** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-KSB**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For the Fiscal Year Ended June 30,2005**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from                 to                 **

**CommissionFile Number: 000-50970**

**PSB Holdings, Inc.**

(Name of Small BusinessIssuer in its Charter)

| **Federal**                                                      | **42-1597948**                           |
|------------------------------------------------------------------|------------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) | (I.R.S. Employer  Identification Number) |
| **40 Main  Street, Putnam, Connecticut**                         | **06260**                                |
| (Address of  Principal Executive Office)                         | (Zip Code)                               |

 

**(860) 928-6501**

(Issuer’s Telephone Number including area code)

SecuritiesRegistered Pursuant to Section 12(b) of the Act:

**None**

SecuritiesRegistered Pursuant to Section 12(g) of the Act:

**Common Stock, par value $0.10 per share**

(Title of Class)

Check whether the issuer: (1) filedall reports required to be filed by Section 13 or 15(d) of theExchange Act during the past twelve months (or for such shorter period that theRegistrant was required to file reports) and (2) has been subject to suchrequirements for the past 90 days.

(1)          YES x   NO o

(2)          YES x   NO o

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B contained in this form, and nodisclosure will be contained, to the best of Registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-KSB or any amendments to this Form 10-KSB. x

The Registrant’s revenues for the fiscal year ended June 30,2005 were $16.0 million.

Indicateby check mark whether the Registrant is a shell company as defined in Rule12b-2 of the Exchange Act oYES   xNO

As of August 31, 2005, there were 6,943,125shares issued and outstanding of the Registrant’s Common Stock, including3,729,846 shares owned by Putnam Bancorp, MHC. The aggregate value of thevoting stock held by non-affiliates of the Registrant, computed by reference tothe closing price of the Common Stock as of August 31, 2005 was $27.0million.

**DOCUMENTSINCORPORATED BY REFERENCE**

1.                 ProxyStatement for the 2005 Annual Meeting of Stockholders (Part III)

** **

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**PSB HOLDINGS, INC.**

**FORM 10-KSB**

**Index**
|                   | ** ** | ** **                                                                                                              | ** ** | **Page** |
|-------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**   |       | **1**                                                                                                                   |
| ITEM 1.           |       | Description of  Business                                                                                                |       | 1        |
| ITEM 2.           |       | Description of  Property                                                                                                |       | 33       |
| ITEM 3.           |       | Legal Proceedings                                                                                                       |       | 33       |
| ITEM 4.           |       | Submission of  Matters to a Vote of Security Holders                                                                    |       | 33       |
| **PART II**  |       | **34**                                                                                                                  |
| ITEM 5.           |       | Market for  Common Equity, Related Stockholder Matters and Small Business Issuer  Purchases of Equity Securities        |       | 34       |
| ITEM 6.           |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             |       | 35       |
| ITEM 7.           |       | Financial Statements                                                                                                    |       | 40       |
| ITEM 8A.          |       | Changes In and  Disagreements With Accountants on Accounting and Financial Disclosure                                   |       | 40       |
| ITEM 8B.          |       | Other Information                                                                                                       |       | 40       |
| **PART III** |       | **41**                                                                                                                  |
| ITEM 9.           |       | Directors,  Executive Officers, Promoters and Control Persons; Compliance with  Section 16(a) of the Exchange |       | 41       |
| ITEM 10.          |       | Executive  Compensation                                                                                                 |       | 41       |
| ITEM 11.          |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                        |       | 41       |
| ITEM 12.          |       | Certain  Relationships and Related Transactions                                                                         |       | 41       |
| ITEM 13.          |       | Exhibits                                                                                                                |       | 41       |
| ITEM 14.          |       | Principal  Accountant Fees and Services                                                                                 |       | 42       |
| **PART IV**  |       |
| Signatures        |       | 43                                                                                                                      |
| Certifications    |       |                                                                                                                    |

 

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**PART I**

**ITEM 1.**                Descriptionof Business

**Forward Looking Statements**

This Annual Reportcontains certain “forward-looking statements” which may be identified by theuse of words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated”and “potential.”  Examples offorward-looking statements include, but are not limited to, estimates withrespect to our financial condition, results of operations and business that aresubject to various factors which could cause actual results to differ materiallyfrom these estimates and most other statements that are not historical innature. These factors include, but are not limited to, general and localeconomic conditions, changes in interest rates, deposit flows, demand formortgage, and other loans, real estate values, competition, changes inaccounting principles, policies, or guidelines, changes in legislation orregulation, and other economic, competitive, governmental, regulatory, andtechnological factors affecting our operations, pricing products and services.

**PSB Holdings, Inc.**

PSB Holdings, Inc. isthe federally chartered stock holding company of Putnam Savings Bank, and owns100% of the common stock of Putnam Savings Bank. PSB Holdings, Inc. also hasinvestment securities of approximately $11.3 million We have not engaged in anysignificant business activity other than owning the common stock of PutnamSavings Bank and investing in marketable securities. Our executive office islocated at 40 Main Street, Putnam, Connecticut 06260, and our telephone numberis (860) 928-6501. 53.7% of the outstanding stock of PSB Holdings, Inc. isowned by Putnam Bancorp, MHC.

**Putnam Bancorp, MHC**

Putnam Bancorp, MHC is afederally chartered mutual holding company. Putnam Bancorp, MHC has not engagedin any significant business activity other than owning the common stock of PSBHoldings, Inc. Putnam Bancorp, MHC owns 53.7% of the outstanding shares ofcommon stock of PSB Holdings, Inc. So long as Putnam Bancorp, MHC exists,it is required to own a majority of the voting stock of PSB Holdings, Inc.As a result, stockholders other than Putnam Bancorp, MHC will not be able toexercise voting control over most matters put to a vote of stockholders andPutnam Bancorp, MHC, through its Board of Directors, will be able to exercisevoting control over most matters put to a vote of stockholders.

**Putnam Savings Bank**

Putnam Savings Bank wasoriginally founded in 1862 as a state-chartered mutual savings bank. In October 2004,the Bank converted to a federally-chartered stock savings bank in connectionwith the offering of common stock by PSB Holdings, Inc. The Bank isheadquartered in Putnam, Connecticut and conducts substantially all of itsbusiness from four full-service banking offices and one loan origination center.In addition, the Bank maintains a “Special Needs Limited Branch” and a “LimitedService (Mobile) Branch”. The telephone number at our main office is (860)928-6501.

**General**

Our principal businessconsists of attracting deposits from the general public in the areassurrounding  Putnam, Connecticut andinvesting those deposits, together with funds generated from operations,primarily in one- to four-family residential mortgage loans and, to a lesserextent, commercial real estate loans (including multi-family real estateloans), commercial loans, construction mortgage loans and consumer loans, andin investment securities.  Our revenuesare derived principally from interest on loans and securities, and from loanorigination and servicing fees. Our primary sources of funds are deposits andprincipal and interest payments on loans and securities.

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**Competition**

We face intense competition within our market areaboth in making loans and attracting deposits. The Town of Putnam and thesurrounding area have a high concentration of financial institutions, includinglarge commercial banks, community banks and credit unions. Some of ourcompetitors offer products and services that we currently do not offer, such astrust services and private banking. As of June 30, 2004, based on the FDIC’sannual Summary of Deposits Report, our market share of deposits represented15.5% of deposits in Windham County.

Our competition for loansand deposits comes principally from commercial banks, savings institutions,mortgage banking firms and credit unions. We face additional competition fordeposits from money market funds, brokerage firms, mutual funds and insurancecompanies. Our primary focus is to build and develop profitable customer relationshipsacross all lines of business while maintaining our role as a community bank.

**Market Area**

We operate in a primarily rural market area that has astable population and household base. All of our offices are located in WindhamCounty, Connecticut. According to a recent census report, during the past threeyears, the population of Windham County increased by 0.5% while the populationof the United States increased by 1.2%. During the period, the number ofhouseholds in Windham County and in the United States increased 0.8% and 1.2%,respectively. In 2003, per capita income for Windham County was $22,800, andthe median household income was $48,000. This compares to per capita income forthe State of Connecticut and the United States of $32,800 and $24,700,respectively, and median household income of $59,200 and $46,600, respectively.

Windham County is locatedin the Northeastern corner of Connecticut and borders both Massachusetts (tothe north) and Rhode Island (to the east). Putnam is approximately45 miles from Hartford, Connecticut, 30 miles from Providence, RhodeIsland, and 65 miles from Boston, Massachusetts. Windham County has adiversified mix of industry groups and employment sectors, including services,wholesale/retail trade and manufacturing. These three sectors compriseapproximately 70% of the employment base in Windham County. Windham County’s June 2005unemployment rate of 5.9% was higher than the comparable Connecticutunemployment rate of 5.4% and higher than the national unemployment rate of5.2%. Consistent with the national and Connecticut unemployment trends, WindhamCounty’s June 2005 unemployment rate of 5.9% was lower than the June 2004unemployment rate of 6.0%. Our primary market area for deposits includes thecommunities in which we maintain our main office and our branch officelocations. Our primary lending area is broader than our primary deposit marketarea and includes all of Windham County, and parts of the adjacent ConnecticutCounties of Tolland and New London and the Rhode Island and Massachusettscommunities adjacent to Windham County.

**Lending Activities**

Historically, our principal lending activity has beenthe origination of first mortgage loans for the purchase or refinancing of one-to four-family residential real estate. We retain most of the loans that weoriginate. However, we generally sell long-term fixed rate loans in thesecondary market. When we sell loans, we generally retain the servicing rightsfor such loans. One- to four-family residential real estate mortgage loansrepresented $127.5 million, or 74.8%, of our loan portfolio at June 30,2005. We also offer commercial real estate loans (including multi-family realestate loans), commercial loans, construction mortgage loans (primarily securedby single-family properties) and consumer loans. At June 30, 2005,commercial real estate loans totaled $32.7 million, or 19.2% of our loanportfolio, commercial loans totaled $4.6 million, or 2.7% of our loanportfolio, construction mortgage loans totaled $4.8 million, or 

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2.8% of our loan portfolioand consumer loans, consisting primarily of auto loans and secured personalloans, totaled $1.0 million, or 0.6% of our loan portfolio.

***Loan Portfolio Composition.  ***Thefollowing table sets forth the composition of our loan portfolio at the datesindicated.
| ** **                      | ** ** | **June 30,**                         | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **Amount**                           | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                      | ** ** | **(Dollars in thousands)** | ** ** |
| Mortgage Loans:                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Residential(1)                  |       | $                                    | 127,520    |   | 74.75 | % | $ | 104,405 |   | 74.58 | % | $ | 100,624 |   | 82.17 | % |
| Commercial real estate          |       | 32,685                               |       | 19.16 |   | 25,740 |   | 18.39 |   | 16,753 |   | 13.68 |   |
| Residential construction        |       | 4,778                                |       | 2.80 |   | 5,467 |   | 3.91 |   | 2,057 |   | 1.68 |   |
| Commercial                      |       | 4,561                                |       | 2.67 |   | 3,324 |   | 2.37 |   | 1,696 |   | 1.38 |   |
| Consumer and  other             |       | 1,044                                |       | 0.62 |   | 1,052 |   | 0.75 |   | 1,325 |   | 1.08 |   |
| Total loans                     |       | $                                    | 170,588    |   | 100.00 | % | $ | 139,988 |   | 100.00 | % | $ | 122,455 |   | 100.00 | % |
| Unadvanced construction loans   |       | (4,220                               | )          |   |   | (4,623 | ) |   |   | (696 | ) |   |   |
| Net deferred loan  costs (fees) |       | (3                                   | )          |   |   | (125 | ) |   |   | (31 | ) |   |   |
| Allowance for  loan losses      |       | (1,359                               | )          |   |   | (1,285 | ) |   |   | (1,264 | ) |   |   |
| Loans, net                      |       | $                                    | 165,006    |   |   |   | $ | 133,955 |   |   |   | $ | 120,464 |   |   |   |

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(1)   Residentialmortgage loans include one- to four-family mortgage loans, home equity loans,and home equity lines of credit.

***Loan Portfolio Maturities and Yields.  ***Thefollowing table summarizes the scheduled repayments of our loan portfolio at June 30,2005. Demand loans, loans having no stated repayment schedule or maturity, andoverdraft loans are reported as being due in one year or less.
| ** ** | ** ** | **Residential(1)**                   | ** ** | **Commercial  Real Estate** | ** ** | **Residential  Construction** | ** ** | **Commercial**              | ** ** | **Consumer  and Other** | ** ** | **Total  Loans**            | ** ** |
|------------|------------|--------------------------------------|------------|----------------------------------|------------|-------------------------------|------------|-----------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** ** | ** ** | **Amount**                           | ** ** | **Weighted  Average  Rate**      | ** ** | **Amount**                    | ** ** | **Weighted  Average  Rate** | ** ** | **Amount**                   | ** ** | **Weighted  Average  Rate** | ** ** | **Amount** | ** ** | **Weighted  Average  Rate** | ** ** | **Amount** | ** ** | **Weighted  Average  Rate** | ** ** | **Amount** | ** ** | **Weighted  Average  Rate** | ** ** |
| ** ** | ** ** | **(Dollars in thousands)** | ** ** |
|            |            |                                      |            |                                  |            |                               |            |                             |            |                              |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |
| **Due During the Years Ending  June 30,** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|-------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| 2006                  |   | $      | 38,114  |   |   | 5.59   | %      |   | $      | 15,143 |   |   | 7.50   | %      |   |   | $      | 558    |   |   |   | 5.43   | %      |   |   | $      | 2,986  |   |   |   | 6.98   | %      |   |   | $      | 620    |   |   |   | 7.08   | %      |   | $      | 57,421  |   |   | 6.04 | %      |   |
|-----------------------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|------|--------|--------|
| 2007                  |   | 19,206 |    |   | 5.60   |   |   | 3,481  |   |   | 7.30   |   |   |   | — |   |   |   | — |   |   |   | 718    |   |   |   | 6.41   |   |   |   | 211    |   |   |   | 7.91   |   |   | 23,616 |   |   | 5.89   |   |   |
| 2008                  |   | 18,241 |    |   | 5.44   |   |   | 3,852  |   |   | 6.66   |   |   |   | — |   |   |   | — |   |   |   | 431    |   |   |   | 5.90   |   |   |   | 135    |   |   |   | 7.74   |   |   | 22,659 |   |   | 5.67   |   |   |
| 2009 to 2010          |   | 24,247 |    |   | 5.56   |   |   | 8,313  |   |   | 6.84   |   |   |   | — |   |   |   | — |   |   |   | 398    |   |   |   | 6.12   |   |   |   | 78     |   |   |   | 7.33   |   |   | 33,036 |   |   | 5.89   |   |   |
| 2011 to 2015          |   | 20,855 |    |   | 5.79   |   |   | 1,659  |   |   | 6.95   |   |   |   | — |   |   |   | — |   |   |   | 28     |   |   |   | 6.00   |   |   |   | — |   |   |   | — |   |   | 22,542 |   |   | 5.88   |   |   |
| 2016 and beyond  |   | 6,857  |    |   | 5.77   |   |   | 237    |   |   | 6.37   |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 7,094  |   |   | 5.78   |   |   |
| Total                 |   | $      | 127,520 |   |   | 5.61   |   |   | $      | 32,685 |   |   | 7.18   |   |   |   | $      | 558    |   |   |   | 5.43   |   |   |   | $      | 4,561  |   |   |   | 6.71   |   |   |   | $      | 1,044  |   |   |   | 7.33   |   |   | $      | 166,368 |   |   | 5.91 |   |   |

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(1)    Residential mortgage loans include one- to four-familymortgage loans, home equity loans, and home equity lines of credit.

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Thefollowing table sets forth the scheduled repayments of fixed and adjustablerate loans at June 30, 2005 that are contractually due after June 30,2006.
| ** **             | ** ** | **Due After June 30, 2006** | ** ** |
|------------------------|------------|-------------------------------------------------|------------|
| ** **             | ** ** | **Fixed**                                       | ** ** | **Adjustable** | ** ** | **Total** | ** ** |
| ** **             | ** ** | **(In thousands)**                         | ** ** |
| Mortgage Loans:        |       |                                            |       |   |   |   |   |   |   |
| Residential(1)         |       | $                                               | 67,089     |   |   | $ | 22,317 |   |   | $ | 89,406 |   |
| Commercial real estate |       | 16,784                                          |       |   | 758 |   |   | 17,542 |   |
| Commercial             |       | 1,392                                           |       |   | 183 |   |   | 1,575 |   |
| Consumer and  other    | * *   | 424                                             | * *   | * * | — |   | * * | 424 | * * |
| Total                  |       | $                                               | 85,689     |   |   | $ | 23,258 |   |   | $ | 108,947 |   |

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(1)          Residential mortgageloans include one- to four-family mortgage loans, home equity loans, and homeequity lines of credit.

The total amount of loans due after June 30, 2005that have fixed interest rates is $111.6 million, and the total amount ofloans due after that date that have floating or adjustable interest rates is$54.8 million.

***Residential Mortgage Loans.  ***Our primary lending activity consistsof the origination of one- to four-family residential mortgage loans that areprimarily secured by properties located in Windham County. At June 30,2005, $127.5 million, or 74.8% of our loan portfolio, consisted of one- tofour-family residential mortgage loans. Included within these one- tofour-family loans at June 30, 2005 were $6.1 million of home equity loansand $9.2 million of home equity lines of credit. Generally, one- to four-familyresidential mortgage loans are originated in amounts up to 80% of the lesser ofthe appraised value or purchase price of the property, with private mortgageinsurance required on loans with a loan-to-value ratio in excess of 80%. Wewill not make loans with a loan-to-value ratio in excess of 100%**for loans secured by single- family homes.Fixed rate mortgage loans generally are originated for terms of 10 to 30 years.Generally, all fixed rate residential mortgage loans are underwritten accordingto Fannie Mae policies and procedures. Fixed rate residential mortgage loanswith terms of more than 15 years are generally sold in the secondary market,while bi-weekly mortgages are generally retained in our portfolio. Bi-weeklymortgages are loans that require payments be made every two weeks. We willusually retain the servicing rights for all loans that we sell in the secondarymarket. We originated $40.3 million of fixed rate one- to four-familyresidential loans during the year ended June 30, 2005, of which $11.9million were sold in the secondary market.

We also offer adjustable-rate mortgage loans for one-to four-family properties, with an interest rate based on the one-year ConstantMaturity Treasury Bill Index, which adjusts annually from the outset of theloan or which adjusts annually after a three-, five-, seven-, or ten-yearinitial fixed rate period. We originated $16.3 million of adjustable rate one-to four-family residential loans during the year ended June 30, 2005. Ouradjustable rate mortgage loans generally provide for maximum rate adjustmentsof 100 basis points per adjustment, with a lifetime maximum adjustment up to6%, regardless of the initial rate. Our adjustable rate mortgage loans amortizeover terms of up to 30 years.

Adjustable rate mortgage loans decrease the riskassociated with changes in market interest rates by periodically repricing, butinvolve other risks because, as interest rates increase, the monthly orbi-weekly payments by the borrower increase, thus increasing the potential fordefault by the borrower. At the same time, the value of the underlyingcollateral may be adversely affected by higher interest rates. Upwardadjustment of the contractual interest rate is also limited by the maximumperiodic and lifetime interest rate adjustments permitted by our loan documentsand, therefore, the effectiveness of adjustable rate mortgage loans may belimited during periods of rapidly rising interest rates. At June 30, 2005,$37.4 million, or 29.3%, of our one- to four-family residential loans hadadjustable rates of interest.

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In an effort to provide financing for moderate incomehome buyers, we offer Veterans Administration (VA), Federal HousingAdministration (FHA), Connecticut Housing Finance Authority (CHFA) and RuralDevelopment loans. These programs offer residential mortgage loans to qualifiedindividuals. These loans are offered with fixed rates of interest and terms ofup to 30 years. Such loans are secured by one- to four-family residentialproperties. All of these loans are originated using agency underwritingguidelines. VA, FHA and CHFA loans are closed in the name of Putnam Savings Bank and are immediatelysold on a servicing-released basis. All such loans are originated in amounts ofup to 100% of the lower of the property’s appraised value or the sale price. Privatemortgage insurance is required on all such loans.

All residential mortgage loans that we originateinclude “due-on-sale” clauses, which give us the right to declare a loanimmediately due and payable in the event that, among other things, the borrowersells or otherwise disposes of the real property subject to the mortgage andthe loan is not repaid. Regulations limit the amount that a savings associationmay lend relative to the appraised value of the real estate securing the loan,as determined by an appraisal of the property at the time the loan isoriginated. All borrowers are required to obtain title insurance. We alsorequire homeowner’s insurance and fire and casualty insurance and, wherecircumstances warrant, flood insurance, on properties securing real estateloans. At June 30, 2005, our largest residential mortgage loan had aprincipal balance of $706,000 and was secured by a residence located in ourprimary market area. This loan was performing in accordance with its repaymentterms.

We also offer home equity loans and home equity oflines of credit, both of which are secured by owner-occupied one- tofour-family residences. At June 30, 2005, home equity loans and equitylines of credit totaled $13.8 million, or 10.8% of our residentialmortgage loans and 8.1% of total loans. Additionally, at June 30, 2005,the unadvanced amounts of home equity lines of credit totaled $8.8 million. Theunderwriting standards utilized for home equity loans and home equity lines ofcredit include a determination of the applicant’s credit history, an assessmentof the applicant’s ability to meet existing obligations and payments on theproposed loan and the value of the collateral securing the loan. Home equityloans are offered with fixed rates of interest and with terms up to 15 years. Theloan-to-value ratio for a home equity loan is generally limited to 80%,however, we offer special programs to borrowers, who satisfy certainunderwriting criteria, with loan-to-value ratios of up to 100%. Our home equitylines of credit have adjustable rates of interest which are indexed to theprime rate, as reported in *The Wall StreetJournal*. Interest rates on home equity lines of credit are generallylimited to a maximum rate of 14.25%.

***Commercial RealEstate Loans.  ***We originate commercial real estateloans, including multi-family real estate loans, that are generally secured byfive or more unit apartment buildings, construction loans and loans onproperties used for business purposes such as small office buildings,industrial facilities or retail facilities primarily located in our primarymarket area. We also offer real estate development loans to licensedcontractors and builders for the construction and development of commercialreal estate projects and one- to four-family residential properties. At June 30,2005, commercial mortgage loans totaled $32.7 million, which amounted to19.2% of total loans. Our commercial real estate underwriting policies providethat such real estate loans may be made in amounts of up to 80% of theappraised value of the property provided such loan complies with our currentloans-to-one borrower limit, which may be increased on an exception basis,which at June 30, 2005 was $2.5 million. Our commercial real estateloans may be made with terms of up to five years with 20 year amortizationschedules and are offered with interest rates that are fixed or adjustperiodically and are generally indexed to the prime rate as reported in *The Wall Street Journal*or Federal Home Loan Bank advance rates .In reaching a decision on whether to make a commercial real estate loan, weconsider the net operating income of the property, the borrower’s expertise andcredit history, and the profitability of the value of the underlying property. Inaddition, with respect to commercial real estate rental properties, we willalso consider the term of the lease and the quality of the tenants. Wegenerally require that the properties securing these real estate loans havedebt service coverage ratios (the ratio of earnings before debt service to debtservice) of at least 1.25x. 

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Environmental surveys aregenerally required for commercial real estate loans. Generally, multi-familyand commercial real estate loans made to corporations, partnerships and otherbusiness entities require personal guarantees by the principals.

A commercial borrower’s financial information ismonitored on an ongoing basis by requiring periodic financial statementupdates, payment history reviews and periodic face-to-face meetings with theborrower. We require commercial borrowers to provide annually updated financialstatements and federal tax returns. These requirements also apply to allguarantors on commercial loans. We also require borrowers with rentalinvestment property to provide an annual report of income and expenses for theproperty, including a tenant list and copies of leases, as applicable. Thelargest commercial real estate loan in our portfolio at June 30, 2005 wasa performing $1.8 million loan secured by property located in our primarymarket area.

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

***Construction Loans.  ***Weoriginate construction loans to individuals for the construction andacquisition of personal residences. At June 30, 2005, constructionmortgage loans totaled $4.8 million, or 2.8%, of total loans. At June 30,2005, the unadvanced portion of these construction loans totaled$4.2 million.

Our construction mortgage loans generally provide forthe payment of interest only during the construction phase, which is usuallynine months. At the end of the construction phase, the construction loanconverts to a permanent mortgage loan. Construction loans can be made with amaximum loan-to-value ratio of 95%, provided that the borrower obtains privatemortgage insurance on the loan if the loan balance exceeds 80% of the appraisedvalue or sales price, whichever is less, of the secured property. At June 30,2005, our largest outstanding residential construction mortgage loan commitmentwas for $544,000, $399,000 of which was outstanding. This loan was performingaccording to its terms at June 30, 2005. Construction loans to individualsare generally made on the same terms as our one- to four-family mortgage loans.

Before making a commitment to fund a residentialconstruction loan, we require an appraisal of the property by an independentlicensed appraiser. We also review and inspect each property beforedisbursement of funds during the term of the construction loan. Loan proceedsare disbursed after inspection based on the percentage of completion method.

Construction financing is generally considered to involvea higher degree of credit risk than long-term financing on improved,owner-occupied real estate. Risk of loss on a construction loan depends largelyupon the accuracy of the initial estimate of the value of the property atcompletion of construction compared to the estimated cost (including interest)of construction and other assumptions. If the estimate of construction cost isinaccurate, we may be required to advance funds beyond the amount originallycommitted in order to protect the value of the property. Additionally, if theestimate of value is inaccurate, we may be confronted with a project, whencompleted, with a value that is insufficient to assure full payment.

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***Commercial Loans.  ***AtJune 30, 2005, we had $4.6 million in commercial loans which amountedto 2.7% of total loans. We make commercial business loans primarily in ourmarket area to a variety of professionals, sole proprietorships and smallbusinesses. Commercial lending products include term loans and revolving linesof credit. The maximum amount of a commercial business loan is limited by ourloans-to-one-borrower limit, which may be increased on an exception basis,which at June 30, 2005 was $2.5 million. Such loans are generallyused for longer-term working capital purposes such as purchasing equipment orfurniture. Commercial loans are made with either adjustable or fixed rates ofinterest. Variable rates are based on the prime rate, as published in *The Wall Street Journal,*plus a margin. Fixed ratecommercial loans are set at a margin above the comparable Federal Home LoanBank advance rate.

When making commercial loans, we consider thefinancial statements of the borrower, our lending history with the borrower,the debt service capabilities of the borrower, the projected cash flows of thebusiness and the value of the collateral. Commercial loans are generallysecured by a variety of collateral, primarily accounts receivable, inventoryand equipment, and are supported by personal guarantees. Depending on thecollateral used to secure the loans, commercial loans are made in amounts of upto 75% of the value of the collateral securing the loan. We generally do notmake unsecured commercial loans.

Commercial loans generally have greater credit riskthan residential mortgage loans. Unlike residential mortgage loans, whichgenerally are made on the basis of the borrower’s ability to make repaymentfrom his or her employment or other income, and which are secured by realproperty whose value tends to be more easily ascertainable, commercial loansgenerally are made on the basis of the borrower’s ability to repay the loanfrom the cash flow of the borrower’s business. As a result, the availability offunds for the repayment of commercial loans may depend substantially on thesuccess of the business itself. Further, any collateral securing the loans maydepreciate over time, may be difficult to appraise and may fluctuate in value. Weseek to minimize these risks through our underwriting standards. At June 30,2005, our largest commercial loan was a $758,000 loan secured by businessassets located in our primary market area. This loan was performing accordingto its terms at June 30, 2005.

***Consumer and Other Loans.  ***Weoffer a limited range of consumer loans, principally to Putnam Savings Bankcustomers residing in our primary market area with acceptable credit ratings.Our consumer loans generally consist of loans on new and used automobiles,loans secured by deposit accounts and unsecured personal loans. Consumer loanstotaled $1.0 million, or 0.6% of our total loan portfolio, at June 30,2005.

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Thefollowing table shows loan origination, sale and principal repayment activityduring the periods indicated.
| ** **                          | ** ** | **Years Ended June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|
| ** **                          | ** ** | **2005**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                          | ** ** | **(In thousands)**                 | ** ** |
| Total loans at  beginning of period |       | $                                       | 135,240    |   | $ | 121,728 |   | $ | 113,443 |   |
| Loans originated:                   |       |                                    |       |   |   |   |   |
| Residential(1)                      |       | 56,642                                  |       | 56,814 |   | 68,693 |   |
| Commercial real estate              |       | 17,433                                  |       | 14,362 |   | 8,043 |   |
| Residential construction            |       | 7,720                                   |       | 9,323 |   | 4,744 |   |
| Commercial                          |       | 6,264                                   |       | 6,420 |   | 4,758 |   |
| Consumer and other                  |       | 1,133                                   |       | 864 |   | 1,185 |   |
| Total loans originated              |       | 89,192                                  |       | 87,783 |   | 87,423 |   |
| Loans purchased                     |       | 9,240                                   |       | — |   | — |   |
| Deduct:                             |       |                                    |       |   |   |   |   |
| Principal repayments                |       | 55,443                                  |       | 62,564 |   | 58,483 |   |
| Loan sales                          |       | 11,859                                  |       | 11,646 |   | 20,615 |   |
| Other repayments                    |       | 5                                       |       | 61 |   | 40 |   |
| Net loan activity                   |       | 31,125                                  |       | 13,512 |   | 8,285 |   |
| Total loans at  end of period       |       | $                                       | 166,365    |   | $ | 135,240 |   | $ | 121,728 |   |

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(1)   Residentialmortgage loans include one- to four-family mortgage loans, home equity loans,and home equity lines of credit.

***Origination, Purchase, Sale andServicing of Loans.  ***Lending activities areconducted primarily by our loan personnel operating at our four branch officesand one loan origination center. All loans originated by us are underwrittenpursuant to our policies and procedures. We originate both adjustable rate andfixed rate loans. Our ability to originate fixed or adjustable rate loans isdependent upon the relative customer demand for such loans, which is affectedby current and expected future levels of market interest rates.

Generally, we retain in our portfolio all bi-weeklyloans and other loans that we originate, with the exception of longer-term,fixed rate one- to four-family mortgage loans. The one- to four-family loansthat we currently originate for sale include mortgage loans which conform tothe underwriting standards specified by Fannie Mae. We also sell all mortgageloans insured by CHFA, FHA and VA and Rural Development loans. Generally, allone- to four-family loans that we sell are sold pursuant to master commitmentsnegotiated with Fannie Mae. We sell our loans without recourse. We generallyretain the servicing rights on the mortgage loans sold to Fannie Mae, butgenerally sell all CHFA, VA, FHA and Rural Development loans on aservicing-released basis.

At June 30, 2005, Putnam Savings Bank was servicing loanssold in the amount of $26.6 million. Loan servicing includes collectingand remitting loan payments, accounting for principal and interest, contactingdelinquent mortgagors, supervising foreclosures and property dispositions inthe event of unremedied defaults, making certain insurance and tax payments onbehalf of the borrowers and generally administering the loans.

During the fiscal year ended June 30, 2005, weoriginated $56.6 million of fixed rate and adjustable rate one-to four-family loans,of which $44.7 million were retained by us.  We recognize at the time of sale, the cashgain or loss on the sale of the loans based on the difference between the netcash proceeds received and the carrying value of the loans sold.

During the fiscal year ended June 30, 2005, wepurchased $9.2 million of one- to four-family residential mortgage loans. Allof the purchased loans were secured by collateral located in Rhode Island, 

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Massachusetts andConnecticut, some of which are located outside of our market area. These loanswere underwritten in accordance with the same standards applicable to ouroriginated loans. We purchased these loans as a means of deploying a portion ofthe proceeds of our recent public offering.

***Loan Approval Procedures andAuthority.  ***The Board of Directors establishes thelending policies and loan approval limits of Putnam Savings Bank. Loan officersgenerally have the authority to originate mortgage loans, consumer loans andcommercial loans up to amounts established for each lending officer. Loans inamounts above the individual authorized limits require the approval of PutnamSavings Bank’s Credit Committee. The Credit Committee is authorized to approvethe following types of loans in amounts up to $350,000: all one- to four familymortgage loans, commercial real estate loans, commercial loans and securedconsumer loans. All loans of $350,000 or greater must receive the approval ofPutnam Savings Bank’s Board of Directors.

The Board annually approves independent appraisersused by Putnam Savings Bank. For larger loans, the Bank may require anenvironmental site assessment to be performed by an independent professionalfor all non-residential mortgage loans. It is Putnam Savings Bank’s policy torequire hazard insurance on all mortgage loans.

***Loan Origination Fees and OtherIncome.****  *Inaddition to interest earned on loans, Putnam Savings Bank receives loanorigination fees. Such fees and costs vary with the volume and type of loansand commitments made and purchased, principal repayments, and competitiveconditions in the mortgage markets, which in turn respond to the demand andavailability of money.

***Loans to One Borrower.****  *The maximum amount that we may lend to one borrowerand the borrower’s related entities is limited, by regulation, to generally 15%of our stated capital and reserves. At June 30, 2005, our regulatory limiton loans to one borrower was $6.2 million. At that date, the largest aggregateamount loaned by Putnam Savings Bank to one borrower was $1.8 million. Theloans comprising this lending relationship were performing in accordance withtheir terms as of June 30, 2005.

**Non-performing and Problem Assets**

A computer-generated delinquency notice is mailedmonthly to all delinquent borrowers, advising them of the amount of theirdelinquency. When a loan becomes 60 days delinquent, Putnam Savings Bank sends a letteradvising the borrower of the delinquency. The borrower is given 30 days to paythe delinquent payments or to contact Putnam Savings Bank to make arrangementsto bring the loan current over a longer period of time. If the borrower failsto bring the loan current in 30 days or to make arrangements to cure thedelinquency over a longer period of time, the matter is referred to legalcounsel and foreclosure proceedings are started. We may consider forbearance incases of a temporary loss of income if a plan is presented by the borrower tocure the delinquency in a reasonable period of time after his or her incomeresumes.

All non-commercial mortgage loans are reviewed on aregular basis and such loans are placed on non-accrual status when they becomemore than 90 days delinquent. Commercial loans are evaluated for non-accrualstatus on a case-by-case basis. When loans are placed on non-accrual status,unpaid accrued interest is fully reserved, and further income is recognizedonly to the extent received.

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***Non-Performing Assets.  ***The tablebelow sets forth the amounts and categories of our non-performing assets at thedates indicated. At each date presented, we had no troubled debt restructurings(loans for which a portion of interest or principal has been forgiven and loansmodified at interest rates materially less than current market rates). A loanclassified in the table below as “non-accrual” does not necessarily mean thatsuch loan is or has been delinquent. Once a loan is more than 90 daysdelinquent or the borrower or collateral securing the loan experiences an eventthat makes collectibility suspect, the loan is placed on “non-accrual” status. Ourpolicies require six-months of continuous payments in order for the loan to beremoved from non-accrual status.
| ** **                                                                     | ** ** | **At June 30,**            | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                     | ** ** | **(Dollars in thousands)** | ** ** |
| Non-accrual loans:                                                             |       |                                 |       |   |   |   |   |
| Residential mortgage loans(1)                                                  |       | $                                    | 86         |   | $ | 659 |   | $ | 742 |   |
| Commercial real estate                                                         |       | —                               |       | — |   | 59 |   |
| Residential construction                                                       |       | —                               |       | — |   | — |   |
| Commercial                                                                     |       | —                               |       | — |   | 65 |   |
| Consumer and  other                                                            |       | —                               |       | — |   | 1 |   |
| Total                                                                          |       | 86                                   | (2)        | 659 |   | 867 |   |
| Accruing loans past due  90 days and under:                                    |       |                                 |       |   |   |   |   |
| Residential mortgage loans(1)                                                  |       | —                               |       | — |   | 7 |   |
| Commercial real estate                                                         |       | —                               |       | — |   | 285 |   |
| Residential construction                                                       |       | —                               |       | — |   | — |   |
| Commercial                                                                     |       | —                               |       | — |   | — |   |
| Consumer and other                                                             |       | —                               |       | — |   | — |   |
| Total                                                                          |       | —                               |       | — |   | 292 |   |
| Accruing loans past due  over 90 days:                                         |       |                                 |       |   |   |   |   |
| Residential mortgage loans(1)                                                  |       | —                               |       | — |   | — |   |
| Commercial real estate                                                         |       | —                               |       | — |   | — |   |
| Residential construction                                                       |       | —                               |       | — |   | — |   |
| Commercial                                                                     |       | —                               |       | — |   | — |   |
| Consumer and  other                                                            |       | —                               |       | — |   | — |   |
| Total                                                                          |       | —                               |       | — |   | — |   |
| Total non-performing loans                                                     |       | 86                                   |       | 659 |   | 1,159 |   |
| Real estate owned                                                              |       | —                               |       | — |   | — |   |
| Other non-performing  assets                                                   |       | —                               |       | — |   | — |   |
| Total non-performing assets                                                    |       | 86                                   |       | 659 |   | 1,159 |   |
| Troubled debt  restructurings                                                  |       | —                               |       | — |   | — |   |
| Troubled debt  restructures and total non-performing assets                    |       | $                                    | 86         |   | $ | 659 |   | $ | 1,159 |   |
| Total non-performing loans to total loans                                      |       | 0.05                                 | %          | 0.47 | % | 0.95 | % |
| Total non-performing  loans to total assets                                    |       | 0.13                                 |       | 0.24 |   | 0.48 |   |
| Total non-performing  assets and troubled debt restructurings to total  assets |       | 0.13                                 |       | 0.24 |   | 0.48 |   |

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(1)          Residential mortgageloans include one- to four-family mortgage loans, home equity loans, and homeequity lines of credit.

(2)          The gross interestincome that would have been reported if the loans had performed in accordancewith their original terms was $6,339. Actual income recognized in income was$6,112.

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Thefollowing table sets forth certain information with respect to our loanportfolio delinquencies at the dates indicated.
| ** **               | ** ** | **Loans Delinquent For**   | ** ** | ** **                          | ** ** |
|--------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **               | ** ** | **60-89 Days**                  | ** ** | **90 Days and Over** | ** ** | **Total** | ** ** |
| ** **               | ** ** | **Number**                           | ** ** | **Amount**                          | ** ** | **Number** | ** ** | **Amount** | ** ** | **Number** | ** ** | **Amount** | ** ** |
| ** **               | ** ** | **(Dollars in thousands)** | ** ** |
| *At June 30, 2005*  |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential(1)           |       |                                 | 1          |                                |       |   | $ | 13 |   |   |   | — |   |   |   | $ | — |   |   |   | 1 |   |   |   | $ | 13 |   |   |
| Commercial real estate   |       |                                 | —     |                                |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Residential construction |       |                                 | —     |                                |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Commercial               |       |                                 | 1          |                                |       |   | 195 |   |   |   | — |   |   |   | — |   |   |   | 1 |   |   |   | 195 |   |   |
| Consumer and other       | * *   | * *                             | *—*   |                                | * *   | * * | — |   | * * | * * | *—* |   | * * | * * | *—* |   | * * | * * | *—* |   | * * | * * | *—* |   |   |
| Total                    |       |                                 | 2          |                                |       |   | $ | 208 |   |   |   | — |   |   |   | $ | — |   |   |   | 2 |   |   |   | $ | 208 |   |   |
| *At  June 30, 2004* |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential(1)           |       |                                 | 5          |                                |       |   | $ | 422 |   |   |   | — |   |   |   | $ | — |   |   |   | 5 |   |   |   | $ | 422 |   |   |
| Commercial real estate   |       |                                 | —     |                                |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Residential construction |       |                                 | —     |                                |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Commercial               |       |                                 | 1          |                                |       |   | 20 |   |   |   | — |   |   |   | — |   |   |   | 1 |   |   |   | 20 |   |   |
| Consumer and other       | * *   | * *                             | *—*   |                                | * *   | * * | *—* |   | * * | * * | *—* |   | * * | * * | *—* |   | * * | * * | *—* |   | * * | * * | *—* |   |   |
| Total                    |       |                                 | 6          |                                |       |   | $ | 442 |   |   |   | — |   |   |   | $ | — |   |   |   | 6 |   |   |   | $ | 442 |   |   |
| *At  June 30, 2003* |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential(1)           |       |                                 | —     |                                |       |   | $ | — |   |   |   | 3 |   |   |   | $ | 327 |   |   |   | 3 |   |   |   | $ | 327 |   |   |
| Commercial real estate   |       |                                 | —     |                                |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Residential construction |       |                                 | —     |                                |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Commercial               |       |                                 | —     |                                |       |   | — |   |   |   | 1 |   |   |   | 33 |   |   |   | 1 |   |   |   | 33 |   |   |
| Consumer and other       |       |                                 | —     |                                |       |   | — |   |   |   | 1 |   |   |   | 1 |   |   |   | 1 |   |   |   | 1 |   |   |
| Total                    |       |                                 | —     |                                |       |   | $ | — |   |   |   | 5 |   |   |   | $ | 361 |   |   |   | 5 |   |   |   | $ | 361 |   |   |

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(1)          Residential mortgageloans include one- to four-family mortgage loans, home equity loans, and homeequity lines of credit.

***Classified Assets.  ***Office of Thrift Supervisionregulations provide that loans and other assets considered to be of lesserquality be classified as “substandard”, “doubtful” or “loss” assets. An assetis considered “substandard” if it is inadequately protected by the current networth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard”assets include those characterized by the “distinct possibility” that theinstitution will sustain “some loss” if the deficiencies are not corrected. Assetsclassified as “doubtful” have all of the weaknesses inherent in thoseclassified “substandard,” with the added characteristic that the weaknesses presentmake “collection or liquidation in full,” on the basis of currently existingfacts, conditions, and values, “highly questionable and improbable.” Assetsclassified as “loss” are those considered “uncollectible” and of such littlevalue that their continuance as assets without the establishment of a specificloss reserve is not warranted.

An insured institution is required to establishgeneral allowances for loan losses in an amount deemed prudent by managementfor loans classified substandard or doubtful, as well as for other problemloans. General allowances represent loss allowances which have been establishedto recognize the inherent losses associated with lending activities, but which,unlike specific allowances, have not been allocated to particular problemassets. When an insured institution classifies problem assets as “loss”, it isrequired either to establish a specific allowance for losses equal to 100% ofthe amount of the asset so classified or to charge off such amount. Aninstitution’s determination as to the classification of its assets and theamount of its valuation allowances is subject to review by the Office of ThriftSupervision which can order the establishment of additional general or specificloss allowances.

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On the basis of management’s review of its assets, at June 30,2005 we had classified $99,871 of our assets as substandard. All these loanswere considered non-performing and included in the table on Non-PerformingAssets. Specific reserves allocated to these loans as of June 30, 2005totaled $2,358. At June 30, 2005, none of our assets were classified asdoubtful or loss.

The loan portfolio isreviewed on a regular basis to determine whether any loans requireclassification in accordance with applicable regulations. Not all classifiedassets constitute non-performing assets.

**Allowance for Loan Losses**

Our allowance for loan losses is maintained at a levelnecessary to absorb loan losses that are both probable and reasonably estimable.Management, in determining the allowance for loan losses, considers the lossesinherent in our loan portfolio and changes in the nature and volume of loanactivities, along with the general economic and real estate market conditions. Weutilize a two-tier approach: (1) identification and establishment ofspecific loss allowances on such loans; and (2) establishment of generalvaluation allowances on the remainder of our loan portfolio. Once a loanbecomes delinquent or is otherwise identified as a problem, we may establish aspecific loan loss allowance based on a review of among other things,delinquency status, size of loans, type and market value of collateral andfinancial condition of the borrowers. General loan loss allowances are basedupon a combination of factors including, but not limited to, actual loan lossexperience, composition of the loan portfolio, current economic conditions,management’s judgment and losses which are probable and reasonably estimable. Theallowance is increased through provisions charged against current earnings and recoveriesof previously charged-off loans. Loans that are determined to be uncollectibleare charged against the allowance. While management uses available informationto recognize probable and reasonably estimable loan losses, future lossprovisions may be necessary based on changing economic conditions. Paymentsreceived on impaired loans are applied first to accrued interest receivable andthen to principal. The allowance for loan losses as of June 30, 2005 wasmaintained at a level that represents management’s best estimate of lossesinherent in the loan portfolio, and such losses were both probable andreasonably estimable.

In addition, the Office of Thrift Supervision, as anintegral part of their examination process, periodically review our allowancefor loan losses. This agency may require that we recognize additions to theallowance based on its judgment of information available to it at the time ofits examination.

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Thefollowing table sets forth activity in our allowance for loan losses for theperiods indicated.
| ** **                                                                     | ** ** | **June 30,**                    | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                     | ** ** | **(Dollars in thousands)** | ** ** |
| Balance at beginning of period                                                 |       | $                                    | 1,285      |   | $ | 1,264 |   | $ | 1,235 |   |
| Provision for  loan losses                                                     |       | 135                                  |       | 60 |   | 60 |   |
| Charge offs:                                                                   |       |                                 |       |   |   |   |   |
| Residential(1)                                                                 |       | —                               |       | (2 | ) | — |   |
| Commercial real estate                                                         |       | —                               |       | — |   | — |   |
| Residential construction                                                       |       | —                               |       | — |   | — |   |
| Commercial                                                                     |       | —                               |       | (47 | ) | (38 | ) |
| Consumer and other                                                             |       | (5                                   | )          | (11 | ) | (2 | ) |
| Total charge-offs                                                              |       | (5                                   | )          | (60 | ) | (40 | ) |
| Recoveries:                                                                    |       |                                 |       |   |   |   |   |
| Residential(1)                                                                 |       | —                               |       | 3 |   | 4 |   |
| Commercial real estate                                                         |       | 26                                   |       | — |   | — |   |
| Residential construction                                                       |       | —                               |       | — |   | — |   |
| Commercial                                                                     |       | 4                                    |       | 18 |   | — |   |
| Consumer and other                                                             |       | 12                                   |       | — |   | 5 |   |
| Total recoveries                                                               |       | 42                                   |       | 21 |   | 9 |   |
| Net (charge-offs)  recoveries                                                  |       | 37                                   |       | (39 | ) | (31 | ) |
| Transfer to  allowance for off-balance sheet items                             |       | (98                                  | )          | — |   | — |   |
| Allowance at end of period                                                     |       | $                                    | 1,359      |   | $ | 1,285 |   | $ | 1,264 |   |
| Ratios:                                                                        |       |                                 |       |   |   |   |   |
| Allowance for  loan losses to non-performing loans at end of period            |       | 1,580.23                             | %          | 194.99 |   | 109.06 | % |
| Allowance for  loan losses to total loans outstanding at the end of the period |       | 0.82                                 | %          | 0.96 | % | 1.05 | % |
| Net charge-offs to  average loans outstanding                                  |       | —                               | %          | 0.03 | % | 0.03 | % |

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(1)          Residential mortgageloans include one- to four-family mortgage loans, home equity loans, and homeequity lines of credit.

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***Allocation of Allowance for Loan Losses.  ***Thefollowing table sets forth the allowance for loan losses allocated by loancategory, the total loan balances by category (including loans held for sale),and the percent of loans in each category to total loans at the dates indicated.The allowance for loan losses allocated to each category is not necessarilyindicative of future losses in any particular category and does not restrictthe use of the allowance to absorb losses in other categories.
| ** **                       | ** ** | **At June 30,**            | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| ** **                       | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                       | ** ** | **Amount**                           | ** ** | **% of  Allowance to**

**Total  Allowance** | ** ** | **% of Loans  in  Category  to Total  Loans** | ** ** | **Amount** | ** ** | **% of  Allowance to  Total  Allowance** | ** ** | **% of Loans  in  Category  to Total  Loans** | ** ** | **Amount** | ** ** | **% of  Allowance to  Total  Allowance** | ** ** | **% of Loans  in  Category  to Total  Loans** | ** ** |
| ** **                       | ** ** | **(Dollars in thousands)** | ** ** |
| Residential mortgages(1)         |       |                                 | $          | 491 |   |   |   | 36.10 | % |   |   | 77.55 | % |   |   | $ | 492 |   |   |   | 38.29 | % |   |   | 78.49 | % |   |   | $ | 459 |   |   |   | 37.17 | % |   |   | 78.49 | % |   |
| Commercial loans(2)              |       |                                 | 723        |   |   |   | 53.16 |   |   |   | 21.83 |   |   |   | 618 |   |   |   | 48.09 |   |   |   | 20.76 |   |   |   | 340 |   |   |   | 27.53 |   |   |   | 20.76 |   |   |
| Consumer loans                   |       |                                 | 16         |   |   |   | 1.18 |   |   |   | 0.61 |   |   |   | 15 |   |   |   | 1.17 |   |   |   | 0.75 |   |   |   | 17 |   |   |   | 1.38 |   |   |   | 0.75 |   |   |
| Unallocated                      |       |                                 | 130        |   |   |   | 9.56 |   |   |   |   |   |   |   | 160 |   |   |   | 12.45 |   |   |   |   |   |   |   | 419 |   |   |   | 33.93 |   |   |   |   |   |   |
| Total allowance  for loan losses |       |                                 | $          | 1,360 |   |   |   | 100.00 | % |   |   | 100.00 | % |   |   | $ | 1,285 |   |   |   | 100.00 | % |   |   | 100.00 | % |   |   | $ | 1,235 |   |   |   | 100.00 | % |   |   | 100.00 | % |   |

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(1)    Residential mortgage loans include one- tofour-family mortgage loans, home equity loans, and home equity lines of credit.

(2)    Commercialloans include commercial real estate loans and C & I loans.

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Each quarter, management evaluates the total balanceof the allowance for loan losses based on several factors, some of which arenot loan specific but are reflective of the inherent losses in the loanportfolio. This process includes, but is not limited to, a periodic review ofloan collectibility in light of historical experience, the nature and volume ofloan activity, conditions that may affect the ability of the borrower to repay,underlying value of collateral, if applicable, and economic conditions in ourimmediate market area. First, we group loans by delinquency status. All loans90 days or more delinquent are evaluated individually, based primarily on thevalue of the collateral securing the loan. Specific loss allowances areestablished as required by this analysis. All loans for which a specific lossallowance has not been assigned are segregated by type, delinquency status orloan grade and a loss allowance is established by using loss experience dataand management’s judgment concerning other matters it considers significant. Theallowance is allocated to each category of loan based on the results of theabove analysis. Small differences between the allocated balances and recordedallowances are reflected as unallocated to absorb losses resulting from theinherent imprecision involved in the loss analysis process.

This analysis process isinherently subjective, as it requires us to make estimates that are susceptibleto revisions as more information becomes available. Although we believe that wehave established the allowance at levels to absorb probable and estimablelosses, future additions may be necessary if economic or other conditions inthe future differ from the current environment.

**Investment Activities**

Putnam Savings Bank’s Investment Committee isresponsible for implementing Putnam Savings Bank’s Investment Policy. TheInvestment Policy is reviewed annually by the Investment Committee and anychanges to the policy are recommended to and subject to the approval of ourBoard of Directors. The Investment Committee is comprised of our Chairman,President, Treasurer and one director who is selected annually for a one-yearterm. Authority to make investments under the approved Investment Policyguidelines is delegated by the Investment Committee to appropriate officers. Whilegeneral investment strategies are developed and authorized by the InvestmentCommittee, the execution of specific actions rests with the President orTreasurer who may act jointly or severally as Putnam Savings Bank’s InvestmentOfficer. The Investment Officer is responsible for ensuring that the guidelinesand requirements included in the Investment Policy are followed and that allsecurities are considered prudent for investment. The Investment Officer isauthorized to execute investment transactions (purchases and sales) up to $2million per transaction without the prior approval of the Investment Committeeand within the scope of the established investment policy. Each transaction inexcess of $2 million must receive prior approval of the Investment Committee.

In addition, Putnam Savings Bank may utilize theservices of an independent investment advisor to assist in managing theinvestment portfolio. The investment advisor is responsible for maintainingcurrent information regarding securities dealers with whom they are conductingbusiness on our behalf. A list of appropriate dealers is provided annually tothe Board of Directors for approval and authorization prior to execution oftrades. The investment advisor, through its assigned portfolio manager, mustcontact our President or Treasurer to review all investment recommendations andtransactions and receive approval from the President or Treasurer prior toexecution of any transaction that might be transacted on our behalf. Uponreceipt of approval, the investment advisor, or its assigned portfolio manager,is authorized to conduct all investment business on our behalf.

Our Investment Policy requires that all securitiestransactions be conducted in a safe and sound manner. Investment decisions mustbe based upon a thorough analysis of each security instrument to determine itsquality, inherent risks, fit within our overall asset/liability managementobjectives, effect on our risk-based capital measurement and prospects for yieldand/or appreciation.

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Consistent with our overall business andasset/liability management strategy, which focuses on sustaining adequatelevels of core earnings, all securities purchased are held available-for-sale.

***U.S. Government andAgency Obligations.  ***At June 30, 2005, Putnam Savings Bank’sU.S. Government and Agency securities portfolio totaled$25.6 million, or 16.8% of total investments, all of which were classifiedas available-for-sale. There were no structured notes in the portfolio. Whilethese securities generally provide lower yields than other investments in oursecurities investment portfolio, we maintain these investments, to the extentappropriate, for liquidity purposes, as collateral for borrowings andprepayment protection.

***State Agency andMunicipal Obligations.  ***These securities consist ofobligations issued by states, counties and municipalities or their agencies andinclude general obligation bonds, industrial development revenue bonds andother revenue bonds. Our investment policy requires that such state agency ormunicipal obligations be rated “A-” or better by a nationally recognized ratingagency. If the debt obligation rating goes below “A-” then the investment isplaced on an investment “watch report” and is monitored by our InvestmentOfficer. The investment is then reviewed quarterly by our Board of Directorswhere a determination is made to hold or dispose of the investment. At June 30,2005, Putnam Savings Bank’s stateagency and municipal obligations portfolio totaled $9.1 million, or 6.0%of total investments, all of which was classified as available-for-sale.

***Corporate Bonds.  ***AtJune 30, 2005, Putnam Savings Bank’scorporate bond portfolio totaled $24.2 million, or 15.9% of totalinvestments, all of which was classified as available-for-sale. Althoughcorporate bonds may offer higher yields than U.S. Treasury or agency securitiesof comparable duration, corporate bonds also have a higher risk of default dueto possible adverse changes in the credit-worthiness of the issuer. In order tomitigate this risk, our investment policy requires that corporate debtobligations be rated “A-” by a nationally recognized rating agency. If the bondrating goes below “A-” then the investment is placed on an investment “watchreport” and is monitored by our Investment Officer. The investment is thenreviewed quarterly by our Board of Directors where a determination is made tohold or dispose of the investment.

***Mortgage-BackedSecurities.  ***PutnamSavings Bank purchases mortgage-backed securities insured or guaranteedby Fannie Mae, Freddie Mac and Ginnie Mae. We invest in mortgage-backedsecurities to achieve positive interest rate spreads with minimaladministrative expense, and lower our credit risk as a result of the guaranteesprovided by Freddie Mac, Fannie Mae and Ginnie Mae. Putnam Savings Bank also invests in collateralized mortgageobligations (“CMOs”), also insured or issued by Freddie Mac, Fannie Mae andGinnie Mae, or private issuers such as WashingtonMutual and Countrywide Home Loans.

Mortgage-backed securities are created by the poolingof mortgages and the issuance of a security with an interest rate that is lessthan the interest rate on the underlying mortgage. Mortgage-backed securitiestypically represent a participation interest in a pool of single-family ormulti-family mortgages, although we focus our investments on mortgage-backed securities backed byone- to four-family mortgages. The issuers of such securities (generallyU.S. government agencies and government sponsored enterprises, includingFannie Mae, Freddie Mac and Ginnie Mae) pool and resell the participationinterests in the form of securities to investors such as Putnam Savings Bank, and guarantee thepayment of principal and interest to investors. Mortgage-backed securitiesgenerally yield less than the loans that underlie such securities because ofthe cost of payment guarantees and credit enhancements. However,mortgage-backed securities are usually more liquid than individual mortgageloans and may be used to collateralize our specific liabilities andobligations.

CMOs are a type of debt security issued by a specialpurpose entity that aggregates pools of mortgage-backed securities and createsdifferent classes of CMO securities with varying maturities and amortizationschedules as well as a residual interest, with each class, or “tranche”,possessing different risk 

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characteristics. Aparticular tranche of CMOs may, therefore, carry prepayment risk that differsfrom that of both the underlying collateral and other tranches. CMO tranchesare purchased by Putnam Savings Bank in an attempt to moderate reinvestmentrisk associated with mortgage-backed securities resulting from unexpectedprepayment activities.

At June 30, 2005, mortgage-backed securitiestotaled $65.9 million, or 43.2% of assets and 20.5% of interest earningassets, all of which were classified as available-for-sale. At June 30,2005, 54.3% of the mortgage-backed securities were backed by adjustable rateloans and 45.7% were backed by fixed rate mortgage loans. The mortgage-backed securitiesportfolio had a weighted average yield of 4.24% at June 30, 2005. Theestimated fair value of our mortgage-backed securities at June 30, 2005was $65.9 million, which is equal to the amortized cost of$65.9 million. Investments in mortgage-backed securities involve a riskthat actual prepayments may differ from estimated prepayments over the life ofthe security, which may require adjustments to the amortization of any premiumor accretion of any discount relating to such instruments thereby changing thenet yield on such securities. There is also reinvestment risk associated withthe cash flows from such securities or if such securities are redeemed by theissuer. In addition, the market value of such securities may be adverselyaffected by changes in interest rates.

***Marketable EquitySecurities.  ***We currently maintain a diversifiedequity securities portfolio. At June 30, 2005, our equity securitiesportfolio totaled $27.8 million, or 18.2% of total assets, all of whichwere classified as available for sale. At June 30, 2005, the portfolioprimarily consisted of $386,000 of diversified common stock, $1.0 millionof preferred stock issued by corporate issuers and $22.6 million of auctionrate preferred stock. At June 30, 2005, our investments in common stockconsisted of investments in five corporate issuers, and the maximum investmentin any single issuer was $198,000. The industries represented by our commonstock investments include technology, services, consumer and financial. Ourinvestments in preferred stock consisted of investments in six corporateissuers, and the maximum investment in any single issuer was $2.0 million. Theindustries represented by our preferred stock investments included governmentagency, technology, financial and investment banking. We generally require thatthe maximum equity investment in any one corporation shall not exceed 20% oftier one capital. Our investment in Federal Home Loan Bank stock was $3.8million.

Investments in equity securities involve risk as theyare not insured or guaranteed investments and are affected by stock marketfluctuations. Such investments are carried at their market value and candirectly affect our net capital position.

As a result of Putnam Savings Bank’s conversion to afederally chartered savings bank, Putnam Savings Bank is no longer permitted toinvest in equity securities, pursuant to Office of Thrift Supervisionregulations. However, the Office of Thrift Supervision has agreed to permit Putnam Savings Bank to divest itsequity securities portfolio over a period of years.

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***Investment Securities Portfolio.  ***Thefollowing table sets forth the carrying values of our investment securitiesportfolio at the dates indicated.
|                                         | ** ** | **At June 30,** | ** ** |
|-----------------------------------------|------------|---------------------------|------------|
| ** **                              | ** ** | **2005**                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                              | ** ** | **Amortized  Cost**       | ** ** | **Fair Value** | ** ** | **Amortized  Cost** | ** ** | **Fair Value** | ** ** | **Amortized  Cost** | ** ** | **Fair Value** | ** ** |
| ** **                              | ** ** | **(In thousands)**   | ** ** |
| **Debt  Securities:**                   |       |                      |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government  and agency securities  |       | $                         | 25,564     |   | $ | 25,300 |   | $ | 15,072 |   | $ | 14,933 |   | $ | 6,173 |   | $ | 6,268 |   |
| State agency and  municipal obligations |       | 9121                      |       | $ | 9,706 |   | 9118 |   | $ | 9,303 |   | 9,115 |   | 9,636 |   |
| Corporate bonds  and other securities   |       | 24,213                    |       | 24,497 |   | 31,239 |   | 31,786 |   | 30,818 |   | 31,943 |   |
| Mortgage-backed  securities             |       | 65,866                    |       | 65,889 |   | 61,144 |   | 60,866 |   | 46,577 |   | 47,229 |   |
| Total debt securities                   |       | 124,764                   |       | 125,392 |   | 116,573 |   | 116,888 |   | 92,683 |   | 95,076 |   |
| **Marketable  equity securities:**      |       |                      |       |   |   |   |   |   |   |   |   |   |   |
| Common stock                            |       | 4,142                     |       | 4,344 |   | 3,160 |   | 3,245 |   | 2,880 |   | 2,930 |   |
| Preferred stock                         |       | 23,608                    |       | 23,669 |   | 6,716 |   | 6,733 |   | 4,590 |   | 4,675 |   |
| Mutual funds                            |       | —                    |       | — |   | — |   | — |   | 2 |   | 2 |   |
| Total equity securities                 |       | 27,750                    |       | 28,013 |   | 9,876 |   | 9,978 |   | 7,472 |   | 7,607 |   |
| Total available  for sale securities    |       | 152,514                   |       | 153,405 |   | 126,449 |   | 126,866 |   | 100,155 |   | 102,683 |   |
|                                         |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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***Portfolio Maturities and Yields.  ***Thecomposition and maturities of the investment securities portfolio at June 30,2005 are summarized in the following table. Maturities are based on the finalcontractual payment dates, and do not reflect the impact of prepayments orearly redemptions that may occur. State agency and municipal obligations aswell as common and preferred stock yields have not been adjusted to atax-equivalent basis. Certain mortgage-backed securities have interest ratesthat are adjustable and will reprice annually within the various maturityranges. These repricing schedules are not reflected in the table below. At June 30,2005, mortgage-backed securities with adjustable rates totaled $35.8 million.
| ** **                              | ** ** | **One Year or Less**  | ** **                                                    | **More than  One Year to  Five Years** | ** ** | **More than   Five Years to  Ten Years** | ** ** | **More than  Ten Years** | ** ** | **Total**           | ** **                                                         |
|-----------------------------------------|------------|--------------------------------------|---------------------------------------------------------------|------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------|------------|---------------------|--------------------------------------------------------------------|
| ** **                              | ** ** | **Carrying  Value**                  | ** **                                                    | **Weighted  Average  Yield**                               | ** ** | **Carrying  Value**                                               | ** ** | **Weighted  Average  Yield**       | ** ** | **Carrying  Value** | ** **                                                         | **Weighted  Average  Yield** | ** ** | **Carrying  Value** | ** ** | **Weighted  Average  Yield** | ** ** | **Carrying  Value** | ** ** | **Weighted  Average  Yield** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)** | ** **                                                    |
| **Debt securities**                     |       |                                 |                                                          |                                                       |       |                                                              |       |                               |       |                |                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Government  and agency securities  |       |                                 | $      —                   |                                                       |       |                                                              |       |                               |       |                | $ 25,300                                                      |   |   |   | 3.37 | % |   |   | $        — |   |   |   |   |   |   |   | $        — |   |   |   |   |   |   | $   25,300 |   |   | 3.37 | % |   |
| State agency and  municipal obligations |       |                                 |         —        |                                                       |       |                                                              |       |                               |       |                |           — |   |   |   |   |   |   |   |         640 |   |   |   | 4.39 | % |   |   |      9,066 |   |   |   | 4.99 | % |   |        9,706 |   |   | 4.95 | % |   |
| Corporate bonds  and other securities   |       |                                 |    8,252                                       |                                                       |       |                                                              | 5.51       | %                                  |       |                |      7,931                                |   |   |   | 3.81 | % |   |   |           — |   |   |   |   |   |   |   |      8,314 |   |   |   | 4.73 | % |   |      24,497 |   |   | 4.69 | % |   |
| Mortgage-backed  securities        |       |                                 |           1 |                                                       |       |                                                              | 8.12       | %                                  |       |                |      4,476                                |   |   |   | 3.62 | % |   |   |    12,450 |   |   |   | 3.78 | % |   |   |    48,962 |   |   |   | 4.41 | % |   |      65,889 |   |   | 4.24 | % |   |
| Total debt securities                   |       |                                 | $ 8,253                                                  |                                                       |       |                                                              |       |                               |       |                | $ 37,707                                                      |   |   |   |   |   |   |   | $ 13,090 |   |   |   |   |   |   |   | $ 66,342 |   |   |   |   |   |   | $ 125,392 |   |   | 4.20 | % |   |
| **Marketable equity securities:**       |       |                                 |                                                          |                                                       |       |                                                              |       |                               |       |                |                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common stock                            |       |                                 |         —        |                                                       |       |                                                              |       |                               |       |                |           — |   |   |   |   |   |   |   |           — |   |   |   |   |   |   |   |           — |   |   |   |   |   |   |           588 |   |   | 1.10 | % |   |
| Preferred stock                         |       |                                 |         —        |                                                       |       |                                                              |       |                               |       |                |           — |   |   |   |   |   |   |   |           — |   |   |   |   |   |   |   |           — |   |   |   |   |   |   |      23,669 |   |   | 3.30 | % |   |
|                                    |       |                                 |                                                          |                                                       |       |                                                              |       |                               |       |                |                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |      24,257 |   |   | 3.27 | % |   |
| FHLB restricted stock                   |       |                                 |         —        |                                                       |       |                                                              |       |                               |       |                |           — |   |   |   |   |   |   |   |           — |   |   |   |   |   |   |   |           — |   |   |   |   |   |   |        3,756 |   |   | 4.00 | % |   |
| Total equity securities            |       |                                 |         —        |                                                       |       |                                                              |       |                               |       |                |           — |   |   |   |   |   |   |   |           — |   |   |   |   |   |   |   |           — |   |   |   |   |   |   |      28,013 |   |   | 3.37 | % |   |
| **Total  investment securities**   | ** ** | ** **                           | **$** **8,253**                                          |                                                       |       |                                                              |       |                               | ** ** | ** **          | **$** **37,707**                                              |   |   |   |   |   | ** ** | ** ** | **$** **13,090** |   |   |   |   |   | ** ** | ** ** | **$** **66,342** |   |   |   |   |   | ** ** | **$** **153,405** |   | ** ** | **4.05** | **%** |   |

 

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**Sources of Funds**

***General.  ***Depositshave traditionally been our primary source of funds for use in lending andinvestment activities. In addition to deposits, funds are derived fromscheduled loan payments, investment maturities, loan prepayments, retained earningsand income on earning assets. While scheduled loan payments and income onearning assets are relatively stable sources of funds, deposit inflows andoutflows can vary widely and are influenced by prevailing interest rates,market conditions and levels of competition. Borrowings from the Federal HomeLoan Bank of Boston may be used to compensate for reductions in deposits and tofund loan growth.

***Deposits.  ***Amajority of our depositors are persons who work or reside in Windham County,Connecticut. We offer a selection of deposit instruments, including checking,savings, money market deposit accounts, negotiable order of withdrawal (NOW)accounts and fixed-term certificates of deposit. Deposit account terms vary,with the principal differences being the minimum balance required, the amountof time the funds must remain on deposit and the interest rate.

Interest rates paid, maturity terms, service fees andwithdrawal penalties are established on a periodic basis. Deposit rates andterms are based primarily on current operating strategies and market rates,liquidity requirements, rates paid by competitors and growth goals. To attractand retain deposits, we rely upon personalized customer service, long-standingrelationships and competitive interest rates.

The flow of deposits is influenced significantly bygeneral economic conditions, changes in money market and other prevailinginterest rates and competition. The variety of deposit accounts that we offerallows us to be competitive in obtaining funds and responding to changes inconsumer demand. Based on historical experience, management believes ourdeposits are relatively stable. However, the ability to attract and maintainmoney market accounts and certificates of deposit, and the rates paid on thesedeposits, have been and will continue to be significantly affected by marketconditions. At June 30, 2005, $83.9 million, or 38.5%, of our depositaccounts were certificates of deposit, of which $48.7 million hadmaturities of one year or less.

Thefollowing table sets forth the distribution of total deposit accounts, byaccount type, at the dates indicated.
| ** **                 | ** ** | **At June 30,**            | ** ** |
|----------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                 | ** ** | **Balance**                          | ** ** | **Percent** | ** ** | **Weighted  Average  Rate** | ** ** | **Balance** | ** ** | **Percent** | ** ** | **Weighted  Average  Rate** | ** ** | **Balance** | ** ** | **Percent** | ** ** | **Weighted  Average  Rate** | ** ** |
| ** **                 | ** ** | **(Dollars in thousands)** | ** ** |
| **Deposit type:**          |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits            |       | $ 25,976                        |       |   | 11.91 | % |   |   | — | % |   | $ 25,380 |   |   | 12.48 | % |   |   | — | % |   | $ 23,075 |   |   | 12.05 | % |   |   | — | % |   |
| NOW accounts               |       | 36,100                               |       |   | 16.55 |   |   |   | 1.59 |   |   | 9,696 |   |   | 4.77 |   |   |   | 0.25 |   |   | 10,105 |   |   | 5.28 |   |   |   | 0.40 |   |   |
| Regular savings            |       | 43,086                               |       |   | 19.75 |   |   |   | 0.65 |   |   | 43,077 |   |   | 21.18 |   |   |   | 0.65 |   |   | 39,283 |   |   | 20.52 |   |   |   | 1.00 |   |   |
| Money market accounts      |       | 28,761                               |       |   | 13.19 |   |   |   | 1.67 |   |   | 48,438 |   |   | 23.81 |   |   |   | 1.57 |   |   | 39,090 |   |   | 20.42 |   |   |   | 1.70 |   |   |
| Club accounts              |       | 270                                  |       |   | 0.12 |   |   |   | 4.17 |   |   | 267 |   |   | 0.13 |   |   |   | 4.17 |   |   | 261 |   |   | 0.14 |   |   |   | 4.17 |   |   |
| Total transaction accounts |       | 134,193                              |       |   | 61.52 |   |   |   | 1.00 |   |   | 126,858 |   |   | 62.37 |   |   |   | 0.85 |   |   | 111,814 |   |   | 58.41 |   |   |   | 0.99 |   |   |
| Certificates of deposit    |       | 83,930                               |       |   | 38.48 |   |   |   | 3.16 |   |   | 76,539 |   |   | 37.63 |   |   |   | 3.02 |   |   | 79,606 |   |   | 41.59 |   |   |   | 3.24 |   |   |
| Total deposits             |       | $ 218,123                       |       |   | 100.00 | % |   |   | 1.83 |   |   | $ 203,397 |   |   | 100.00 | % |   |   | 1.66 |   |   | $ 191,420 |   |   | 100.00 | % |   |   | 1.93 |   |   |

 

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As of June 30,2005, the aggregate amount of outstanding certificates of deposit in amountsgreater than or equal to $100,000 was approximately $30.6 million. Thefollowing table sets forth the maturity of those certificates as of June 30,2005.
| ** **                            | ** ** | **At  June 30, 2005** | ** **    |
|---------------------------------------|------------|---------------------------------|---------------|
| ** **                            | ** ** | **(In thousands)**         | ** **    |
| Three months or  less                 |       |                            | $ 7,927  |   |   |
| Over three months  through six months |       |                            | 2,782         |   |   |
| Over six months  through one year     |       |                            | 7,142         |   |   |
| Over one year to  three years         |       |                            | 8,984         |   |   |
| Over three years                      | * *   | * *                        | *3,796*       |   |   |
| Total                                 |       |                            | $ 30,631 |   |   |

 

Thefollowing table sets forth the time deposits classified by interest rate as ofthe dates indicated.
| ** **    | ** ** | **At June 30,**    | ** ** |
|---------------|------------|------------------------------|------------|
| ** **    | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **    | ** ** | **(In thousands)**      | ** ** |
| Interest Rate |       |                         |       |   |   |   |   |
| 0.00% - 1.00% |       | $    118 |       | $ 4,224 |   | $      58 |   |
| 1.01% - 2.00% |       | 15,387                       |       | 22,496 |   | 19,392 |   |
| 2.01% - 3.00% |       | 22,832                       |       | 12,424 |   | 20,394 |   |
| 3.01% - 4.00% |       | 29,206                       |       | 16,857 |   | 16,244 |   |
| 4.01% - 5.00% |       | 12,298                       |       | 13,394 |   | 14,341 |   |
| 5.01% - 6.00% |       | 3,794                        |       | 6,059 |   | 8,107 |   |
| 6.01% - 7.00% |       | 295                          |       | 1,085 |   | 1,070 |   |
| 7.01% - 8.00% | * *   | *—*                     | * *   | *—* | * * | *—* | * * |
| Total         |       | $ 83,930                |       | $ 76,539 |   | $ 79,606 |   |

 

Thefollowing table sets forth the amount and maturities of time deposits at June 30,2005.
| ** **     | ** ** | **Less Than  One Year**    | ** **                                        | **Over One  Year to  Two Years** | ** ** | **Over Two  Years to  Three Years** | ** **                                        | **Over Three  Years to  Four Years** | ** ** | **Over Four  Years to  Five Years** | ** **                   | **Total** | ** ** | **Percentage  of Total  Certificate  Accounts** | ** **                            |
|----------------|------------|--------------------------------------|---------------------------------------------------|-------------------------------------------------|------------|----------------------------------------------------|---------------------------------------------------|-----------------------------------------------------|------------|----------------------------------------------------|------------------------------|-----------|------------|------------------------------------------------------|---------------------------------------|
| ** **     | ** ** | **(Dollars in thousands)** | ** **                                        |
| Interest Rate: |       |                                 |                                              |                                            |       |                                               |                                              |                                                |       |                                               |                         |      |       |                                                 |                                  |   |   |   |   |   |   |   |   |   |   |   |   |
| 0.00% - 1.00%  |       |                                 | $       — |                                            |       |                                               | $       — |                                                |       |                                               | $    118 |      |       |                                                 | $     — |   |   |   | $     — |   |   | $    118 |   |   | 0.14 | % |   |
| 1.01% - 2.00%  |       |                                 | 15,320                                            |                                            |       |                                               | 37                                                |                                                |       |                                               | 5                            |      |       |                                                 | 25                                    |   |   |   | — |   |   | 15,387 |   |   | 18.33 |   |   |
| 2.01% - 3.00%  |       |                                 | 16,121                                            |                                            |       |                                               | 5,530                                             |                                                |       |                                               | 1,161                        |      |       |                                                 | 20                                    |   |   |   | — |   |   | 22,832 |   |   | 27.20 |   |   |
| 3.01% - 4.00%  |       |                                 | 14,206                                            |                                            |       |                                               | 1,763                                             |                                                |       |                                               | 4,512                        |      |       |                                                 | 3,472                                 |   |   |   | 5,253 |   |   | 29,206 |   |   | 34.80 |   |   |
| 4.01% - 5.00%  |       |                                 | 1,688                                             |                                            |       |                                               | 3,669                                             |                                                |       |                                               | 6,203                        |      |       |                                                 | —                                |   |   |   | 738 |   |   | 12,298 |   |   | 14.65 |   |   |
| 5.01% - 6.00%  |       |                                 | 1,108                                             |                                            |       |                                               | 2,627                                             |                                                |       |                                               | 59                           |      |       |                                                 | —                                |   |   |   | — |   |   | 3,794 |   |   | 4.52 |   |   |
| 6.01% - 7.00%  |       |                                 | 295                                               |                                            |       |                                               | —                                            |                                                |       |                                               | —                       |      |       |                                                 | —                                |   |   |   | — |   |   | 295 |   |   | 0.35 |   |   |
| Total          |       |                                 | $ 48,738                                     |                                            |       |                                               | $ 13,626                                     |                                                |       |                                               | $ 12,058                |      |       |                                                 | $ 3,517                          |   |   |   | $ 5,991 |   |   | $ 83,930 |   |   | 100.0 | % |   |

 

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Thefollowing table sets forth the interest-bearing deposit activities for theperiods indicated.
| ** **                             | ** ** | **Year Ended June 30,** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|
| ** **                             | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                             | ** ** | **(in thousands)**                | ** ** |
| Beginning balance                      |       | $ 178,017                         |       | $ 168,345 |   | $ 146,099 |   |
| Net deposits before  interest credited |       | 10,356                                 |       | 6,164 |   | 18,051 |   |
| Interest credited                      |       | 3,774                                  |       | 3,508 |   | 4,195 |   |
| Net increase in  deposits              |       | 14,130                                 |       | 9,672 |   | 22,246 |   |
| Ending balance                         |       | $ 192,147                         |       | $ 178,017 |   | $ 168,345 |   |

 

***Borrowings.  ***Our borrowingsconsist of advances from and a line of credit with the Federal Home Loan Bankof Boston and retail repurchase agreements. At June 30, 2005, we had anavailable line of credit with the Federal Home Loan Bank of Boston in theamount of $2.4 million and access to additional Federal Home Loan Bankadvances of up to $61.2 million. At June 30, 2005, retail repurchaseagreements were $1.1 million. The following table sets forth informationconcerning balances and interest rates on our Federal Home Loan Bank advancesat the dates and for the periods indicated.
| ** **                                                              | ** ** | **2005**                             | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------|------------|---------------|------------|
| ** **                                                              | ** ** | **(Dollars in thousands)** | ** ** |
| Maximum amount of  advances outstanding at any month during the period: |       |                                 |       |          |       |          |       |
| FHLB advances                                                           |       | $ 62,630                        |       | $ 49,452 |       | $ 38,250 |       |
| Repurchase agreements                                                   |       | 1,685                                |       | 790           |       | 0             |       |
| Average advances  outstanding during the period:                        |       |                                 |       |          |       |          |       |
| FHLB advances                                                           |       | 52,958                               |       | 29,244        |       | 33,386        |       |
| Repurchase agreements                                                   |       | 1,188                                |       | 61            |       | —        |       |
| Balance outstanding at  end of period:                                  |       |                                 |       |          |       |          |       |
| FHLB advances                                                           |       | 62,630                               |       | 49,450        |       | 27,000        |       |
| Repurchase agreements                                                   |       | 1,104                                |       | 790           |       | —        |       |
| Weighted average  interest rate during the period:                      |       |                                 |       |          |       |          |       |
| FHLB advances                                                           |       | 3.34                                 | %          | 3.89          | %          | 4.93          | %          |
| Repurchase agreements                                                   |       | 1.94                                 |       | 0.74          |       | —        |       |
| Weighted average  interest rate at end of period:                       |       |                                 |       |          |       |          |       |
| FHLB advances                                                           |       | 3.61                                 | %          | 3.39          | %          | 4.95          | %          |
| Repurchase agreements                                                   |       | 3.00                                 |       | 0.88          |       | —        |       |

 

**SubsidiaryActivities**

PSB Holdings’ onlysubsidiary is Putnam Savings Bank. Putnam Savings Bank has two subsidiaries,Windham North Properties, LLC and PSB Realty, LLC. Windham North Properties,LLC is used to acquire title to selected properties on which Putnam Savings Bank forecloses. As of June 30,2005, Windham North Properties, LLC, did not own any such properties. PSBRealty, LLC owns a single parcel of real estate located immediately adjacent toPutnam Savings Bank’s main office. This real estate is utilized as a loancenter for Putnam Savings Bank and there are no outside tenants that occupy thepremises.

**Personnel**

As of June 30, 2005,we had 68 full-time employees and 23 part-time employees. Ouremployees are not represented by any collective bargaining group. Managementbelieves that we have good relations with our employees.

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**FEDERAL AND STATE TAXATION**

**Federal Taxation**

***General****.  *PSB Holdings, Inc. and Putnam Savings Bank aresubject to federal income taxation in the same general manner as othercorporations, with some exceptions discussed below. PSB Holdings, Inc.’sand Putnam Savings Bank’s tax returns have not been audited during the pastfive years. The following discussion of federal taxation is intended only tosummarize certain pertinent federal income tax matters and is not acomprehensive description of the tax rules applicable to PSB Holdings, Inc.or Putnam Savings Bank.

***Method of Accounting****.  *For federal income tax purposes, PSB Holdings, Inc.and Putnam Savings Bank currently report their income and expenses on theaccrual method of accounting and use a tax year ending June 30 for filingtheir federal income tax returns.

***Bad Debt Reserves****.  *Prior to the Small Business Protection Act of 1996(the “1996 Act”), Putnam Savings Bank was permitted to establish a reserve forbad debts and to make annual additions to the reserve. These additions could,within specified formula limits, be deducted in arriving at our taxable income.As a result of the 1996 Act, Putnam Savings Bank was required to use thespecific charge off method in computing its bad debt deduction beginning withits 1996 federal tax return. Savings institutions were required to recaptureany excess reserves over those established as of December 31, 1987 (baseyear reserve). At June 30, 2005 Putnam Savings Bank had no reservessubject to recapture in excess of its base year.

***Taxable Distributions andRecapture****.  *Priorto the 1996 Act, bad debt reserves created prior to January 1, 1988 weresubject to recapture into taxable income if Putnam Savings Bank failed to meetcertain thrift asset and definitional tests. Federal legislation has eliminatedthese thrift-related recapture rules. At June 30, 2005, our total federalpre-1988 base year reserve was approximately $2.3 million. However, undercurrent law, pre-1988 base year reserves remain subject to recapture ifPutnam Savings Bank makes certain non-dividend distributions, repurchases anyof its stock, pays dividends in excess of tax earnings and profits, or ceasesto maintain a bank charter.

***Alternative Minimum Tax****.  *The Internal Revenue Code of 1986, as amended (the “Code”)imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base ofregular taxable income plus certain tax preferences which we refer to as “alternativeminimum taxable income”. The AMT is payable to the extent such alternativeminimum taxable income is in excess of an exemption amount and the AMT exceedsthe regular income tax. Net operating losses can offset no more than 90% ofalternative minimum taxable income. Certain AMT payments may be used as creditsagainst regular tax liabilities in future years. Putnam Savings Bank has notbeen subject to the AMT and has no such amounts available as credits forcarryover.

***Net Operating Loss Carryovers****.  *A financial institution may carry back net operatinglosses to the preceding two taxable years and forward to the succeeding 20taxable years. At June 30, 2005, Putnam Savings Bank had no net operatingloss carryforwards for federal income tax purposes.

***CorporateDividends-Received Deduction****.  *PSBHoldings, Inc. may exclude from its income 100% of dividends received fromPutnam Savings Bank as a member of the same affiliated group of corporations. Thecorporate dividends-received deduction is 80% in the case of dividendsreceived from corporations with which a corporate recipient does not file aconsolidated tax return, and corporations which own less than 20% of the stockof a corporation distributing a dividend may deduct only 70% of dividendsreceived or accrued on their behalf.

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**State Taxation**

***Connecticut State Taxation****.  *PSB Holdings, Inc. and Putnam Savings Bank and its subsidiaries, are subject to theConnecticut corporation business tax. Both entities are required to pay theregular corporation business tax (income tax).

The Connecticutcorporation business tax is based on the federal taxable income before netoperating loss and special deductions and makes certain modifications tofederal taxable income to arrive at Connecticut taxable income. Connecticuttaxable income is multiplied by the state tax rate of 7.5% to arrive atConnecticut income tax. Additionally, for the fiscal year ended June 30,2005, there was a 25% surcharge resulting in an effective rate of 9.375%.

**SUPERVISION AND REGULATION**

**General**

Putnam Savings Bank is examined and supervised by theOffice of Thrift Supervision. This regulation and supervision establishes acomprehensive framework of activities in which an institution may engage and isintended primarily for the protection of the Federal Deposit InsuranceCorporation’s deposit insurance funds and depositors. Under this system offederal regulation, financial institutions are periodically examined to ensurethat they satisfy applicable standards with respect to their capital adequacy,assets, management, earnings, liquidity and sensitivity to market interestrates. Following completion of its examination, the federal agency critiquesthe institution’s operations and assigns its rating (known as an institution’sCAMELS rating). Under federal law, an institution may not disclose its CAMELSrating to the public. Putnam Savings Bank also is a member of and owns stock inthe Federal Home Loan Bank of Boston, which is one of the twelve regional banksin the Federal Home Loan Bank System. Putnam Savings Bank also is regulated toa lesser extent by the Board of Governors of the Federal Reserve System,governing reserves to be maintained against deposits and other matters. TheOffice of Thrift Supervision examines Putnam Savings Bank and prepares reportsfor the consideration of its Board of Directors on any operating deficiencies. PutnamSavings Bank’s relationship with its depositors and borrowers also is regulatedto a great extent by both federal and state laws, especially in mattersconcerning the ownership of deposit accounts and the form and content of PutnamSavings Bank’s mortgage documents.

Any change in these lawsor regulations, whether by the Federal Deposit Insurance Corporation, theOffice of Thrift Supervision or Congress, could have a material adverse impacton PSB Holdings, Inc. and Putnam Savings Bank and their operations.

**Federal Banking Regulation**

***Business Activities.  ***Afederal savings association derives its lending and investment powers from theHome Owners’ Loan Act, as amended, and the regulations of the Office of ThriftSupervision. Under these laws and regulations, Putnam Savings Bank may investin mortgage loans secured by residential real estate without limitations as apercentage of assets and non-residential real estate loans which may not in theaggregate exceed 400% of capital, commercial business loans up to 20% of assetsin the aggregate and consumer loans up to 35% of assets in the aggregate,certain types of debt securities and certain other assets. Putnam Savings Bankalso may establish subsidiaries that may engage in activities not otherwisepermissible for Putnam Savings Bank, including real estate investment andsecurities and insurance brokerage.

***CapitalRequirements.  ***Office of Thrift Supervisionregulations require savings associations to meet three minimum capitalstandards:  a 1.5% tangible capitalratio, a 4% leverage ratio (3% for associations receiving the highest rating onthe CAMELS rating system) and an 8% risk-based capital ratio. The 

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prompt corrective actionstandards discussed below, in effect, establish a minimum 2% tangible capitalstandard.

The risk-based capital standard for savings associationsrequires the maintenance of Tier 1 (core) and total capital (which isdefined as core capital and supplementary capital) to risk-weighted assets ofat least 4% and 8%, respectively. In determining the amount of risk-weightedassets, all assets, including certain off-balance sheet assets, are multipliedby a risk-weight factor of 0% to 100%, assigned by the Office of ThriftSupervision based on the risks believed inherent in the type of asset. Corecapital is defined as common stockholders’ equity (including retainedearnings), certain noncumulative perpetual preferred stock and related surplusand minority interests in equity accounts of consolidated subsidiaries, lessintangibles other than certain mortgage servicing rights and credit card relationships.The components of supplementary capital currently include cumulative preferredstock, long-term perpetual preferred stock, mandatory convertible securities,subordinated debt and intermediate preferred stock, the allowance for loan andlease losses limited to a maximum of 1.25% of risk-weighted assets and up to45% of net unrealized gains on available-for-sale equity securities withreadily determinable fair market values. Overall, the amount of supplementarycapital included as part of total capital cannot exceed 100% of core capital. Additionally,a savings association that retains credit risk in connection with an asset salemay be required to maintain additional regulatory capital because of therecourse back to the savings association. Putnam Savings Bank does nottypically engage in asset sales.

At June 30, 2005, Putnam Savings Bank’s capitalexceeded all applicable requirements.

***Loans-to-OneBorrower.  ***A federal savings association generallymay not make a loan or extend credit to a single or related group of borrowersin excess of 15% of unimpaired capital and surplus. An additional amount may beloaned, equal to 10% of unimpaired capital and surplus, if the loan is securedby readily marketable collateral, which generally does not include real estate.As of June 30, 2005, Putnam Savings Bank was in compliance with theloans-to-one borrower limitations.

***Qualified ThriftLender Test.  ***As a federal savings association,Putnam Savings Bank must satisfy the qualified thrift lender, or “QTL”, test. Underthe QTL test, Putnam Savings Bank must maintain at least 65% of its “portfolioassets” in “qualified thrift investments” in at least nine of the most recent 12-monthperiod. “Portfolio assets” generally means total assets of a savingsinstitution, less the sum of specified liquid assets up to 20% of total assets,goodwill and other intangible assets, and the value of property used in theconduct of the savings association’s business.

“Qualified thrift investments” include various typesof loans made for residential and housing purposes, investments related to suchpurposes, including certain mortgage-backed and related securities, and loansfor personal, family, household and certain other purposes up to a limit of 20%of portfolio assets. “Qualified thrift investments” also include 100% of aninstitution’s credit card loans, education loans and small business loans. PutnamSavings Bank also may satisfy the QTL test by qualifying as a “domesticbuilding and loan association” as defined in the Internal Revenue Code.

A savings association that fails the qualified thriftlender test must either convert to a bank charter or operate under specifiedrestrictions. At June 30, 2005, Putnam Savings Bank satisfied this test.

***Capital Distributions.  ***Office ofThrift Supervision regulations govern capital distributions by a federalsavings association, which include cash dividends, stock repurchases and othertransactions charged to the capital account. A savings association must file anapplication for approval of a capital distribution if:

·       thetotal capital distributions for the applicable calendar year exceed the sum ofthe association’s net income for that year to date plus the association’sretained net income for the preceding two years;

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·       theassociation would not be at least adequately capitalized following thedistribution;

·       thedistribution would violate any applicable statute, regulation, agreement orOffice of Thrift Supervision-imposed condition; or

·       theassociation is not eligible for expedited treatment of its filings.

Even if an application is not otherwise required,every savings association that is a subsidiary of a holding company must stillfile a notice with the Office of Thrift Supervision at least 30 days before theBoard of Directors declares a dividend or approves a capital distribution.

The Office ofThrift Supervision may disapprove a notice or application if:

·       theassociation would be undercapitalized following the distribution;

·       theproposed capital distribution raises safety and soundness concerns; or

·       thecapital distribution would violate a prohibition contained in any statute,regulation or agreement.

In addition, the Federal Deposit Insurance Actprovides that an insured depository institution shall not make any capitaldistribution, if after making such distribution the institution would beundercapitalized.

***Liquidity.  ***Afederal savings association is required to maintain a sufficient amount ofliquid assets to ensure its safe and sound operation.

***Community ReinvestmentAct and Fair Lending Laws.  ***All savings associationshave a responsibility under the Community Reinvestment Act and relatedregulations of the Office of Thrift Supervision to help meet the credit needsof their communities, including low- and moderate-income neighborhoods. Inconnection with its examination of a federal savings association, the Office ofThrift Supervision is required to assess the association’s record of compliancewith the Community Reinvestment Act. In addition, the Equal Credit OpportunityAct and the Fair Housing Act prohibit lenders from discriminating in theirlending practices on the basis of characteristics specified in those statutes. Anassociation’s failure to comply with the provisions of the CommunityReinvestment Act could, at a minimum, result in denial of certain corporateapplications, such as branches or mergers, or in restrictions on its activities.The failure to comply with the Equal Credit Opportunity Act and the FairHousing Act could result in enforcement actions by the Office of ThriftSupervision, as well as other federal regulatory agencies and the Department ofJustice. Putnam Savings Bank received a satisfactory Community Reinvestment Actrating in its most recent federal examination.

***Privacy Standards.  ***EffectiveJuly 2001, financial institutions, including Putnam Savings Bank, becamesubject to FDIC regulations implementing the privacy protection provisions ofthe Gramm-Leach-Bliley Act. These regulations require Putnam Savings Bank todisclose its privacy policy, including identifying with whom it shares “non-publicpersonal information” to customers at the time of establishing the customerrelationship and annually thereafter.

The regulations also require Putnam Savings Bank toprovide its customers with initial and annual notices that accurately reflectits privacy policies and practices. In addition, Putnam Savings Bank isrequired to provide its customers with the ability to “opt-out” of havingPutnam Savings Bank share their non-public personal information withunaffiliated third parties before it can disclose such information, subject tocertain exceptions. The implementation of these regulations did not have amaterial adverse effect on PSB Holdings, Inc. or Putnam Savings Bank. TheGramm-Leach-Bliley Act also allows each state to enact legislation that is moreprotective of consumers’ personal information. We cannot predict whetherConnecticut may enact such legislation or what impact, if any, it would have ifenacted.

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On February 1, 2001, the FDIC and other federalbanking agencies adopted guidelines establishing standards for safeguardingcustomer information to implement certain provisions of The Gramm-Leach BlileyAct. The guidelines describe the agencies’ expectations for the creation,implementation and maintenance of an information security program, which wouldinclude administrative, technical and physical safeguards appropriate to thesize and complexity of the institution and the nature and scope of itsactivities. The standards set forth in the guidelines are intended to insurethe security and confidentiality of customer records and information, protectagainst any anticipated threats or hazards to the security or integrity of suchrecords and protect against unauthorized access to or use of such records, orinformation that could result in substantial harm or inconvenience to anycustomer. Putnam Savings Bank has implemented these guidelines, and suchimplementation did not have a material adverse effect on our operations.

***Transactions withRelated Parties.  ***A federal savings association’sauthority to engage in transactions with its “affiliates” is limited by Officeof Thrift Supervision regulations and by Sections 23A and 23B of the FederalReserve Act (the “FRA”). The term “affiliates” for these purposes generallymeans any company that controls, is controlled by, or is under common controlwith an institution. PSB Holdings, Inc. is an affiliate of Putnam SavingsBank. In general, transactions with affiliates must be on terms that are asfavorable to the association as comparable transactions with non-affiliates. Inaddition, certain types of these transactions are restricted to an aggregatepercentage of the association’s capital. Collateral in specified amounts mustusually be provided by affiliates in order to receive loans from theassociation. In addition, Office of Thrift Supervision regulations prohibit asavings association from lending to any of its affiliates that are engaged inactivities that are not permissible for bank holding companies and frompurchasing the securities of any affiliate, other than a subsidiary.

Putnam Savings Bank’s authority to extend credit toits directors, executive officers and 10% shareholders, as well as to entitiescontrolled by such persons, is currently governed by the requirements ofSections 22(g) and 22(h) of the FRA and Regulation O of theFederal Reserve Board. Among other things, these provisions require thatextensions of credit to insiders (i) be made on terms that aresubstantially the same as, and follow credit underwriting procedures that arenot less stringent than, those prevailing for comparable transactions withunaffiliated persons and that do not involve more than the normal risk ofrepayment or present other unfavorable features, and (ii) not exceedcertain limitations on the amount of credit extended to such persons,individually and in the aggregate, which limits are based, in part, on theamount of Putnam Savings Bank’s capital. In addition, extensions of credit inexcess of certain limits must be approved by Putnam Savings Bank’s Board ofDirectors.

***Enforcement.  ***TheOffice of Thrift Supervision has primary enforcement responsibility overfederal savings institutions and has the authority to bring enforcement actionagainst all “institution-affiliated parties”, including stockholders, andattorneys, appraisers and accountants who knowingly or recklessly participatein wrongful action likely to have an adverse effect on an insured institution. Formalenforcement action by the Office of Thrift Supervision may range from theissuance of a capital directive or cease and desist order, to removal ofofficers and/or directors of the institution and the appointment of a receiveror conservator. Civil penalties cover a wide range of violations and actions,and range up to $25,000 per day, unless a finding of reckless disregard ismade, in which case penalties may be as high as $1 million per day. The FederalDeposit Insurance Corporation also has the authority to terminate depositinsurance or to recommend to the Director of the Office of Thrift Supervisionthat enforcement action be taken with respect to a particular savingsinstitution. If action is not taken by the Director, the Federal DepositInsurance Corporation has authority to take action under specifiedcircumstances.

***Standards forSafety and Soundness.  ***Federal law requires eachfederal banking agency to prescribe certain standards for all insureddepository institutions. These standards relate to, among other things,internal controls, information systems and audit systems, loan documentation,credit underwriting, interest rate risk exposure, asset growth, compensation,and other operational and managerial standards as the 

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agency deems appropriate. Thefederal banking agencies adopted Interagency Guidelines Prescribing Standardsfor Safety and Soundness to implement the safety and soundness standardsrequired under federal law. The guidelines set forth the safety and soundnessstandards that the federal banking agencies use to identify and addressproblems at insured depository institutions before capital becomes impaired. Theguidelines address internal controls and information systems, internal auditsystems, credit underwriting, loan documentation, interest rate risk exposure,asset growth, compensation, fees and benefits. If the appropriate federal bankingagency determines that an institution fails to meet any standard prescribed bythe guidelines, the agency may require the institution to submit to the agencyan acceptable plan to achieve compliance with the standard. If an institutionfails to meet these standards, the appropriate federal banking agency mayrequire the institution to submit a compliance plan.

***Prompt Corrective Action Regulations*.  **Underthe prompt corrective action regulations, the Office of Thrift Supervision isrequired and authorized to take supervisory actions against undercapitalizedsavings associations. For this purpose, a savings association is placed in oneof the following five categories based on the association’s capital:

·       well-capitalized(at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% totalrisk-based capital);

·       adequatelycapitalized (at least 4% leverage capital, 4% Tier 1 risk-based capitaland 8% total risk-based capital);

·       undercapitalized(less than 8% total risk-based capital, 4% Tier 1 risk-based capital or 3%leverage capital);

·       significantlyundercapitalized (less than 6% total risk-based capital, 3% Tier 1risk-based capital or 3% leverage capital); and

·       criticallyundercapitalized (less than 2% tangible capital).

Generally, the banking regulator is required toappoint a receiver or conservator for an association that is “criticallyundercapitalized” within specific time frames. The regulations also providethat a capital restoration plan must be filed with the Office of ThriftSupervision within 45 days of the date an association receives notice that itis “undercapitalized”, “significantly undercapitalized” or “criticallyundercapitalized”. The criteria for an acceptable capital restoration planinclude, among other things, the establishment of the methodology andassumptions for attaining adequately capitalized status on an annual basis,procedures for ensuring compliance with restrictions imposed by applicablefederal regulations, the identification of the types and levels of activities thesavings association will engage in while the capital restoration plan is ineffect, and assurances that the capital restoration plan will not appreciablyincrease the current risk profile of the savings association. Any holdingcompany for the savings association required to submit a capital restorationplan must guarantee the lesser of: an amount equal to 5% of the savingsassociation’s assets at the time it was notified or deemed to beundercapitalized by the Office of Thrift Supervision, or the amount necessaryto restore the savings association to adequately capitalized status. Thisguarantee remains in place until the Office of Thrift Supervision notifies thesavings association that it has maintained adequately capitalized status foreach of four consecutive calendar quarters, and the Office of ThriftSupervision has the authority to require payment and collect payment under theguarantee. Failure by a holding company to provide the required guarantee willresult in certain operating restrictions on the savings association, such asrestrictions on the ability to declare and pay dividends, pay executivecompensation and management fees, and increase assets or expand operations. TheOffice of Thrift Supervision may also take any one of a number of discretionarysupervisory actions against undercapitalized associations, including theissuance of a capital directive and the replacement of senior executiveofficers and directors.

At June 30, 2005, Putnam Savings Bank met thecriteria for being considered “well-capitalized”.

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***Insurance ofDeposit Accounts.  ***Deposit accounts in PutnamSavings Bank are insured by the Federal Deposit Insurance Corporation,generally up to a maximum of $100,000 per separately insured depositor. PutnamSavings Bank’s deposits therefore are subject to Federal Deposit InsuranceCorporation deposit insurance assessments. The Federal Deposit InsuranceCorporation has adopted a risk-based system for determining deposit insuranceassessments. The Federal Deposit Insurance Corporation is authorized to raisethe assessment rates as necessary to maintain the required ratio of reserves toinsured deposits of 1.25%. In addition, all Federal Deposit InsuranceCorporation-insured institutions must pay assessments to the Federal DepositInsurance Corporation at an annual rate of approximately 0.02% of insureddeposits to fund interest payments on bonds maturing in 2017 issued by afederal agency to recapitalize the predecessor to the Savings AssociationInsurance Fund.

***ProhibitionsAgainst Tying Arrangements*.  **Federal savingsassociations are prohibited, subject to some exceptions, from extending creditto or offering any other service, or fixing or varying the consideration forsuch extension of credit or service, on the condition that the customer obtainsome additional service from the institution or its affiliates or not obtainservices of a competitor of the institution.

***Federal Home LoanBank System.  ***Putnam Savings Bank is a member of theFederal Home Loan Bank System, which consists of 12 regional Federal Home LoanBanks. The Federal Home Loan Bank System provides a central credit facilityprimarily for member institutions. As a member of the Federal Home Loan Bank ofBoston, Putnam Savings Bank is required to acquire and hold shares of capitalstock in the Federal Home Loan Bank in an amount at least equal to 1% of theaggregate principal amount of its unpaid residential mortgage loans and similarobligations at the beginning of each year, or 1/20 of its borrowings from theFederal Home Loan Bank, whichever is greater. As of June 30, 2005, PutnamSavings Bank was in compliance with this requirement.

***Federal ReserveSystem*.  **The Federal Reserve Board regulationsrequire savings associations to maintain noninterest-earning reserves againsttheir transaction accounts, such as negotiable order of withdrawal and regularchecking accounts. At June 30, 2005, Putnam Savings Bank was in compliancewith these reserve requirements.

**The USA PATRIOT Act**

The USA PATRIOT Act gives the federal government newpowers to address terrorist threats through enhanced domestic securitymeasures, expanded surveillance powers, increased information sharing andbroadened anti-money laundering requirements. Certain provisions of the actimpose affirmative obligations on a broad range of financial institutions,including savings banks, like Putnam Savings Bank. These obligations includeenhanced anti-money laundering programs, customer identification programs andregulations relating to private banking accounts or correspondence accounts inthe United States for non-United States persons or their representatives(including foreign individuals visiting the United States).

The federal bankingagencies have begun to propose and implement regulations pursuant to the USAPATRIOT Act. These proposed and interim regulations would require financialinstitutions to adopt the policies and procedures contemplated by the USAPATRIOT Act.

**Sarbanes-Oxley Act of 2002**

The Sarbanes-Oxley Act of 2002 was enacted in responseto public concerns regarding corporate accountability in connection withcertain accounting scandals. The stated goals of the Sarbanes-Oxley Act are toincrease corporate responsibility, to provide for enhanced penalties foraccounting and auditing improprieties at publicly traded companies, and toprotect investors by improving the accuracy and reliability of corporatedisclosures pursuant to the securities laws. The Sarbanes-Oxley Act generally 

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applies to all companiesthat file or are required to file periodic reports with the Securities andExchange Commission, under the Securities Exchange Act of 1934.

The Sarbanes-Oxley Act includes very specificadditional disclosure requirements and new corporate governance rules requiringthe Securities and Exchange Commission and national securities exchanges toadopt extensive additional disclosure, corporate governance and other relatedrules, and mandates further studies of certain issues by the Securities andExchange Commission. The Sarbanes-Oxley Act represents significant federalinvolvement in matters traditionally left to state regulatory systems, such asthe regulation of the accounting profession, and to state corporate law, suchas the relationship between a board of directors and management and between aboard of directors and its committees.

Although we anticipatethat we will incur additional expense in complying with the provisions of theSarbanes-Oxley Act and the regulations that have been promulgated to implementthe Sarbanes-Oxley Act, management does not expect that such compliance willhave a material impact on our results of operations or financial condition.

**Holding Company Regulation**

***General*.  **PutnamBancorp, MHC and PSB Holdings, Inc. are nondiversified savings and loanholding companies within the meaning of the Home Owners’ Loan Act. As such,Putnam Bancorp, MHC and PSB Holdings, Inc. are registered with the Officeof Thrift Supervision and are subject to Office of Thrift Supervisionregulations, examinations, supervision and reporting requirements. In addition,the Office of Thrift Supervision has enforcement authority over PSB Holdings, Inc.and Putnam Bancorp, MHC, and their subsidiaries. Among other things, thisauthority permits the Office of Thrift Supervision to restrict or prohibitactivities that are determined to be a serious risk to the subsidiary savingsinstitution. As federal corporations, PSB Holdings, Inc. and PutnamBancorp, MHC are generally not subject to state business organization laws.

***Permitted Activities*.  **Pursuantto Section 10(o) of the Home Owners’ Loan Act and Office of ThriftSupervision regulations and policy, a mutual holding company and a federallychartered mid-tier holding company such as PSB Holdings, Inc. may engagein the following activities: (i) investing in the stock of a savingsassociation; (ii) acquiring a mutual association through the merger ofsuch association into a savings association subsidiary of such holding companyor an interim savings association subsidiary of such holding company; (iii) mergingwith or acquiring another holding company, one of whose subsidiaries is asavings association; (iv) investing in a corporation, the capital stock ofwhich is available for purchase by a savings association under federal law orunder the law of any state where the subsidiary savings association orassociations share their home offices; (v) furnishing or performingmanagement services for a savings association subsidiary of such company; (vi) holding,managing or liquidating assets owned or acquired from a savings subsidiary ofsuch company; (vii) holding or managing properties used or occupied by asavings association subsidiary of such company; (viii) acting as trusteeunder deeds of trust; (ix) any other activity (A) that the FederalReserve Board, by regulation, has determined to be permissible for bank holdingcompanies under Section 4(c) of the Bank Holding Company Act of 1956,unless the Director of the Office of Thrift Supervision, by regulation,prohibits or limits any such activity for savings and loan holding companies;or (B) in which multiple savings and loan holding companies wereauthorized (by regulation) to directly engage on March 5, 1987; (x) anyactivity permissible for financial holding companies under Section 4(k) ofthe Bank Holding Company Act, including securities and insurance underwriting;and (xi) purchasing, holding, or disposing of stock acquired in connection witha qualified stock issuance if the purchase of such stock by such savings andloan holding company is approved by the Director. If a mutual holding companyacquires or merges with another holding company, the holding company acquiredor the holding company resulting from such merger or acquisition may onlyinvest in assets and engage in activities listed in (i) through (xi)above, and has a period of two years to cease any nonconforming activities anddivest any nonconforming investments.

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The Home Owners’ Loan Act prohibits a savings and loanholding company, including PSB Holdings, Inc. and Putnam Bancorp, MHC,directly or indirectly, or through one or more subsidiaries, from acquiringmore than 5% of another savings institution or holding company thereof, withoutprior written approval of the Office of Thrift Supervision. It also prohibitsthe acquisition or retention of, with certain exceptions, more than 5% of anonsubsidiary company engaged in activities other than those permitted by theHome Owners’ Loan Act, or acquiring or retaining control of an institution thatis not federally insured. In evaluating applications by holding companies toacquire savings institutions, the Office of Thrift Supervision must considerthe financial and managerial resources, future prospects of the company andinstitution involved, the effect of the acquisition on the risk to the federaldeposit insurance fund, the convenience and needs of the community andcompetitive factors.

The Office of Thrift Supervision is prohibited fromapproving any acquisition that would result in a multiple savings and loanholding company controlling savings institutions in more than one state,subject to two exceptions: (i) the approval of interstate supervisoryacquisitions by savings and loan holding companies; and (ii) theacquisition of a savings institution in another state if the laws of the stateof the target savings institution specifically permit such acquisitions. Thestates vary in the extent to which they permit interstate savings and loanholding company acquisitions.

***Waivers of Dividends by Putnam Bancorp,MHC*.  **Office of Thrift Supervision regulationsrequire Putnam Bancorp, MHC to notify the Office of Thrift Supervision of anyproposed waiver of its receipt of dividends from PSB Holdings, Inc. TheOffice of Thrift Supervision reviews dividend waiver notices on a case-by-casebasis, and, in general, does not object to any such waiver if: (i) themutual holding company’s board of directors determines that such waiver isconsistent with such directors’ fiduciary duties to the mutual holding company’smembers; (ii) for as long as the savings association subsidiary iscontrolled by the mutual holding company, the dollar amount of dividends waivedby the mutual holding company is considered as a restriction on the retainedearnings of the savings association, which restriction, if material, isdisclosed in the public financial statements of the savings association as anote to the financial statements; (iii) the amount of any dividend waivedby the mutual holding company is available for declaration as a dividend solelyto the mutual holding company, and, in accordance with SFAS 5, where thesavings association determines that the payment of such dividend to the mutualholding company is probable, an appropriate dollar amount is recorded as aliability; and (iv) the amount of any waived dividend is considered ashaving been paid by the savings association in evaluating any proposed dividendunder Office of Thrift Supervision capital distribution regulations. Weanticipate that Putnam Bancorp, MHC will waive any dividends paid by PSBHoldings, Inc. Under Office of Thrift Supervision regulations, our publicstockholders would not be diluted because of any dividends waived by PutnamBancorp, MHC (and waived dividends would not be considered in determining anappropriate exchange ratio) in the event Putnam Bancorp, MHC converts to stockform.

***Conversion of Putnam Bancorp,MHC to Stock Form*.  **Office of Thrift Supervisionregulations permit Putnam Bancorp, MHC to convert from the mutual form oforganization to the capital stock form of organization (a “ConversionTransaction”). There can be no assurance when, if ever, a ConversionTransaction will occur, and the Board of Directors has no current intention orplan to undertake a Conversion Transaction. In a Conversion Transaction a newstock holding company would be formed as the successor to PSB Holdings, Inc.(the “New Holding Company”), Putnam Bancorp, MHC’s corporate existence wouldend, and certain depositors of Putnam Savings Bank would receive the right tosubscribe for additional shares of the New Holding Company. In a ConversionTransaction, each share of common stock held by stockholders other than PutnamBancorp, MHC (“Minority Stockholders”) would be automatically converted into anumber of shares of common stock of the New Holding Company determined pursuantto an exchange ratio that ensures that Minority Stockholders own the samepercentage of common stock in the New Holding Company as they owned in PSBHoldings, Inc. immediately prior to the Conversion Transaction. UnderOffice of Thrift Supervision regulations, Minority 

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Stockholders wouldnot be diluted because of any dividends waived by Putnam Bancorp, MHC (andwaived dividends would not be considered in determining an appropriate exchangeratio), in the event Putnam Bancorp, MHC converts to stock form. The totalnumber of shares held by Minority Stockholders after a Conversion Transactionalso would be increased by any purchases by Minority Stockholders in the stockoffering conducted as part of the Conversion Transaction.

**Federal Securities Laws**

PSB Holdings, Inc. common stock is registeredwith the Securities and Exchange Commission under the Securities Exchange Actof 1934. PSB Holdings, Inc. is subject to the information, proxysolicitation, insider trading restrictions and other requirements under theSecurities Exchange Act of 1934.

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**ITEM2.**                Description of Property

Weconduct substantially all of our business through our main office, three fullservice branch offices and one loan origination center. We also conduct limitedbusiness operations through a “Special Needs Limited Branch” and a “LimitedServices Branch”. In 2002, we began Limited Service (Mobile) Branch activities.The Limited Services (Mobile) Branch serves approximately eight locations inour primary market area consisting of schools and retirement facilities. Bankpersonnel visit these facilities approximately once per week and, in the caseof school locations, conduct deposit taking activities and, in the case of theretirement facilities, conduct deposit-taking, check cashing, notary andcertificate of deposit renewal activities. Set forth below is information onour office locations as of June 30, 2005. 
| Location                                     | ** ** | ** ** | ** ** | **Leased  or Owned** | ** ** | **Year Acquired  or Leased** | ** ** | **Square  Footage**     | ** ** | **Net Book Value  of Real Property** | ** ** |
|----------------------------------------------|------------|------------|------------|---------------------------|------------|----------------------------------------|------------|-------------------------|------------|----------------------------------------------------------|------------|
| ** **                                   | ** ** | ** ** | ** ** | ** **                | ** ** | ** **                             | ** ** | **(In thousands)** | ** ** |
| **Main Office:**                             |       |       |       |                      |       |                                   |       |                    |       |                                                     |       |   |   |   |   |
| 40 Main Street                               |       |       | Owned      |                      |       |                                   | 1974       |                    |       | 14,938                                                   |       |   | $ | 1,644 |   |   |
| Putnam, Connecticut  06260                   |       |       |       |                      |       |                                   |       |                    |       |                                                     |       |   |   |   |   |
| **Full Service Branches:**                   |       |       |       |                      |       |                                   |       |                    |       |                                                     |       |   |   |   |   |
| 100 Averill Road                             |       |       | Owned      |                      |       |                                   | 1981       |                    |       | 2,487                                                    |       |   | 639 |   |   |
| Pomfret Center,  Connecticut 06259           |       |       |       |                      |       |                                   |       |                    |       |                                                     |       |   |   |   |   |
| 125 Wauregan Road                            |       |       | Owned      |                      |       |                                   | 1993       |                    |       | 2,452                                                    |       |   | 441 |   |   |
| Danielson, Connecticut 06239                 |       |       |       |                      |       |                                   |       |                    |       |                                                     |       |   |   |   |   |
| 11 Pratt Road                                |       |       | Owned      |                      |       |                                   | 2000       |                    |       | 2,162                                                    |       |   | 417 |   |   |
| Plainfield, Connecticut  06374               |       |       |       |                      |       |                                   |       |                    |       |                                                     |       |   |   |   |   |
| **Loan Center:**                             |       |       |       |                      |       |                                   |       |                    |       |                                                     |       |   |   |   |   |
| 50 Canal Street                              |       |       | Owned      |                      |       |                                   | 2000       |                    |       | 2,940                                                    |       |   | 228 |   |   |
| Putnam, Connecticut  06260                   |       |       |       |                      |       |                                   |       |                    |       |                                                     |       |   |   |   |   |
| **ATM Remote Location:**                     |       |       |       |                      |       |                                   |       |                    |       |                                                     |       |   |   |   |   |
| 168 Route 169                                |       |       | Leased     |                      |       |                                   | 2003       |                    |       | 30                                                       |       |   | — |   |   |
| Woodstock, Connecticut  06281                |       |       |       |                      |       |                                   |       |                    |       |                                                     |       |   |   |   |   |
| **Special Needs Limited Branch**(**1**)**:** |       |       |       |                      |       |                                   |       |                    |       |                                                     |       |   |   |   |   |
| Creamery Brook  Retirement Village           |       |       | —     |                      |       |                                   |       |                    |       | —                                                   |       |   | — |   |   |
| 36 Vina Lane                                 |       |       |       |                      |       |                                   |       |                    |       |                                                     |       |   |   |   |   |
| Brooklyn, Connecticut 06234                  |       |       |       |                      |       |                                   |       |                    |       |                                                     |       |   |   |   |   |
| Total                                        |       |       |       |                      |       |                                   |       |                    |       |                                                     |       |   | $3,369 |   |   |
|                                              |            |            |            |                           |            |                                        |            |                         |            |                                                          |            |  |  |  |  |  |  |  |

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(1)          Ourpersonnel are at this location for approximately three hours once a week. Thefacility provides a furnished room for us at no cost. Our personnel conductlimited banking activities, such as deposit taking, check cashing, notary andcertificate of deposit renewals. We began operating at this location in 2002.

The net book value of ourpremises, land and equipment was approximately $4.5 million at June 30,2005.

**ITEM 3.**                LegalProceedings

From time to time, we areinvolved as plaintiff or defendant in various legal proceedings arising in theordinary course of business. At June 30, 2005, we were not involved in anylegal proceedings, the outcome of which would be material to our financialcondition or results of operations.

**ITEM4.**                Submission ofMatters to a Vote of Security Holders

No matters were submittedto a vote of stockholders during the fourth quarter of the year under report.

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**PART II**

**ITEM 5.**                Marketfor Common Equity, Related Stockholder Matters and Small Business IssuerPurchases of Equity Securities

(a)   Our common stock is traded on the NasdaqNational Market under the symbol “PSBH.” Putnam Bancorp, MHC owns 3,729,846 shares, or 53.7% of our outstandingcommon stock. The approximate number of holders of record of PSB Holdings’common stock as of August 31, 2005 was 562. Certain shares of PSB Holdingsare held in “nominee” or “street” name and accordingly, the number of beneficialowners of such shares is not known or included in the foregoing number. Thefollowing table presents quarterly market information for PSB Holdings’ commonstock for the period ended June 30, 2005. PSB Holdings began trading onthe Nasdaq National Market on October 5, 2004. Accordingly, no informationprior to this date is available. The following information was provided by theNasdaq National Market.
| **Fiscal 2005**                  | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** | **Dividends** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|---------|------------|---------------|------------|
| Quarter ended  December 31, 2004 |       | $          | 12.25      |     | $          | 10.25   |       |          | $ .05 |   |   |
| Quarter ended  March 31, 2005    |       | 11.95      |       | 10.10    |       |    | .05        |          |       |
| Quarter ended  June 30, 2005     |       | 10.75      |       | 9.50     |       |    | .05        |          |       |
|                                       |            |            |            |          |            |         |            |               |            |  |  |  |  |

 

Dividend payments by PSB Holdings are dependentprimarily on dividends it receives from Putnam Savings Bank, because PSBHoldings will have no source of income other than dividends from Putnam SavingsBank, earnings from the investment of proceeds from the sale of shares ofcommon stock retained by PSB Holdings, and interest payments with respect toPSB Holdings’ loan to the Employee Stock Ownership Plan.

At June 30, 2005, there were no compensationplans under which equity securities of PSB Holdings were authorized forissuance.

In addition,reference is made to the “Market for Common Stock” section of PSB Holdings’2005 Annual Report to Stockholders, which is incorporated herein by reference.

(b)   On October 4,2004, PSB Holdings completed an offering of securities registered pursuant tothe Securities Act of 1933, as amended. In connection therewith:

                                         1.  The effective date of the registrationstatement on Form SB-2, as amended (File No. 333-116364) was August 13,2004.

                                         2.  The offering of securities was notunderwritten. Keefe, Bruyette & Woods, Inc. acted as marketingagent and offered the securities on a “best efforts” basis.

                                         3.  The class of securities registered was commonstock, $0.10 par value per share. The amount of such securities registered was3,213,279 shares at an offering price of $10.00 per share. The offeringterminated on September 14, 2004 with the sale of 3,089,691 shares at aprice of $10.00 per share. In addition to the shares issued to eligibledepositors, PSB Holdings issued 3,729,846 additional shares to Putnam Bancorp,MHC. As a result of the offering, at June 30, 2005,  purchasers in the offering owned 46.3% of PSBHoldings’ common stock, and Putnam Bancorp, MHC owned 53.7% of PSB Holdings’common stock.

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                                         4.  The total offering expensesincurred by PSB Holdings were approximately $1.1 million, none of which werepaid directly or indirectly to directors or officers of PSB Holdings or theirassociates. A breakdown of the fees by type is as follows (dollars inthousands):
| Marketing agent  commission and expenses |     | $       | 303,510   |   |
|------------------------------------------|----------|---------|-----------|--------|
| Other expenses                           | * * | 747,027 | * *  |
| Total expenses                           |     | $       | 1,050,537 |   |

 

                                         5.  Gross proceeds of the offering were $30.9million. PSB Holdings loaned $2.6 million to Putnam Savings Bank’s employeestock ownership plan to purchase stock in the offering and incurred $1.1million of expenses associated with the offering resulting in net proceeds of$29.8 million. One-half of the net proceeds were invested in Putnam SavingsBank and the remaining amount was initially invested in deposit accounts atPutnam Savings Bank and other financial institutions. These uses of proceeds donot represent a material change in the use of proceeds, described in PSBHoldings’ prospectus dated August 13, 2004.

(c)   PSB Holdings did not repurchase any shares of its common stockduring the relevant period.

**ITEM 6.**                Management’sDiscussion and Analysis of Financial Condition and Results of Operations

The following analysisdiscusses changes in the financial condition and results of operations at andfor the twelve months ended June 30, 2005 and 2004, and should be read inconjunction with the Company’s Condensed Consolidated Financial Statements andthe notes thereto, appearing in Part II, Item 7 of this annual report.

**Overview**

The Company’s results ofoperations depend primarily on net interest and dividend income, which is thedifference between the interest and dividend income earned on itsinterest-earning assets, such as loans and securities, and the interest expenseon its interest-bearing liabilities, such as deposits and borrowings. TheCompany also generates noninterest income, primarily from fees and servicecharges. Gains on sales of loans and securities and cash surrender value oflife insurance policies are added sources of noninterest income. The Company’snoninterest expense primarily consists of employee compensation and benefits,occupancy and equipment expense, advertising, data processing, professionalfees and other operating expenses.

**Comparisonof Financial Condition at June 30, 2005 and June 30, 2004**

***Assets.  ***Totalassets of the Company were $337.6 million at June 30, 2005, an increase of$58.5 million or 21.0%, from $279.1 million at June 30, 2004. Investmentsin available-for-sale securities increased $26.5 million or 20.9%, to $153.4million at June 30, 2005 compared to $126.9 million at June 30, 2004.There were no Federal funds sold at June 30, 2005, a decrease of $2.1million from June 30, 2004. The growth in securities was primarily due tothe $29.8 million in net proceeds raised in our recently completed minoritystock offering on October 4, 2004. Gross loans outstanding increased $31.2million to $166.4 million at June 30, 2005 from $135.2 million at June 30,2004. This increase was primarily due to an increase of $23.1 million inresidential mortgage loans. Of this $23.1 million increase, $9.2 million was awholesale purchase of residential mortgages. In addition to the wholesaleloan  purchase, residential mortgageloans increased $13.9 million, or 13.3% reflecting continued strong demand forsuch loans in our market area, as well as our efforts to deploy the netproceeds of our public offering. Commercial loans increased $8.2 million, or28.2%, from June 30, 2004 to June 30, 2005, which reflects thecontinued strong performance by the Company’s Business Banking Group as well asstrong economic conditions in our market area.

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***Liabilities.  ***Totalliabilities increased $28.8 million, or 11.3%, from $255.8 million at June 30,2004 to $284.6 million at June 30, 2005, primarily due to the increase indeposits. Deposits increased $14.7 million, or 7.2%, from $203.4 million at June 30,2004 to $218.1 million at June 30, 2005.

***Stockholders’ Equity.  ***Totalstockholders’ equity increased $29.7 million to $53.0 million at June 30,2005 from $23.3 million at June 30, 2004. The increase was primarily dueto net income of $1.3 million and the sale of 3,213,279 shares of common stockat $10.00 per share. These factors were partially offset by unearned ESOPcompensation of $2.5 million.

**Comparisonof Operating Results for the Twelve Months Ended June 30, 2005 and 2004**

***Net Income.  ***Netincome decreased $283,000, or 18.2%, to $1.3 million for the twelve monthsended June 30, 2005 from $1.6 million for the twelve months ended June 30,2004. The decrease in net income was primarily due to a one-time charge of $1.2million to establish and fund the Putnam Savings Foundation. This was partiallyoffset by an increase in net interest income. Net income for the twelve-monthperiod excluding this one time charge would have been $2.1 million or anincrease of $530,000, or 34.1% over the $1.6 million for the twelve monthsended June 30, 2004.

***Interest andDividend Income.  ***Interest and dividend incomeincreased by $2.7 million, or 22.4%, to $14.8 million for the twelve monthsended June 30, 2005 from $12.1 million for the twelve months ended June 30,2004. The increase in interest and dividend income resulted primarily from anincrease of $67.9 million, or 28.2%, in average interest-earning assets betweenthe periods. This was partially offset by a decrease of 25 basis points in theaverage yield on our interest-earning assets in a declining interest rateenvironment to 4.84% for the twelve months ended June 30, 2005 from 5.09%for the twelve months ended June 30, 2004. Interest income on loansincreased by $978,000, or 12.5%, to $8.8 million from $7.8 million. Interestand dividend income on investment securities increased $1.7 million, or 40.8%,to $5.9 million for the twelve months ended June 30, 2005 from $4.2million for the twelve months ended June 30, 2004. This increase wasprimarily due to the net proceeds of the stock offering, which were invested insecurities pending their deployment into loans.

***Interest Expense.  ***Interestexpense increased by $916,000, or 19.7%, to $5.6 million for twelve monthsended June 30, 2005 from $4.7 million for the twelve months ended June 30,2004. The increase in interest expense resulted primarily from an increase inaverage interest-bearing liabilities of $43.5 million, or 21.4% from period toperiod. This was partially offset by a decrease of 3 basis points in theaverage cost of our interest-bearing liabilities to 2.26% for the twelve monthsended June 30, 2005 from 2.29% for the twelve months ended June 30,2004.

***Net Interest andDividend Income.  ***Net interest and dividend incomeincreased $1.8 million, or 24.1%, to $9.2 million for the twelve months ended June 30,2005 from $7.4 million for the twelve months ended June 30, 2004. Theprimary reason for the improvement in our net interest and dividend income wasthe $24.4 million increase in our net interest-earning assets to $61.4 millionfor the twelve months ended June 30, 2005 from $37.0 million for thetwelve months ended June 30, 2004. Included in this increase was the $29.8million raised in our recently completed minority stock offering on October 4,2004.

***Provision for LoanLosses.  ***The provision for loan losses for thetwelve months ended June 30, 2005 was $135,000 compared to $60,000recorded for the twelve months ended June 30, 2004. The primary reason forthe increased provision was the $31.2 million increase in total loans, to $166.4million at June 30, 2005 from $135.2 million at June 30, 2004.

***Noninterest Income.  ***Noninterestincome decreased $55,000, or 4.3%, to $1.22 million for the twelve months endedJune 30, 2005 from $1.27 million for the twelve months ended June 30,2004. The decrease in noninterest income resulted primarily from a decrease incommissions from brokerage services. This was partially offset by increases innet gains on loan sales and other fee income.

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***Noninterest Expense.  ***Noninterestexpense increased by $2.2 million, or 34.4%, to $8.6 million for the twelvemonths ended June 30, 2005 from $6.4 million for the twelve months ended June 30,2004. Compensation and benefits expense increased by $389,000, or 10.3%, to$4.2 million for the twelve months ended June 30, 2005 from $3.8 millionfor the twelve months ended June 30, 2004. The primary reasons for theincrease in compensation and benefits expense were increased salaries andcommissions, due to increased staffing and higher medical insurance premiums. Inaddition, the current period included $106,000 in ESOP compensation expense ascompared to no ESOP compensation expense for the twelve months ended June 30,2004. Occupancy and equipment expense increased by $255,000, or 38.8%, to$913,000 for the twelve months ended June 30, 2005 from $658,000 for thetwelve months ended June 30, 2004 primarily due to increased depreciationexpense of $186,000. Other noninterest expense, consisting primarily ofcharitable contributions, marketing, office supplies, and professional expensesincreased by $1.5 million, or 79.2%, to $3.5 million for the twelve monthsended June 30, 2005 from $2.0 million for the twelve months ended June 30,2004. The increase resulted primarily from a one-time charge of $1.2 million toestablish and fund the Putnam Savings Foundation. In addition, there wereincreases in marketing expenses, data processing fees and other miscellaneousexpenses including a new OTS assessment.

***Provision for Income Taxes.  ***Theincome tax expense decreased by $274,000, or 42.0%, to $379,000 for the twelvemonths ended June 30, 2005 from $653,000 for the twelve months ended June 30,2004. Our effective tax rate was 23.0% for the twelve months ended June 30,2005, compared to 29.6% for the twelve months ended June 30, 2004. Theprimary reason for the decrease was due to the tax benefits associated with theestablishment and funding of the new Putnam Savings Foundation. The effectivetax rate differed from the statutory tax rate of 34% primarily due to thedividends-received deduction applicable to certain securities in our investmentportfolio, tax-exempt municipal income and non-taxable bank-owned lifeinsurance income.

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**Average Balance Sheet**

Thefollowing tables set forth average balance sheets, average yields and costs,and certain other information for the periods indicated. No tax-equivalentyield adjustments were made, as the effect thereof was not material. Allaverage balances are daily average balances. Non-accrual loans were included inthe computation of average balances, but have been reflected in the table asloans carrying a zero yield. The yields set forth below include the effect ofdeferred fees, discounts and premiums that are amortized or accreted tointerest income or expense.
| ** **                                                      | ** ** | **For the twelve months ended June 30,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                                               | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **Average  Balance**                                                   | ** ** | **Interest/  Dividends** | ** ** | **Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest/  Dividends** | ** ** | **Yield/  Cost** | ** ** |
| ** **                                                      | ** ** | **(Dollars in thousands)**                                   | ** ** |
| **Interest-earning assets:**                                    |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment  securities                                          |       | $                                                                      | 150,872    |   |   | $ | 5,854 |   |   | 3.88 | % | $ | 105,741 |   |   | $ | 4,206 |   |   | 3.98 | % |
| Loans                                                           |       | 150,275                                                                |       |   | 8,885 |   |   | 5.91 | % | 130,661 |   |   | 7,912 |   |   | 6.06 | % |
| Other earning assets                                            |       | 7,369                                                                  |       |   | 179 |   |   | 2.43 | % | 4,209 |   |   | 122 |   |   | 2.90 | % |
| Total  interest-earning assets                                  |       | 308,516                                                                |       |   | 14,918 |   |   | 4.84 | % | 240,611 |   |   | 12,240 |   |   | 5.09 | % |
| Non-interest-earning  assets                                    |       | 13,205                                                                 |       |   |   |   |   |   |   | 8,204 |   |   |   |   |   |   |   |
| Total assets                                                    |       | $                                                                      | 321,721    |   |   |   |   |   |   |   | $ | 248,815 |   |   |   |   |   |   |   |
| **Interest-bearing  liabilities:**                              |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW accounts                                                    |       | $                                                                      | 19,687     |   |   | $ | 245 |   |   | 1.24 | % | $ | 8,677 |   |   | $ | 26 |   |   | 0.30 | % |
| Savings accounts                                                |       | 47,146                                                                 |       |   | 317 |   |   | 0.67 | % | 43,641 |   |   | 377 |   |   | 0.86 | % |
| Money market  accounts                                          |       | 40,513                                                                 |       |   | 670 |   |   | 1.65 | % | 44,442 |   |   | 719 |   |   | 1.62 | % |
| Time deposits                                                   |       | 85,595                                                                 |       |   | 2,546 |   |   | 2.97 | % | 77,514 |   |   | 2,396 |   |   | 3.09 | % |
| Borrowed money                                                  |       | 54,147                                                                 |       |   | 1,794 |   |   | 3.31 | % | 29,305 |   |   | 1,139 |   |   | 3.89 | % |
| Total  interest-bearing liabilities                             |       | 247,088                                                                |       |   | 5,572 |   |   | 2.25 | % | 203,579 |   |   | 4,657 |   |   | 2.29 | % |
| Non-interest-bearing  demand deposits                           |       | 25,230                                                                 |       |   |   |   |   |   |   | 21,086 |   |   |   |   |   |   |   |
| Other  non-interest-bearing liabilities                         |       | 4,471                                                                  |       |   |   |   |   |   |   | 845 |   |   |   |   |   |   |   |
| Capital accounts                                                |       | 44,932                                                                 |       |   |   |   |   |   |   | 23,305 |   |   |   |   |   |   |   |
| Total liabilities  and capital accounts                    |       | $                                                                      | 321,721    |   |   |   |   |   |   |   | $ | 248,815 |   |   |   |   |   |   |   |
| Net interest income                                             |       |                                                                   |       |   | $ | 9,346 |   |   |   |   |   |   |   | $ | 7,583 |   |   |   |   |
| Interest rate  spread                                           |       |                                                                   |       |   |   |   |   | 2.58 | % |   |   |   |   |   |   | 2.80 | % |
| Net  interest-earning assets                                    |       | $                                                                      | 61,428     |   |   |   |   |   |   |   | $ | 37,032 |   |   |   |   |   |   |   |
| Net interest  margin                                            |       |                                                                   |       |   |   |   |   | 3.03 | % |   |   |   |   |   |   | 3.15 | % |
| Average earning assets  to average interest-bearing liabilities |       |                                                                   |       |   |   |   |   | 124.86 | % |   |   |   |   |   |   | 118.19 | % |

 

38

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**Rate/VolumeAnalysis**

Thefollowing table sets forth the effects of changing rates and volumes on our netinterest income for the periods indicated. The rate column shows the effectsattributable to changes in rate (changes in rate multiplied by prior volume). Thevolume column shows the effects attributable to changes in volume (changes involume multiplied by prior rate). The net column represents the sum of theprior columns. For purposes of this table, changes attributable to changes inboth rate and volume that cannot be segregated have been allocatedproportionately based on the changes due to rate and the changes due to volume.
| ** **                         | ** ** | **Years Ended June 30,  2005 vs. 2004** | ** ** |
|------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Increase (Decrease)  Due to**                        | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Rate**                                                         | ** ** | **Volume** | ** ** | **Net** | ** ** |
| ** **                         | ** ** | **(In thousands)**                                          | ** ** |
| **Interest  and dividend income:** |       |                                                             |       |   |   |   |   |
| Investment securities              |       | $                                                                | (106       | ) | $ | 1,754 |   | $ | 1,648 |   |
| Loans receivable                   |       | (190                                                             | )          | 1,163 |   | 973 |   |
| Other earning assets               | * *   | (22                                                              | )          | 79 |   | 57 |   |
| Total interest-earning assets      | * *   | $                                                                | (318       | ) | $ | 2,996 |   | $ | 2,678 |   |
| **Interest expense:**              |       |                                                             |       |   |   |   |   |
| NOW accounts                       |       | $                                                                | 156        |   | $ | 63 |   | $ | 219 |   |
| Savings accounts                   |       | (88                                                              | )          | 28 |   | (60 | ) |
| Money Market accounts              |       | 16                                                               |       | (65 | ) | (49 | ) |
| Time deposits                      |       | $                                                                | (93        | ) | $ | 243 |   | $ | 150 |   |
| Other borrowed money               |       | (189                                                             | )          | 844 |   | 655 |   |
| Total interest-bearing liabilities |       | $                                                                | (198       | ) | $ | 1,113 |   | $ | 915 |   |
| Net change in  interest income     |       | $                                                                | (120       | ) | $ | 1,883 |   | $ | 1,763 |   |

 

**Liquidity and Capital Resources**

The term liquidity refers to the ability of theCompany and the Bank to meet current and future short-term financialobligations. The Company and the Bank further define liquidity as the abilityto generate adequate amounts of cash to fund loan originations, depositwithdrawals and operating expenses. Liquidity management is both a daily andlong-term function of business management. The Bank’s primary sources ofliquidity are deposits, scheduled amortization and prepayments of loanprincipal and mortgage-related securities, and Federal Home Loan Bankborrowings. The Bank can borrow funds from the Federal Home Loan Bank based oneligible collateral of loans and securities. The Bank had Federal Home LoanBank borrowings as of June 30, 2005 of $62.6 million with unused borrowingcapacity of $61.2 million. The Bank also has the ability to originate brokeredCDs as a secondary source of liquidity.

The Bank’s primary investing activities are theorigination of loans and the purchase of investment securities. During thetwelve months ended June 30, 2005 and 2004, the Bank originated loans netof principal payments of approximately $31.9 million and $26.1 million,respectively. In addition, the Bank purchased $9.2 million of residentialmortgage loans during the twelve months ended June 30, 2005. There was noloan purchases during the twelve months ended June 30, 2004. Purchases ofsecurities totaled $103.5 million and $64.1 million, for the twelve monthsended June 30, 2005 and 2004, respectively. The primary reason for theincreased security purchases for 2005 is the money on deposit at the Bankduring the Company’s stock subscription period was invested in short terminvestments.

Loan repayment and maturing investment securities area relatively predictable source of funds. However, deposit flows, calls ofinvestment securities and prepayments of loans and mortgage-backed 

39

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securities are stronglyinfluenced by interest rates, general and economic conditions and competitionin the marketplace. These factors reduce the predictability of the timing ofthese sources of funds. Deposit flows are affected by the level of interestrates, by the interest rates and products offered by competitors and by otherfactors. The Bank monitors its liquidity position frequently and anticipatesthat it will have sufficient funds to meet its current funding commitments.

Certificates of deposits totaled $83.9 million at June 30,2005. The Bank relies on competitive rates, customer service and long-standingrelationships with customers to retain deposits. Based on the Bank’s experiencewith deposit retention and current retention strategies, management believesthat, although it is not possible to predict future terms and conditions uponrenewal, a significant portion of such deposits will remain with the Bank.

Management is not aware ofany known trends, events or uncertainties that will have or are reasonablylikely to have a material effect on the Company’s or the Bank’s liquidity,capital or operations, nor is management aware of any current recommendationsby regulatory authorities which, if implemented, would have a material effecton the Company’s or the Bank’s liquidity, capital or operations.

**Off-Balance Sheet Arrangements**

In addition to the normal course of operations, weengage in a variety of financial transactions that, in accordance withgenerally accepted accounting principles are not recorded in our financialstatements. These transactions involve, to varying degrees, elements of credit,interest rate, and liquidity risk. Such transactions are used primarily tomanage customers’ requests for funding and take the form of loan commitments,lines of credit, and letters of credit.

For the twelve monthsended June 30, 2005, we engaged in no off-balance sheet transactionsreasonably likely to have a material effect on our financial condition, resultsof operations or cash flows.

**ITEM 7.**                FinancialStatements

For the Company’sConsolidated Financial Statements, see table of contents on page 41.

**ITEM 8.**                ChangesIn and Disagreements With Accountants on Accounting and Financial Disclosure

None.

**ITEM 8A.**        Controlsand Procedures

Under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, we evaluated the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rule 13a-15(e) underthe Securities Exchange Act of 1934) as of the end of the period covered bythis report. Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that, as of the end of the period covered by thisreport, our disclosure controls and procedures were effective to ensure thatinformation required to be disclosed in the reports that the Company files orsubmits under the Securities Exchange Act of 1934, is recorded, processed,summarized and reported, within the time periods specified in the SEC’s rules andforms. There has been no change in the Company’s internal control overfinancial reporting during the Company’s fourth quarter of fiscal year 2005that has materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

**ITEM 8B.**       OtherInformation

None.

40

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**PART III**

**ITEM 9.**                Directors,Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) ofthe Exchange 

PSB Holdings has adopted a Code of Ethics that appliesto PSB Holdings’ principal executive officer, principal financial officer, principalaccounting officer or controller or persons performing similar functions. TheCode of Ethics may be accessed on PSB Holdings’ website atwww.putnamsavings.com. The Code of Ethics is also filed as Exhibit 14 tothis Form 10-KSB.

Information concerningdirectors and executive officers of PSB Holdings is incorporated herein byreference from our definitive Proxy Statement (the “Proxy Statement”),specifically the section captioned “Proposal I—Election of Directors.”

**ITEM 10.**         ExecutiveCompensation

Information concerningexecutive compensation is incorporated herein by reference from our ProxyStatement, specifically the section captioned “Proposal I—Electionof Directors.”

**ITEM 11.**         SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

Information concerningsecurity ownership of certain owners and management is incorporated herein byreference from our Proxy Statement, specifically the sections captioned “VotingSecurities and Principal Holders Thereof” and “Proposal I—Electionof Directors.”

**ITEM 12.**         CertainRelationships and Related Transactions

Information concerningrelationships and transactions is incorporated herein by reference from ourProxy Statement, specifically the section captioned “Transactions with CertainRelated Persons.”

**ITEM 13.**         Exhibits

(a)           *FinancialStatements*

(A)      Management ResponsibilityStatement

(B)       Report of IndependentRegistered Public Accounting Firm

(C)       Consolidated Statements ofFinancial Condition

(D)      Consolidated Statements ofOperations

(E)       Consolidated Statements ofChanges In Stockholders’ Equity

(F)        Consolidated Statements ofCash Flows

(G)     Notes to ConsolidatedFinancial Statements

(b)          *FinancialStatement Schedules*

41

----

(c)           *Exhibits.*
| 3  | .1     | Charter of PSB Holdings, Inc.*                                                                                                                                                                            |
|----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3  | .2     | Bylaws of PSB Holdings, Inc.*                                                                                                                                                                             |
| 4  |   | Form of Common Stock Certificate of PSB  Holdings, Inc.*                                                                                                                                             |
| 10 | .1     | Employee Stock Ownership Plan*                                                                                                                                                                                 |
| 10 | .2     | Deferred Compensation Plan*                                                                                                                                                                                    |
| 10 | .3     | Purchase and assumption agreement concerning the  Griswold, Ledyard, and Plainfield branches between Peoples Savings Bank and  Putnam Savings Bank dated June 13, 2005**                                  |
| 14 |   | Code of Ethics                                                                                                                                                                                                 |
| 21 |   | Subsidiaries of Registrant*                                                                                                                                                                                    |
| 31 | .1     | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, as  amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |
| 31 | .2     | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, as  amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |
| 32 |   | Certification of Chief Executive Officer and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                      |

----

*                    Incorporatedby reference to the Registration Statement on Form SB-2 of PSBHoldings (file no. 333-116364), originally filed with the Securitiesand Exchange Commission on June 10, 2004.

****            **Incorporatedby reference to Exhibit 10.1 of the current report on form 8-K ofPSB Holdings, Inc. originally filed with the Securities and ExchangeCommission on June 16, 2005

**ITEM 14.**         PrincipalAccountant Fees and Services

Information concerning principal accountant fees andservices is incorporated herein by reference from our Proxy Statement,specifically the section captioned “Proposal 3-Ratification ofAppointment of Independent Auditors.”

42

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**SIGNATURES**

Pursuantto the requirements of Section 13 of the Securities Exchange Act of 1934,the Company has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|                          |   | **PSB HOLDINGS, INC.**                          |
|--------------------------|--------|-------------------------------------------------|
| Date: September 19, 2005 | By:    | /s/ ROBERT G. COCKS, JR.                   |
|                     |   | Robert G. Cocks, Jr.                       |
|                     |   | President, Chief Executive Officer and Director |
|                     |   | (Duly Authorized Representative)                |

 

Pursuantto the requirements of the Securities Exchange of 1934, this report has beensigned by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.
|                               | **Signatures** | ** **                               | ** ** |                     | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|-------------------------------|----------------|------------------------------------------|------------|---------------------|-----------|------------|------------|--|----------|------------|
| /s/ ROBERT G. COCKS, JR. |           | President, Chief Executive  Officer and  |       | September  19, 2005 |
| Robert G. Cocks, Jr.     |           | Director (Principal Executive Officer)   |       |                |
| /s/ ROBERT J. HALLORAN, JR    |           | Vice President and  Treasurer (Principal |       | September  19, 2005 |
| Robert J. Halloran, Jr        |           | Financial and Accounting Officer)        |       |                |
| /s/ THOMAS A. BORNER          |           | Chairman of the Board                    |       | September  19, 2005 |
| Thomas A. Borner              |           |                                     |       |                |
| /s/ A. LEON ARCHAMBAULT       |           | Director                                 |       | September  19, 2005 |
| A. Leon Archambault           |           |                                     |       |                |
| /s/ MAURICE P. BEAULAC        |           | Director                                 |       | September  19, 2005 |
| Maurice P. Beaulac            |           |                                     |       |                |
| /s/ PAUL M. KELLY             |           | Director                                 |       | September  19, 2005 |
| Paul M. Kelly                 |           |                                     |       |                |
| /s/ RICHARD A. LOOMIS         |           | Director                                 |       | September  19, 2005 |
| Richard A. Loomis             |           |                                     |       |                |
| /s/ WILBUR D. NEUMANN         |           | Director                                 |       | September  19, 2005 |
| Wilbur D. Neumann             |           |                                     |       |                |
| /s/ MARY E. PATENAUDE         |           | Director                                 |       | September  19, 2005 |
| Mary E. Patenaude             |           |                                     |       |                |
| /s/ CHARLES H. PUFFER         |           | Director                                 |       | September  19, 2005 |
| Charles H. Puffer             |           |                                     |       |                |

 

 

43

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**PSB Holdings, Inc.**

**Table of Contents**
|                                                                  | ** ** | **Page** |
|------------------------------------------------------------------|------------|----------|
| Report of Independent Registered Public Accounting  Firm         |       | 45       |
| Consolidated Statements of Financial Condition                   |       | 46       |
| Consolidated Statements of Operations                            |       | 47       |
| Consolidated Statements of Changes in Stockholders’  Equity |       | 48       |
| Consolidated Statements of Cash Flows                            |       | 49       |
| Notes to Consolidated Financial Statements                       |       | 50       |
| 1.   Summary of Significant Accounting  Policies  |       | 50       |
| 2.   Investment  Securities                       |       | 56       |
| 3.   Loans                                        |       | 58       |
| 4.   Premises  and Equipment                      |       | 60       |
| 5.   Deposits                                     |       | 61       |
| 6.   Borrowed  Funds                              |       | 62       |
| 7.   Income  Taxes                                |       | 63       |
| 8.   Regulatory  Capital                          |       | 64       |
| 9.   Retained  Earnings                           |       | 66       |
| 10. Employee  Benefits                                      |       | 66       |
| 11. Other Comprehensive Income                              |       | 67       |
| 12. Financial  Instruments                                  |       | 68       |
| 13. Branch Acquisitions Pending                             |       | 69       |
| 14. Parent Company Only Financial Statements                |       | 70       |

 

44

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**Reportof Independent Registered Public Accounting Firm**

To the Board of DirectorsPSB Holdings, Inc.

We have audited the accompanying consolidatedstatements of financial condition of PSB Holdings, Inc. (the “Company”) andsubsidiary as of June 30, 2005 and 2004, and the related consolidatedstatements of operations, changes in stockholders’ equity and cash flows forthe years then ended. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of PSB Holdings, Inc.and subsidiary at June 30, 2005 and 2004, and the results of theiroperations and their cash flows for the years then ended, in conformity withU.S. generally accepted accounting principles.
| /s/ SNYDER  & HALLER, P.C. |   |
|--------------------------------|--------|
| Hartford, Connecticut          |   |
| July 28, 2005             |   |

 

45

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**PSB Holdings, Inc.Consolidated Statementsof Financial Condition**
| ** **                                                                                                                  | ** ** | **June 30,**                                    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **2005**                                             | ** ** | **2004** | ** ** |
| ** **                                                                                                                  | ** ** | **(in thousands  except share data)** | ** ** |
| **ASSETS**                                                                                                                  |       |                                                 |       |   |   |
| Cash and due from  depository institutions                                                                                  |       | $                                                    | 7,665      |   | $ | 5,276 |   |
| Interest-bearing  deposits                                                                                                  |       | 40                                                   |       | 51 |   |
| Investment in  federal funds                                                                                                |       | —                                               |       | 2,100 |   |
| Investment  securities                                                                                                      |       | 153,405                                              |       | 126,866 |   |
| Loans receivable,  net                                                                                                      |       | 165,006                                              |       | 133,955 |   |
| Loans  held-for-sale                                                                                                        |       | —                                               |       | 1,998 |   |
| Premises and  equipment, net                                                                                                |       | 4,514                                                |       | 4,151 |   |
| Accrued income  receivable                                                                                                  |       | 1,571                                                |       | 1,421 |   |
| Deferred income  taxes                                                                                                      |       | 901                                                  |       | 687 |   |
| Bank owned life  insurance                                                                                                  |       | 2,270                                                |       | 2,189 |   |
| Deposit for  branch acquisitions                                                                                            |       | 1,888                                                |       | — |   |
| Other assets                                                                                                                |       | 375                                                  |       | 391 |   |
| **Total assets**                                                                                                            |       | $                                                    | 337,635    |   | $ | 279,085 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                              |       |                                                 |       |   |   |
| Liabilities                                                                                                                 |       |                                                 |       |   |   |
| Deposits                                                                                                                    |       | $                                                    | 218,123    |   | $ | 203,397 |   |
| Borrowed funds                                                                                                              |       | 63,734                                               |       | 50,240 |   |
| Mortgagors’ escrow accounts                                                                                            |       | 1,029                                                |       | 895 |   |
| Other liabilities                                                                                                           |       | 1,729                                                |       | 1,251 |   |
| Total liabilities                                                                                                           |       | 284,615                                              |       | 255,783 |   |
| Commitments and  Contingencies                                                                                              |       |                                                 |       |   |   |
| Stockholders’  Equity                                                                                                  |       |                                                 |       |   |   |
| Preferred stock, $0.10 par value, 1,000,000 shares  authorized, no shares issued and outstanding                            |       | —                                               |       | — |   |
| Common stock, $0.10 par value, 12,000,000 shares  authorized, 6,943,125 shares issued and outstanding at June 30, 2005 |       | 694                                                  |       | — |   |
| Additional paid-in capital                                                                                                  |       | 30,446                                               |       | 51 |   |
| Unearned ESOP shares                                                                                                        |       | (2,472                                               | )          | — |   |
| Retained earnings                                                                                                           |       | 23,808                                               |       | 22,996 |   |
| Accumulated other comprehensive income                                                                                      |       | 544                                                  |       | 255 |   |
| Total stockholders’ equity                                                                                             |       | 53,020                                               |       | 23,302 |   |
| **Total  liabilities and stockholders’ equity**                                                                        |       | $                                                    | 337,635    |   | $ | 279,085 |   |

 

See notes to consolidated financial statements.

46

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**PSBHoldings, Inc.Consolidated Statements of Operations**
| ** **                                               | ** ** | **For the Years Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                               | ** ** | **2005**                                                  | ** ** | **2004** | ** ** |
| ** **                                               | ** ** | **(in thousands)**                                   | ** ** |
| **Interest income**                                      |       |                                                      |       |   |   |
| Interest on loans                                        |       | $                                                         | 8,823      |   | $ | 7,845 |   |
| Interest and dividends on investments                    |       | 5,945                                                     |       | 4,223 |   |
| Total interest income                                    |       | 14,768                                                    |       | 12,068 |   |
| **Interest  expense**                                    |       |                                                      |       |   |   |
| Deposits and escrow                                      |       | 3,778                                                     |       | 3,517 |   |
| Borrowed funds                                           |       | 1,794                                                     |       | 1,139 |   |
| Total interest expense                                   |       | 5,572                                                     |       | 4,656 |   |
| **Net interest income**                                  |       | 9,196                                                     |       | 7,412 |   |
| **Provision for loan losses**                            |       | 135                                                       |       | 60 |   |
| **Net interest income after provision for loan  losses** |       | 9,061                                                     |       | 7,352 |   |
| **Noninterest  income**                                  |       |                                                      |       |   |   |
| Fees for services                                        |       | 829                                                       |       | 831 |   |
| Net gain on sale of loans                                |       | 85                                                        |       | 61 |   |
| Commissions from brokerage service                       |       | 61                                                        |       | 148 |   |
| Other income                                             |       | 185                                                       |       | 175 |   |
| Net investment security gains                            |       | 58                                                        |       | 58 |   |
| Total noninterest income                                 |       | 1,218                                                     |       | 1,273 |   |
| **Noninterest  expense**                                 |       |                                                      |       |   |   |
| Compensation and benefits                                |       | 4,173                                                     |       | 3,784 |   |
| Occupancy and equipment                                  |       | 913                                                       |       | 658 |   |
| Data processing                                          |       | 568                                                       |       | 521 |   |
| Contribution to The Putnam Savings Foundation            |       | 1,236                                                     |       | — |   |
| Advertising and marketing                                |       | 246                                                       |       | 209 |   |
| Other noninterest expense                                |       | 1,495                                                     |       | 1,248 |   |
| Total noninterest expense                                |       | 8,631                                                     |       | 6,420 |   |
| **Income before income tax expense**                     |       | 1,648                                                     |       | 2,205 |   |
| **Income tax expense**                                   |       | 379                                                       |       | 653 |   |
| **Net income**                                           |       | $                                                         | 1,269      |   | $ | 1,552 |   |
| **Earnings Per Share—See Note 1**                   |       |                                                      |       |   |   |

 

See notes to consolidated financial statements.

47

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**PSBHoldings, Inc.Consolidated Statements of Changes in Stockholders’ Equity**
| ** **                                                                                 | ** ** | **Common  Stock**       | ** ** | **Additional  Paid-in  Capital** | ** ** | **Unallocated  Common  Shares held  by ESOP** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------------|------------|---------------------------------------------------------|------------|------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                 | ** ** | **(in thousands)** | ** ** |
| **Balance  at June 30, 2003**                                                              |       |                    | $          | —                           |       |                                                    |       | $                      | —     |                                                      |       |                                  | $          | — |   |   | $ | 21,515 |   |   | $ | 1,544 |   |   |   | $ | 23,059 |   |   |
| Common stock issued                                                                        |       |                    | —     |                             |       |                                                    | 51         |                   |       |                                                      | —     |                                  |       | — |   |   | — |   |   |   | 51 |   |   |
| Dividends paid                                                                             |       |                    | —     |                             |       |                                                    | —     |                   |       |                                                      | —     |                                  |       | (71 | ) |   | — |   |   |   | (71 | ) |   |
| Comprehensive  income:                                                                     |       |                    |       |                             |       |                                                    |       |                   |       |                                                      |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                 |       |                    |       |                             |       |                                                    |       |                   |       |                                                      |       |                                  |       | 1,552 |   |   |   |   |   |   |   |   |   |
| Net change in unrealized holding gain on  available-for-sale securities, net of tax effect |       |                    |       |                             |       |                                                    |       |                   |       |                                                      |       |                                  |       |   |   |   | (1,289 | ) |   |   |   |   |   |
| Comprehensive income                                                                       |       |                    |       |                             |       |                                                    |       |                   |       |                                                      |       |                                  |       |   |   |   |   |   |   |   | 263 |   |   |
| **Balance at June 30, 2004**                                                               |       |                    | $          | —                           |       |                                                    |       | $                      | 51         |                                                      |       |                                  | $          | — |   |   | $ | 22,996 |   |   | $ | 255 |   |   |   | $ | 23,302 |   |   |
| Common stock issued net of expenses of $1,051                                              |       |                    | 694        |                             |       |                                                    | 30,388     |                   |       |                                                      | —     |                                  |       | — |   |   | — |   |   |   | 31,082 |   |   |
| Dividends paid/declared                                                                    |       |                    | —     |                             |       |                                                    | —     |                   |       |                                                      | —     |                                  |       | (457 | ) |   | — |   |   |   | (457 | ) |   |
| ESOP shares purchased                                                                      |       |                    | —     |                             |       |                                                    | —     |                   |       |                                                      | (2,571     | )                                     |       | — |   |   | — |   |   |   | (2,571 | ) |   |
| ESOP shares released                                                                       |       |                    | —     |                             |       |                                                    | 7          |                   |       |                                                      | 99         |                                  |       | — |   |   | — |   |   |   | 106 |   |   |
| Comprehensive  income:                                                                     |       |                    |       |                             |       |                                                    |       |                   |       |                                                      |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                 |       |                    |       |                             |       |                                                    |       |                   |       |                                                      |       |                                  |       | 1,269 |   |   |   |   |   |   |   |   |   |
| Net change in unrealized holding gain on  available-for-sale securities, net of tax effect |       |                    |       |                             |       |                                                    |       |                   |       |                                                      |       |                                  |       |   |   |   | 289 |   |   |   |   |   |   |
| Comprehensive income                                                                       |       |                    |       |                             |       |                                                    |       |                   |       |                                                      |       |                                  |       |   |   |   |   |   |   |   | 1,558 |   |   |
| **Balance  at June 30, 2005**                                                              |       |                    | $          | 694                              |       |                                                    |       | $                      | 30,446     |                                                      |       |                                  | $          | (2,472 | ) |   | $ | 23,808 |   |   | $ | 544 |   |   |   | $ | 53,020 |   |   |

 

See notes to consolidated financial statements.

48

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**PSBHoldings, Inc.Consolidated Statements of Cash Flows**
| ** **                                                                     | ** ** | **For the Years Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                                                  | ** ** | **2004** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**                                   | ** ** |
| **Cash flows from operating  activities**                                      |       |                                                      |       |   |   |
| Net income                                                                     |       | $                                                         | 1,269      |   | $ | 1,552 |   |
| Adjustments to reconcile  net income to cash provided by operating activities: |       |                                                      |       |   |   |
| Provision for loan losses                                                      |       | 135                                                       |       | 60 |   |
| Depreciation                                                                   |       | 486                                                       |       | 277 |   |
| Net amortization on available-for-sale securities                              |       | 461                                                       |       | 747 |   |
| Amortization of premium on purchased loans                                     |       | 19                                                        |       | — |   |
| Contribution of common stock to charitable foundation                          |       | 1,236                                                     |       | — |   |
| Net realized investment security gains                                         |       | (58                                                       | )          | (58 | ) |
| Originations of loans for resale                                               |       | (9,861                                                    | )          | (12,593 | ) |
| Proceeds from sale of loans                                                    |       | 11,944                                                    |       | 11,707 |   |
| Gain on sale of loans                                                          |       | (85                                                       | )          | (61 | ) |
| Increase in cash surrender value of Bank owned life  insurance                 |       | (81                                                       | )          | (100 | ) |
| Deferred income tax provision                                                  |       | (399                                                      | )          | 6 |   |
| ESOP shares released                                                           |       | 106                                                       |       | — |   |
| Net  change in:                                                                |       |                                                      |       |   |   |
| Accrued income receivable                                                      |       | (150                                                      | )          | (147 | ) |
| Deferred loan fees                                                             |       | 13                                                        |       | (94 | ) |
| Other assets                                                                   |       | 16                                                        |       | (244 | ) |
| Other liabilities                                                              |       | 318                                                       |       | 8 |   |
| **Net cash provided by operating activities**                                  |       | 5,369                                                     |       | 1,060 |   |
| **Cash  flows from investing activities**                                      |       |                                                      |       |   |   |
| Proceeds from sales of available-for-sale securities                           |       | 45,113                                                    |       | 4,373 |   |
| Proceeds from maturities of available-for-sale  securities                     |       | 31,886                                                    |       | 32,782 |   |
| Purchase of available-for-sale securities                                      |       | (103,467                                                  | )          | (64,138 | ) |
| Purchase of loans                                                              |       | (9,240                                                    | )          | — |   |
| Loan originations net of principal payments                                    |       | (21,979                                                   | )          | (13,457 | ) |
| Deposit for branch acquisitions                                                |       | (1,888                                                    | )          | — |   |
| Purchase of premises and equipment                                             |       | (849                                                      | )          | (1,700 | ) |
| **Net cash used by investing activities**                                      |       | (60,424                                                   | )          | (42,140 | ) |
| **Cash  flows from financing activities**                                      |       |                                                      |       |   |   |
| Change in savings and demand deposit accounts                                  |       | 7,335                                                     |       | 15,031 |   |
| Change in time deposit accounts                                                |       | 7,391                                                     |       | (3,067 | ) |
| Proceeds from long term borrowings                                             |       | 13,075                                                    |       | 26,350 |   |
| Repayments of long term borrowings                                             |       | (17,544                                                   | )          | (8,250 | ) |
| Net change in short term borrowings                                            |       | 17,963                                                    |       | 5,140 |   |
| Change in mortgagors’ escrow accounts                                     |       | 134                                                       |       | 43 |   |
| Proceeds from common stock offering                                            |       | 30,897                                                    |       | 51 |   |
| Cost of common stock issuance                                                  |       | (1,051                                                    | )          | — |   |
| Acquisition of common stock by ESOP                                            |       | (2,571                                                    | )          | — |   |
| Dividends paid                                                                 |       | (296                                                      | )          | (71 | ) |
| **Net cash provided by financing activities**                                  |       | 55,333                                                    |       | 35,227 |   |
| Increase (decrease) in cash and cash equivalents                               |       | 278                                                       |       | (5,853 | ) |
| Cash and cash equivalents at beginning of year                                 |       | 7,427                                                     |       | 13,280 |   |
| **Cash and cash equivalents at end of year**                                   |       | $                                                         | 7,705      |   | $ | 7,427 |   |
| ***Supplemental  disclosures***                                                |       |                                                      |       |   |   |
| Cash paid during the year  for:                                                |       |                                                      |       |   |   |
| Interest                                                                       |       | $                                                         | 5,519      |   | $ | 4,658 |   |
| Income taxes                                                                   |       | $                                                         | 705        |   | $ | 841 |   |

 

See notes to consolidated financial statements.

49

----

**PSB Holdings, Inc. Notes to Consolidated Financial Statements**

**1.   Summaryof Significant Accounting Policies**

*Principles ofBusiness*

PSB Holdings, Inc. (the “Company”) is a federallychartered holding company formed on May 27, 2003 for the purpose ofacquiring all of the common stock of Putnam Savings Bank (the “Bank”)concurrent with the Bank’s reorganization from a mutual savings institution tothe mutual holding company form of organization. No shares were offered to thepublic as part of this reorganization.

On October 4, 2004, the Company completed a planof stock issuance pursuant to which 44.5% of its common stock was sold toeligible depositors and the Employee Stock Ownership Plan. The Company issued atotal of 6,943,125 shares.

3,729,846 shares, representing 53.72% of total sharesissued, was issued to Putnam Bancorp MHC in exchange for its ownership of thebank. The sole purpose of Putnam Bancorp MHC is to own a majority of the commonstock of PSB Holdings, Inc.

As part of the stock issuance the Bank established thePutnam Savings Bank Employee Stock Ownership Plan (ESOP), which purchased257,062 shares of common stock. The ESOP borrowed the necessary funds from theCompany. The Bank intends to make annual contributions adequate to meet thedebt service requirements of the ESOP.

In connection with the stock offering the Companyestablished The Putnam Savings Foundation and contributed 123,588 shares ofcommon stock, representing 4% of shares sold to the public. The Foundation willsupport charities in the geographic area the Bank serves. The Bank recognizedan expense of $1,235,880 representing the shares valued at $10.

The Bank is a federally chartered savings bank andprovides a full range of banking services to individual and small businesscustomers located primarily in Eastern Connecticut. The Bank is subject tocompetition from other financial institutions throughout the region.

Both the Company and theBank are subject to the regulations of certain federal agencies and undergoperiodic examinations by those regulatory authorities.

*Basis ofpresentation and consolidation*

The consolidated financial statements include theaccounts of the Company and its wholly-owned subsidiary, Putnam Savings Bank,and the Bank’s wholly owned subsidiaries, Windham North, LLC and PSB Realty,LLC. Significant intercompany accounts and transactions have been eliminated inconsolidation.

The accounting and reporting policies of the Companyand its subsidiaries conform to generally accepted accounting principles in theUnited States of America and to general practices within the banking industry. Suchpolicies have been followed on a consistent basis.

In preparing the consolidated financial statements,management is required to make estimates and assumptions that affect thereported amounts of assets and liabilities as of the date of the statements ofcondition and operations for the period. Actual results could differ from thoseestimates.

Material estimates thatare particularly susceptible to significant change in the near-term relate tothe determination of the allowance for losses on loans and the valuation ofreal estate acquired in connection with foreclosure or in satisfaction of loans.While management uses available information to recognize 

50

----

**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**1.**   Summary of SignificantAccounting Policies (Continued)

losseson loans and other real estate owned, future additions to the allowance may benecessary based on changes in economic conditions, particularly in Connecticut.

*Cash and cashequivalents*

For purposes of reportingcash flows, cash and cash equivalents include cash and amounts due fromdepository institutions, interest-bearing deposits, and investments in federalfunds.

*Interest-bearingdeposits*

Interest-bearing depositsconsist of deposit accounts with the Federal Home Loan Bank of Boston and otherinstitutions, and they generally have maturities of three months or less.

*Investmentsecurities*

The Company’s management determines the appropriateclassification of a security at the time of purchase.

Securities to be held for indefinite periods of timeare classified as available-for-sale and are carried at fair value withunrealized gains and losses reported as a separate component of capital net ofestimated income taxes.

All of the Company’s investments are classified asavailable-for-sale.

Mortgage-backed securities, which includecollateralized mortgage obligations (“CMOs”), are either U.S. Government Agencysecurities or are rated in at least the top two ratings categories by at leastone of the major rating agencies at the time of purchase. One of the risksinherent when investing in mortgage-backed securities and CMOs is the abilityof such instruments to incur prepayments of principal prior to maturity. Becauseof prepayments, the weighted-average yield of these securities may also change,which could affect earnings. Amortization of premiums and accretion ofdiscounts is done over a continuously evaluated remaining life using the levelyield method.

Gains or losses on thesales of securities are recognized at trade date utilizing the specificidentification method.

*Loans receivableand allowance for loan losses*

Loans receivable are stated at unpaid principalbalance adjusted for loans in process, deferred loan fees, and allowances forloan losses. Most of the Company’s activities are with customers located withineastern Connecticut. The Company does not have any significant concentrationsin any one industry or customer.

Uncollected interest on loans receivable is accrued asearned based on rates applied to principal amounts outstanding. Recognition ofincome on the accrual basis is discontinued when there is sufficient questionas to the collectibility of the interest. In these cases, the interestpreviously accrued to income is reversed, and the loans are placed on the cashbasis.

51

----

**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**1.**   Summary of SignificantAccounting Policies (Continued)

Loan origination fees and certain direct loanorigination costs are being deferred and the net amount amortized on alevel-yield basis as an adjustment to the related loan yield over itscontractual life. Unamortized net fees are recognized upon early repayment ofthe loans.

The allowance for loan losses is established by aprovision charged to earnings and is maintained at a level to absorb loanlosses that are both probable and reasonably estimable based on management’sevaluation of known and inherent credit risks in the loan portfolio. When aloan or portion of a loan is considered uncollectible, it is charged againstthe allowance for loan losses. Recoveries of loans previously charged-off arecredited to the allowance when collected.

Management makes regular evaluations of the loanportfolio to determine the adequacy of the level of the allowance for loanlosses. Numerous factors are considered in the evaluation, including a reviewof certain borrowers’ current financial status and credit standing, availablecollateral, loss experience in relation to outstanding loans, the overall loanportfolio quality, management’s judgment regarding prevailing and anticipatedeconomic conditions, and other relevant factors.

In addition, variousregulatory agencies, as an integral part of their examination process,periodically review the Company’s allowance for loan losses. Such agencies mayrequire the Company to recognize additions to the allowance based on theirjudgments about information available to them at the time of their examination.

*Loans held-for-saleand mortgage-servicing rights*

Loans held-for-sale are valued at the lower of cost ormarket as determined by outstanding commitments from investors. All loans soldby the Company are sold on a non-recourse basis. Gains or losses on the sale ofloans are determined using the specific identification method.

The Company sellsresidential mortgage loans with servicing rights retained. At the time of thesale, the Company determines the value of the retained servicing rights, whichrepresents the present value of the differential between the contractualservicing fee and adequate compensation, defined as the fee a sub-servicerwould require to assume the role of servicer, after considering the estimatedeffects of prepayments. If material, a portion of the gain on the sale of theloan is recognized as due to the value of the servicing rights, and a servicingasset is recorded. The Company has had no loan sales which have resulted in therecording of a servicing asset, due to the immaterial differential between thecontractual servicing fee and adequate compensation, as described above.

*Rate lockcommitments*

In accordance with FASBinterpretations and the United States Securities and Exchange Commission StaffAccounting Bulletin 105 rate lock commitment agreements entered into for loansoriginated for sale are considered derivatives and must be recorded at fairmarket value. The Company performs quarterly valuations and if material willrecord the commitment. No commitments have been recorded due to theimmateriality of the amount.

*Other real estateowned*

Real estate propertiesacquired through loan foreclosure and other partial or total satisfaction ofproblem loans are carried at the lower of fair value less estimated costs tosell or the related loan balance 

52

----

**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**1.**   Summary of SignificantAccounting Policies (Continued)

at thedate of foreclosure. Valuations are periodically performed by management. Lossesarising at the time of acquisition of such properties are charged against theallowance for loan losses. Subsequent write-downs in the carrying value andexpenses incurred to maintain the properties are charged to expense.

*Premises andequipment*

Premises and equipment are stated at cost lessaccumulated depreciation computed on the straight-line method at rates based onestimated useful lives. Estimated lives are 5 to 40 years for buildings andpremises and 3 to 20 years for furniture, fixtures and equipment.

Expenditures forreplacements or major improvements are capitalized. Expenditures for normalmaintenance and repairs are charged to expense as incurred. Upon the sale orretirement of premises and equipment, the cost and accumulated depreciation areremoved from the respective accounts and any gain or loss is included inincome.

*Earnings per share*

Basic earnings per shareis computed by dividing income available to common stockholders by the weightedaverage number of common shares outstanding for the period. Diluted earningsper share reflect the potential dilution that could occur if securities orother contracts to issue common stock were exercised or converted into commonstock or resulted in the issuance of common stock that then shared in theearnings of the entity. Because the formation of the Company was completed on October 4,2004, per share earnings data is not meaningful for the periods presented.

*Employee stockownership plan*

The Company established anEmployee Stock Ownership Plan as part of its minority stock issuance on October 4,2004. The ESOP plan is accounted for in accordance with Statement of Position(SOP) 93-6. Under SOP 93-6, unearned ESOP shares are not consideredoutstanding and are therefore not taken into account when computing earningsper share. Unearned ESOP shares are presented as a reduction to stockholdersequity and represent shares to be allocated to ESOP participants in futureperiods for services provided to the Company. As shares are committed to bereleased, compensation expense is recognized for the fair market value of thestock and stockholders equity is increased by a corresponding amount. The loanto the ESOP will be repaid principally from the Bank’s contributions to theESOP and dividends payable on common stock held by ESOP over a period of twentyyears.

*Computation of fairvalues*

SFAS No. 107, “Disclosures about Fair Value ofFinancial Instruments”, requires disclosure of the estimated fair value offinancial instruments, including both assets and liabilities recognized and notrecognized in the statement of financial condition, for which it is practicableto estimate fair value.

The calculation of fair value estimates of financialinstruments is dependent upon certain subjective assumptions and involvessignificant uncertainties. Changes in assumptions could significantly affectthe estimates. These estimates do not reflect any possible tax ramifications,estimated transaction costs or any premium or discount that could result fromoffering the Company’s entire holdings of a particular financial instrument.

53

----

**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**1.**   Summary of SignificantAccounting Policies (Continued)

The following methods and assumptions were utilized bythe Company in estimating the fair values of its on-balance sheet financialinstruments:

*Cash and cash equivalents—*Thecarrying amounts reported in the statement of financial condition approximatethese assets’ fair value.

*Investmentsecurities**—*Fair values for investment securities arebased on quoted market prices where available. If quoted market pricesare not available, fair values are based on market prices for comparableinstruments. The carrying values of FHLB stock approximate fair values.

*Loansreceivable**—*For variablerate loans that reprice frequently and without significant change in creditrisk, fair values are based on carrying values. The fair value of other loansare estimated by discounted cash flow analyses using interest rates currentlybeing offered for loans with similar terms to borrowers of similar creditquality. The fair value of nonaccrual loans is estimated using the lesser ofloan value or the estimated fair values of the underlying collateral.

*Loansheld-for-sale**—*The currentmarket price of similar loans sold is used to estimate the fair value of loansheld-for-sale.

*Accruedincome receivable**—*The carryingvalue of accrued income receivable approximates fair value.

*Deposits**—*The fair values of demand, NOW, and savings deposits are,equal to the amount payable on demand at the reporting date. Fair values fortime certificates of deposit are estimated using a discounted cash flowcalculation that applies interest rates currently being offered to a scheduleof aggregated expected monthly maturities on time deposits.

*Borrowedfunds**—*Fair valuesare estimated using discounted cash flow analyses based on the Company’scurrent incremental borrowing rates for similar types of borrowingarrangements.

*Mortgagors’ escrowaccounts**—*The carryingvalue of escrow accounts approximates fair value.

*Income taxes*

The Company accounts forcertain income and expense items differently for financial reporting purposesthan for income tax purposes. Provisions for deferred taxes are being made inrecognition of these temporary differences.

*Recent accountingpronouncements*

On March 9, 2004, the United States Securitiesand Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 105,“Application of Accounting Principles to Loan Commitments”. The bulletin setsforth the views of the accounting staff of the SEC as it pertains to loancommitments recognized for loans originated for sale. The bulletin concludesthat expected future cash flows related to the servicing of the loan should notbe considered until the loan has been contractually separated from the servicing.The provisions of SAB 105 were effective for commitments entered into after March 31,2004. The adoption of SAB 105 did not have any effect on the Company as nocommitments have been recognized due to the immateriality of the amount.

54

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**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**1.**   Summaryof Significant Accounting Policies (Continued)

In December 2004, the Financial AccountingStandards Board issued Statement of Financial Accounting Standards (SFAS) No. 123(R),“Share-Based Payment”, that will require compensation costs related toshare-based payment transactions to be recognized in the financial statements.That cost will be measured based on the grant-date fair value of equity orliability instruments issued. SFAS No. 123(R) replaces SFAS No. 123,“Accounting for Stock-Based Compensation”, and supercedes APB Opinion No. 25,“Accounting for Stock Issued to Employees”. The Company currently does not havea stock option plan and therefore at this time SFAS No. 123(R) has noeffect on the financial statements.

In June 2005, theFinancial Accounting Standards Board decided to discontinue any furtherconsideration of the Emerging Issues Task Force’s consensus on EITF 03-01regarding unrealized losses on marketable debt and equity securities accountedfor under SFAS No. 115, “Accounting for Certain Investments in Debt andEquity Securities”, that are classified as either held-to-maturity oravailable-for-sale. The Board directed staff to finalize Financial StaffPosition (FSP) “FAS 115-1”, which is expected to clarify that an investormust recognize a loss as soon as impairment is deemed other than temporary. TheFSP is also expected to clarify when a pattern of selling debt investmentsprior to forecasted recovery of fair value may call into questions theinvestors intent to hold to maturity. The FSP is scheduled to be effective forperiods beginning after September 15, 2005. The Company does not expectthat the FSP will have a material effect on its financial statements.

*Reclassification*

Prior years’ consolidatedfinancial statements have been reclassified to conform to changes in thecurrent financial statement presentation. Such reclassifications had no effecton the 2004 net income.

55

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**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**2.**   InvestmentSecurities

At June 30,the cost and approximate fair values of investment securities were as follows:
| ** **                               | ** ** | **2005**                | ** ** |
|------------------------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **Amortized**           | ** ** | **Gross Unrealized** | ** ** | **Fair** | ** ** |
| ** **                               | ** ** | **Cost Basis**     | ** ** | **Gain** | ** ** | **(Loss)** | ** ** | **Value** | ** ** |
| ** **                               | ** ** | **(in thousands)** | ** ** |
| Debt securities:                         |       |                    |       |   |   |   |   |   |   |
| US government and  agency obligations:   |       |                    |       |   |   |   |   |   |   |
| From one through five years              |       | $                       | 25,564     |   | $ | 3 |   | $ | (267 | ) | $ | 25,300 |   |
|                                     |       | 25,564                  |       | 3 |   | (267 | ) | 25,300 |   |
| State agency and municipal obligations:  |       |                    |       |   |   |   |   |   |   |
| From five through ten years              |       | 609                     |       | 31 |   | — |   | 640 |   |
| After ten years                          |       | 8,512                   |       | 554 |   | — |   | 9,066 |   |
|                                     |       | 9,121                   |       | 585 |   | — |   | 9,706 |   |
| Corporate bonds and other obligations:   |       |                    |       |   |   |   |   |   |   |
| Due within one year                      |       | 8,200                   |       | 63 |   | (11 | ) | 8,252 |   |
| From one through five years              |       | 7,973                   |       | 47 |   | (89 | ) | 7,931 |   |
| After ten years                          |       | 8,040                   |       | 534 |   | (260 | ) | 8,314 |   |
|                                     |       | 24,213                  |       | 644 |   | (360 | ) | 24,497 |   |
| Mortgage-backed securities               |       | 65,866                  |       | 380 |   | (357 | ) | 65,889 |   |
| Total debt securities                    |       | 124,764                 |       | 1,612 |   | (984 | ) | 125,392 |   |
| Marketable equity securities:            |       |                    |       |   |   |   |   |   |   |
| Common stock                             |       | 386                     |       | 202 |   | — |   | 588 |   |
| Preferred stock                          |       | 23,608                  |       | 61 |   | — |   | 23,669 |   |
|                                     |       | 23,994                  |       | 263 |   | — |   | 24,257 |   |
| FHLB restricted stock                    |       | 3,756                   |       | — |   | — |   | 3,756 |   |
| Total equity securities                  |       | 27,750                  |       | 263 |   | — |   | 28,013 |   |
| **Total  available-for-sale securities** |       | $                       | 152,514    |   | $ | 1,875 |   | $ | (984 | ) | $ | 153,405 |   |

** **

56

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**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**2.**   Investment Securities(Continued)

 
| ** **                               | ** ** | **2004**                | ** ** |
|------------------------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **Amortized**           | ** ** | **Gross Unrealized** | ** ** | **Fair** | ** ** |
| ** **                               | ** ** | **Cost Basis**     | ** ** | **Gain** | ** ** | **(Loss)** | ** ** | **Value** | ** ** |
| ** **                               | ** ** | **(in thousands)** | ** ** |
| Debt securities:                         |       |                    |       |   |   |   |   |   |   |
| US government and  agency obligations:   |       |                    |       |   |   |   |   |   |   |
| From one through five years              |       | $                       | 15,072     |   | $ | 4 |   | $ | (143 | ) | $ | 14,933 |   |
|                                     |       | 15,072                  |       | 4 |   | (143 | ) | 14,933 |   |
| State agency and municipal obligations:  |       |                    |       |   |   |   |   |   |   |
| From five through ten years              |       | 609                     |       | 17 |   | — |   | 626 |   |
| After ten years                          |       | 8,509                   |       | 168 |   | — |   | 8,677 |   |
|                                     |       | 9,118                   |       | 185 |   | — |   | 9,303 |   |
| Corporate bonds and other obligations:   |       |                    |       |   |   |   |   |   |   |
| Due within one year                      |       | 3,021                   |       | 51 |   | — |   | 3,072 |   |
| From one through five years              |       | 20,080                  |       | 535 |   | (87 | ) | 20,528 |   |
| After ten years                          |       | 8,138                   |       | 243 |   | (195 | ) | 8,186 |   |
|                                     |       | 31,239                  |       | 829 |   | (282 | ) | 31,786 |   |
| Mortgage-backed securities               |       | 61,144                  |       | 475 |   | (753 | ) | 60,866 |   |
| Total debt securities                    |       | 116,573                 |       | 1,493 |   | (1,178 | ) | 116,888 |   |
| Marketable equity securities:            |       |                    |       |   |   |   |   |   |   |
| Common stock                             |       | 386                     |       | 88 |   | (3 | ) | 471 |   |
| Preferred stock                          |       | 6,716                   |       | 23 |   | (6 | ) | 6,733 |   |
|                                     |       | 7,102                   |       | 111 |   | (9 | ) | 7,204 |   |
| FHLB restricted stock                    |       | 2,774                   |       | — |   | — |   | 2,774 |   |
| Total equity securities                  |       | 9,876                   |       | 111 |   | (9 | ) | 9,978 |   |
| **Total  available-for-sale securities** |       | $                       | 126,449    |   | $ | 1,604 |   | $ | (1,187 | ) | $ | 126,866 |   |

 

Gross gains of $82,168 and $206,591 were realized onavailable-for-sale securities for the years ended June 30, 2005 and 2004,respectively. Gross losses of $24,100 and $147,879 were realized onavailable-for-sale securities for the years ended June 30, 2005 and 2004,respectively.

At June 30, 2005 and 2004, debt securities with acarrying and market value of $3,972,140 and $2,529,590, respectively, werepledged as collateral to secure public deposits and repurchase agreements.

57

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**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**2.**   Investment Securities(Continued)

The following is a summaryof the estimated fair value and related unrealized losses aggregated byinvestment category and length of time that individual securities have been ina continuous unrealized loss position at June 30, 2005.
| ** **                       | ** ** | **Length of Time in Continuous Unrealized Loss  Position** | ** ** | ** **                           | ** ** | ** **      | ** ** |
|----------------------------------|------------|------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------|------------|
| ** **                       | ** ** | **Less than 12 months**                                                   | ** ** | **12 months or more** | ** ** | **Total**       | ** ** |
| ** **                       | ** ** | **Fair  Value**                                                                          | ** ** | **Unrealized  Loss**                 | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** |
| ** **                       | ** ** | **(in thousands)**                                                                  | ** ** |
| US Government Agencies           |       | $                                                                                        | 19,819     |                                 |       | $               | 186        |   |   | $ | 3,978 |   |   | $ | 81 |   |   | $ | 23,797 |   |   | $ | 267 |   |   |
| Corporate bonds                  |       | 3,058                                                                                    |       |                                 | 37         |            |       | 9,285 |   |   | 323 |   |   | 12,343 |   |   | 360 |   |   |
| Mortgage-backed  securities      |       | 18,525                                                                                   |       |                                 | 80         |            |       | 16,849 |   |   | 277 |   |   | 35,374 |   |   | 357 |   |   |
| Common stock                     |       | —                                                                                   |       |                                 | —     |            |       | — |   |   | — |   |   | — |   |   | — |   |   |
| Preferred stock                  |       | 2,000                                                                                    |       |                                 | —     |            |       | — |   |   | — |   |   | 2,000 |   |   | — |   |   |
| **Total  investment securities** |       | $                                                                                        | 43,402     |                                 |       | $               | 303        |   |   | $ | 30,112 |   |   | $ | 681 |   |   | $ | 73,514 |   |   | $ | 984 |   |   |

 

The Bank has 59 individualinvestment securities in which the market value of the security is less thanthe cost of the security. Management believes that these unrealized losses aretemporary and are the result of interest rate conditions.

**3.   Loans**

Thecomposition of the Company’s loan portfolio at June 30, was as follows:
| ** **                       | ** ** | **2005**                             | ** ** | **2004** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|----------|------------|
| ** **                       | ** ** | **(dollars in thousands)** | ** ** |
| Residential  mortgages           |       | $                                    | 127,520    |     | $          | 104,405 |   |
| Commercial  mortgages            |       | 32,685                               |       | 25,740   |       |
| Construction  mortgages          |       | 4,778                                |       | 5,467    |       |
| Commercial                       |       | 4,561                                |       | 3,324    |       |
| Installment                      |       | 750                                  |       | 662      |       |
| Collateral                       |       | 266                                  |       | 370      |       |
| Other                            |       | 28                                   |       | 20       |       |
|                             |       | 170,588                              |       | 139,988  |       |
| Unadvanced  construction loans   |       | (4,220                               | )          | (4,623   | )          |
|                             |       | 166,368                              |       | 135,365  |       |
| Deferred loan costs, net of fees |       | (113                                 | )          | (126     | )          |
| Deferred fees on purchased loans |       | 110                                  |       | 1        |       |
| Allowance for loan losses        |       | (1,359                               | )          | (1,285   | )          |
| **Loans receivable, net**        |       | $                                    | 165,006    |     | $          | 133,955 |   |
| **Weighted average yield**       |       | 5.91                                 | %          | 5.75     | %          |

 

58

----

**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**3.**   Loans(Continued)

TheCompany’s lending activities are conducted principally in Eastern Connecticut.The Company’s investment in loans includes both adjustable and fixed rateloans. The composition of the Company’s investment in loans at June 30 wasas follows:
| ** **                     | ** ** | **2005**                | ** ** | **2004** | ** ** |
|--------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Fixed rate:                    |       |                    |       |     |       |
| Term to maturity               |       |                    |       |     |       |
| One month through one year     |       | $                       | 4,815      |     | $          | 5,337 |   |
| One year through three years   |       | 5,956                   |       | 3,641    |       |
| Three years through five years |       | 14,594                  |       | 11,252   |       |
| Five years through ten years   |       | 14,611                  |       | 11,043   |       |
| Over ten years                 |       | 71,602                  |       | 57,973   |       |
|                           |       | 111,578                 |       | 89,246   |       |
| Adjustable rate:               |       |                    |       |     |       |
| Rate adjustment                |       |                    |       |     |       |
| One month through one year     |       | 29,322                  |       | 29,332   |       |
| One year through three years   |       | 8,593                   |       | 4,470    |       |
| Three years through five years |       | 12,231                  |       | 8,474    |       |
| Over five years                |       | 4,644                   |       | 3,843    |       |
|                           |       | 54,790                  |       | 46,119   |       |
| **Total  loans**               |       | $                       | 166,368    |     | $          | 135,365 |   |

 

The adjustable rate loans generally have interest rateadjustment limitations and are generally indexed to the Company’s cost offunds, prime rate, or to the U.S. Treasury Bill rate.

In addition, the Company services loans for otherfinancial institutions and agencies. These loans are originated by the Companyand then sold. The Company continues to service these loans and remits thepayments received to the purchasing institution. The amounts of these loanswere approximately $26.6 million and $27.8 million at June 30, 2005 and2004, respectively.

Transactionsin the allowance for loan losses accounts for the years ended June 30,were as follows:
| ** **                                       | ** ** | **2005**                | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                       | ** ** | **(in thousands)** | ** ** |
| Balance at  beginning of period                  |       | $                       | 1,285      |     | $          | 1,264 |   |
| Provision for  loan losses                       |       | 135                     |       | 60       |       |
| Charge offs                                      |       | (5                      | )          | (60      | )          |
| Recoveries                                       |       | 42                      |       | 21       |       |
| Transfer to  reserve for off-balance sheet items |       | (98                     | )          | —   |       |
| **Balance at end of period**                     |       | $                       | 1,359      |     | $          | 1,285 |   |

 

59

----

**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**3.**   Loans (Continued)

The following tablesummarizes information on nonperforming loans:
| ** **                                                                                                                   | ** ** | **June 30,**       | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                                   | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                                                                                                   | ** ** | **(in thousands)** | ** ** |
| Nonperforming  loans                                                                                                         |       |                    | $          | 86 |   |   | $ | 659 |   |
| Nonperforming loans accounted for on a nonaccrual  basis                                                                     |       |                    | 86         |   |   | 659 |   |
| Amount of gross interest income that would have been  recognized if the loans had performed in accordance with original term |       |                    | 6          |   |   | 49 |   |
| Amount of interest income recognized                                                                                         |       |                    | 6          |   |   | 50 |   |
| Income  contractually due but not recognized on nonaccrual loans                                                             |       |                    | 1          |   |   | 4 |   |
|                                                                                                                              |            |                         |            |  |  |  |  |  |  |

 

At June 30, 2005 and2004, the Company did not have any restructured or impaired loans. There are nooutstanding commitments to lend to borrowers with loans on which the accrual ofinterest has been discontinued.

**4.**   Premisesand Equipment

Premisesand equipment at June 30, were summarized as follows:
| ** **                       | ** ** | **2005**                | ** ** | **2004** | ** ** |
|----------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                       | ** ** | **(in thousands)** | ** ** |
| Land                             |       | $                       | 301        |     | $          | 301 |   |
| Buildings                        |       | 4,201                   |       | 2,766    |       |
| Equipment                        |       | 2,476                   |       | 1,575    |       |
| Construction in  progress        |       | 45                      |       | 1,531    |       |
|                             |       | 7,023                   |       | 6,173    |       |
| Accumulated  depreciation        |       | (2,509                  | )          | (2,022   | )          |
| **Premises  and equipment, net** |       | $                       | 4,514      |     | $          | 4,151 |   |

 

60

----

**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

Depreciationexpense amounted to $486,239 and $277,226, for the years ended June 30,2005 and  2004, respectively.

TheCompany leases part of its Pomfret location to other tenants. Rental income was$25,510 and $24,340, for the years ended June 30 2005 and 2004,respectively.

**5.**   Deposits

Therates at which the Company paid interest on deposit accounts and the balancesat June 30, were as follows:
| ** **                        | ** ** | **2005**                             | ** ** | **2004**                    | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **Amount**                           | ** ** | **Weighted  Average  Rate** | ** ** | **Amount** | ** ** | **Weighted  Average  Rate** | ** ** |
| ** **                        | ** ** | **(dollars in thousands)** | ** ** |
| Demand deposits                   |       | $                                    | 25,976     |                        |       | — | % |   | $ | 25,380 |   |   | — | % |   |
| NOW accounts                      |       | 36,100                               |       |                        | 1.59       |   |   | 9,696 |   |   | 0.25 |   |   |
| Regular savings                   |       | 43,086                               |       |                        | 0.65       |   |   | 43,077 |   |   | 0.65 |   |   |
| Money market  accounts            |       | 28,761                               |       |                        | 1.67       |   |   | 48,438 |   |   | 1.57 |   |   |
| Clubs                             |       | 270                                  |       |                        | 4.17       |   |   | 267 |   |   | 4.17 |   |   |
|                              |       | 134,193                              |       |                        | 1.00       |   |   | 126,858 |   |   | 0.85 |   |   |
| Certificate accounts maturing in: |       |                                 |       |                        |       |   |   |   |   |   |   |   |   |
| Less than one year                |       | 48,738                               |       |                        | 2.66       |   |   | 36,607 |   |   | 2.25 |   |   |
| One year to two years             |       | 13,626                               |       |                        | 3.75       |   |   | 17,238 |   |   | 3.19 |   |   |
| Two years to three years          |       | 12,058                               |       |                        | 4.03       |   |   | 9,845 |   |   | 4.12 |   |   |
| Three years to five years         |       | 9,508                                |       |                        | 3.74       |   |   | 12,849 |   |   | 4.11 |   |   |
|                              |       | 83,930                               |       |                        | 3.16       |   |   | 76,539 |   |   | 3.02 |   |   |
| **Total  deposits**               |       | $                                    | 218,123    |                        |       | 1.83 | % |   | $ | 203,397 |   |   | 1.66 | % |   |

 

The aggregate amount ofindividual time deposits of $100,000 or more at June 30, 2005 and 2004,was approximately $30.6 million and $24.9 million, respectively. Depositaccounts are insured by the FDIC up to $100,000 each per insured depositor.

61

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**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**6.**   BorrowedFunds

At June 30,borrowed funds consisted of the following:
| ** **                    | ** ** | **2005**                             | ** ** | **2004**                    | ** ** |
|-------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **Amount  Due**                      | ** ** | **Weighted  Average  Rate** | ** ** | **Amount  Due** | ** ** | **Weighted  Average  Rate** | ** ** |
| ** **                    | ** ** | **(dollars in thousands)** | ** ** |
| ***Short-term  borrowing***   |       |                                 |       |                        |       | ** ** |   |   |   |   |   | ** ** |   |
| FHLB advances                 |       | $                                    | 26,000     |                        |       | 3.38 | **%** |   | $ | 13,350 |   |   | 1.72 | **%** |   |
| Repurchase  agreements        |       | 1,104                                |       |                        | 3.00       | ** ** |   | 790 |   |   | 0.88 | ** ** |   |
| Total short-term  borrowings  |       | 27,104                               |       |                        | 3.36       | ** ** |   | 14,140 |   |   | 1.67 | ** ** |   |
| ***Long-term FHLB advances*** |       |                                 |       |                        |       | ** ** |   |   |   |   |   | ** ** |   |
| Year of maturity:             |       |                                 |       |                        |       | ** ** |   |   |   |   |   | ** ** |   |
| 2005                          |       | —                               |       |                        | 0.00       | ** ** |   | 8,545 |   |   | 3.88 | ** ** |   |
| 2006                          |       | 13,863                               |       |                        | 3.23       | ** ** |   | 12,363 |   |   | 3.22 | ** ** |   |
| 2007                          |       | 14,309                               |       |                        | 4.05       | ** ** |   | 8,884 |   |   | 4.38 | ** ** |   |
| 2008                          |       | 1,668                                |       |                        | 3.75       | ** ** |   | 168 |   |   | 3.68 | ** ** |   |
| 2009                          |       | 3,779                                |       |                        | 3.83       | ** ** |   | 3,129 |   |   | 3.80 | ** ** |   |
| 2010                          |       | 11                                   |       |                        | 3.86       | ** ** |   | 11 |   |   | 3.86 | ** ** |   |
| 2011                          |       | 3,000                                |       |                        | 4.88       | ** ** |   | 3,000 |   |   | 4.88 | ** ** |   |
| Total long-term  borrowings   |       | 36,630                               |       |                        | 3.77       | ** ** |   | 36,100 |   |   | 3.85 | ** ** |   |
| **Total  borrowed funds**     | ** ** | **$**                                | **63,734** | ** **                  | ** ** | **3.60** | **%** | ** ** | **$** | **50,240** | ** ** | ** ** | **3.24** | **%** |   |

 

Federal Home Loan Bank advances are secured by ablanket lien on qualified collateral consisting primarily of first mortgages onresidential property and are at fixed rates. The maturity schedule abovereflects final maturity; however, some are callable at earlier dates.Repurchase agreements generally have terms of one day and are secured bygovernment agency securities.

Additionally, the Bank hasa line of credit with Federal Home Loan Bank of Boston for $2,354,000.

62

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**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**7.**   IncomeTaxes

The components of theincome tax expense for the years ended June 30, were as follows:
| ** **             | ** ** | **2005**                | ** ** | **2004** | ** ** |
|------------------------|------------|-------------------------|------------|----------|------------|
| ** **             | ** ** | **(in thousands)** | ** ** |
| Current:               |       |                    |       |     |       |
| Federal                |       | $                       | 574        |     | $          | 462 |   |
| State                  |       | 204                     |       | 185      |       |
| Total current          |       | 778                     |       | 647      |       |
| Deferred:              |       |                    |       |     |       |
| Federal                |       | (387                    | )          | 17       |       |
| State                  |       | (12                     | )          | (11      | )          |
| Total deferred         |       | (399                    | )          | 6        |       |
| **Income tax expense** |       | $                       | 379        |     | $          | 653 |   |

 

The principal reasons forthe income tax expense differing from the amount of such tax computed byapplying the federal statutory tax rate of 34% to reported income before incometax expense were as follows:
| ** **                          | ** ** | **2005**                | ** ** | **2004** | ** ** |
|-------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                          | ** ** | **(in thousands)** | ** ** |
| Tax on income at  statutory rates   |       | $                       | 560        |     | $          | 749 |   |
| Increase (decrease) resulting from: |       |                    |       |     |       |
| State taxes net of federal benefit  |       | 127                     |       | 114      |       |
| Dividends received deduction        |       | (161                    | )          | (52      | )          |
| Bank owned life insurance           |       | (30                     | )          | (36      | )          |
| Tax-exempt municipal income         |       | (122                    | )          | (122     | )          |
| Other items, net                    |       | 5                       |       | —   |       |
| **Tax at  effective rates**         |       | $                       | 379        |     | $          | 653 |   |

 

63

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**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**7.**   IncomeTaxes (Continued)

Thecomponents of deferred taxes included in the balance sheet at June 30,were as follows:
| ** **                                                 | ** ** | **2005**                | ** ** | **2004**   | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                 | ** ** | **(in thousands)** | ** ** |
| Current tax (payable) receivable                           |       | $                       | (66        | )          | $          | 114 |   |
| Deferred tax  receivable:                                  |       |                    |       |       |       |
| Allowance for loan losses                                  |       | $                       | 541        |       | $          | 488 |   |
| Unrealized trading loss carryover                          |       | 87                      |       | 87         |       |
| Deferred loan fees                                         |       | 44                      |       | 49         |       |
| Contribution carryforward                                  |       | 403                     |       | —     |       |
| Deferred compensation                                      |       | 224                     |       | 215        |       |
| Depreciation                                               |       | —                  |       | 2          |       |
| Capital loss carryforward                                  |       | 20                      |       | 20         |       |
| Loans held for sale                                        |       | —                  |       | 6          |       |
| Interest receivable on nonaccrual loans                    |       | —                  |       | 2          |       |
|                                                       |       | 1,319                   |       | 869        |       |
| Deferred tax  payable:                                     |       |                    |       |       |       |
| Depreciation                                               |       | (2                      | )          | —     |       |
| Available-for-sale securities                              |       | (347                    | )          | (162       | )          |
|                                                       |       | (349                    | )          | (162       | )          |
| Net deferred taxes receivable, before valuation  allowance |       | 970                     |       | 707        |       |
| Valuation allowance                                        |       | (69                     | )          | (20        | )          |
| **Net  deferred tax receivable**                           | ** ** | **$**                   | **901**    | ** ** | **$**      | **687** | ** ** |

 

SFAS No. 109 requiresa valuation allowance against deferred tax assets if, based on the weight ofavailable evidence, it is more likely than not that some or all of the deferredtax assets will not be realized. The Company believes that it is more likelythan not that it will not realize all of its state tax benefits related torealized and unrealized capital losses, and contributions; therefore it hasreserved that portion of its deferred tax assets.

**8.**   RegulatoryCapital

The Company, as a federally chartered holding company,is not subject to regulatory capital requirements. The Bank is subject tovarious regulatory capital requirements administered by the federal bankingagencies. Failure to meet minimum capital requirements can initiate certainmandatory and possibly additional discretionary actions by regulators that, ifundertaken, could have a direct material effect on the Bank’s financialstatements.

The Office of Thrift Supervision (OTS) regulationsrequire savings institutions to maintain minimum levels of regulatory capital.Under the regulations in effect at June 30, 2005, the Bank was required tomaintain a minimum ratio of tangible capital to total adjusted assets of 1.5%;a minimum ratio of Tier 1 (core) capital to total adjusted assets of 4.0%; aminimum ratio of Tier I capital to risk-weighted assets of 

64

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**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**8.**   Regulatory Capital(Continued)

4.0% and a minimum ratioof total (core and supplementary) capital to risk-weighted assets of 8.0%. Asof June 30, 2005 the Bank meets all capital requirements to which it issubject.

At June 30, 2005 the Bank was considered “wellcapitalized” for regulatory purposes. To be categorized as well capitalized,the Bank must maintain a minimum ratio of tangible capital to total adjustedassets of 2.00%; a minimum ratio of Tier 1 (core) capital to total adjustedassets of 5.00%; a minimum ratio of Tier I capital to risk-weighted assets of6.00% and a minimum ratio of total (core and supplementary) capital torisk-weighted assets of 10.00%. There have been no subsequent conditions orevents which management believes have changed the Bank’s status.

Prior to its reorganization (see note 1), the Bank wassubject to capital requirements established by the FDIC. Under the regulationsin effect at June 30, 2004, the Bank was required to maintain a Tier 1capital to average assets ratio of 4.00%, a Tier 1 capital to risk-based ratioof at least 4.00%; and a total risk-based capital to risk-weighted assets ratioof at least 8.00%. At June 30, 2004, the Bank was considered “wellcapitalized” for regulatory purposes.

Thefollowing is a summary of the Bank’s actual capital as computed under thestandards established by the OTS and the FDIC at June 30, 2005 and 2004,respectively.
| ** **                                                                    | ** ** | **2005**                             | ** ** | **2004**  | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------|------------|
| ** **                                                                    | ** ** | **Amount**                           | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                                                                    | ** ** | **(dollars in thousands)** | ** ** |
| Total Capital (to  Risk-Weighted Assets)                                      |       | $                                    | 41,428     |      | 21.68      | % | $ | 24,358 |   | 15.65 | % |
| Tier I Capital (to Risk-Weighted Assets)                                      |       | 39,853                               |       | 20.85     | %          | 23,028 |   | 14.79 | % |
| Tier I Capital (to Average Assets in 2004 and  Adjusted Total Assets in 2005) |       | 39,853                               |       | 12.17     | %          | 23,028 |   | 8.86 | % |
| Tangible Equity  Capital (to Tangible Assets)                                 |       | 39,853                               |       | 12.17     | %          | n/a |   | n/a |   |
|                                                                               |            |                                      |            |           |            |  |  |  |  |  |  |

 

TheBank’s capital under generally accepted accounting principles (GAAP) isreconciled as follows:
| ** **                                                  | ** ** | **June 30,**       | ** ** |
|-------------------------------------------------------------|------------|-------------------------|------------|
| **Putnam Savings Bank**                           | ** ** | ** **              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                  | ** ** | **(in thousands)** | ** ** |
| **Capital  under generally accepted accounting principles** |       | $                       | 40,416     |   | $ | 23,283 |   |
| Unrealized gains on available-for-sale securities           |       | (563                    | )          | (255 | ) |
| **Tier I Capital**                                          |       | 39,853                  |       | 23,028 |   |
| Allowance for loan losses                                   |       | 1,457                   |       | 1,285 |   |
| Unrealized gains on available-for-sale equity  securities   |       | 118                     |       | 45 |   |
| **Total  Risk-Based capital**                               |       | $                       | 41,428     |   | $ | 24,358 |   |
|                                                             |            |                         |            |  |  |  |  |  |  |

 

The ability of the Companyto pay dividends depends, in part, on the ability of the Bank to pay dividendsto the Company. The Bank will not be able to declare or pay a cash dividend on,or repurchase 

65

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**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**8.**   Regulatory Capital(Continued)

any ofits common stock, if the effect thereof would be to reduce the regulatorycapital of the Bank to an amount below amounts required under OTS rules andregulations.

**9.**   RetainedEarnings

Retainedearnings at June 30, 2005 and 2004 include approximately $2,284,000 forwhich no provision for federal income tax has been made. This amount representsaggregate allocations of income to bad debt deductions for tax purposes only. Reductionof amounts so allocated for purposes other than tax bad debt losses will createincome for tax purposes only, which will be subjected to the then currentcorporate income tax rate.

**10.**   EmployeeBenefits

***Defined Contribution Plan***

The Bank has a definedcontribution plan that covers substantially all of the Bank’s employees. Contributionsto the plan are discretionary and are voted on annually by the Directors of theBank. Costs expensed were$153,567 and $138,021 for the years ended June 30, 2005 and 2004,respectively.

***401K Plan***

The Bank has a 401K plancovering each eligible employee. Employees must be 21 years of age, work atleast 1,000 hours per year, and have at least 1 year of service with the Bankto be eligible to participate. Employees may defer up to 10% of grosscompensation. The Bank’s matching contribution is discretionary. For the yearended June 30, 2005 and 2004 the Bank chose to contribute 25% of theemployee’s deferral on a maximum of 4% of the employee’s salary. The Bankcontributed $22,894 and $21,684, to the plan during the years ended June 30,2005 and 2004, respectively.

***Employee Stock Ownership Plan***

The Bank established an Employee Stock Ownership Plan(ESOP) on October 4, 2004 in connection with its common stock offering.The ESOP purchased 257,062 shares of the common stock of the Company. To fundthe purchase, the ESOP borrowed $2.6 million from the Company. The borrowing isat an initial interest rate of 4.75% and is to be repaid on a pro-rata basis intwenty substantially equal annual installments. The collateral for the loan isthe common stock of the Company purchased by the ESOP.

The shares of stockpurchased by the ESOP are held in a suspense account until they are releasedfor allocation among participants. The shares will be released annually fromthe suspense account and the released shares will be allocated among theparticipants on the basis of each participant’s compensation for the year ofallocation. As shares are released from collateral, the Bank recognizescompensation expense equal to the average market price of the shares during theperiod and the shares will be outstanding for earning-per-share purposes. Theshares not released are reported as unearned ESOP shares in the capitalaccounts of the consolidated statements of financial condition. ESOP expensefor the year ended June 30, 2005 was $106,203. At June 30, 2005,there were 9,880 unallocated and 247,182 unreleased ESOP shares. The unreleasedshares had an aggregate fair value of $2.5 million.

66

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**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**11.**   OtherComprehensive Income

The Company’s source of comprehensive income includesthe unrealized gains on investment securities.

Thecomponents and the related tax effects allocated to other comprehensive incomefor the years ended June 30, were as follows:
| ** **                                                                          | ** ** | **2005**                | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                                          | ** ** | **(in thousands)** | ** ** |
| **Net  income**                                                                     |       | $                       | 1,269      |     | $          | 1,552 |   |
| **Other  comprehensive income:**                                                    |       |                    |       |     |       |
| Unrealized  holding gains (losses) on securities available-for-sale                 |       | 532                     |       | (2,053   | )          |
| Reclassification  adjustment for gains recognized in net income                     |       | (58                     | )          | (58      | )          |
| **Other  comprehensive income (loss) before tax expense**                           |       | 474                     |       | (2,111   | )          |
| Income tax expense (benefit) related to items of  other comprehensive income (loss) |       | 185                     |       | (822     | )          |
| **Other comprehensive income (loss) net of tax**                                    |       | 289                     |       | (1,289   | )          |
| **Total  comprehensive income**                                                     |       | $                       | 1,558      |     | $          | 263 |   |

 

67

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**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**12.**   FinancialInstruments

The Company is party to financial instruments withoff-balance sheet risk in the normal course of business to meet the financialneeds of its customers. These financial instruments include commitments toextend credit. These commitments involve, to varying degrees, elements ofcredit and interest risk in excess of the amount recognized in the balancesheet.

Thecontract or notional amounts of outstanding commitments at June 30, wereas follows:
| ** **                     | ** ** | **2005**                | ** ** | **2004** | ** ** |
|--------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Commitments to extend  credit: |       |                    |       |     |       |
| Loan commitments               |       | $                       | 3,476      |     | $          | 4,770 |   |
| Unadvanced construction loans  |       | 4,220                   |       | 4,623    |       |
| Unadvanced lines of credit     |       | 12,301                  |       | 10,398   |       |
| Standby letters of credit      |       | 144                     |       | 145      |       |
| **Outstanding  commitments**   |       | $                       | 20,141     |     | $          | 19,936 |   |

 

The Company’s exposure to credit loss in the event ofnonperformance by the other party to the financial instrument for commitmentsto extend credit is represented by the contractual amount of those instruments.The Company uses the same credit policies in making commitments and conditionalobligations as it does for on-balance sheet instruments. Commitments to extendcredit are agreements to lend to a customer as long as there is no violation ofany condition established in the contract. Commitments generally have fixedexpiration dates or other termination clauses and may require payment of a fee.Since some of the commitments may expire without being drawn upon, the totalcommitment amounts do not necessarily represent future cash requirements.

The Company evaluates each customer’s creditworthinesson a case-by-case basis. The amount of collateral obtained, if deemed necessaryby the Company upon extension of credit, is based on management’s creditevaluation of the counterparty. Collateral held is primarily real property.

Standby letters of credit are conditional commitmentsissued by the Company to guarantee the performance of a customer to a thirdparty. The credit risk involved in issuing letters of credit is essentially thesame as that involved in a loan commitment.

Management does not anticipate any material losses asa result of these commitments.

68

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**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**12.**   Financial Instruments(Continued)

The estimated fair valuesof the Company’s financial instruments at June 30, were as follows:
| ** **                   | ** ** | **2005**                | ** ** | **2004**            | ** ** |
|------------------------------|------------|-------------------------|------------|---------------------|------------|
| ** **                   | ** ** | **Carrying  Amount**    | ** ** | **Fair Value** | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
| ** **                   | ** ** | **(in thousands)** | ** ** |
| Financial assets             |       |                    |       |                |       |   |   |   |   |
| Cash and cash equivalents    |       | $                       | 7,705      |                | $          | 7,705 |   | $ | 7,427 |   | $ | 7,427 |   |
| Investment securities        |       | 153,405                 |       | 153,405             |       | 126,866 |   | 126,866 |   |
| Loans receivable             |       | 165,006                 |       | 164,527             |       | 133,955 |   | 133,255 |   |
| Loans held-for-sale          |       | —                  |       | —              |       | 1,998 |   | 1,998 |   |
| Accrued income receivable    |       | 1,571                   |       | 1,571               |       | 1,421 |   | 1,421 |   |
| Financial liabilities        |       |                    |       |                |       |   |   |   |   |
| Deposits                     |       | 218,123                 |       | 217,918             |       | 203,397 |   | 204,674 |   |
| Borrowed funds               |       | 63,734                  |       | 63,797              |       | 50,240 |   | 50,509 |   |
| Mortgagors'  escrow accounts |       | 1,029                   |       | 1,029               |       | 895 |   | 895 |   |
|                              |            |                         |            |                     |            |  |  |  |  |  |  |  |  |

 

Commitments to extendcredit and standby letters of credit have short maturities and have nosignificant fair values.

**13.**   BranchAcquisitions Pending

On June 13, 2005,Putnam Savings Bank, a wholly owned subsidiary of the Company entered into adefinitive agreement with People’s Bank, Bridgeport, Connecticut to acquirethree branches of People’s Bank located in Windham and New London Counties,Connecticut. The transaction is subject to approval by the applicableregulatory authorities and is scheduled to close during the third quarter of2005. As of April 30, 2005 the deposits to be acquired totaledapproximately $62.9 million. The Bank will assume the outstanding leases of thethree branches.

69

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**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**14.**   ParentCompany Only Financial Statements

The following financialstatements are for the Company (PSB Holdings, Inc.) only, and should beread in conjunction with the consolidated financial statements of the Company.

***Statements ofFinancial Condition***
| ** **                                      | ** ** | **June 30,**       | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| **ASSETS**                                      | ** ** | ** **              | ** ** | ** ** | ** ** |
| Cash and due from  depository institutions      |       | $                       | 932        |   | $ | 13 |   |
| Investment  securities                          |       | 11,277                  |       | — |   |
| Loan to ESOP                                    |       | 2,513                   |       | — |   |
| Accrued income  receivable                      |       | 53                      |       | — |   |
| Deferred income  taxes                          |       | 365                     |       | — |   |
| Investment in  Putnam Savings Bank              |       | 40,415                  |       | 23,283 |   |
| Other assets                                    |       | 142                     |       | 6 |   |
| **Total assets**                                |       | $                       | 55,697     |   | $ | 23,302 |   |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**        |       |                    |       |   |   |
| Liabilities                                     |       |                    |       |   |   |
| Payable to Putnam Savings Bank                  |       | $                       | 2,476      |   | $ | — |   |
| Other liabilities                               |       | 201                     |       | — |   |
| Total liabilities                               |       | 2,677                   |       | — |   |
| Stockholders' Equity                            |       | 53,020                  |       | 23,302 |   |
| **Total  liabilities and stockholders' equity** |       | $                       | 55,697     |   | $ | 23,302 |   |

 

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**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**14.**   Parent Company OnlyFinancial Statements

***Statements ofOperations***
| ** **                                                                                        | ** ** | **For the years  ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2005**                                              | ** ** | **2004** | ** ** |
| ** **                                                                                        | ** ** | **(in thousands)**                               | ** ** |
| **Interest  income**                                                                              |       |                                                  |       |   |   |
| Interest on loan                                                                                  |       | $                                                     | 96         |   | $ | — |   |
| Interest and dividends on investments                                                             |       | 272                                                   |       | 40 |   |
| Total interest income                                                                             |       | 368                                                   |       | 40 |   |
| **Noninterest expense**                                                                           |       |                                                  |       |   |   |
| Compensation and benefits                                                                         |       | 15                                                    |       | — |   |
| Charitable contributions                                                                          |       | 1,236                                                 |       | — |   |
| Other noninterest expense                                                                         |       | 52                                                    |       | 3 |   |
| Total noninterest expense                                                                         |       | 1,303                                                 |       | 3 |   |
| **Income (loss) before income tax benefit and  equity in undistributed net income of subsidiary** |       | (935                                                  | )          | 37 |   |
| **Income tax benefit**                                                                            |       | (302                                                  | )          | (1 | ) |
| **Income (loss) before equity in undistributed net  income of subsidiary**                        |       | (633                                                  | )          | 38 |   |
| **Equity in undistributed net income of subsidiary**                                              |       | 1,902                                                 |       | 1,554 |   |
| **Net  income**                                                                                   |       | $                                                     | 1,269      |   | $ | 1,592 |   |

 

71

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**PSB Holdings, Inc. Notes to Consolidated Financial Statements (Continued)**

**14.**   Parent Company OnlyFinancial Statements

***Statements of Cashflows***
| ** **                                                                     | ** ** | **For the years  ended June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                                              | ** ** | **2004** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**                               | ** ** |
| **Cash  flows from operating activities**                                      |       |                                                  |       |   |   |
| Net income                                                                     |       | $                                                     | 1,269      |   | $ | 1,592 |   |
| Adjustments to  reconcile net income to cash provided by operating activities: |       |                                                  |       |   |   |
| Net amortization on available-for-sale securities                              |       | (2                                                    | )          | — |   |
| Contribution of common stock to charitable  foundation                         |       | 1,236                                                 |       | — |   |
| Equity in undistributed net income of subsidiary                               |       | (1,902                                                | )          | (1,554 | ) |
| Deferred income tax provision                                                  |       | (353                                                  | )          | — |   |
| ESOP Shares released                                                           |       | 106                                                   |       | — |   |
| Net change in:                                                                 |       |                                                  |       |   |   |
| Accrued income receivable                                                      |       | (53                                                   | )          | — |   |
| Other assets                                                                   |       | (136                                                  | )          | (4 | ) |
| Payable to Putnam Savings Bank                                                 |       | (95                                                   | )          | — |   |
| Other liabilities                                                              |       | 202                                                   |       | (1 | ) |
| **Net  cash provided by operating activities**                                 |       | 272                                                   |       | 33 |   |
| **Cash flows from investing activities**                                       |       |                                                  |       |   |   |
| Proceeds from  sales of available-for-sale securities                          |       | 1,000                                                 |       | — |   |
| Proceeds from  maturities of available-for-sale securities                     |       | 591                                                   |       | — |   |
| Purchase of  available-for-sale securities                                     |       | (12,897                                               | )          | — |   |
| Loan to ESOP                                                                   |       | (2,571                                                | )          | — |   |
| Principal  payments received on loan to ESOP                                   |       | 58                                                    |       | — |   |
| Investment in  subsidiary                                                      |       | (14,923                                               | )          | — |   |
| **Net  cash used by investing activities**                                     |       | (28,742                                               | )          | — |   |
| **Cash flows from financing activities**                                       |       |                                                  |       |   |   |
| Proceeds from  common stock offering                                           |       | 30,897                                                |       | — |   |
| Cost of common stock  issuance                                                 |       | (1,051                                                | )          | — |   |
| Dividends  paid/declared                                                       |       | (457                                                  | )          | (20 | ) |
| **Net  cash provided by financing activities**                                 |       | 29,389                                                |       | (20 | ) |
| Increase in cash  and cash equivalents                                         |       | 919                                                   |       | 13 |   |
| Cash and cash  equivalents at beginning of year                                |       | 13                                                    |       | — |   |
| **Cash and cash equivalents at end of year**                                   |       | $                                                     | 932        |   | $ | 13 |   |
| ***Supplemental disclosures***                                                 |       |                                                  |       |   |   |
| Cash paid during the year for:                                                 |       |                                                  |       |   |   |
| Income taxes                                                                   |       | $                                                     | 24         |   | $ | — |   |

 

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