		7.24	%	$	3,224		4.00	%	$	4,031		5.00	%

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

Memorandum of Understanding

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for smaller reporting companies.

ITEM 4.

CONTROLS AND PROCEDURES

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

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 December 31, 2010.

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		Stock Certificate of Auburn Bancorp, Inc. **

10.1		Form of Auburn Savings Bank Employee Stock Ownership Plan and Trust **

10.2		Form of ESOP Loan Commitment Letter and ESOP Loan Documents **

10.3		Form of Employment Agreement between Auburn Savings Bank and Allen T. Sterling **

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of the Company

31.2		Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer of the Company

32.1		Section 1350 Certification of Chief Executive Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Section 1350 Certification of Principal Financial Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002

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

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: February 8, 2011	By:	/s/ Allen T. Sterling
		Allen T. Sterling
		President and Chief Executive Officer (Principal Executive Officer)

Date: February 8, 2011	By:	/s/ Rachel A. Haines
		Rachel A. Haines
		Senior Vice President and Treasurer (Principal Accounting and Financial Officer)

Auburn Bancorp, Inc. - FORM 10-Q - February 10, 2011

Attached files

Auburn Bancorp, Inc. Reports