UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM 10-KSB
  x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
  For
the Fiscal Year Ended June 30, 2008
 OR
   ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
  For
the transition period from
            
to
 Commission
File Number: 000-50970
  PSB
Holdings, Inc.
 (Name
of Small Business Issuer 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)
  Securities
Registered Under to Section 12(b) of the Act:
 Common
Stock, par value $0.10 per share
 (Title of
Class)
 The
NASDAQ Stock Market LLC
 (Name of
exchange on which registered)
  Securities
Registered Under Section 12(g) of the Exchange Act:
 None
  Check whether the issuer is not required to file reports pursuant to Section 13
of 15(d) of the Exchange Act. [ ]
  Check
whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months
(or for such shorter period that the Registrant was required to file reports)
and (2) has been subject to such requirements for the past 90
days.
  (1)  YES  x  NO   ̈
 (2)  YES  x  NO   ̈
  Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB. x
  Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)   ̈  YES    x  NO
  The
Registrant’s revenues for the fiscal year ended June 30, 2008 were $30.4
million.
  As of
August 31, 2008, there were 6,943,125 shares issued and 6,530,509
outstanding of the Registrant’s Common Stock, including 3,729,846 shares owned
by Putnam Bancorp, MHC. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the closing price of
the Common Stock as of August 31, 2008 was $15.8 million.
  DOCUMENTS
INCORPORATED BY REFERENCE
  1.
              Proxy
      Statement for the 2008 Annual Meeting of Stockholders (Part II
      and III)
  Transitional
Small Business Disclosure Format:   ̈  YES    x  NO
 
 PSB
HOLDINGS, INC.
  FORM 10-KSB
  Index
 PagePART I
              3ITEM 1.
              Description
      of
      Business
              3ITEM 2.
              Description
      of
      Property
              30ITEM 3.
              Legal
      Proceedings
              31ITEM 4.
              Submission
      of Matters to a Vote of Security
      Holders
              31PART II
              32ITEM 5.
              Market
      for Common Equity, Related Stockholder Matters and Small Business Issuer
      Purchases of Equity Securities
              32ITEM 6.
              Management’s
      Discussion and Analysis or Plan of
      Operations
              33ITEM 7.
              Financial
      Statements
              39ITEM 8.
              Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
              75ITEM 8A.
              Controls
      and
      Procedures
              75ITEM
      8A(T).
              Controls
      and Procedures
              75ITEM 8B.
              Other
      Information
              75PART III
              76ITEM 9.
              Directors,
      Executive Officers, Promoters, Control Persons and Corporate Governance;
      Compliance with Section 16(a) of the Exchange
Act
              76ITEM 10.
              Executive
      Compensation
              76ITEM 11.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              76ITEM 12.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              76ITEM 13.
              Exhibits
              76ITEM 14.
              Principal
      Accountant Fees and
      Services
              77Signatures
              78
  2
  PART I
  ITEM 1.
              Description
      of Business
  Forward
Looking Statements
  This
Annual Report on Form 10-KSB contains certain “forward-looking statements” which
may be identified by the use of words such as “believe,” “expect,” “anticipate,”
“should,” “planned,” “estimated” and “potential.” Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors which could cause actual results to differ materially from these
estimates and most other statements that are not historical in nature. These
factors include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgage and other loans,
real estate values, competition, changes in accounting principles, policies, or
guidelines, changes in legislation or regulation, and other economic,
competitive, governmental, regulatory, and technological factors affecting our
operations, pricing products and services.
  PSB
Holdings, Inc.
  PSB
Holdings, Inc. is the federally chartered stock holding company of Putnam
Bank, and owns 100% of the common stock of Putnam Bank. PSB Holdings, Inc. also
owns investment securities valued at $1.8 million as of June 30, 2008. We
have not engaged in any significant business activity other than owning the
common stock of Putnam Bank and investing in marketable securities. Our
executive office is located at 40 Main Street, Putnam, Connecticut 06260, and
our telephone number is (860) 928-6501. 57.1% of the outstanding stock of
PSB Holdings, Inc. is owned by Putnam Bancorp, MHC.
  Putnam
Bancorp, MHC
  Putnam
Bancorp, MHC is a federally chartered mutual holding company. Putnam Bancorp,
MHC has not engaged in any significant business activity other than owning the
common stock of PSB Holdings, Inc. Putnam Bancorp, MHC owns 57.1% of the
outstanding shares of common 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 to exercise voting control over most matters put to a vote of
stockholders and Putnam Bancorp, MHC, through its Board of Directors, will be
able to exercise voting control over most matters put to a vote of
stockholders.
  Putnam
Bancorp, MHC is headquartered at 40 Main Street in Putnam, Connecticut and its
telephone number at that address is (860) 928-6501.
  Putnam
Bank
  Putnam
Bank was originally founded in 1862 as a state-chartered mutual savings bank. In
October 2004, the Bank converted to a federally chartered stock savings
bank in connection with the offering of common stock by PSB Holdings, Inc.
The Bank is headquartered at 40 Main Street in Putnam, Connecticut and conducts
substantially all of its business from seven full-service banking offices and
one loan origination center. In addition, the Bank maintains a “Special Needs
Limited Branch” and a “Limited Service (Mobile) Branch.” The telephone number at
the Bank’s main office is (860) 928-6501.
  General
  Our
principal business consists of attracting deposits from the general public in
Windham County and New London County, Connecticut and investing those deposits,
together with funds generated from operations, primarily in one- to four-family
residential mortgage loans and, to a lesser extent, commercial real estate loans
(including multi-family real estate loans), commercial loans, construction
mortgage loans and consumer loans, and in investment securities. Our revenues
are derived principally from interest on loans and securities, and from loan
origination and servicing fees. Our primary sources of funds are deposits and
principal and interest payments on loans and securities.
  Competition
  We face
intense competition within our market area both in making loans and attracting
deposits. The Town of Putnam and the surrounding area have a high concentration
of financial institutions, including large commercial banks, community banks and
credit unions. Some of our competitors offer products and services that we
currently do not offer, such as trust services and private banking. As of June
30, 2007, based on the FDIC’s annual Summary of Deposits Report (the most
current data available), our market share of deposits represented 18.7% of
deposits in Windham County and 1.1% in New London County.
  3
  Our
competition for loans and deposits comes principally from commercial banks,
savings institutions, mortgage banking firms and credit unions. We face
additional competition for deposits from money market funds, brokerage firms,
mutual funds and insurance companies. Our primary focus is to build and develop
profitable customer relationships across all lines of business while maintaining
our role as a community bank.
  Market
Area
  We operate in
a primarily rural market area that has a stable population and household base.
We currently operate out of seven offices, which are located in Windham County
and New London County, Connecticut. According to a recent census report, from
2000 to 2007, the population of Windham and New London Counties increased by
1.2% and 0.7% annually while the population of the United States increased by
1.2% on an annual basis. During the same period, the number of households in
Windham and New London Counties increased 1.1% and 0.9% on an annual basis,
compared to the United States increase of 1.3% annually. In 2007, per
capita income for Windham County was $26,298, and the median household income
was $55,549. In the same year, per capita income for New London County was
$32,251, and the median household income was $63,477. These compare to per
capita income for the State of Connecticut and the United States of $37,645 and
$27,916, respectively, and median household income of $68,430 and $53,154,
respectively.
  Windham
County is located in the Northeastern corner of Connecticut and borders both
Massachusetts (to the north) and Rhode Island (to the east). New London County
is to the south of Windham County, located in the Southeastern corner of
Connecticut. Putnam is approximately 45 miles from Hartford, Connecticut, 30
miles from Providence, Rhode Island, and 65 miles from Boston, Massachusetts.
Windham County has a diversified mix of industry groups and employment sectors,
including services, wholesale/retail trade and government. These three sectors
comprise approximately 66% of the employment base in Windham County. The same
three sectors comprise a higher 74% of the employment base in New London County;
however, approximately 28% of the employment base is employed by the government
sector. Windham County’s June 2008 unemployment rate of 6.7% was higher than the
New London County unemployment rate of 5.5%, higher than the comparable
Connecticut unemployment rate of 5.4% and higher than the national unemployment
rate of 5.5%. The national, Connecticut, Windham County and New London County’s
June 2008 unemployment rates were all higher than their June 2007 unemployment
rates of 4.6%, 4.4%, 5.5%, and 4.3%. Our primary market area for deposits
includes the communities in which we maintain our main office and our branch
office locations. Our primary lending area is broader than our primary deposit
market area and includes all of Windham County, and parts of the adjacent
Connecticut Counties of New London and Tolland and the Rhode Island and
Massachusetts communities adjacent to Windham County.
  Lending
Activities
  Historically,
our principal lending activity has been the 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 we originate. However, we generally sell
long-term fixed rate loans in the secondary market. When we sell loans, we
generally retain the servicing rights for such loans. One- to four-family
residential real estate mortgage loans represented $182.0 million, or
72.6%, of our loan portfolio at June 30, 2008. We also offer commercial
real estate loans (including multi-family real estate loans), commercial loans,
construction mortgage loans (primarily secured by single-family properties) and
consumer loans. At June 30, 2008, commercial real estate loans totaled
$55.4 million, or 22.1% of our loan portfolio, commercial loans totaled
$8.7 million, or 3.4% of our loan portfolio, construction mortgage loans
totaled $3.2 million, or 1.3% of our loan portfolio and consumer loans,
consisting primarily of auto loans and secured personal loans, totaled
$1.4 million, or 0.6% of our loan portfolio.
  4
  Loan Portfolio
Composition. The following table sets forth the composition of our loan
portfolio at June 30,
  2008
                
                
                2007Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent(Dollars
      in thousands)Mortgage
      Loans:Residential
      (1)
                
                $
                181,978
                
                
                
                72.59
                %
                
                $
                168,126
                
                
                
                69.86
                %Commercial
      real estate
                
                
                55,406
                
                
                
                22.10
                
                
                
                59,274
                
                
                
                24.63Residential
      construction
                
                
                3,223
                
                
                
                1.29
                
                
                
                5,376
                
                
                
                2.23Commercial
                
                
                8,687
                
                
                
                3.46
                
                
                
                6,449
                
                
                
                2.68Consumer
      and other
                
                
                1,394
                
                
                
                0.56
                
                
                
                1,439
                
                
                
                0.60Total
      loans
                
                $
                250,688
                
                
                
                100.00
                %
                
                $
                240,664
                
                
                
                100.00
                %Unadvanced
      construction loans
                
                
                (6,522
                )
                
                
                
                
                
                
                (8,264
                )244,166
                
                
                
                
                
                
                
                232,400Net
      deferred loan costs
                
                
                320
                
                
                
                
                
                
                
                282Allowance
      for loan losses
                
                
                (1,758
                )
                
                
                
                
                
                
                (1,780
                )Loans,
      net
                
                $
                242,728
                
                
                
                
                
                
                $
                230,902
 
 (1)
              Residential
      mortgage loans include one- to four-family mortgage loans, home equity
      loans, and home equity lines of
credit.
  5
  Loan Portfolio
Maturities and Yields. The following table summarizes the scheduled
repayments of our loan portfolio at June 30, 2008. Demand loans, loans
having no stated repayment schedule or maturity, and overdraft loans are
reported as being due in one year or less.
  Residential
      (1)
                
                Commercial
      Real Estate
                
                Residential
      Construction
                
                Commercial
                
                
                Consumer
      and Other Loans
                
                
                Total
      LoansAmount
                
                
                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 YearsEnding
      June 30,2009
                
                $
                29,844
                
                
                
                5.51
                %
                
                $
                17,488
                
                
                
                6.67
                %
                
                $
                2,147
                
                
                
                6.03
                %
                
                $
                4,561
                
                
                
                6.36
                %
                
                $
                709
                
                
                
                6.71
                %
                
                $
                54,749
                
                
                
                5.98
                %2010
                
                
                17,864
                
                
                
                5.58
                %
                
                
                12,057
                
                
                
                6.95
                %
                
                
                -
                
                
                
                -
                
                
                
                2,087
                
                
                
                6.86
                %
                
                
                290
                
                
                
                7.82
                %
                
                
                32,298
                
                
                
                6.20
                %2011
                
                
                16,510
                
                
                
                5.65
                %
                
                
                3,801
                
                
                
                7.77
                %
                
                
                -
                
                
                
                -
                
                
                
                698
                
                
                
                7.00
                %
                
                
                193
                
                
                
                7.84
                %
                
                
                21,202
                
                
                
                6.09
                %2012
      to 2013
                
                
                31,403
                
                
                
                5.89
                %
                
                
                11,848
                
                
                
                7.82
                %
                
                
                -
                
                
                
                -
                
                
                
                916
                
                
                
                6.38
                %
                
                
                128
                
                
                
                7.85
                %
                
                
                44,295
                
                
                
                6.41
                %2014
      to 2018
                
                
                36,844
                
                
                
                5.91
                %
                
                
                3,726
                
                
                
                6.65
                %
                
                
                -
                
                
                
                -
                
                
                
                425
                
                
                
                5.29
                %
                
                
                12
                
                
                
                6.25
                %
                
                
                41,007
                
                
                
                5.97
                %2019
      and beyond
                
                
                49,513
                
                
                
                5.99
                %
                
                
                1,040
                
                
                
                7.51
                %
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                62
                
                
                
                3.57
                %
                
                
                50,615
                
                
                
                6.01
                %Total
                
                $
                181,978
                
                
                
                5.80
                %
                
                $
                49,960
                
                
                
                7.11
                %
                
                $
                2,147
                
                
                
                6.03
                %
                
                $
                8,687
                
                
                
                6.48
                %
                
                $
                1,394
                
                
                
                7.06
                %
                
                $
                244,166
                
                
                
                6.10
                %
 
 (1)
              Residential
      mortgage loans include one- to four-family mortgage loans, home equity
      loans, and home equity lines of
credit.
  6
  The
following table sets forth the scheduled repayments of fixed and adjustable rate
loans at June 30, 2008 that are contractually due after June 30,
2009.
  Fixed
                
                
                Adjustable
                
                
                Total(In
      thousands)Mortgage
      Loans:Residential
      (1)
                
                $
                95,235
                
                
                $
                56,899
                
                
                $
                152,134Commercial
      real estate
                
                
                26,235
                
                
                
                6,237
                
                
                
                32,472Commercial
                
                
                2,874
                
                
                
                1,252
                
                
                
                4,126Consumer
      and other
                
                
                623
                
                
                
                62
                
                
                
                685Total
                
                $
                124,967
                
                
                $
                64,450
                
                
                $
                189,417
 
 (1)
              Residential
      mortgage loans include one- to four-family mortgage loans, home equity
      loans, and home equity lines of
credit.
  At June
30, 2008, the total amount of loans that have fixed interest rates was
$139.6 million, and the total amount of loans due after that date that have
floating or adjustable interest rates was $104.6 million.
  Residential
Mortgage Loans. Our primary lending activity consists of the origination
of one- to four-family residential mortgage loans that are primarily secured by
properties located in Windham County and New London County. At June 30,
2008, $182.0 million, or 72.6% of our loan portfolio, consisted of one- to
four-family residential mortgage loans. Included within these one- to
four-family loans at June 30, 2008 were $15.1 million of home equity loans
and $10.9 million of home equity lines of credit. Generally, one- to four-family
residential mortgage loans are originated in amounts up to 80% of the lesser of
the appraised value or purchase price of the property, with private mortgage
insurance required on loans with a loan-to-value ratio in excess of 80%. We will
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 according to Fannie Mae policies and procedures. Fixed rate
residential mortgage loans with terms of more than 15 years are generally sold
in the secondary market, while bi-weekly mortgages are generally retained in our
portfolio. Bi-weekly mortgages are loans that require payments be made every two
weeks. We will usually retain the servicing rights for all loans that we sell in
the secondary market. We originated $35.1 million of fixed rate one- to
four-family residential loans during the year ended June 30, 2008, of which
$13.2 million 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 Constant Maturity Treasury Bill Index, which
adjusts annually from the outset of the loan or which adjusts annually after a
three-, five-, seven-, or ten-year initial fixed rate period. We originated
$18.6 million of adjustable rate one- to four-family residential loans during
the year ended June 30, 2008, of which $316,000 was sold in the secondary
market. Our adjustable rate mortgage loans generally provide for maximum rate
adjustments of 100 basis points per adjustment, with a lifetime maximum
adjustment up to 6%, regardless of the initial rate. Our adjustable rate
mortgage loans amortize over terms of up to 30 years.
  Adjustable
rate mortgage loans decrease the risk associated with changes in market interest
rates by periodically repricing, but involve other risks because, as interest
rates increase, the monthly or bi-weekly payments by the borrower increase, thus
increasing the potential for default by the borrower. At the same time, the
value of the underlying collateral may be adversely affected by higher interest
rates. Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustments permitted by our loan
documents and, therefore, the effectiveness of adjustable rate mortgage loans
may be limited during periods of rapidly rising interest rates. At June 30,
2008, $80.1 million, or 44.0%, of our one- to four-family residential loans had
adjustable rates of interest.
  In an
effort to provide financing for moderate income home buyers, we offer Veterans
Administration (VA), Federal Housing Administration (FHA), Connecticut Housing
Finance Authority (CHFA) and Rural Development loans. These programs offer
residential mortgage loans to qualified individuals. These loans are offered
with fixed rates of interest and terms of up to 30 years. Such loans are secured
by one- to four-family residential properties. All of these loans are originated
using agency underwriting guidelines. VA, FHA and CHFA loans are closed in the
name of Putnam Bank and are immediately sold on a servicing-released basis. All
such loans are originated in amounts of up to 100% of the lower of the
property’s appraised value or the sale price. Private mortgage insurance is
required on all such loans.
  7
  All
residential mortgage loans that we originate include “due-on-sale” clauses,
which give us the right to declare a loan immediately due and payable in the
event that, among other things, the borrower sells or otherwise disposes of the
real property subject to the mortgage and the loan is not repaid. Regulations
limit the amount that a savings association may 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 is originated. All borrowers are required to
obtain title insurance. We also require homeowner’s insurance and fire and
casualty insurance and, where circumstances warrant, flood insurance, on
properties securing real estate loans. At June 30, 2008, our largest
residential mortgage loan had a principal balance of $700,000 and was secured by
a residence located in our primary market area. This loan was performing in
accordance with its repayment terms.
  We also
offer home equity loans and home equity of lines of credit, both of which are
secured by owner-occupied one- to four-family residences. At June 30, 2008,
home equity loans and equity lines of credit totaled $26.0 million, or
14.3% of our residential mortgage loans and 10.4% of total loans. Additionally,
at June 30, 2008, the unadvanced amounts of home equity lines of credit
totaled $11.6 million. The underwriting standards utilized for home equity loans
and home equity lines of credit include a determination of the applicant’s
credit history, an assessment of the applicant’s ability to meet existing
obligations and payments on the proposed loan and the value of the collateral
securing the loan. Home equity loans are offered with fixed rates of interest
and with terms up to 15 years. The loan-to-value ratio for a home equity loan is
generally limited to 80%. However, we offer special programs to borrowers, who
satisfy certain underwriting criteria, with loan-to-value ratios of up to 100%.
Our home equity lines of credit have adjustable rates of interest which are
indexed to the prime rate, as reported in The Wall Street Journal.
Interest rates on home equity lines of credit are generally limited to a maximum
rate of 14.25%.
  Commercial Real
Estate Loans.We originate commercial real estate loans, including
multi-family real estate loans that are generally secured by five unit or more
apartment buildings, construction loans and loans on properties used for
business purposes such as small office buildings, industrial facilities or
retail facilities primarily located in our primary market area. We also offer
real estate development loans to licensed contractors and builders for the
construction and development of commercial real estate projects and one- to
four-family residential properties. At June 30, 2008, commercial mortgage
loans totaled $55.4 million, which amounted to 22.1% of total loans. Our
commercial real estate underwriting policies provide that such real estate loans
may be made in amounts of up to 80% of the appraised value of the property
provided such loan complies with our current loans-to-one-borrower limit, which
at June 30, 2008 was $6.4 million. Our commercial real estate loans
may be made with terms of up to five years with 20 year amortization schedules
and are offered with interest rates that are fixed or adjust periodically and
are generally indexed to the prime rate as reported in The Wall Street Journalor
Federal Home Loan Bank advance rates. In reaching a decision on whether to make
a commercial real estate loan, we consider the net operating income of the
property, the borrower’s expertise and credit history, and the profitability of
the value of the underlying property. In addition, with respect to commercial
real estate rental properties, we will also consider the term of the lease and
the quality of the tenants. We generally require that the properties securing
these real estate loans have debt service coverage ratios (the ratio of earnings
before debt service to debt service) of at least 1.25x. Environmental surveys
are generally required for commercial real estate loans. Generally, multi-family
and commercial real estate loans made to corporations, partnerships and other
business entities require personal guarantees by the principals.
  A
commercial borrower’s financial information is monitored on an ongoing basis by
requiring periodic financial statement updates, payment history reviews and
periodic face-to-face meetings with the borrower. We require commercial
borrowers to provide annually updated financial statements and federal tax
returns. These requirements also apply to all guarantors on commercial loans. We
also require borrowers with rental investment property to provide an annual
report of income and expenses for the property, including a tenant list and
copies of leases, as applicable. The largest commercial real estate loan in our
portfolio at June 30, 2008 was a performing $2.8 million loan secured
by property located in our primary market area.
  Loans
secured by commercial real estate, including multi-family properties, generally
involve larger principal amounts and a greater degree of risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
commercial real estate, including multi-family properties, are often dependent
on successful operation or management of the properties, repayment of such loans
may be affected by adverse conditions in the real estate market or the
economy.
  8
  Residential
Construction Loans. We originate construction loans to individuals for
the construction and acquisition of personal residences. At June 30, 2008,
construction mortgage loans totaled $3.2 million, or 1.3%, of total loans.
At June 30, 2008, the unadvanced portion of these construction loans
totaled $1.1 million.
  Our
construction mortgage loans generally provide for the payment of interest only
during the construction phase, which is usually nine months. At the end of the
construction phase, the construction loan converts to a permanent mortgage loan.
Construction loans can be made with a maximum loan-to-value ratio of 95%,
provided that the borrower obtains private mortgage insurance on the loan if the
loan balance exceeds 80% of the appraised value or sales price, whichever is
less, of the secured property. At June 30, 2008, our largest outstanding
residential construction mortgage loan commitment was for $638,800, $465,100 of
which was outstanding. This loan was performing according to its terms at
June 30, 2008. Construction loans to individuals are generally made on the
same terms as our one- to four-family mortgage loans.
  Before
making a commitment to fund a residential construction loan, we require an
appraisal of the property by an independent licensed appraiser. We also review
and inspect each property before disbursement of funds during the term of the
construction loan. Loan proceeds are disbursed after inspection based on the
percentage of completion method.
  Construction
financing is generally considered to involve a higher degree of credit risk than
long-term financing on improved, owner-occupied real estate. Risk of loss on a
construction loan depends largely upon the accuracy of the initial estimate of
the value of the property at completion of construction compared to the
estimated cost (including interest) of construction and other assumptions. If
the estimate of construction cost is inaccurate, we may be required to advance
funds beyond the amount originally committed in order to protect the value of
the property. Additionally, if the estimate of value is inaccurate, we may be
confronted with a project, when completed, with a value that is insufficient to
assure full payment.
  Commercial
Loans. At June 30, 2008, we had $8.7 million in commercial
loans which amounted to 3.4% of total loans. We make commercial business loans
primarily in our market area to a variety of professionals, sole proprietorships
and small businesses. Commercial lending products include term loans and
revolving lines of credit. Such loans are generally used for longer-term working
capital purposes such as purchasing equipment or furniture. Commercial loans are
made with either adjustable or fixed rates of interest. Variable rates are based
on the prime rate, as published in The Wall Street Journal,plus
a margin. Fixed rate commercial loans are set at a margin above the comparable
Federal Home Loan Bank advance rate.
  When
making commercial loans, we consider the financial statements of the borrower,
our lending history with the borrower, the debt service capabilities of the
borrower, the projected cash flows of the business and the value of the
collateral. Commercial loans are generally secured by a variety of collateral,
primarily accounts receivable, inventory and equipment, and are supported by
personal guarantees. Depending on the collateral used to secure the loans,
commercial loans are made in amounts of up to 75% of the value of the collateral
securing the loan. We generally do not make unsecured commercial
loans.
  Commercial
loans generally have greater credit risk than residential mortgage loans. Unlike
residential mortgage loans, which generally are made on the basis of the
borrower’s ability to make repayment from his or her employment or other income,
and which are secured by real property whose value tends to be more easily
ascertainable, commercial loans generally are made on the basis of the
borrower’s ability to repay the loan from the cash flow of the borrower’s
business. As a result, the availability of funds for the repayment of commercial
loans may depend substantially on the success of the business itself. Further,
any collateral securing the loans may depreciate over time, may be difficult to
appraise and may fluctuate in value. We seek to minimize these risks through our
underwriting standards. At June 30, 2008, our largest commercial loan was a
$1.0 million loan secured by business assets located in our primary market area.
This loan was performing according to its terms at June 30,
2008.
  Consumer and
Other Loans. We offer a limited range of consumer loans, principally to
Putnam Bank customers 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 loans totaled $1.4 million, or 0.6% of our total loan portfolio,
at June 30, 2008.
  9
  Origination,
Purchase, Sale and Servicing of Loans. Lending activities are conducted
primarily by our loan personnel operating at our seven branch offices and one
loan origination center. All loans originated by us are underwritten pursuant to
our policies and procedures. We originate both adjustable rate and fixed rate
loans. Our ability to originate fixed or adjustable rate loans is dependent upon
the relative customer demand for such loans, which is affected by current and
expected future levels of market interest rates.
  Generally,
we retain in our portfolio all bi-weekly loans 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 loans that we currently originate for
sale include mortgage loans which conform to the underwriting standards
specified by Fannie Mae. We also sell all mortgage loans insured by CHFA, FHA,
VA and Rural Development loans. Generally, all one- to four-family loans that we
sell are sold pursuant to master commitments negotiated with Fannie Mae. We sell
our loans without recourse. We generally retain the servicing rights on the
mortgage loans sold to Fannie Mae, but generally sell all CHFA, VA, FHA and
Rural Development loans on a servicing-released basis.
  At
June 30, 2008, Putnam Bank was servicing loans sold in the amount of
$27.1 million. Loan servicing includes collecting and remitting loan
payments, accounting for principal and interest, contacting delinquent
mortgagors, supervising foreclosures and property dispositions in the event of
unremedied defaults, making certain insurance and tax payments on behalf of the
borrowers and generally administering the loans.
  During
the fiscal year ended June 30, 2008, we originated $53.7 million of fixed
rate and adjustable rate one-to four-family loans, of which $40.2 million
were retained by us. We recognize at the time of sale, the cash gain or loss on
the sale of the loans based on the difference between the net cash proceeds
received and the carrying value of the loans sold.
  Loan Approval
Procedures and Authority. The Board of Directors establishes the lending
policies and loan approval limits of Putnam Bank. Loan officers generally have
the authority to originate mortgage loans, consumer loans and commercial loans
up to amounts established for each lending officer. Loans in amounts above the
individual authorized limits require the approval of Putnam Bank’s Credit
Committee. The Credit Committee is authorized to approve the following types of
loans in amounts up to $500,000: all one- to four family mortgage loans,
commercial real estate loans, commercial loans and secured consumer loans. All
loans of $500,000 or greater must receive the approval of Putnam Bank’s Board of
Directors.
  The Board
annually approves independent appraisers used by Putnam Bank. For larger loans,
the Bank may require an environmental site assessment to be performed by an
independent professional for all non-residential mortgage loans. It is Putnam
Bank’s policy to require hazard insurance on all mortgage loans.
  Loan Origination
Fees and Other Income. In addition to interest earned on loans, Putnam
Bank receives loan origination fees. Such fees and costs vary with the volume
and type of loans and commitments made and purchased, principal repayments, and
competitive conditions in the mortgage markets, which in turn respond to the
demand and availability of money.
  Loans to One
Borrower. The maximum amount that we may lend to one borrower and the
borrower’s related entities is limited, by regulation, to generally 15% of our
stated capital and reserves. At June 30, 2008, our regulatory limit on
loans to one borrower was $6.4 million. At that date, the largest aggregate
amount loaned by Putnam Bank to one borrower was $4.4 million. The loans
comprising this lending relationship were performing in accordance with their
terms as of June 30, 2008.
  Non-Performing
and Problem Assets
  A
computer-generated delinquency notice is mailed monthly to all delinquent
borrowers, advising them of the amount of their delinquency. When a loan becomes
60 days delinquent, Putnam Bank sends a letter advising the borrower of the
delinquency. The borrower is given 30 days to pay the delinquent payments or to
contact Putnam Bank to make arrangements to bring the loan current over a longer
period of time. If the borrower fails to bring the loan current in 30 days or to
make arrangements to cure the delinquency over a longer period of time, the
matter is referred to legal counsel and foreclosure proceedings are started. We
may consider forbearance in cases of a temporary loss of income if a plan is
presented by the borrower to cure the delinquency in a reasonable period of time
after his or her income resumes.
  10
  All
non-commercial mortgage loans are reviewed on a regular basis and such loans are
placed on non-accrual status when they become more than 90 days delinquent.
Commercial loans are evaluated for non-accrual status on a case-by-case basis.
When loans are placed on non-accrual status, unpaid accrued interest is fully
reserved, and further income is recognized only to the extent
received.
  Non-Performing
Assets. The table below sets forth the amounts and categories of our
non-performing assets at the dates indicated. At each date presented, we had no
troubled debt restructurings (loans for which a portion of interest or principal
has been forgiven and loans modified at interest rates materially less than
current market rates). A loan classified in the table below as “non-accrual”
does not necessarily mean that such loan is or has been delinquent. Once a loan
is more than 90 days delinquent or the borrower or collateral securing the loan
experiences an event that makes collectability suspect, the loan is placed on
“non-accrual” status. Our policies require six months of continuous payments in
order for the loan to be removed from non-accrual status.
  At
      June 30,2008
                
                
                
                
                2007(Dollars
      in thousands)Non-accrual
      loans:Residential
      mortgage loans (1)
                
                $
                -
                
                
                
                
                $
                55Commercial
      real estate
                
                
                982
                
                
                
                
                
                1,480Residential
      construction
                
                
                -
                
                
                
                
                
                -Commercial
                
                
                -
                
                
                
                
                
                3Consumer
      and other
                
                
                -
                
                
                
                
                
                -Total
                
                
                982
                (2
                )
                
                
                
                1,538
                (2)Accruing
      loans past due 90 days and under:Residential
      mortgage loans (1)
                
                
                -
                
                
                
                
                
                -Commercial
      real estate
                
                
                -
                
                
                
                
                
                -Residential
      construction
                
                
                -
                
                
                
                
                
                -Commercial
                
                
                -
                
                
                
                
                
                -Consumer
      and other
                
                
                -
                
                
                
                
                
                -Total
                
                
                -
                
                
                
                
                
                -Accruing
      loans past due over 90 days:Residential
      mortgage loans (1)
                
                
                -
                
                
                
                
                
                -Commercial
      real estate
                
                
                470
                
                
                
                
                
                -Residential
      construction
                
                
                -
                
                
                
                
                
                -Commercial
                
                
                -
                
                
                
                
                
                -Consumer
      and other
                
                
                -
                
                
                
                
                
                -Total
                
                
                470
                
                
                
                
                
                -Total
      non-performing loans
                
                
                1,452
                
                
                
                
                
                1,538Real
      estate owned
                
                
                -
                
                
                
                
                
                -Other
      non-performing assets
                
                
                -
                
                
                
                
                
                -Total
      non-performing assets
                
                
                1,452
                
                
                
                
                
                1,538Troubled
      debt restructurings
                
                
                -
                
                
                
                
                
                -Troubled
      debt restructures and total non-performing assets
                
                $
                1,452
                
                
                
                
                $
                1,538Total
      non-performing loans to total loans
                
                
                0.58
                %
                
                
                
                
                0.64
                %Total
      non-performing loans to total assets
                
                
                0.29
                
                
                
                
                
                0.31Total
      non-performing assets and troubled debt restructurings to total
      assets
                
                
                0.29
                
                
                
                
                
                0.31
 (1)
              Residential
      mortgage loans include one- to four-family mortgage loans, home equity
      loans, and home equity lines of
credit.
 (2)
              The
      gross interest income that would have been reported if the loans had
      performed in accordance with their original terms was $116,000 and $98,000
      for the year ended June 30, 2008 and 2007, respectively. Actual income
      recognized in income was $12,000 and $11,000 for the year ended June 30,
      2008 and 2007, respectively.
  11
  The
following table sets forth certain information with respect to our loan
portfolio delinquencies at the dates indicated.
  Loans
      Delinquent For60-89
      Days Past Due
                
                
                90
      Days and Over
                
                
                TotalNumber
                
                
                Amount
                
                
                Number
                
                
                Amount
                
                
                Number
                
                
                Amount(Dollars
      in thousands)At
      June 30, 2008Residential
      (1)
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -Commercial
      real estate
                
                
                6
                
                
                
                1,289
                
                
                
                11
                
                
                
                2,859
                
                
                
                17
                
                
                
                4,148Residential
      construction
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Commercial
                
                
                1
                
                
                
                45
                
                
                
                1
                
                
                
                195
                
                
                
                2
                
                
                
                240Consumer
      and other loans
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                
                7
                
                
                $
                1,334
                
                
                
                12
                
                
                $
                3,054
                
                
                
                19
                
                
                $
                4,388At
      June 30, 2007Residential
      (1)
                
                
                -
                
                
                $
                -
                
                
                
                1
                
                
                $
                16
                
                
                
                1
                
                
                $
                16Commercial
      real estate
                
                
                1
                
                
                
                128
                
                
                
                -
                
                
                
                -
                
                
                
                1
                
                
                
                128Residential
      construction
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Commercial
                
                
                -
                
                
                
                -
                
                
                
                1
                
                
                
                3
                
                
                
                1
                
                
                
                3Consumer
      and other loans
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                
                1
                
                
                $
                128
                
                
                
                2
                
                
                $
                19
                
                
                
                3
                
                
                $
                147
 (1)
              Residential
      mortgage loans include one- to four-family mortgage loans, home equity
      loans, and home equity lines of
credit.
 (2)
              The
      difference in loans delinquent 90 days and over and non-performing loans
      as of June 30, 2008 is primarily relating to completion of underwriting
      for renewals and obtaining current financial information from borrowers,
      with these loans otherwise performing as
agreed.
  Classified
Assets. Office of Thrift Supervision regulations provide that loans and
other assets considered to be of lesser quality be classified as “substandard”,
“doubtful” or “loss” assets. An asset is considered “substandard” if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. “Substandard” assets include those
characterized by the “distinct possibility” that the institution will sustain
“some loss” if the deficiencies are not corrected. Assets classified as
“doubtful” have all of the weaknesses inherent in those classified
“substandard,” with the added characteristic that the weaknesses present make
“collection or liquidation in full,” on the basis of currently existing facts,
conditions, and values, “highly questionable and improbable”. Assets classified
as “loss” are those considered “uncollectible” and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted.
  An
insured institution is required to establish general allowances for loan losses
in an amount deemed prudent by management for loans classified substandard or
doubtful, as well as for other problem loans. General allowances represent loss
allowances which have been established to recognize the inherent losses
associated with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. When an insured institution
classifies problem assets as “loss”, it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount. An institution’s determination as to
the classification of its assets and the amount of its valuation allowances is
subject to review by the Office of Thrift Supervision which can order the
establishment of additional general or specific loss allowances.
  On the
basis of management’s review of its assets, at June 30, 2008 we had
classified $4.8 million of our assets as substandard. Of these loans, $1.5
million were considered non-performing and included in the table of
Non-Performing Assets.  At June 30, 2008, none of our assets were
classified as doubtful or loss.
  12
 The loan
portfolio is reviewed on a regular basis to determine whether any loans require
classification in accordance with applicable regulations. Not all classified
assets constitute non-performing assets.
  Allowance
for Loan Losses
  Our
allowance for loan losses is maintained at a level necessary to absorb loan
losses that are both probable and reasonably estimable. Management, in
determining the allowance for loan losses, considers the losses inherent in our
loan portfolio and changes in the nature and volume of loan activities, along
with the general economic and real estate market conditions. We utilize a
two-tier approach: (1) identification and establishment of specific loss
allowances on such loans; and (2) establishment of general valuation
allowances on the remainder of our loan portfolio. Once a loan becomes
delinquent or is otherwise identified as a problem, we may establish a specific
loan loss allowance based on a review of among other things, delinquency status,
size of loans, type and market value of collateral and financial condition, of
the borrowers. General loan loss allowances are based upon a combination of
factors including, but not limited to, actual loan loss experience, composition
of the loan portfolio, current economic conditions, management’s judgment and
losses which are probable and reasonably estimable. The allowance is increased
through provisions charged against current earnings and recoveries of previously
charged-off loans. Loans that are determined to be uncollectible are charged
against the allowance. While management uses available information to recognize
probable and reasonably estimable loan losses, future loss provisions may be
necessary based on changing economic conditions. Payments received on impaired
loans are applied first to principal. The allowance for loan losses as of
June 30, 2008 was maintained at a level that represents management’s best
estimate of losses inherent in the loan portfolio, and such losses were both
probable and reasonably estimable.
  In
addition, the Office of Thrift Supervision, as an integral part of their
examination process, periodically reviews our allowance for loan losses. This
agency may require that we recognize additions to the allowance based on its
judgment of information available to it at the time of its
examination.
  The
following table sets forth activity in our allowance for loan losses for the
periods indicated.
 
 Year
      Ended June 30,2008
                
                
                2007(Dollars
      in thousands)Balance
      at beginning of period
                
                $
                1,780
                
                
                $
                1,582Provision
      for loan losses
                
                
                51
                
                
                
                264Charge
      offs:Residential
      (1)
                
                
                -
                
                
                
                -Commercial
      real estate
                
                
                -
                
                
                
                (26
                )Residential
      construction
                
                
                -
                
                
                
                -Commercial
                
                
                (27
                )
                
                
                -Consumer
      and other
                
                
                (97
                )
                
                
                (86
                )Total
      charge-offs
                
                
                (124
                )
                
                
                (112
                )Recoveries:Residential
      (1)
                
                
                -
                
                
                
                -Commercial
      real estate
                
                
                10
                
                
                
                -Residential
      construction
                
                
                -
                
                
                
                -Commercial
                
                
                4
                
                
                
                19Consumer
      and other
                
                
                37
                
                
                
                27Total
      recoveries
                
                
                51
                
                
                
                46Net
      (charge-offs) recoveries
                
                
                (73
                )
                
                
                (66
                )Allowance
      at end of period
                
                $
                1,758
                
                
                $
                1,780Ratios:Allowance
      for loan losses to non-performing loans at end of period
                
                
                121.07
                %
                
                
                115.73Allowance
      for loan losses to total loans outstanding at the end of the
      period
                
                
                0.72
                %
                
                
                0.77Net
      charge-offs to average loans outstanding
                
                
                0.03
                %
                
                
                0.03
 13
 (1)
              Residential
      mortgage loans include one- to four-family mortgage loans, home equity
      loans, and home equity lines of
credit.
  
  Allocation of
Allowance for Loan Losses. The following table sets forth the allowance
for loan losses allocated by loan category, the percent of the allowance for a
category to the total allowance, 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 necessarily indicative of future losses in any particular
category and does not restrict the use of the allowance to absorb losses in
other categories.
 At
      June 30,2008
                
                
                2007Amount
                
                
                %
      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)
                
                $
                842
                
                
                
                47.89
                %
                
                
                73.88
                %
                
                $
                919
                
                
                
                51.63
                %
                
                
                72.09
                %Commercial
      loans (2)
                
                
                845
                
                
                
                48.07
                
                
                
                25.57
                
                
                
                788
                
                
                
                44.27
                
                
                
                27.31Consumer
      loans
                
                
                15
                
                
                
                0.85
                
                
                
                0.55
                
                
                
                25
                
                
                
                1.40
                
                
                
                0.60Unallocated
                
                
                56
                
                
                
                3.19
                
                
                
                -
                
                
                
                48
                
                
                
                2.70
                
                
                
                -Total
      allowance for loan losses
                
                $
                1,758
                
                
                
                100.00
                %
                
                
                100.00
                %
                
                $
                1,780
                
                
                
                100.00
                %
                
                
                100.00
                %
 
 (1)
              Residential
      mortgage loans include one- to four-family mortgage loans, home equity
      loans, and home equity lines of
credit.
 (2)
              Commercial
      loans include commercial real estate loans and
      commercial & industrial
loans.
  Each
quarter, management evaluates the total balance of the allowance for loan losses
based on several factors, some of which are not loan specific but are reflective
of the inherent losses in the loan portfolio. This process includes, but is not
limited to, a periodic review of loan collectability in light of historical
experience, the nature and volume of loan activity, conditions that may affect
the ability of the borrower to repay, underlying value of collateral, if
applicable, and economic conditions in our immediate market area. First, we
group loans by delinquency status. All loans 90 days or more delinquent are
evaluated individually, based primarily on the value of the collateral securing
the loan. Specific loss allowances are established as required by this analysis.
All loans for which a specific loss allowance has not been assigned are
segregated by type, delinquency status or loan grade and a loss allowance is
established by using loss experience data and management’s judgment concerning
other matters it considers significant. The allowance is allocated to each
category of loan based on the results of the above analysis. Small differences
between the allocated balances and recorded allowances are reflected as
unallocated to absorb losses resulting from the inherent imprecision involved in
the loss analysis process.
  This
analysis process is inherently subjective, as it requires us to make estimates
that are susceptible to revisions as more information becomes available.
Although we believe that we have established the allowance at levels to absorb
probable and estimable losses, future additions may be necessary if economic or
other conditions in the future differ from the current environment.
  Investment
Activities
  Putnam
Bank’s Executive Committee is responsible for implementing Putnam Bank’s
Investment Policy. The Investment Policy is reviewed annually and any changes to
the policy are recommended to, and subject to, the approval of our Board of
Directors. The Executive Committee is comprised of our Chairman, President and
one rotating director. Authority to make investments under the approved
Investment Policy guidelines is delegated by the Executive Committee to
appropriate officers. While general investment strategies are developed and
authorized by the Asset/Liability Committee, the execution of specific actions
rests with the Chief Executive Officer or President who may act jointly or
severally as Putnam Bank’s Investment Officer. The Investment Officer is
responsible for ensuring that the guidelines and requirements included in the
Investment Policy are followed and that all securities are considered prudent
for investment. The Investment Officer is authorized to execute investment
transactions (purchases and sales) up to $5 million per transaction without the
prior approval of the Executive Committee and within the scope of the
established investment policy. Each transaction in excess of established limits
must receive prior approval of the Executive Committee.
  14
  In
addition, Putnam Bank may utilize the services of an independent investment
advisor to assist in managing the investment portfolio. The investment advisor
is responsible for maintaining current information regarding securities dealers
with whom they are conducting business on our behalf. A list of appropriate
dealers is provided annually to the Board of Directors for approval and
authorization prior to execution of trades. The investment advisor, through its
assigned portfolio manager, must contact our President or Treasurer to review
all investment recommendations and transactions and receive approval from the
President or Treasurer prior to execution of any transaction that might be
transacted on our behalf. Upon receipt 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 securities transactions be conducted in a
safe and sound manner. Investment decisions must be based upon a thorough
analysis of each security instrument to determine its quality, inherent risks,
fit within our overall asset/liability management objectives, effect on our
risk-based capital measurement and prospects for yield and/or
appreciation.
  Consistent
with our overall business and asset/liability management strategy, which focuses
on sustaining adequate levels of core earnings, all securities purchased are
held available-for-sale.
  On September
7, 2008, the U. S. Department of the Treasury placed Fannie Mae and Freddie Mac
under conservatorship and assumed an equity position in these entities, which
takes priority over both common and preferred stocks. As of June 30, 2008,
Putnam Bank had preferred equity investments in Freddie Mac totaling $4,000,000.
The Bank may record an other-than-temporary impairment loss during the quarter
ending September 30, 2008 on its Freddie Mac preferred equity investments, but
cannot estimate the amount of the impairment loss at this time.  However,
even if the Bank’s Freddie Mac preferred equity investments are ultimately
deemed to have no value and no offsetting tax benefit is available, the Bank
would continue to substantially exceed the capital ratios that must be
maintained to be considered “well capitalized” under the capital guidelines
administered by the federal banking agencies.
  U.S. Government
and Agency Obligations. At June 30, 2008, the Company’s
U.S. Government and Agency securities portfolio totaled $19.3 million,
or 8.5% of total investments, all of which were classified as
available-for-sale. There were no structured notes in the portfolio. While U.S.
Government and Agency securities generally provide lower yields than other
investments in our securities investment portfolio, we maintain these
investments, to the extent appropriate, for liquidity purposes, as collateral
for borrowings and prepayment protection.
  State Agency and
Municipal Obligations. These securities consist of obligations issued by
states, counties and municipalities or their agencies and include general
obligation bonds, industrial development revenue bonds and other revenue bonds.
Our investment policy requires that such state agency or municipal obligations
be rated “A-” or better by a nationally recognized rating agency. If the debt
obligation rating goes below “A-” then the investment is placed on an investment
“watch report” and is monitored by our Investment Officer. The investment is
then reviewed quarterly by our Board of Directors where a determination is made
to hold or dispose of the investment. At June 30, 2008, the Company’s state
agency and municipal obligations portfolio totaled $4.4 million, or 2.0% of
total investments, all of which was classified as
available-for-sale.
  Corporate Bonds.At June 30, 2008, the Company’s corporate bond portfolio totaled
$19.1 million, or 8.4% of total investments, all of which was classified as
available-for-sale. Although corporate bonds may offer higher yields than U.S.
Treasury or agency securities of comparable duration, corporate bonds also have
a higher risk of default due to possible adverse changes in the
credit-worthiness of the issuer. In order to mitigate this risk, our investment
policy requires that corporate debt obligations be rated “A-” by a nationally
recognized rating agency. If the bond rating goes below “A-” then the investment
is placed on an investment “watch report” and is monitored by our Investment
Officer. The investment is then reviewed quarterly by our Board of Directors
where a determination is made to hold or dispose of the investment.
  Mortgage-Backed
Securities.The Company purchases mortgage-backed securities insured or
guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. We invest in
mortgage-backed securities to achieve positive interest rate spreads with
minimal administrative expense, and lower our credit risk as a result of the
guarantees provided by Freddie Mac, Fannie Mae and Ginnie Mae. The Company also
invests in collateralized mortgage obligations (CMOs), also insured or issued by
Freddie Mac, Fannie Mae and Ginnie Mae, or private issuers such as Washington
Mutual and Countrywide Home Loans. All private issuer CMOs were rated
AAA.
  15
  Mortgage-backed
securities are created by the pooling of mortgages and the issuance of a
security with an interest rate that is less than the interest rate on the
underlying mortgage. Mortgage-backed securities typically represent a
participation interest in a pool of single-family or multi-family mortgages,
although we focus our investments on mortgage-backed securities backed by one-
to four-family mortgages. The issuers of such securities (generally
U.S. government agencies and government sponsored enterprises, including
Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell the participation
interests in the form of securities to investors such as Putnam Bank, and
guarantee the payment of principal and interest to investors. Mortgage-backed
securities generally yield less than the loans that underlie such securities
because of the cost of payment guarantees and credit enhancements. However,
mortgage-backed securities are usually more liquid than individual mortgage
loans and may be used to collateralize our specific liabilities and
obligations.
  CMOs are
a type of debt security issued by a special purpose entity that aggregates pools
of mortgage-backed securities and creates different classes of CMO securities
with varying maturities and amortization schedules as well as a residual
interest, with each class, or “tranche”, possessing different risk
characteristics. A particular tranche of CMOs may, therefore, carry prepayment
risk that differs from that of both the underlying collateral and other
tranches. CMO tranches are purchased by the Company in an attempt to moderate
reinvestment risk associated with mortgage-backed securities resulting from
unexpected prepayment activities.
  At
June 30, 2008, mortgage-backed securities totaled $156.1 million, or
69.1% of total investments, all of which were classified as available-for-sale.
At June 30, 2008, 36.3% of the mortgage-backed securities were backed by
adjustable rate loans and 63.7% were backed by fixed rate mortgage loans. The
mortgage-backed securities portfolio had a weighted average yield of 5.13% at
June 30, 2008. The estimated fair value of our mortgage-backed securities
at June 30, 2008 was $151.9 million, which is less than the amortized
cost of $156.1 million. Investments in mortgage-backed securities involve a
risk that actual prepayments may differ from estimated prepayments over the life
of the security, which may require adjustments to the amortization of any
premium or accretion of any discount relating to such instruments thereby
changing the net yield on such securities. There is also reinvestment risk
associated with the cash flows from such securities or if such securities are
redeemed by the issuer. In addition, the market value of such securities may be
adversely affected by changes in interest rates.
  Marketable Equity
Securities.At June 30, 2008, our equity securities portfolio
totaled $26.9 million, or 11.9% of total investments, all of which were
classified as available for sale. At June 30, 2008, the portfolio consisted
of $7.9 million of Federal Home Loan Bank stock and $19.0 million of auction
rate preferred stock. Auction rate preferred stock is a floating rate preferred
stock, on which the dividend rate generally resets every 90 days based on an
auction process to reflect the yield demand for the instruments by potential
purchasers. At June 30, 2008, our investments in preferred stock consisted
of investments in five corporate issuers. During the last year, the Auction rate
securities market has come under considerable pressure.  Due to the
current credit market environment and the lack of liquidity, many Auction rate
securities auctions have been “failing.”  It is important to note that
an auction failure does not denote a default in the security, but is indicative
of a liquidity issue.
  Investments
in equity securities involve risk as they are not insured or guaranteed
investments and are affected by stock market fluctuations. Such investments are
carried at their market value and can directly affect our net capital
position.
  16
  Investment
Securities Portfolio.The following table sets forth the amortized costs
and carrying values of our investment securities portfolio at the dates
indicated.
  At
      June 30,2008
                
                
                2007Amortized
                  Cost
                
                
                Fair
      Value
                
                
                Amortized
                  Cost
                
                
                Fair
      Value(In
      thousands)Debt
      Securities:U.S.
      Government and agency securities
                
                $
                19,298
                
                
                $
                19,472
                
                
                $
                45,026
                
                
                $
                44,679State
      agency and municipal obligations
                
                
                4,448
                
                
                
                4,547
                
                
                
                9,128
                
                
                
                9,382Corporate
      bonds and other securities
                
                
                19,058
                
                
                
                17,214
                
                
                
                20,902
                
                
                
                20,937Mortgage-backed
      securities
                
                
                156,063
                
                
                
                151,850
                
                
                
                137,530
                
                
                
                135,324Total
      debt securities
                
                
                198,867
                
                
                
                193,083
                
                
                
                212,586
                
                
                
                210,322Marketable
      equity securities:Federal
      Home Bank stock
                
                
                7,943
                
                
                
                7,943
                
                
                
                7,180
                
                
                
                7,180Preferred
      stock
                
                
                19,000
                
                
                
                19,000
                
                
                
                5,000
                
                
                
                5,000Total
      equity securities
                
                
                26,943
                
                
                
                26,943
                
                
                
                12,180
                
                
                
                12,180Total
      available-for-sale securities
                
                $
                225,810
                
                
                $
                220,026
                
                
                $
                224,766
                
                
                $
                222,502
  17
  Portfolio
Maturities and Yields.The composition and maturities of the investment
securities portfolio at June 30, 2008 are summarized in the following
table. Maturities are based on the final contractual payment dates, and do not
reflect the impact of prepayments or early redemptions that may occur. State
agency and municipal obligations as well as common and preferred stock yields
have not been adjusted to a tax-equivalent basis. Certain mortgage-backed
securities have interest rates that are adjustable and will reprice annually
within the various maturity ranges. These repricing schedules are not reflected
in the table below. At June 30, 2008, mortgage-backed securities with
adjustable rates totaled $56.7 million.
 
 One
      Year or Less
                
                
                More
      than One Year to Five Years
                
                
                More
      than Five Years to Ten Years
                
                
                More
      than Ten Years
                
                
                TotalCarrying
      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
      securitiesU.S.
      Government and agency securities
                
                $
                -
                
                
                
                
                
                $
                3,095
                
                
                
                5.01
                %
                
                $
                2,228
                
                
                
                5.52
                %
                
                $
                14,149
                
                
                
                6.11
                %
                
                $
                19,472
                
                
                
                5.87
                %State
      agency and municipal obligations
                
                
                -
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                4,547
                
                
                
                4.92
                %
                
                
                4,547
                
                
                
                4.92
                %Corporate
      bonds and other securities
                
                
                2,977
                
                
                
                5.25
                %
                
                
                7,579
                
                
                
                5.14
                %
                
                
                -
                
                
                
                
                
                
                
                6,658
                
                
                
                4.33
                %
                
                
                17,214
                
                
                
                4.85
                %Mortgage-backed
      securities
                
                
                998
                
                
                
                6.80
                %
                
                
                3,715
                
                
                
                5.33
                %
                
                
                10,576
                
                
                
                5.76
                %
                
                
                136,561
                
                
                
                5.06
                %
                
                
                151,850
                
                
                
                5.13
                %Total
      debt securities
                
                $
                3,975
                
                
                
                
                
                
                $
                14,389
                
                
                
                
                
                
                $
                12,804
                
                
                
                
                
                
                $
                161,915
                
                
                
                
                
                
                $
                193,083
                
                
                
                5.17
                %Marketable
      equity securities:Preferred
      stock
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                19,000
                
                
                
                5.20
                %FHLB
      Restricted Stock
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                7,943
                
                
                
                4.00
                %Total
      equity securities
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                26,943
                
                
                
                4.85
                %Total
      investment securities
                
                $
                3,975
                
                
                
                
                
                
                $
                14,389
                
                
                
                
                
                
                $
                12,804
                
                
                
                
                
                
                $
                161,915
                
                
                
                
                
                
                $
                220,026
                
                
                
                5.13
                %
  18
  Sources
of Funds
  General.
Deposits have traditionally been our primary source of funds for use in lending
and investment activities. In addition to deposits, funds are derived from
scheduled loan payments, investment maturities, loan prepayments, retained
earnings and income on earning assets. While scheduled loan payments and income
on earning assets are relatively stable sources of funds, deposit inflows and
outflows can vary widely and are influenced by prevailing interest rates, market
conditions and levels of competition. Borrowings from the Federal Home Loan Bank
of Boston and brokered certificates of deposit may be used to compensate for
reductions in deposits and to fund loan growth.
  Deposits.
A majority of our depositors are persons who work or reside in Windham County
and New London 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 amount of time the funds must remain on deposit and the interest
rate.
  Interest
rates paid, maturity terms, service fees and withdrawal penalties are
established on a periodic basis. Deposit rates and terms are based primarily on
current operating strategies and market rates, liquidity requirements, rates
paid by competitors and growth goals. To attract and retain deposits, we rely
upon personalized customer service, long-standing relationships and competitive
interest rates.
  The flow
of deposits is influenced significantly by general economic conditions, changes
in money market and other prevailing interest rates and competition. The variety
of deposit accounts that we offer allows us to be competitive in obtaining funds
and responding to changes in consumer demand. Based on historical experience,
management believes our deposits are relatively stable. However, the ability to
attract and maintain money market accounts and certificates of deposit, and the
rates paid on these deposits, have been and will continue to be significantly
affected by market conditions. At June 30, 2008, $149.9 million, or
52.8%, of our deposit accounts were certificates of deposit, of which
$87.6 million had maturities of one year or less.
  The
following table sets forth the distribution of total deposit accounts, by
account type, for the periods indicated.
  For
      the Year Ended June 30,2008
                
                
                2007Average
                
                
                
                
                
                Weighted
                
                
                Average
                
                
                
                
                
                WeightedBalance
                
                
                Percent
                
                
                Average
    Rate
                
                
                Balance
                
                
                Percent
                
                
                Average
    Rate(Dollars
      in thousands)Demand
      deposits
                
                $
                38,001
                
                
                
                13.38
                %
                
                
                -
                %
                
                $
                39,522
                
                
                
                13.60
                %
                
                
                -
                %NOW
      accounts
                
                
                29,813
                
                
                
                10.50
                
                
                
                2.37
                
                
                
                24,798
                
                
                
                8.53
                
                
                
                1.83Regular
      savings
                
                
                47,403
                
                
                
                16.69
                
                
                
                0.60
                
                
                
                51,658
                
                
                
                17.77
                
                
                
                0.74Money
      market accounts
                
                
                15,496
                
                
                
                5.46
                
                
                
                1.70
                
                
                
                20,210
                
                
                
                6.95
                
                
                
                1.84Club
      accounts
                
                
                250
                
                
                
                0.09
                
                
                
                4.17
                
                
                
                243
                
                
                
                0.08
                
                
                
                4.17Total
      transaction accounts
                
                
                130,963
                
                
                
                46.12
                
                
                
                1.02
                
                
                
                136,431
                
                
                
                46.93
                
                
                
                0.88Certificates
      of deposit
                
                
                153,014
                
                
                
                53.88
                
                
                
                3.87
                
                
                
                154,259
                
                
                
                53.07
                
                
                
                4.66Total
                
                $
                283,977
                
                
                
                100.00
                %
                
                
                2.53
                %
                
                $
                290,690
                
                
                
                100.00
                %
                
                
                2.86
                %
  19
 
 As of
June 30, 2008, the aggregate amount of outstanding certificates of deposit
in amounts greater than or equal to $100,000 was approximately
$54.6 million. The following table sets forth the maturity of those
certificates as of June 30, 2008.
 At June 30,Maturity
      Period
                  
                  2008(In
      thousands)Three
      months or less
                  
                  $
                  17,155Over
      three through six months
                  
                  
                  4,218Over
      six months through one year
                  
                  
                  11,666Over
      one year through three years
                  
                  
                  14,361Over
      three years
                  
                  
                  7,224Total
                  
                  $
                  54,624
 The
following table sets forth the certificates of deposit, classified by interest
rate, as of the dates indicated.
  At
      June 30,2008
                
                
                2007Interest
      Rate:0.00
                %
                
                -
                
                
                
                1.00
                %
                
                $
                269
                
                
                $
                141.01
                
                
                -
                
                
                
                2.00
                
                
                
                200
                
                
                
                3802.01
                
                
                -
                
                
                
                3.00
                
                
                
                34,816
                
                
                
                15,2273.01
                
                
                -
                
                
                
                4.00
                
                
                
                52,578
                
                
                
                16,7014.01
                
                
                -
                
                
                
                5.00
                
                
                
                23,636
                
                
                
                32,2455.01
                
                
                -
                
                
                
                6.00
                
                
                
                38,402
                
                
                
                89,152$
                149,901
                
                
                $
                153,719
   The
following table sets forth the amount and maturities of certificates of deposit
at June 30, 2008.
  Amount
      DueLess
      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
                
                
                Percent
      of
                  Total
                  Certificate
                  Accounts(In
      thousands)0.00
                %
                -
                
                1.00
                %
                
                $
                269
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                269
                
                
                
                0.2
                %1.01
                
                -
                
                2.00
                
                
                
                200
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                200
                
                
                
                0.12.01
                
                -
                
                3.00
                
                
                
                31,272
                
                
                
                3,273
                
                
                
                50
                
                
                
                221
                
                
                
                -
                
                
                
                34,816
                
                
                
                23.23.01
                
                -
                
                4.00
                
                
                
                23,383
                
                
                
                24,347
                
                
                
                2,739
                
                
                
                138
                
                
                
                1,971
                
                
                
                52,578
                
                
                
                35.14.01
                
                -
                
                5.00
                
                
                
                11,277
                
                
                
                4,207
                
                
                
                3,218
                
                
                
                1,317
                
                
                
                3,617
                
                
                
                23,636
                
                
                
                15.85.01
                
                -
                
                6.00
                
                
                
                21,183
                
                
                
                3,912
                
                
                
                983
                
                
                
                12,324
                
                
                
                -
                
                
                
                38,402
                
                
                
                25.6$
                87,584
                
                
                $
                35,739
                
                
                $
                6,990
                
                
                $
                14,000
                
                
                $
                5,588
                
                
                $
                149,901
                
                
                
                100.0
                %
  20
  The
following table sets forth the interest-bearing deposit activities for the
periods indicated.
  Year
      Ended June 30,2008
                
                
                2007(In
      thousands)Beginning
      balance
                
                $
                249,980
                
                
                $
                250,471Net
      deposits (withdrawals)before
      interest credited
                
                
                (11,824
                )
                
                
                (8,546
                )Interest
      credited
                
                
                8,373
                
                
                
                8,055Net
      decrease in deposits
                
                
                (3,451
                )
                
                
                (491
                )Ending
      balance
                
                $
                246,529
                
                
                $
                249,980
  21
  Borrowings.
Our borrowings consist of advances from, and a line of credit with, the Federal
Home Loan Bank of Boston and repurchase agreements. At June 30, 2008, we
had an available line of credit with the Federal Home Loan Bank of Boston in the
amount of $2.4 million and access to additional Federal Home Loan Bank
advances of up to $42.0 million. At June 30, 2008, retail repurchase
agreements were $6.4 million.  The following table sets forth
information concerning balances and interest rates on our Federal Home Loan Bank
advances at the dates and for the periods indicated.
 
 At
      and For The Year Ended June 30,June
      30,2008
                
                
                2007(Dollars
      in thousands)Maximum
      amount of advances outstandingat
      any month end during the period:FHLB
      advances
                
                $
                152,236
                
                
                $
                137,883Repurchase
      Agreements with other companies
                
                
                -
                
                
                
                1,722Repurchase
      Agreements with customers
                
                
                6,406
                
                
                
                5,389Average
      advances outstanding during the period:FHLB
      advances
                
                
                145,691
                
                
                
                126,524Repurchase
      Agreements with other companies
                
                
                -
                
                
                
                754Repurchase
      Agreements with customers
                
                
                4,602
                
                
                
                3,330Balance
      outstanding at end of period:FHLB
      advances
                
                
                150,215
                
                
                
                137,883Repurchase
      Agreements with other companies
                
                
                -
                
                
                
                -Repurchase
      Agreements with customers
                
                
                6,406
                
                
                
                3,974Weighted
      average interest rate during the period:FHLB
      advances
                
                
                4.62
                %
                
                
                5.19
                %Repurchase
      Agreements with other companies
                
                
                -
                
                
                
                5.40Repurchase
      Agreements with customers
                
                
                2.84
                
                
                
                3.92Weighted
      average interest rate at end of period:FHLB
      advances
                
                
                3.95
                %
                
                
                4.98
                %Repurchase
      Agreements with other companies
                
                
                -
                
                
                
                -Repurchase
      Agreements with customers
                
                
                2.17
                
                
                
                3.97
  Subsidiary
Activities
  PSB
Holdings Inc.’s only subsidiary is Putnam Bank. Putnam Bank has three
subsidiaries, Windham North Properties, LLC, PSB Realty, LLC and Putnam Bank
Mortgage Servicing Company. Windham North Properties, LLC is used to acquire
title to selected properties on which Putnam Bank forecloses. As of
June 30, 2008, Windham North Properties, LLC, did not own any such
properties. PSB Realty, LLC owns a single parcel of real estate located
immediately adjacent to Putnam Bank’s main office. This real estate is utilized
as a loan center for Putnam Bank and there are no outside tenants that occupy
the premises. Putnam Bank Mortgage Servicing Company is a qualified “passive
investment company” that is intended to reduce Connecticut state taxes on
interest earned on real estate loans.
  Personnel
  As of
June 30, 2008, we had 84 full-time employees and 32 part-time
employees. Our employees are not represented by any collective bargaining group.
Management believes that we have good relations with our employees.
  FEDERAL
AND STATE TAXATION
  Federal
Taxation
  General. PSB Holdings, Inc. and
Putnam Bank are subject to federal income taxation in the same general manner as
other corporations, with some exceptions discussed below. PSB
Holdings, Inc.’s and Putnam Bank’s tax returns have not been audited during
the past five years. The following discussion of federal taxation is intended
only to summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to PSB
Holdings, Inc. or Putnam Bank.
  22
  Method of
Accounting. For
federal income tax purposes, PSB Holdings, Inc. and Putnam Bank currently
report their income and expenses on the accrual method of accounting and use a
tax year ending June 30 for filing their federal income tax
returns.
  Bad Debt
Reserves. Prior
to the Small Business Protection Act of 1996 (the “1996 Act”), Putnam Bank was
permitted to establish a reserve for bad 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 Bank was
required to use the specific charge off method in computing its bad debt
deduction beginning with its 1996 federal tax return. Savings institutions were
required to recapture any excess reserves over those established as of
December 31, 1987 (base year reserve). At June 30, 2008 Putnam Bank
had no reserves subject to recapture in excess of its base year
reserves.
  Taxable
Distributions and Recapture. Prior to the 1996 Act, bad
debt reserves created prior to January 1, 1988 were subject to recapture
into taxable income if Putnam Bank failed to meet certain thrift asset and
definitional tests. Federal legislation has eliminated these thrift-related
recapture rules. At June 30, 2008, our total federal pre-1988 base year
reserve was approximately $2.3 million. However, under current law, pre-1988
base year reserves remain subject to recapture if Putnam Bank makes certain
non-dividend distributions, repurchases any of its stock, pays dividends in
excess of tax earnings and profits, or ceases to 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 of regular taxable income plus
certain tax preferences, which we refer to as “alternative minimum taxable
income.” The AMT is payable to the extent such alternative minimum taxable
income is in excess of an exemption amount and the AMT exceeds the regular
income tax. Net operating losses can offset no more than 90% of alternative
minimum taxable income. Certain AMT payments may be used as credits against
regular tax liabilities in future years. At June 30, 2008, PSB Holdings, Inc.
had $81,473 of AMT payments available to carry forward to future
periods.
  Net Operating
Loss Carryovers.
A financial institution may carry back net operating losses to the preceding two
taxable years and forward to the succeeding 20 taxable years. At June 30,
2008, Putnam Bank had no net operating loss carry forwards for federal income
tax purposes.
  Corporate
Dividends-Received Deduction. PSB Holdings, Inc. may
exclude from its income 100% of dividends received from Putnam Bank as a member
of the same affiliated group of corporations. The corporate dividends-received
deduction is 80% in the case of dividends received from corporations with which
a corporate recipient does not file a consolidated tax return, and corporations
which own less than 20% of the stock of a corporation distributing a dividend
may deduct only 70% of dividends received or accrued on their
behalf.
  State
Taxation
  Connecticut State
Taxation. PSB
Holdings, Inc. and Putnam Bank and its subsidiaries, are subject to the
Connecticut corporation business tax. Both entities are required to pay the
regular corporation business tax (income tax).
  The
Connecticut corporation business tax is based on the federal taxable income
before net operating loss and special deductions and makes certain modifications
to federal taxable income to arrive at Connecticut taxable income. Connecticut
taxable income is multiplied by the state tax rate of 7.5% to arrive at
Connecticut income tax.
  In 1998,
the State of Connecticut enacted legislation permitting the formation of passive
investment companies by financial institutions. This legislation exempts
qualifying passive investment companies from the Connecticut corporation
business tax and excludes dividends paid from a passive investment company from
the taxable income of the parent financial institution. Putnam Bank established
a passive investment company, Putnam Bank Mortgage Servicing Company, during
2007 and eliminated the state income tax expense of Putnam Bank effective July
1, 2006. If the State of Connecticut were to pass legislation in the future to
eliminate the passive investment company exemption Putnam Bank would be subject
to state income taxes in Connecticut.
 
 PSB
Holdings, Inc. and Putnam Bank are not currently under audit with respect to
their income tax returns, and their state tax returns have not been audited for
the past five years.
  23
  SUPERVISION
AND REGULATION
  General
  Putnam
Bank is examined and supervised by the Office of Thrift Supervision. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution may engage and is intended primarily for the protection
of the Federal Deposit Insurance Corporation’s deposit insurance funds and
depositors. Under this system of federal regulation, financial institutions are
periodically examined to ensure that they satisfy applicable standards with
respect to their capital adequacy, assets, management, earnings, liquidity and
sensitivity to market interest rates. Following completion of its examination,
the federal agency critiques the institution’s operations and assigns its rating
(known as an institution’s CAMELS rating). Under federal law, an institution may
not disclose its CAMELS rating to the public. Putnam Bank also is a member of
and owns stock in the Federal Home Loan Bank of Boston, which is one of the
twelve regional banks in the Federal Home Loan Bank System. Putnam Bank also is
regulated to a lesser extent by the Board of Governors of the Federal Reserve
System, governing reserves to be maintained against deposits and other matters.
The Office of Thrift Supervision examines Putnam Bank and prepares reports for
the consideration of its Board of Directors on any operating deficiencies.
Putnam Bank’s relationship with its depositors and borrowers also is regulated
to a great extent by both federal and state laws, especially in matters
concerning the ownership of deposit accounts and the form and content of Putnam
Bank’s mortgage documents.
  Any
change in these laws or regulations, whether by the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision or Congress, could have a material
adverse impact on PSB Holdings, Inc. and Putnam Bank and their
operations.
  Federal
Banking Regulation
  Business
Activities. A federal savings association derives its lending and
investment powers from the Home Owners’ Loan Act, as amended, and the
regulations of the Office of Thrift Supervision. Under these laws and
regulations, Putnam Bank may invest in mortgage loans secured by residential
real estate without limitations as a percentage of assets and non-residential
real estate loans which may not in the aggregate exceed 400% of capital,
commercial business loans up to 20% of assets in the aggregate and consumer
loans up to 35% of assets in the aggregate, certain types of debt securities and
certain other assets. Putnam Bank also may establish subsidiaries that may
engage in activities not otherwise permissible for Putnam Bank, including real
estate investment and securities and insurance brokerage.
  Capital
Requirements. Office of Thrift Supervision regulations require savings
associations to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for associations receiving the highest rating on
the CAMELS rating system) and an 8% risk-based capital ratio. The prompt
corrective action standards discussed below, in effect, establish a minimum 2%
tangible capital standard.
  The
risk-based capital standard for savings associations requires the maintenance of
Tier 1 (core) and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision based on the
risks believed inherent in the type of asset. Core capital is defined as common
stockholders’ equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus and minority interests in equity
accounts of consolidated subsidiaries, less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
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 sale may be required to maintain additional regulatory capital because
of the recourse back to the savings association. Putnam Bank does not typically
engage in asset sales.
  At
June 30, 2008, Putnam Bank’s capital exceeded all applicable
requirements.
  On September 7, 2008, the U. S. Department of the Treasury placed Fannie Mae and
Freddie Mac under conservatorship and assumed an equity position in these
entities, which takes priority over both common and preferred stocks. As of June
30, 2008, Putnam Bank had preferred equity investments in Freddie Mac totaling
$4,000,000. The Bank may record an other-than-temporary impairment loss during
the quarter ending September 30, 2008 on its Freddie Mac preferred equity
investments, but cannot estimate the amount of the impairment loss at this
time.  However, even if the Bank’s Freddie Mac preferred equity investments
are ultimately deemed to have no value and no offsetting tax benefit is
available, the Bank would continue to substantially exceed the capital ratios
that must be maintained to be considered “well capitalized” under the capital
guidelines administered by the federal banking agencies.
  24
  Loans-to-One
Borrower. A federal savings association generally may not make a loan or
extend credit to a single or related group of borrowers in excess of 15% of
unimpaired capital and unimpaired surplus. An additional amount may be loaned,
equal to 10% of unimpaired capital and surplus, if the loan is secured by
readily marketable collateral, which generally does not include real estate. As
of June 30, 2008, Putnam Bank was in compliance with the loans-to-one
borrower limitations.
  Qualified Thrift
Lender Test. As a federal savings association, Putnam Bank must satisfy
the qualified thrift lender, or “QTL”, test. Under the QTL test, Putnam Bank
must maintain at least 65% of its “portfolio assets” in “qualified thrift
investments” in at least nine of the most recent 12-month period. “Portfolio
assets” generally means total assets of a savings institution, 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 the conduct of the savings
association’s business.
  “Qualified
thrift investments” include various types of loans made for residential and
housing purposes, investments related to such purposes, including certain
mortgage-backed and related securities, and loans for personal, family,
household and certain other purposes up to a limit of 20% of portfolio assets.
“Qualified thrift investments” also include 100% of an institution’s credit card
loans, education loans and small business loans. Putnam Bank also may satisfy
the QTL test by qualifying as a “domestic building and loan association” as
defined in the Internal Revenue Code.
  A savings
association that fails the qualified thrift lender test must either convert to a
commercial bank charter or operate under specified restrictions. At
June 30, 2008, Putnam Bank satisfied this test.
  Capital
Distributions. Office of Thrift Supervision regulations govern capital
distributions by a federal savings association, which include cash dividends,
stock repurchases and other transactions charged to the capital account. A
savings association must file an application for approval of a capital
distribution if:
  •
              the
      total capital distributions for the applicable calendar year exceed the
      sum of the association’s net income for that year to date plus the
      association’s retained net income for the preceding two years still
      available for dividend;
  •
              the
      association would not be at least adequately capitalized following the
      distribution;
  •
              the
      distribution would violate any applicable statute, regulation, agreement
      or Office of Thrift Supervision-imposed condition;
  or
  •
              the
      association 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 still file a notice with the Office of
Thrift Supervision at least 30 days before the Board of Directors declares a
dividend or approves a capital distribution.
  The
Office of Thrift Supervision may disapprove a notice or application
if:
  •
              the
      association would be undercapitalized following the
      distribution;
  •
              the
      proposed capital distribution raises safety and soundness concerns;
      or
  •
              the
      capital distribution would violate a prohibition contained in any statute,
      regulation or agreement.
  In
addition, the Federal Deposit Insurance Act provides that an insured depository
institution shall not make any capital distribution, if after making such
distribution the institution would be undercapitalized.
  Liquidity.
A federal savings association is required to maintain a sufficient amount of
liquid assets to ensure its safe and sound operation.
  Community
Reinvestment Act and Fair Lending Laws. All savings associations have a
responsibility under the Community Reinvestment Act and related regulations of
the Office of Thrift Supervision to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In connection
with its examination of a federal savings association, the Office of Thrift
Supervision is required to assess the association’s record of compliance with
the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act
and the Fair Housing Act prohibit lenders from discriminating in their lending
practices on the basis of characteristics specified in those statutes. An
association’s failure to comply with the provisions of the Community
Reinvestment Act could, at a minimum, result in denial of certain corporate
applications, such as branches or mergers, or in restrictions on its activities.
The failure to comply with the Equal Credit Opportunity Act and the Fair Housing
Act could result in enforcement actions by the Office of Thrift Supervision, as
well as other federal regulatory agencies and the Department of Justice. Putnam
Bank received a “satisfactory” Community Reinvestment Act rating in its most
recent federal examination.
  25
  Privacy
Standards. Federal regulations require Putnam Bank to disclose its
privacy policy, including identifying with whom it shares “non-public personal
information” to customers at the time of establishing the customer relationship
and annually thereafter.
  The
regulations also require Putnam Bank to provide its customers with initial and
annual notices that accurately reflect its privacy policies and practices. In
addition, Putnam Bank is required to provide its customers with the ability to
“opt-out” of having Putnam Bank share their non-public personal information with
unaffiliated third parties before it can disclose such information, subject to
certain exceptions. The implementation of these regulations did not have a
material adverse effect on PSB Holdings, Inc. or Putnam Bank. The
Gramm-Leach-Bliley Act also allows each state to enact legislation that is more
protective of consumers’ personal information. We cannot predict whether
Connecticut may enact such legislation or what impact, if any, it would have if
enacted.
  Putnam
Bank must implement measures intended to insure the security and confidentiality
of customer records and information, protect against any anticipated threats or
hazards to the security or integrity of such records and protect against
unauthorized access to or use of such records, or information that could result
in substantial harm or inconvenience to any customer. Putnam Bank has
implemented these measures.
  Transactions with
Related Parties. A federal savings association’s authority to engage in
transactions with its “affiliates” is limited by Office of Thrift Supervision
regulations and by Sections 23A and 23B of the Federal Reserve Act (the “FRA”).
The term “affiliates” for these purposes generally means any company that
controls, is controlled by, or is under common control with an institution. PSB
Holdings, Inc. is an affiliate of Putnam Bank. In general, transactions
with affiliates must be on terms that are as favorable to the association as
comparable transactions with non-affiliates. In addition, certain types of these
transactions are restricted to an aggregate percentage of the association’s
capital. Collateral in specified amounts must usually be provided by affiliates
in order to receive loans from the association. In addition, Office of Thrift
Supervision regulations prohibit a savings association from lending to any of
its affiliates that are engaged in activities that are not permissible for bank
holding companies and from purchasing the securities of any affiliate, other
than a subsidiary.
  Putnam
Bank’s authority to extend credit to its directors, executive officers and 10%
shareholders, as well as to entities controlled by such persons, is currently
governed by the requirements of Sections 22(g) and 22(h) of the
FRA and Regulation O of the Federal Reserve Board. Among other things, these
provisions require that extensions of credit to insiders (i) be made on
terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features, and
(ii) not exceed certain limitations on the amount of credit extended to
such persons, individually and in the aggregate, which limits are based, in
part, on the amount of Putnam Bank’s capital. In addition, extensions of credit
in excess of certain limits must be approved by Putnam Bank’s Board of
Directors.
  Enforcement.
The Office of Thrift Supervision has primary enforcement responsibility over
federal savings institutions and has the authority to bring enforcement action
against all “institution-affiliated parties”, including stockholders, and
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action by the Office of Thrift Supervision may range from the
issuance of a capital directive or cease and desist order, to removal of
officers and/or directors of the institution and the appointment of a receiver
or 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 is made,
in which case penalties may be as high as $1 million per day. The Federal
Deposit Insurance Corporation also has the authority to terminate deposit
insurance or to recommend to the Director of the Office of Thrift Supervision
that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director of the Office of Thrift
Supervision, the Federal Deposit Insurance Corporation has authority to take
action under specified circumstances.
  Standards for
Safety and Soundness. Federal law requires each federal banking agency to
prescribe certain standards for all insured depository 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 agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness to
implement the safety and soundness standards required under federal law. The
guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. The guidelines address internal controls and
information systems, internal audit systems, credit underwriting, loan
documentation, interest rate risk exposure, asset growth, compensation, fees and
benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard. If an institution fails to meet these
standards, the appropriate federal banking agency may require the institution to
submit a compliance plan.
  26
  Prompt Corrective
Action Regulations. Under the prompt corrective
action regulations, the Office of Thrift Supervision is required and authorized
to take supervisory actions against undercapitalized savings associations. For
this purpose, a savings association is placed in one of 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%
      total risk-based capital);
  •
              adequately
      capitalized (at least 4% leverage capital, 4% Tier 1 risk-based
      capital and 8% total risk-based
capital);
  •
              undercapitalized
      (less than 8% total risk-based capital, 4% Tier 1 risk-based capital
      or 3% leverage capital);
  •
              significantly
      undercapitalized (less than 6% total risk-based capital, 3% Tier 1
      risk-based capital or 3% leverage capital);
  and
  •
              critically
      undercapitalized (less than 2% tangible
  capital).
  Generally,
the banking regulator is required to appoint a receiver or conservator for an
association that is “critically undercapitalized” within specific time frames.
The regulations also provide that a capital restoration plan must be filed with
the Office of Thrift Supervision within 45 days of the date an association
receives notice that it is “undercapitalized”, “significantly undercapitalized”
or “critically undercapitalized”. The criteria for an acceptable capital
restoration plan include, among other things, the establishment of the
methodology and assumptions for attaining adequately capitalized status on an
annual basis, procedures for ensuring compliance with restrictions imposed by
applicable federal regulations, the identification of the types and levels of
activities the savings association will engage in while the capital restoration
plan is in effect, and assurances that the capital restoration plan will not
appreciably increase the current risk profile of the savings association. Any
holding company for the savings association required to submit a capital
restoration plan must guarantee the lesser of: an amount equal to 5% of the
savings association’s assets at the time it was notified or deemed to be
undercapitalized by the Office of Thrift Supervision, or the amount necessary to
restore the savings association to adequately capitalized status. This guarantee
remains in place until the Office of Thrift Supervision notifies the savings
association that it has maintained adequately capitalized status for each of
four consecutive calendar quarters, and the Office of Thrift Supervision has the
authority to require payment and collect payment under the guarantee. Failure by
a holding company to provide the required guarantee will result in certain
operating restrictions on the savings association, such as restrictions on the
ability to declare and pay dividends, pay executive compensation and management
fees, and increase assets or expand operations. The Office of Thrift Supervision
may also take any one of a number of discretionary supervisory actions against
undercapitalized associations, including the issuance of a capital directive and
the replacement of senior executive officers and directors.
  At
June 30, 2008, Putnam Bank met the criteria for being considered
“well-capitalized”.
  Insurance of Deposit
Accounts.  Deposit accounts in Putnam Bank are insured by the
Federal Deposit Insurance Corporation, generally up to a maximum of $100,000 per
separately insured depositor and up to a maximum of $250,000 for self-directed
retirement accounts.  Putnam Bank’s deposits, therefore, are subject
to Federal Deposit Insurance Corporation deposit insurance
assessments.  Federal law gives the Federal Deposit Insurance
Corporation flexibility to adjust the insurance fund reserve ratio between 1.15%
and 1.50% of estimated insured deposits, depending on projected losses, economic
changes and assessment ratios at the end of a calendar year, and allows for
dividends to insured institutions whenever reserve ratios exceed specified
levels.
  Federal
Deposit Insurance Corporation regulations assess insurance premiums based on
risk.  This regulation enables the Federal Deposit Insurance
Corporation to more closely tie each financial institution’s deposit insurance
premiums to the risk it poses to the deposit insurance fund.  Under
its risk-based assessment system, the Federal Deposit Insurance Corporation
evaluates the risk of each financial institution based on its supervisory
rating, its financial ratios, and its long-term debt issuer rating for larger
institutions.  The rates for nearly all of the financial institutions
industry vary between five and seven cents for every $100 of domestic
deposits.
 
 In addition
to assessments by the Federal Deposit Insurance Corporation, the Financing
Corporation (“FICO”) has the authority to impose and collect, with the approval
of the Federal Deposit Insurance Corporation, assessments for anticipated
payments, issuance costs and custodial fees on bonds issued by the FICO in the
1980s to recapitalize the former Federal Savings and Loan Insurance
Corporation.  The bonds issued by the FICO are due to mature in 2017
through 2019.  For the quarter ended June 30, 2008, the annualized
FICO assessment was equal to 1.22 basis points for each $100 in domestic
deposits maintained at an institution.
  27
  Prohibitions
Against Tying Arrangements. Federal savings associations
are prohibited, subject to some exceptions, from extending credit to or offering
any other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or its affiliates or not obtain services of a
competitor of the institution.
  Federal Home Loan
Bank System. Putnam Bank is a member of the Federal Home Loan Bank
System, which consists of 12 regional Federal Home Loan Banks. The Federal Home
Loan Bank System provides a central credit facility primarily for member
institutions. As a member of the Federal Home Loan Bank of Boston, Putnam Bank
is required to acquire and hold shares of capital stock in the Federal Home Loan
Bank in an amount at least equal to 1% of the aggregate principal amount of its
unpaid residential mortgage loans and similar obligations at the beginning of
each year, or 1/20 of its borrowings from the Federal Home Loan Bank, whichever
is greater. As of June 30, 2008, Putnam Bank was in compliance with this
requirement.
  Federal Reserve
System. The
Federal Reserve Board regulations require savings associations to maintain
noninterest-earning reserves against their transaction accounts, such as
negotiable order of withdrawal and regular checking accounts. At June 30,
2008, Putnam Bank was in compliance with these reserve
requirements.
  The
USA PATRIOT Act
  The USA
PATRIOT Act gives the federal government new powers to address terrorist threats
through enhanced domestic security measures, expanded surveillance powers,
increased information sharing and broadened anti-money laundering requirements.
Certain provisions of the act impose affirmative obligations on a broad range of
financial institutions, including savings banks, like Putnam Bank. These
obligations include enhanced anti-money laundering programs, customer
identification programs and regulations relating to private banking accounts or
correspondence accounts in the United States for non-United States persons or
their representatives (including foreign individuals visiting the United
States).
  Sarbanes-Oxley
Act of 2002
  The
Sarbanes-Oxley Act of 2002 was enacted in response to public concerns regarding
corporate accountability in connection with certain accounting scandals. The
stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility,
to provide for enhanced penalties for accounting and auditing improprieties at
publicly traded companies, and to protect investors by improving the accuracy
and reliability of corporate disclosures pursuant to the securities laws. The
Sarbanes-Oxley Act generally applies to all companies that file or are required
to file periodic reports with the Securities and Exchange Commission, under the
Securities Exchange Act of 1934.
  The
Sarbanes-Oxley Act includes very specific additional disclosure requirements and
new corporate governance rules requiring the Securities and Exchange
Commission and national securities exchanges to adopt extensive additional
disclosure, corporate governance and other related rules, and mandates further
studies of certain issues by the Securities and Exchange Commission. The
Sarbanes-Oxley Act represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and
its committees.
  Although
we anticipate that we will incur additional expense in complying with the
provisions of the Sarbanes-Oxley Act and the regulations that have been
promulgated to implement the Sarbanes-Oxley Act, management does not expect that
such compliance will have a material impact on our results of operations or
financial condition.
  Holding
Company Regulation
  General. Putnam Bancorp, MHC and PSB
Holdings, Inc. are nondiversified savings and loan holding companies within
the meaning of the Home Owners’ Loan Act. As such, Putnam Bancorp, MHC and PSB
Holdings, Inc. are registered with the Office of Thrift Supervision and are
subject to Office of Thrift Supervision regulations, 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, this authority permits the Office of
Thrift Supervision to restrict or prohibit activities that are determined to be
a serious risk to the subsidiary savings institution. As federal corporations,
PSB Holdings, Inc. and Putnam Bancorp, MHC are generally not subject to
state business organization laws.
  Permitted
Activities.
Pursuant to Section 10(o) of the Home Owners’ Loan Act and Office of
Thrift Supervision regulations and policy, a mutual holding company and a
federally chartered mid-tier holding company such as PSB Holdings, Inc. may
engage in the following activities: (i) investing in the stock of a savings
association; (ii) acquiring a mutual association through the merger of such
association into a savings association subsidiary of such holding company or an
interim savings association subsidiary of such holding company;
(iii) merging with or acquiring another holding company, one of whose
subsidiaries is a savings association; (iv) investing in a corporation, the
capital stock of which is available for purchase by a savings association under
federal law or under the law of any state where the subsidiary savings
association or associations share their home offices; (v) furnishing or
performing management services for a savings association subsidiary of such
company; (vi) holding, managing or liquidating assets owned or acquired
from a savings subsidiary of such company; (vii) holding or managing
properties used or occupied by a savings association subsidiary of such company;
(viii) acting as trustee under deeds of trust; (ix) any other activity
(A) that the Federal Reserve Board, by regulation, has determined to be
permissible for bank holding companies 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 were authorized (by regulation) to directly engage on
March 5, 1987; (x) any activity permissible for financial holding
companies under Section 4(k) of the Bank Holding Company Act,
including securities and insurance underwriting; and (xi) purchasing,
holding, or disposing of stock acquired in connection with a qualified stock
issuance if the purchase of such stock by such savings and loan holding company
is approved by the Director. If a mutual holding company acquires or merges with
another holding company, the holding company acquired or the holding company
resulting from such merger or acquisition may only invest in assets and engage
in activities listed in (i) through (xi) above, and has a period of
two years to cease any nonconforming activities and divest any nonconforming
investments.
  28
  The Home
Owners’ Loan Act prohibits a savings and loan holding company, including PSB
Holdings, Inc. and Putnam Bancorp, MHC, directly or indirectly, or through
one or more subsidiaries, from acquiring more than 5% of another savings
institution or holding company thereof, without prior written approval of the
Office of Thrift Supervision. It also prohibits the acquisition or retention of,
with certain exceptions, more than 5% of a nonsubsidiary company engaged in
activities other than those permitted by the Home Owners’ Loan Act, or acquiring
or retaining control of an institution that is not federally insured. In
evaluating applications by holding companies to acquire savings institutions,
the Office of Thrift Supervision must consider the financial and managerial
resources, future prospects of the company and institution involved, the effect
of the acquisition on the risk to the federal deposit insurance fund, the
convenience and needs of the community and competitive factors.
  The
Office of Thrift Supervision is prohibited from approving any acquisition that
would result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions: (i) the
approval of interstate supervisory acquisitions by savings and loan holding
companies; and (ii) the acquisition of a savings institution in another
state if the laws of the state of the target savings institution specifically
permit such acquisitions. The states vary in the extent to which they permit
interstate savings and loan holding company acquisitions.
  Waivers of
Dividends by Putnam Bancorp, MHC. Office of Thrift Supervision
regulations require Putnam Bancorp, MHC to notify the Office of Thrift
Supervision of any proposed waiver of its receipt of dividends from PSB
Holdings, Inc. The Office of Thrift Supervision reviews dividend waiver
notices on a case- by-case basis, and, in general, does not object to any such
waiver if: (i) the mutual holding company’s board of directors determines
that such waiver is consistent with such directors’ fiduciary duties to the
mutual holding company’s members; (ii) for as long as the savings
association subsidiary is controlled by the mutual holding company, the dollar
amount of dividends waived by the mutual holding company is considered as a
restriction on the retained earnings of the savings association, which
restriction, if material, is disclosed in the public financial statements of the
savings association as a note to the financial statements; (iii) the amount
of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; and (iv) the amount
of any waived dividend is considered as having been paid by the savings
association in evaluating any proposed dividend under Office of Thrift
Supervision capital distribution regulations. Except for the receipt of $75,000,
Putnam Bancorp, MHC has waived all dividends paid by PSB Holdings, Inc. and is
expected to do so in the future. Under Office of Thrift Supervision regulations,
our public stockholders would not be diluted because of any dividends waived by
Putnam Bancorp, MHC (and waived dividends would not be considered in determining
an appropriate exchange ratio) in the event Putnam Bancorp, MHC converts to
stock form.
  Conversion of
Putnam Bancorp, MHC to Stock Form. Office of Thrift Supervision
regulations permit Putnam Bancorp, MHC to convert from the mutual form of
organization to the capital stock form of organization (a “Conversion
Transaction”). There can be no assurance when, if ever, a Conversion Transaction
will occur, and the Board of Directors has no current intention or plan to
undertake a Conversion Transaction. In a Conversion Transaction a new stock
holding company would be formed as the successor to PSB Holdings, Inc. (the
“New Holding Company”), Putnam Bancorp, MHC’s corporate existence would end, and
certain depositors of Putnam Bank would receive the right to subscribe for
additional shares of the New Holding Company. In a Conversion Transaction, each
share of common stock held by stockholders other than Putnam Bancorp, MHC
(“Minority Stockholders”) would be automatically converted into a number of
shares of common stock of the New Holding Company determined pursuant to an
exchange ratio that ensures that Minority Stockholders own the same percentage
of common stock in the New Holding Company as they owned in PSB
Holdings, Inc. immediately prior to the Conversion Transaction. Under
Office of Thrift Supervision regulations, Minority Stockholders would not be
diluted because of any dividends waived by Putnam Bancorp, MHC (and waived
dividends would not be considered in determining an appropriate exchange ratio),
in the event Putnam Bancorp, MHC converts to stock form. The total number of
shares held by Minority Stockholders after a Conversion Transaction also would
be increased by any purchases by Minority Stockholders in the stock offering
conducted as part of the Conversion Transaction.
  29
  Federal
Securities Laws
  PSB
Holdings, Inc. common stock is registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934. PSB Holdings, Inc. is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements under the Securities Exchange Act of 1934.
  PSB
Holdings, Inc. common stock held by persons who are affiliates (generally
officers, directors and principal shareholders) of PSB Holdings, Inc. may not be
resold without registration or unless sold in accordance with certain resale
restrictions. If PSB Holdings, Inc. meets specified current public information
requirements, each affiliate of PSB Holdings, Inc. is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
  Reports
to Security Holders
  PSB
Holdings, Inc. files annual and quarterly reports with the SEC on Forms 10-KSB
and 10-QSB, respectively. PSB Holdings, Inc. also files current reports on the
Form 8-K with the SEC. Finally, PSB Holdings, Inc. files preliminary and
definitive proxy materials with the SEC.
  The
public may read and copy any materials filed by PSB Holdings, Inc. with the SEC
at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. PSB Holdings, Inc. is an
electronic filer. The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC. The address of the site is
http://www.sec.gov.
  ITEM 2.
              Description
      of Property
  We conduct
substantially all of our business through our main office, six full service
branch offices and one loan origination center.
We also conduct limited business operations through a “Special Needs Limited
Branch” and a “Limited Services Branch”.
In 2002, we began Limited Service (Mobile) Branch activities. The Limited
Services (Mobile) Branch serves approximately
eight locations in our primary market area consisting of schools and retirement
facilities. Bank personnel visit these
facilities approximately once per week and, in the case of school locations,
conduct deposit taking activities and, in the case of
the retirement facilities, conduct deposit-taking, check cashing, notary and
certificate of deposit renewal activities. Set forth
below is information on our office locations as of June 30,
2008.  The net book value of our premises, land and equipment
was approximately $3.9 million at June 30, 2008.
  30
 
 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
                
                
                $
                1,375Putnam,
      Connecticut 06260Full
      Service Branches:251
      Kennedy Drive............................
                
                Leased
                
                2006
                
                473
                
                
                
                106Putnam,
      Connecticut 06260100
      Averill Road...............................
                
                Owned
                
                1981
                
                2,487
                
                
                
                549Pomfret
      Center, Connecticut 06259125
      Wauregan Road...........................
                
                Owned
                
                1993
                
                2,452
                
                
                
                388Danielson,
      Connecticut 0623911
      Pratt Road....................................
                
                Owned
                
                2000
                
                2,162
                
                
                
                374Plainfield,
      Connecticut 06374461
      Voluntown Road, Rte. 138..............
                
                Leased
                
                2005
                
                2,600
                
                
                
                61Griswold,
      Connecticut 0635139
      Kings Highway.............................
                
                Leased
                
                2005
                
                2,270
                
                
                
                32Gales
      Ferry, Connecticut 06335Loan
      Center:50
      Canal Street..................................
                
                Owned
                
                2000
                
                2,940
                
                
                
                193Putnam,
      Connecticut 06260ATM
      Remote Location:168
      Route 169...................................
                
                Leased
                
                2003
                
                30
                
                
                __Woodstock,
      Connecticut 06281Special
      Needs Limited Branch (1):Creamery
      Brook Retirement Village.......
                
                __
                
                
                
                __
                
                
                __36
      Vina LaneBrooklyn,
      Connecticut 06234Total.......................................
                
                
                
                
                
                
                
                
                $
                3,078
   (1)
              Our
      personnel are at this location for approximately three hours once a week.
      The facility provides a furnished room for us at no cost. Our personnel
      conduct limited banking activities, such as deposit-taking, check cashing,
      notary and certificate of deposit renewals. We began operating at this
      location in 2002.
  ITEM 3.
              Legal
      Proceedings
  From time
to time, we are involved as plaintiff or defendant in various legal proceedings
arising in the ordinary course of business. At June 30, 2008, we were not
involved in any legal proceedings, the outcome of which would be material to our
financial condition or results of operations.
  ITEM 4.
              Submission
      of Matters to a Vote of Security
Holders
  No
matters were submitted to a vote of stockholders during the fourth quarter of
the year under report.
  31
  PART II
  ITEM 5.
              Market
      for Common Equity, Related Stockholder Matters and Small Business Issuer
      Purchases of Equity Securities
  (a) Our
common stock is traded on the NASDAQ Global Market under the symbol “PSBH.”
Putnam Bancorp, MHC owns 3,729,846 shares, or 57.1% of our outstanding common
stock. The approximate number of holders of record of PSB Holdings, Inc.’s
common stock as of August 31, 2008 was 498. Certain shares of PSB Holdings,
Inc. are held in “nominee” or “street” name and accordingly, the number of
beneficial owners of such shares is not known or included in the foregoing
number. The following table presents quarterly market information for PSB
Holdings, Inc.’s common stock for the period ended June 30, 2008 and June
30, 2007. The following information was provided by the NASDAQ Global
Market.
  High
                
                
                Low
                
                
                DividendsFiscal
      2007Quarter
      ended September 30, 2006
                
                $
                11.20
                
                
                $
                10.40
                
                
                $
                0.06Quarter
      ended December 31, 2006
                
                
                11.48
                
                
                
                10.74
                
                
                
                0.06Quarter
      ended March 31, 2007
                
                
                11.28
                
                
                
                10.61
                
                
                
                0.06Quarter
      ended June 30, 2007
                
                
                10.90
                
                
                
                10.32
                
                
                
                0.06Fiscal
      2008Quarter
      ended September 30, 2007
                
                $
                10.76
                
                
                $
                9.35
                
                
                $
                0.07Quarter
      ended December 31, 2007
                
                
                10.55
                
                
                
                7.58
                
                
                
                0.07Quarter
      ended March 31, 2008
                
                
                9.68
                
                
                
                8.00
                
                
                
                0.08Quarter
      ended June 30, 2008
                
                
                10.00
                
                
                
                8.37
                
                
                
                0.09
  Dividend
payments by PSB Holdings, Inc. are dependent primarily on dividends it receives
from Putnam Bank, because PSB Holdings, Inc. has no source of income other than
dividends from Putnam Bank, earnings from the investment of proceeds from the
sale of shares of common stock retained by PSB Holdings, Inc. and interest
payments with respect to PSB Holdings, Inc.’s loan to the Employee Stock
Ownership Plan.
  In
addition, reference is made to the “Market for Common Stock” section of PSB
Holdings, Inc. 2008 Annual Report to Stockholders, which is incorporated herein
by reference.
  Information
with respect to securities authorized for issuance under the Company’s Equity
Compensation Plan is incorporated by reference herein from the Company’s Proxy
Statement.
  (b) Not
applicable.
  (c)
Issuer repurchases of equity securities
  Total
      Number of
                Maximum
      NumberShares
      Purchased
                of
      Shares that Mayas
      Part of Publicly
                Yet
      be PurchasedTotal
      Number of
                Average
      Price Paid
                Announced
                Under
      thePeriod
                Shares
      Purchased
                Per
      Share
                Program
      (1)
                Program
      (1)April
      1 through April 30, 2008
                0
                $
                -
                514,000
                0May
      1 through May 31, 2008
                0
                $
                -
                514,000
                0June
      1 through June 30, 2008
                0
                $
                -
                514,000
                0
 
 (1)           The
Company announced in December 2005 that it authorized the repurchase of 347,000
shares, or approximately 5% of its outstanding common shares.  On
August 2, 2007, The Company announced the completion of this program and
authorized a new stock repurchase program of up to 2.5% of its current
outstanding shares, or up to approximately 167,000 shares. This program was
completed on March 7, 2008.
 
 32
  ITEM 6.
              Management’s
      Discussion and Analysis or Plan of
Operation
  The
following analysis discusses changes in the financial condition and results of
operations at and for the twelve months ended June 30, 2008 and 2007, and
should be read in conjunction with the Company’s Condensed Consolidated
Financial Statements and the notes thereto, appearing in Part II,
Item 7 of this Annual Report on Form 10-KSB.
  Overview
  The
Company’s results of operations depend primarily on net interest and dividend
income, which is the difference between the interest and dividend income earned
on its interest-earning assets, such as loans and securities, and the interest
expense on its interest-bearing liabilities, such as deposits and borrowings.
The Company also generates noninterest income, primarily from fees and service
charges. Gains on sales of loans and securities and cash surrender value of life
insurance policies are added sources of noninterest income. The Company’s
noninterest expense primarily consists of employee compensation and benefits,
occupancy and equipment expense, advertising, data processing, professional fees
and other operating expenses.
  
 Net
Income.Net income increased $1.1 million, or 59.5%, to $3.1 million or
$.49 per basic share and $.48 per diluted share for the twelve months ended
June 30, 2008 from $1.9 million or $.29 per basic share and $.28 per
diluted share for the twelve months ended June 30, 2007.  The increase
in net income reflected higher net interest and dividend income due to the
steepening yield curve, higher noninterest income and a decrease in the loan
loss provision.  This was partially offset by increases in total
noninterest expense and income tax expense.
  Critical
Accounting Policies
  Critical
accounting policies are those that involve significant judgments and assumptions
by management and that have, or could have, a material impact on our income or
the carrying value of our assets. Our critical accounting policies are those
related to our allowance for loan losses and goodwill.  Management has
discussed the development, selection and application of these critical
accounting policies with the Audit Committee of the Board of
Directors.
  Allowance for
Loan Losses.The allowance for loan
losses is the amount estimated by management as necessary to cover credit losses
inherent in the loan portfolio at the balance sheet date. The allowance is
established through the provision for loan losses which is charged against
income.
  Management
performs a quarterly evaluation of the adequacy of the allowance for loan
losses. We consider a variety of factors in establishing this estimate
including, but not limited to, current economic conditions, delinquency
statistics, geographic and industry concentrations, the adequacy of the
underlying collateral, the financial strength of the borrower, results of
internal and external loan reviews and other relevant factors. This evaluation
is inherently subjective as it requires material estimates by management that
may be susceptible to significant change.
  The
analysis has two components: specific and general allocations. Specific
allocations are made for loans for which collection is questionable and the loan
is downgraded. Additionally, the size of the allocation is measured by
determining an expected collection or, for collateral-dependent loans, the fair
value of the collateral adjusted for market conditions and selling expenses. The
general allocation is determined by segregating the remaining loans by type of
loan, risk weighting (if applicable) and payment history. We also analyze
historical loss experience, delinquency trends, general economic conditions and
geographic and industry concentrations. This analysis establishes factors that
are applied to the loan groups to determine the amount of the general allowance
for loan losses. Actual loan losses may be significantly more than the
allowances we have established which could have a material negative effect on
our financial results.
  Goodwill.
The Company’s goodwill (the amount paid in excess of fair value of acquired net
assets) is reviewed at least annually to ensure that there have been no events
or circumstances resulting in an impairment of the recorded amount of excess
purchase price. Adverse changes in the economic environment, operations of
acquired business units, or other factors could result in a decline in projected
fair values. If the estimated fair value is less than the carrying amount, a
loss would be recognized to reduce the carrying amount to fair
value.
  Comparison
of Financial Condition at June 30, 2008 and June 30, 2007
  Assets.Total assets of the Company were $494.5 million at June 30, 2008, an
increase of $3.3 million or 0.7%, from $491.2 million at June 30, 2007.
Investments in available-for-sale securities decreased $2.5 million or 1.1%, to
$220.0 million at June 30, 2008 compared to $222.5 million at June 30, 2007.
Federal funds sold at June 30, 2008 were $1.1 million compared to $4.5 million
as of June 30, 2007. The decrease in securities was primarily used to fund loan
growth. Net loans outstanding increased $11.8 million or 5.1% to $242.7 million
at June 30, 2008 from $230.9 million at June 30, 2007. This increase was
primarily due to an increase of $11.7 million, or 6.7% in residential mortgage
and residential construction loans, reflecting continued strong demand for such
loans in our expanded market area. Total commercial loans decreased $1.6
million, or 2.5%, from June 30, 2007 to June 30, 2008.
  33
  Liabilities.Total liabilities
increased $5.1 million, or 1.2%, from $439.9 million at June 30, 2007 to $445.0
million at June 30, 2008, primarily due to an increase in borrowed funds.
Borrowed funds increased by $14.8 million, or 10.4%, to $156.6 million at June
30, 2008 from $141.8 million at June 30, 2007.  Total deposits
decreased by $9.8 million, or 3.3%, to $283.7 million at June 30, 2008 from
$293.5 million at June 30, 2007.  This decrease included a reduction
in brokered CDs from $11.4 million at June 30, 2007 to no brokered CDs as of
June 30, 2008.  Excluding this change in brokered CDs, total
deposits as of June 30,
2008 would have increased $1.6 million, or 0.6%, from June 30, 2007 to June 30,
2008.
  Stockholders’
Equity.Total stockholders’ equity decreased $1.8 million, or 3.5% to
$49.4 million at June 30, 2008 from $51.2 million at June 30, 2007. The decrease
was primarily due to the repurchase of 226,810 shares at a total cost of $2.4
million during the twelve months ended June 30, 2008 and an increase in the
unrealized loss in the available-for-sale securities to $3.8 million as of June
30, 2008 as compared to $1.4 million as of June 30, 2007.  This was
partially offset by net income of $3.1 million. The unrealized loss in the
available-for-sale securities was attributable solely to interest rate
movements. At June 30, 2008, management did not consider the loss to be other
than temporary.
  Comparison
of Operating Results for the Twelve Months Ended June 30, 2008 and
2007
  Net Income.Net income increased $1.1 million, or 59.5%, to $3.1 million or $.49 per
basic share and $.48 per diluted share for the twelve months ended June 30,
2008 from $1.9 million or $.29 per basic share and $.28 per diluted share for
the twelve months ended June 30, 2007.
  Interest and
Dividend Income.Interest and dividend income increased by $1.7 million,
or 6.9%, to $27.1 million for the twelve months ended June 30, 2008 from $25.4
million for the twelve months ended June 30, 2007. The increase in interest and
dividend income resulted primarily from an increase of $12.7 million, or 2.8%,
in average interest-earning assets between the periods. In addition, the yield
on average interest-earning assets increased 22 basis points to 5.86% for the
twelve months ended June 30, 2008 as compared to 5.64% for the twelve months
ended June 30, 2007. Interest income on loans increased by $1.2 million, or
8.9%, to $15.1 million for the twelve months ended June 30, 2008 from $13.9
million for the twelve months ended June 30, 2007. Interest and dividend income
on investment securities and deposits increased $513,000, or 4.5%, to $11.9
million for the twelve months ended June 30, 2008 from $11.4 million for the
twelve months ended June 30, 2007.
  Interest Expense.Interest expense increased by $434,000, or 2.9%, to $15.2 million for
twelve months ended June 30, 2008 from $14.8 million for the twelve months ended
June 30, 2007. The increase in interest expense resulted primarily from an
increase in average interest-bearing liabilities of $14.5 million, or 3.8% from
period to period. The cost of average interest-bearing liabilities decreased by
four basis points to 3.84% for the twelve months ended June 30, 2008 as compared
to 3.88% for the twelve months ended June 30, 2007.
  Net Interest
Income.Net interest income increased $1.3 million, or 12.5%, to $11.9
million for the twelve months ended June 30, 2008 from $10.6 million for the
twelve months ended June 30, 2007. The primary reason for the increase in our
net interest income was a higher net interest margin for the twelve months ended
June 30, 2008, 2.56%, as compared to 2.34% for the twelve months ended June 30,
2007.
  Provision for
Loan Losses.The provision for loan losses for the twelve months ended
June 30, 2008 was $51,000 compared to $263,000 recorded for the twelve months
ended June 30, 2007. The ratio of the allowance to gross loans outstanding was
0.72% as of June 30, 2008 compared to 0.77% as of June 30, 2007.  The
ratio of the allowance to nonperforming loans was 121.1% as of June 30, 2008
compared to 115.7% as of June 30, 2007.
  Noninterest
Income. Noninterest income increased $541,000, or 19.7%, to $3.3 million
for the twelve months ended June 30, 2008 from $2.7 million for the twelve
months ended June 30, 2007. The increase in noninterest income resulted
primarily from a $204,000 increase in service fee income, an increase of
$284,000 in net gains on sales of securities.
  Noninterest
Expense.Noninterest expense increased by $176,000, or 1.6%, to $10.9
million for the twelve months ended June 30, 2008 from $10.8 million for the
twelve months ended June 30, 2007. Compensation and benefits expense increased
by $217,000, or 3.8%, to $6.0 million for the twelve months ended June 30, 2008
from $5.8 million for the twelve months ended June 30, 2007. The primary reasons
for the increase in compensation and benefits expense were increased salaries
and commissions. In addition, expenses for the current year included $261,000 in
employee stock award compensation expense as compared to $215,000 in stock award
compensation expense for the twelve months ended June 30, 2007. Occupancy and
equipment expense increased by $15,000, or 1.2%, to $1.31 million for the twelve
months ended June 30, 2008 from $1.29 million for the twelve months ended June
30, 2007 primarily due to increases in real estate expense of $16,000,
maintenance expense of $11,000, service contracts of $11,000 and rental expense
of $9,000.  This was partially offset by a decrease in depreciation
expense of $39,000. All other noninterest expense, consisting primarily of
charitable contributions, marketing, office supplies, and professional expenses
decreased by $56,000, or 1.5%, to $3.6 million for the twelve months ended June
30, 2008 from $3.7 million for the twelve months ended June 30,
2007.
  34
  Provision for Income
Taxes.The income tax expense increased by $751,000, or 212.1%, to $1.1
million for the twelve months ended June 30, 2008 from $354,000 for the twelve
months ended June 30, 2007. Our effective tax rate was 26.5% for the twelve
months ended June 30, 2008, compared to 15.5% for the twelve months ended June
30, 2007. This increase in the tax provision reflected a significant reduction
in Auction Rate Preferred investments that have a dividends-received deduction
applicable to them. The reason for the reduction was to avoid being subject to
Alternative Minimum Tax.Average Auction Rate Preferred securities for the twelve months ended
June 30, 2008 were $13.9 million compared to $32.7 million for the twelve months
ended June 30, 2007.  The effective tax rate differed from the
statutory tax rate of 34% primarily due to the dividends-received deduction
applicable to certain securities in our investment portfolio, tax-exempt
municipal income and non-taxable bank-owned life insurance income.
  35
  Average
Balance Sheet
  The
following tables set forth average balance sheets, average yields and costs, and
certain other information for the periods indicated. No tax-equivalent yield
adjustments were made, as the effect thereof was not material. All average
balances are daily average balances. Non-accrual loans were included in the
computation of average balances, but have been reflected in the table as loans
carrying a zero yield. The yields set forth below include the effect of deferred
fees, discounts and premiums that are amortized or accreted to interest income
or expense.
  For
      the twelve months ended June 30,2008
                
                
                
                
                
                
                2007(Dollars
      in thousands)Average
                
                
                Interest/
                
                
                Yield/
                
                
                Average
                
                
                Interest/
                
                
                Yield/Interest-earning
      assets:
                
                Balance
                
                
                Dividends
                
                
                Cost
                
                
                Balance
                
                
                Dividends
                
                
                CostInvestment
      securities
                
                $
                219,397
                
                
                $
                11,821
                
                
                
                5.39
                %
                
                $
                227,601
                
                
                $
                11,243
                
                
                
                4.94
                %Loans
                
                
                240,403
                
                
                
                15,185
                
                
                
                6.32
                %
                
                
                218,974
                
                
                
                13,946
                
                
                
                6.37
                %Other earning assets
                
                
                2,921
                
                
                
                110
                
                
                
                3.77
                %
                
                
                3,406
                
                
                
                175
                
                
                
                5.14
                %Total
      interest-earnings assets
                
                
                462,721
                
                
                
                27,116
                
                
                
                5.86
                %
                
                
                449,981
                
                
                
                25,364
                
                
                
                5.64
                %Non-interest-earning
      assets
                
                
                25,848
                
                
                
                
                
                
                
                
                
                
                
                24,512Total
      assets
                
                $
                488,569
                
                
                
                
                
                
                
                
                
                
                $
                474,493Interest-bearing
      liabilities:NOW
      accounts
                
                $
                29,813
                
                
                
                778
                
                
                
                2.61
                %
                
                $
                24,798
                
                
                
                391
                
                
                
                1.58
                %Savings
      accounts
                
                
                47,397
                
                
                
                329
                
                
                
                0.69
                %
                
                
                51,652
                
                
                
                383
                
                
                
                0.74
                %Money
      market accounts
                
                
                15,496
                
                
                
                300
                
                
                
                1.94
                %
                
                
                20,210
                
                
                
                351
                
                
                
                1.74
                %Time
      deposits
                
                
                153,262
                
                
                
                6,967
                
                
                
                4.55
                %
                
                
                154,501
                
                
                
                6,930
                
                
                
                4.49
                %Borrowed money
                
                
                150,294
                
                
                
                6,855
                
                
                
                4.56
                %
                
                
                130,609
                
                
                
                6,740
                
                
                
                5.16
                %Total
      interest-bearing liabilities
                
                
                396,262
                
                
                
                15,229
                
                
                
                3.84
                %
                
                
                381,770
                
                
                
                14,795
                
                
                
                3.88
                %Non-interest-bearing
      demand deposits
                
                
                38,846
                
                
                
                
                
                
                
                
                
                
                
                40,264Other
      non-interest-bearing liabilities
                
                
                1,996
                
                
                
                
                
                
                
                
                
                
                
                965Capital
      accounts
                
                
                51,465
                
                
                
                
                
                
                
                
                
                
                
                51,494Total
      liabilities and capital accounts
                
                $
                488,569
                
                
                
                
                
                
                
                
                
                
                $
                474,493Net
      interest income
                
                
                
                
                
                $
                11,887
                
                
                
                
                
                
                
                
                
                
                $
                10,569Interest
      rate spread
                
                
                
                
                
                
                
                
                
                
                2.02
                %
                
                
                
                
                
                
                
                
                
                
                1.76
                %Net
      interest-earning assets
                
                $
                66,459
                
                
                
                
                
                
                
                
                
                
                $
                68,211Net
      interest margin
                
                
                
                
                
                
                
                
                
                
                2.56
                %
                
                
                
                
                
                
                
                
                
                
                2.34
                %Average
      earning assets toaverage
      interest-bearing liabilities
                
                
                
                
                
                
                
                
                
                
                116.77
                %
                
                
                
                
                
                
                
                
                
                
                117.87
                %
 
 36
  Rate/Volume
Analysis
  The
following table sets forth the effects of changing rates and volumes on our net
interest income for the periods indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The net column represents the sum of the
prior columns. For purposes of this table, changes attributable to changes in
both rate and volume that cannot be segregated have been allocated
proportionately based on the changes due to rate and the changes due to
volume.
  For
      the twelve months ended June 30, 2008(Dollars
      in thousands)
                compared
      to the twelve months ended June 30, 2007Increase
      (Decrease) Due toINTEREST-EARNING
      ASSETS:
                
                Rate
                
                
                Volume
                
                
                NetInterest
      and Dividend Income:Investment
      securities
                
                $
                994
                
                
                $
                (416
                )
                
                $
                578Loans
                
                
                (115
                )
                
                
                1,354
                
                
                
                1,239Other
      interest-earning assets
                
                
                (42
                )
                
                
                (23
                )
                
                
                (65
                )TOTAL
      INTEREST-EARNING ASSETS
                
                
                837
                
                
                
                915
                
                
                
                1,752INTEREST-BEARING
      LIABILITIES:Interest
      Expense:NOW
      accounts
                
                
                296
                
                
                
                91
                
                
                
                387Savings
      accounts
                
                
                (24
                )
                
                
                (30
                )
                
                
                (54
                )Money
      Market accounts
                
                
                37
                
                
                
                (88
                )
                
                
                (51
                )Time
      deposits
                
                
                93
                
                
                
                (56
                )
                
                
                37Other
      borrowed money
                
                
                (834
                )
                
                
                949
                
                
                
                115TOTAL
      INTEREST-BEARING LIABILITIES
                
                
                (432
                )
                
                
                866
                
                
                
                434CHANGE
      IN NET INTEREST INCOME
                
                $
                1,269
                
                
                $
                49
                
                
                $
                1,318
  Liquidity
and Capital Resources
  The term
“liquidity” refers to the ability of the Company and the Bank to meet current
and future short-term financial obligations. The Company and the Bank further
define liquidity as the ability to generate adequate amounts of cash to fund
loan originations, deposit withdrawals and operating expenses. Liquidity
management is both a daily and long-term function of business management. The
Bank’s primary sources of liquidity are deposits, scheduled amortization and
prepayments of loan principal and mortgage-related securities, and Federal Home
Loan Bank borrowings. The Bank can borrow funds from the Federal Home Loan Bank
based on eligible collateral of loans and securities. The Bank had Federal Home
Loan Bank borrowings as of June 30, 2008 of $150.2 million with unused
borrowing capacity of $44.3 million. The Bank also has the ability to originate
brokered certificates of deposit as a secondary source of
liquidity.
  The
Bank’s primary investing activities are the origination of loans and the
purchase of investment securities. During the twelve months ended June 30,
2008 and 2007, the Bank originated loans net of principal payments of $12.0
million and $31.9 million, respectively.  Purchases of securities
totaled $75.5 million and $87.7 million, for the twelve months ended
June 30, 2008 and 2007, respectively.
  Loan
repayment and maturing investment securities are a relatively predictable source
of funds. However, deposit flows, calls of investment securities and prepayments
of loans and mortgage-backed securities are strongly influenced by interest
rates, general and economic conditions and competition in the marketplace. These
factors reduce the predictability of the timing of these sources of funds.
Deposit flows are affected by the level of interest rates, by the interest rates
and products offered by competitors and by other factors. The Bank monitors its
liquidity position frequently and anticipates that it will have sufficient funds
to meet its current funding commitments.
  37
  Certificates
of deposit totaled $149.9 million at June 30, 2008. The Bank relies on
competitive rates, customer service and long-standing relationships with
customers to retain deposits. Based on the Bank’s experience with deposit
retention and current retention strategies, management believes that, although
it is not possible to predict future terms and conditions upon renewal, a
significant portion of such deposits will remain with the Bank.
  Management
is not aware of any known trends, events or uncertainties that will have, or are
reasonably likely to have, a material effect on the Company’s or the Bank’s
liquidity, capital or operations, nor is management aware of any current
recommendations by regulatory authorities which, if implemented, would have a
material effect on the Company’s or the Bank’s liquidity, capital or
operations.
  Off-Balance
Sheet Arrangements
  In
addition to the normal course of operations, we engage in a variety of financial
transactions that, in accordance with generally accepted accounting principles
are not recorded in our financial statements. These transactions involve, to
varying degrees, elements of credit, interest rate, and liquidity risk. Such
transactions are used primarily to manage customers’ requests for funding and
take the form of loan commitments, lines of credit, and letters of
credit.
  For the
twelve months ended June 30, 2008, we engaged in no off-balance sheet
transactions reasonably likely to have a material effect on our financial
condition, results of operations or cash flows.
  38
  ITEM 7.
              Financial
      Statements
  PSB
Holdings, Inc.
 
 Consolidated
Financial Statements
 
 June 30,
2008
 
 39
 PSB
Holdings, Inc.
 
 Table
      of ContentsReport
      of Independent Registered Public Accounting Firm
                  41Consolidated
      Statements of Financial Condition
                  42Consolidated
      Statements of Operations
                  43Consolidated
      Statements of Changes in Stockholders’ Equity
                  44Consolidated
      Statements of Cash Flows
                  46Notes
      to Consolidated Financial Statements
                  481.
      Summary
      of Significant Accounting Policies
                  482.
      Investment
      Securities
                  553.
      Loans
      Receivable
                  584.
      Premises
      and Equipment
                  605.
      Intangible
      Assets
                  616.
      Deposits
                  627.
      Borrowed
      Funds
                  638.
      Income
      Taxes
                  649.
      Regulatory
      Capital
                  6610.
      Benefit Plans
                  6711.
      Other Comprehensive Income
                  7012.
      Financial Instruments
                  7013.
      Subsequent Events
                  7114.
      Parent Company Only Financial Statements
                  72
 40
  
  Report
of Independent Registered Public Accounting Firm
  
 
 To the
Board of Directors and Stockholders
 PSB
Holdings, Inc.
 
 
 We have
audited the accompanying consolidated statements of financial condition of PSB
Holdings, Inc. (the Company) and subsidiary as of June 30, 2008 and 2007,
and the related consolidated statements of operations, changes in stockholders’
equity and cash flows for the years then ended.  These
consolidated financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe
that our audits provide a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of PSB Holdings, Inc. and
subsidiary at June 30, 2008 and 2007, and the results of their operations and
their cash flows for the years then ended, in conformity with U. S. generally
accepted accounting principles.
  graphic
  Hartford,
Connecticut
 September
4, 2008, except for Note 13, as to which the date is September 9,
2008
  41
 
  PSB Holdings, Inc.
 
  Consolidated
Statements of FinancialCondition
 June
      30,2008
                      
                      
                      2007(in
      thousands except share data)ASSETSCash
      and due from depository institutions
                      
                      $
                      7,026
                      
                      
                      $
                      8,718Federal
      funds sold
                      
                      
                      1,120
                      
                      
                      
                      4,480Investment
      securities, at fair value
                      
                      
                      220,026
                      
                      
                      
                      222,502Loans
      receivable, net
                      
                      
                      242,728
                      
                      
                      
                      230,902Loans
      held-for-sale
                      
                      
                      675
                      
                      
                      
                      1,478Premises
      and equipment, net
                      
                      
                      3,854
                      
                      
                      
                      4,218Bank
      owned life insurance
                      
                      
                      5,798
                      
                      
                      
                      5,536Intangible
      assets
                      
                      
                      7,769
                      
                      
                      
                      8,003Other
      assets
                      
                      
                      5,503
                      
                      
                      
                      5,361Total
      assets
                      
                      $
                      494,499
                      
                      
                      $
                      491,198LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilitiesDeposits
                      
                      $
                      283,724
                      
                      
                      $
                      293,473Borrowed
      funds
                      
                      
                      156,621
                      
                      
                      
                      141,857Mortgagors'
      escrow accounts
                      
                      
                      1,423
                      
                      
                      
                      1,280Other
      liabilities
                      
                      
                      3,294
                      
                      
                      
                      3,337Total
      liabilities
                      
                      
                      445,062
                      
                      
                      
                      439,947Commitments
      and ContingenciesStockholders'
      EquityPreferred
      stock, $0.10 par value, 1,000,000 shares authorized,
                      
                      
                      -
                      
                      
                      
                      -no
      shares issued and outstandingCommon
      stock, ($0.10 par value, 12,000,000 shares authorized,6,943,125
      shares issued, 6,530,509 and 6,778,303. sharesoutstanding
      at June 30, 2008 and 2007, respectively)
                      
                      
                      694
                      
                      
                      
                      694Additional
      paid-in capital
                      
                      
                      30,795
                      
                      
                      
                      30,465Unearned
      ESOP shares
                      
                      
                      (2,089
                      )
                      
                      
                      (2,222
                      )Unearned
      stock awards
                      
                      
                      (605
                      )
                      
                      
                      (978
                      )Retained
      earnings
                      
                      
                      28,663
                      
                      
                      
                      26,441Treasury
      stock, at cost (412,616 shares at June 30, 2008 and164,822
      shares at June 30, 2007)
                      
                      
                      (4,205
                      )
                      
                      
                      (1,767
                      )Accumulated
      other comprehensive loss
                      
                      
                      (3,816
                      )
                      
                      
                      (1,382
                      )Total
      stockholders' equity
                      
                      
                      49,437
                      
                      
                      
                      51,251Total
      liabilities and stockholders' equity
                      
                      $
                      494,499
                      
                      
                      $
                      491,198
 42
 
  Consolidated
Statements of Operations
 For
      the Years Ended June, 302008
                    
                    
                    2007(in
      thousands except share data)Interest
      incomeInterest
      on loans
                    
                    $
                    15,185
                    
                    
                    $
                    13,946Interest
      and dividends on investments
                    
                    
                    11,931
                    
                    
                    
                    11,418Total
      interest income
                    
                    
                    27,116
                    
                    
                    
                    25,364Interest
      expenseDeposits
      and escrow
                    
                    
                    8,373
                    
                    
                    
                    8,055Borrowed
      funds
                    
                    
                    6,856
                    
                    
                    
                    6,740Total
      interest expense
                    
                    
                    15,229
                    
                    
                    
                    14,795Net
      interest income
                    
                    
                    11,887
                    
                    
                    
                    10,569Provision
      for loan losses
                    
                    
                    51
                    
                    
                    
                    263Net
      interest income after provision for loan losses
                    
                    
                    11,836
                    
                    
                    
                    10,306Noninterest
      incomeFees
      for services
                    
                    
                    2,462
                    
                    
                    
                    2,258Mortgage
      banking activities
                    
                    
                    105
                    
                    
                    
                    75Net
      commissions from brokerage service
                    
                    
                    120
                    
                    
                    
                    146Net
      investment security gains (losses)
                    
                    
                    217
                    
                    
                    
                    (67
                    )Other
      income
                    
                    
                    378
                    
                    
                    
                    329Total
      noninterest income
                    
                    
                    3,282
                    
                    
                    
                    2,741Noninterest
      expenseCompensation
      and benefits
                    
                    
                    5,983
                    
                    
                    
                    5,766Occupancy
      and equipment
                    
                    
                    1,308
                    
                    
                    
                    1,293Data
      processing
                    
                    
                    829
                    
                    
                    
                    836Advertising
      and marketing
                    
                    
                    452
                    
                    
                    
                    398Other
      noninterest expense
                    
                    
                    2,373
                    
                    
                    
                    2,476Total
      noninterest expense
                    
                    
                    10,945
                    
                    
                    
                    10,769Income
      before income tax expense
                    
                    
                    4,173
                    
                    
                    
                    2,278Income
      tax expense
                    
                    
                    1,105
                    
                    
                    
                    354Net
      income
                    
                    $
                    3,068
                    
                    
                    $
                    1,924Earnings
      per common shareBasic
                    
                    $
                    0.49
                    
                    
                    $
                    0.29Diluted
                    
                    $
                    0.48
                    
                    
                    $
                    0.28Weighted
      average common shares outstandingBasic
                    
                    
                    6,297,478
                    
                    
                    
                    6,707,697Diluted
                    
                    
                    6,370,683
                    
                    
                    
                    6,810,614
   43
  PSB
Holdings, Inc.
  Consolidated
Statements of Changes in Stockholders’ Equity
 Common
                      Stock
                    
                    
                    Additional
                      Paid-in
                      Capital
                    
                    
                    Unearned
                      ESOP
      Shares
                    
                    
                    Unearned
                      Stock
                      Awards(in
      thousands)Balance
      at June 30, 2006
                    
                    $
                    694
                    
                    
                    $
                    30,454
                    
                    
                    $
                    (2,347
                    )
                    
                    $
                    (1,219
                    )Dividends
      paid/declared
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -ESOP
      shares released
                    
                    
                    -
                    
                    
                    
                    11
                    
                    
                    
                    125
                    
                    
                    
                    -Treasury
      stock acquired
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Stock
      based compensation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (101
                    )Incentive
      plan shares earned
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    342Comprehensive
      income:Net
      incomeNet
      change in unrealizedholding
      losses on available-for-sale
      securities,net
      of tax effectComprehensive
      incomeBalance
      at June 30, 2007
                    
                    $
                    694
                    
                    
                    $
                    30,465
                    
                    
                    $
                    (2,222
                    )
                    
                    $
                    (978
                    )Dividends
      paid/declared
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -ESOP
      shares released
                    
                    
                    -
                    
                    
                    
                    (10
                    )
                    
                    
                    133
                    
                    
                    
                    -Treasury
      stock acquired
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Stock
      based compensation
                    
                    
                    -
                    
                    
                    
                    340
                    
                    
                    
                    -
                    
                    
                    
                    21Incentive
      plan shares earned
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    352Comprehensive
      income:Net
      incomeNet
      change in unrealizedholding
      losses on available-for-sale
      securities,net
      of tax effectComprehensive
      incomeBalance
      at June 30, 2008
                    
                    $
                    694
                    
                    
                    $
                    30,795
                    
                    
                    $
                    (2,089
                    )
                    
                    $
                    (605
                    )
   44
 
    Retained
                    Earnings
                  
                  Treasury
                    Stock
                  
                  
                  Accumulated
                    Other
                    Comprehensive
                    Loss
                  
                  
                  Total
                    Stockholders'
                    Equity(in
      thousands)$    25,219
                  
                  $
                  (1,437
                  )
                  
                  $
                  (2,452
                  )
                  
                  $
                  48,912(703)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (703
                  )-
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  136-
                  
                  
                  (408
                  )
                  
                  
                  -
                  
                  
                  
                  (408
                  )1
                  
                  
                  78
                  
                  
                  
                  -
                  
                  
                  
                  (22
                  )-
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3421,9241,0702,994$    26,441
                  
                  $
                  (1,767
                  )
                  
                  $
                  (1,382
                  )
                  
                  $
                  51,251(846)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (846
                  )-
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  123-
                  
                  
                  (2,417
                  )
                  
                  
                  -
                  
                  
                  
                  (2,417
                  )(21
                  )
                  
                  
                  -
                  
                  
                  
                  340-
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3523,068(2,434
                  )634$    28,663
                  
                  $
                  (4,205
                  )
                  
                  $
                  (3,816
                  )
                  
                  $
                  49,437
 
 45
 PSB
Holdings, Inc.
  Consolidated
Statements of Cash Flows
 For the
Years Ended June 30,
 
 2008
                  
                  
                  2007(in
      thousands)Cash
      flows from operating activitiesNet
      income
                  
                  $
                  3,068
                  
                  
                  $
                  1,924Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Provision
      for loan losses
                  
                  
                  51
                  
                  
                  
                  263Stock-based
      compensation expense
                  
                  
                  413
                  
                  
                  
                  393Amortization
      of core deposit intangible
                  
                  
                  234
                  
                  
                  
                  262Depreciation
                  
                  
                  532
                  
                  
                  
                  571Net
      accretion on available-for-sale securities
                  
                  
                  (61
                  )
                  
                  
                  (163
                  )Amortization
      of premium on purchased loans
                  
                  
                  22
                  
                  
                  
                  31Net
      realized investment security (gains) losses
                  
                  
                  (217
                  )
                  
                  
                  67Originations
      of loans for resale
                  
                  
                  (12,390
                  )
                  
                  
                  (7,681
                  )Proceeds
      from sale of loans
                  
                  
                  13,298
                  
                  
                  
                  7,208Gain
      on sale of loans
                  
                  
                  (105
                  )
                  
                  
                  (70
                  )Increase
      in cash surrender value of Bank owned life insurance
                  
                  
                  (262
                  )
                  
                  
                  (176
                  )Deferred
      income tax provision (benefit)
                  
                  
                  411
                  
                  
                  
                  (47
                  )ESOP
      shares released
                  
                  
                  123
                  
                  
                  
                  136Net
      change in:Deferred
      loan fees
                  
                  
                  62
                  
                  
                  
                  277Other
      assets
                  
                  
                  533
                  
                  
                  
                  (482
                  )Other
      liabilities
                  
                  
                  140
                  
                  
                  
                  451Net
      cash provided by operating activities
                  
                  
                  5,852
                  
                  
                  
                  2,964Cash
      flows from investing activitiesProceeds
      from sales of available-for-sale securities
                  
                  
                  30,043
                  
                  
                  
                  45,372Proceeds
      from maturities of available-for-sale securities
                  
                  
                  44,739
                  
                  
                  
                  66,732Purchase
      of available-for-sale securities
                  
                  
                  (75,548
                  )
                  
                  
                  (87,650
                  )Loan
      originations net of principal payments
                  
                  
                  (11,961
                  )
                  
                  
                  (31,937
                  )Investment
      in bank owned life insurance
                  
                  
                  -
                  
                  
                  
                  (3,000
                  )Purchase
      of premises and equipment
                  
                  
                  (168
                  )
                  
                  
                  (285
                  )Net
      cash used by investing activities
                  
                  
                  (12,895
                  )
                  
                  
                  (10,768
                  )
   46
  
    2008
                  
                  
                  2007(in
      thousands)Cash
      flows from financing activitiesChange
      in savings and demand deposit accounts
                  
                  
                  (5,931
                  )
                  
                  
                  (12,402
                  )Change
      in time deposit accounts
                  
                  
                  (3,818
                  )
                  
                  
                  8,910Proceeds
      from long term borrowings
                  
                  
                  89,000
                  
                  
                  
                  133,425Repayments
      of long term borrowings
                  
                  
                  (66,668
                  )
                  
                  
                  (83,509
                  )Net
      change in short term borrowings
                  
                  
                  (7,568
                  )
                  
                  
                  (32,652
                  )Change
      in mortgagors' escrow accounts
                  
                  
                  143
                  
                  
                  
                  150Acquisition
      of treasury stock
                  
                  
                  (2,417
                  )
                  
                  
                  (408
                  )Dividends
      paid
                  
                  
                  (750
                  )
                  
                  
                  (707
                  )Net
      cash provided by financing activities
                  
                  
                  1,991
                  
                  
                  
                  12,807Increase
      (decrease) in cash and cash equivalents
                  
                  
                  (5,052
                  )
                  
                  
                  5,003Cash
      and cash equivalents at beginning of year
                  
                  
                  13,198
                  
                  
                  
                  8,195Cash
      and cash equivalents at end of year
                  
                  $
                  8,146
                  
                  
                  $
                  13,198Supplemental
      disclosuresCash
      paid during the year for:Interest
                  
                  $
                  15,319
                  
                  
                  $
                  14,595Income
      taxes, net of refunds
                  
                  $
                  385
                  
                  
                  $
                  660Noncash
      activitiesDeclared
      dividends
                  
                  $
                  279
                  
                  
                  $
                  182
 47
 PSB
Holdings, Inc.
 Notes
to Consolidated Financial Statements
  1.  Summary
of Significant Accounting Policies
  Principles of
Business
  PSB
Holdings, Inc. (the Company) is a federally chartered holding company formed on
May 27, 2003 for the purpose of acquiring all of the common stock of Putnam Bank
(the Bank) concurrent with the Bank’s reorganization from a mutual savings
institution to the mutual holding company form of organization. No shares were
offered to the public as part of this reorganization.
 
 On
October 4, 2004, the Company completed a plan of stock issuance pursuant to
which 44.5% of its common stock was sold to eligible depositors and the Putnam
Savings Bank Employee Stock Ownership Plan (ESOP). The Company issued a total of
6,943,125 shares.
 
 3,729,846
shares, representing 53.72% of total shares issued, was issued to Putnam Bancorp
MHC in exchange for its ownership of the bank. The sole purpose of Putnam
Bancorp MHC is to own a majority of the common stock of PSB Holdings,
Inc.
 
 As part
of the stock issuance, the Bank established the ESOP, which purchased 257,062
shares of common stock. The ESOP borrowed the necessary funds from the Company.
The Bank intends to make annual contributions adequate to meet the debt service
requirements of the ESOP.
 
 In
connection with the stock offering the Company established The Putnam Savings
Foundation and contributed 123,588 shares of common stock, representing 4% of
shares sold to the public. The Foundation supports charities in the geographic
area the Bank serves.
 
 The Bank
is a federally chartered savings bank and provides a full range of banking
services to individual and small business customers located primarily in Eastern
Connecticut.  The Bank is subject to competition from other financial
institutions throughout the region.
 
 Both the
Company and the Bank are subject to the regulations of certain federal agencies
and undergo periodic examinations by those regulatory authorities.
  Basis of presentation and
consolidation
  The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiary, Putnam Bank, and the Bank’s wholly owned subsidiaries,
Windham North, LLC, PSB Realty, LLC and Putnam Bank Mortgage Servicing Company.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
 
 The
accounting and reporting policies of the Company and its subsidiaries conform to
generally accepted accounting principles in the United States of America and to
general practices within the banking industry.  Such policies have
been followed on a consistent basis.
  Use of
estimates
  In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated statements of condition and
operations for the period.  Actual results could differ from those
estimates.
 
 Material
estimates that are particularly susceptible to significant change in the
near-term relate to the determination of the allowance for losses on loans and
the valuation of real estate acquired in connection with foreclosure or in
satisfaction of loans.  While management uses available information to
recognize losses on loans and other real estate owned, future additions to the
allowance may be necessary based on changes in economic conditions, particularly
in Connecticut.
 
 48
 Notes
to Consolidated Financial Statements
  Cash and cash
equivalents
  For
purposes of reporting cash flows, cash and cash equivalents include cash and
amounts due from depository institutions and investments in federal
funds.
  Investment
securities
  The
Company’s management determines the appropriate classification of a security at
the time of purchase.
 
 Securities
to be held for indefinite periods of time are classified as available-for-sale
and are carried at fair value with unrealized gains and losses reported as a
separate component of capital, net of estimated income taxes.
 
 All of
the Company’s investments are classified as available-for-sale.
 
 Mortgage-backed
securities, which include collateralized mortgage obligations (CMOs), are either
U.S. Government Agency securities or are rated in at least the top two ratings
categories by at least one of the major rating agencies at the time of
purchase.  One of the risks inherent when investing in mortgage-backed
securities and CMOs is the ability of such instruments to incur prepayments of
principal prior to maturity.  Because of prepayments, the
weighted-average yield of these securities may also change, which could affect
earnings.  Amortization of premiums and accretion of discounts is done
over a continuously evaluated remaining life using the level yield
method. Gains or losses on the sales of securities are recognized at trade
date utilizing the specific identification method.
  Loans receivable and
allowance for loan losses
  Loans
receivable are stated at unpaid principal balance adjusted for loans in process,
deferred loan fees, and allowances for loan losses. Most of the Company’s
activities are with customers located within eastern Connecticut. The Company
does not have any significant concentrations in any one industry or
customer.
 
 Uncollected
interest on loans receivable is accrued as earned based on rates applied to
principal amounts outstanding.  Recognition of income on the accrual
basis is discontinued when there is sufficient question as to the collectibility
of the interest.  In these cases, the interest previously accrued to
income is reversed, and the loans are placed on the cash basis.
 
 Loan
origination fees and certain direct loan origination costs are being deferred
and the net amount amortized on a level-yield basis as an adjustment to the
related loan yield over its contractual life. Unamortized net fees are
recognized upon early repayment of the loans.
 
 The
allowance for loan losses is established by a provision charged to earnings and
is maintained at a level to absorb loan losses that are both probable and
reasonably estimable based on management's evaluation of known and inherent
credit risks in the loan portfolio.  When a loan or portion of a loan
is considered uncollectible, it is charged against the allowance for loan
losses.  Recoveries of loans previously charged-off are credited to
the allowance when collected.
 
 49
 PSB
Holdings, Inc.
  1.  Summary
of Significant Accounting Policies–(Continued)
  Loans
receivable and allowance for loan losses– (Continued)
  Management
makes regular evaluations of the loan portfolio to determine the adequacy of the
level of the allowance for loan losses.  Numerous factors are
considered in the evaluation, including a review of certain borrowers' current
financial status and credit standing, available collateral, loss experience in
relation to outstanding loans, the overall loan portfolio quality, management's
judgment regarding prevailing economic conditions, and other relevant
factors.
 
 In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan
losses.  Such agencies may require the Company to recognize additions
to the allowance based on their judgments about information available to them at
the time of their examination.
  Loans held-for-sale and
mortgage-servicing rights
  Loans
held-for-sale are valued at the lower of cost or market as determined by
outstanding commitments from investors.  All loans sold by the Company are
sold on a non-recourse basis.  Gains or losses on the sale of loans
are determined using the specific identification method.
 
 The
Company sells residential mortgage loans with servicing rights retained. At the
time of the sale, the Company determines the value of the retained servicing
rights, which represents the present value of the differential between
the contractual servicing fee and adequate compensation,
defined as the fee a sub-servicer would require to assume the role of
servicer, after considering the estimated effects of prepayments.  If
material, a portion of the gain on the sale of the loan is recognized as due to
the value of the servicing rights, and a servicing asset is recorded. The
Company has had no loan sales which have resulted in the recording of a
servicing asset, due to the immaterial differential between the contractual
servicing fee and adequate compensation, as described above.
  Rate lock
commitments
  In
accordance with Financial Accounting Standards Board (FASB) interpretations and
the United States Securities and Exchange Commission Staff Accounting Bulletin
105, rate lock commitment agreements entered into for loans originated for sale
are considered derivatives and must be recorded at fair market value. The
Company performs quarterly valuations and will record the commitment if
material.  No commitments have been recorded due to the immateriality of
the amount.
  Other real estate
owned
  Real
estate properties acquired through loan foreclosure and other partial or total
satisfaction of problem loans are carried at the lower of fair value less
estimated costs to sell or the related loan balance at the date of
foreclosure.  Valuations are periodically performed by
management.  Losses arising at the time of acquisition of such
properties are charged against the allowance for loan losses. Subsequent
write-downs in the carrying value and expenses incurred to maintain the
properties are charged to expense.
 
 50
 Notes
to Consolidated Financial Statements
  Premises and
equipment
  Premises
and equipment are stated at cost less accumulated depreciation computed on the
straight-line method at rates based on estimated useful
lives.  Estimated lives are five to 40 years for buildings and
premises and three to 20 years for furniture, fixtures and
equipment.
 
 Expenditures
for replacements or major improvements are capitalized. Expenditures for normal
maintenance and repairs are charged to expense as incurred.  Upon the
sale or retirement of premises and equipment, the cost and accumulated
depreciation are removed from the respective accounts and any gain or loss is
included in income.
  Bank owned life insurance
asset
  The cash
surrender value of bank owned life insurance relates to policies on employees of
the Bank for which the Bank is the beneficiary.  Increases in cash
surrender value are included in non-interest income in the consolidated income
statements.
  Goodwill and core deposit
intangible
  Goodwill
is evaluated for impairment on an annual basis. The Company records as goodwill
the excess purchase price over the fair value of net identifiable assets
acquired. The Company follows the guidance provided in the Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets which
prescribes a two-step process to test and measure impairment of goodwill. Core
deposit intangibles are amortized on an accelerated basis over ten
years.
  Earnings per
share
  Basic net
income per common share is calculated by dividing the net income available to
common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted net income per common share is computed in a manner
similar to basic net income per common share except that the weighted-average
number of common shares outstanding is increased to include the incremental
common shares (as computed using the treasury stock method) that would have been
outstanding if all potentially dilutive common stock equivalents were issued
during the period. The Company's common stock equivalents relate solely to stock
option and restricted stock awards. Anti-dilutive shares are common stock
equivalents with weighted-average exercise prices in excess of the
weighted-average market value for the periods presented.  The Company
had 269,747 anti-dilutive common shares outstanding at June 30,
2008.  Unallocated common shares held by the ESOP are not included in
the weighted-average number of common shares outstanding for purposes of
calculating either basic or diluted net income per common share.
 
 51
  PSB
Holdings, Inc.
  1.  Summary
of Significant Accounting Policies–(Continued)
  Earnings per
share –(Continued)
  For
      the years ended June 30,2008
                  
                  
                  2007Net
      income, as reported
                  
                  $
                  3,068,000
                  
                  
                  $
                  1,924,000Weighted
      average common shares outstanding:Basic
                  
                  
                  6,297,478
                  
                  
                  
                  6,707,697Effect
      of dilutive stock option and restricted stock awards
                  
                  
                  73,205
                  
                  
                  
                  102,917Diluted
                  
                  
                  6,370,683
                  
                  
                  
                  6,810,614Net
      income per common shareBasic
                  
                  $
                  0.49
                  
                  
                  $
                  0.29Diluted
                  
                  $
                  0.48
                  
                  
                  $
                  0.28
  Employee stock ownership
plan
  The
Company established an Employee Stock Ownership Plan (the ESOP) as part of its
minority stock issuance on October 4, 2004. The ESOP is accounted for in
accordance with Statement of Position (SOP) 93-6. Under SOP 93-6, unearned ESOP
shares are not considered outstanding and are therefore not taken into account
when computing earnings per share. Unearned ESOP shares are presented as a
reduction to stockholders’ equity and represent shares to be allocated to ESOP
participants in future periods for services provided to the Company. As shares
are committed to be released, compensation expense is recognized for the fair
market value of the stock and stockholders’ equity is increased by a
corresponding amount. The loan to the ESOP will be repaid principally from the
Bank’s contributions to the ESOP and dividends payable on common stock held by
ESOP over a period of 20 years.
  Stock Based
Compensation
  As more
fully described in Note 10, the Company has a stock based incentive plan
authorizing various types of incentive awards that may be granted to directors,
officers and employees.  The
Company adopted the FASB’s SFAS No.123(R), “Share Based Payment”, as of July 1,
2006.  In accordance with SFAS No.123(R), the Company records
share-based compensation expense related to outstanding stock option and
restricted stock awards based upon the fair value at the date of grant over the
vesting period of such awards on a straight-line basis.
  Computation of fair
values
  SFAS No.
107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of the estimated fair value of financial instruments, including both
assets and liabilities recognized and not recognized in the statement of
financial condition, for which it is practicable to estimate fair
value.
 
 The
calculation of fair value estimates of financial instruments is dependent upon
certain subjective assumptions and involves significant
uncertainties.  Changes in assumptions could significantly affect the
estimates.  These estimates do not reflect any possible tax
ramifications, estimated transaction costs or any premium or discount that could
result from offering the Company's entire holdings of a particular financial
instrument.
 
 52
 Notes
to Consolidated Financial Statements
   The
following methods and assumptions were utilized by the Company in estimating the
fair values of its on-balance sheet financial instruments:
 
 Cash and cash equivalents -
The carrying amounts reported in the statement of financial condition
approximate these assets' fair value.
 
 Investment securities - Fair
values for investment securities are based on quoted market prices where
available.  If quoted market prices are not available, fair values are
based on market prices for comparable instruments.  The carrying value
of Federal Home Loan Bank of Boston (FHLBB) stock approximates fair
value.
 
 Loans receivable - For
variable rate loans that reprice frequently and without significant change in
credit risk, fair values are based on carrying values.  The fair value
of other loans are estimated by discounted cash flow analyses using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality.  The fair value of nonaccrual loans is
estimated using the lesser of loan value or the estimated fair values of the
underlying collateral.
 
 Loans held-for-sale - The
current market price of similar loans sold is used to estimate the fair value of
loans held-for-sale.
 
 Deposits - The fair values of
demand, NOW, and savings deposits are equal to the amount payable on demand at
the reporting date.  Fair values for time certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered to a schedule of aggregated expected monthly maturities
on time deposits.
 
 Borrowed funds- Fair values
are estimated using discounted cash flow analyses based on the Company’s current
incremental borrowing rates for similar types of borrowing
arrangements.
 
 Mortgagors' escrow accounts -
The carrying value of escrow accounts approximates fair value.
  Income
taxes
  The
Company accounts for certain income and expense items differently for financial
reporting purposes than for income tax purposes. Provisions for deferred taxes
are being made in recognition of these temporary differences.
 
 The
Company adopted the provisions of FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes, on October 1, 2007.  Previously, the Company
had accounted for tax contingencies in accordance with Statement
of Financial Accounting Standards 5, Accounting for Contingencies. As
required by Interpretation 48, which clarifies Statement 109, Accounting for
Income Taxes, the Company recognizes the financial statement benefit of a tax
position only after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax positions
meeting the more-likely-than-not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement with the relevant tax
authority. Tax regulations within each jurisdiction are subject to the
interpretation of the related tax laws and regulations and require significant
judgment to apply.
 
 The
Company applied Interpretation 48 to all tax positions for which the statute of
limitations remained open. The adoption of Interpretation 48 did not have a
material impact on the results of operation or financial condition of the
Company.
  53
 PSB
Holdings, Inc.
  1.  Summary
of Significant Accounting Policies–(Continued)
  Recent accounting
pronouncements
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” to
define fair value, establish a framework for measuring fair value and expand
disclosures about fair values. The Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Company does not expect SFAS No.
157 to have a material impact on the Company’s financial position or results of
operation.
 
 During
the first quarter of 2007, FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities” (SFAS No. 159), which permits
entities to choose and measure many financial instruments and certain other
items at fair value. The Company will be required to adopt SFAS No. 159 on
July 1, 2008, and is currently evaluating the impact of the adoption of SFAS
No. 159 on its financial position and results of operations.
 
 In
September 2006, the Emerging Issues Task Force issued EITF Issue 06-4,
“Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar
  Life
Insurance Arrangements” (EITF Issue 06-4). EITF Issue 06-4 requires that for
endorsement split-dollar insurance arrangements that provide a benefit to an
employee that extends to postretirement periods, an employer should recognize a
liability for future benefits in accordance with SFAS No. 106 or Accounting
Principles Board Opinion (APB) No. 12 based on the substantive
agreement of the employee. If the employee has effectively agreed to maintain a
life insurance policy during postretirement periods, the costs of the life
insurance policy during the postretirement periods should be accrued in
accordance with either FASB Statement No. 106 or APB No. 12. If the
employer has agreed to provide a death benefit, the employer should recognize a
liability for the future death benefit in accordance with either SFAS
No. 106 or APB No. 12. EITF Issue 06-4 is effective for fiscal years
beginning after December 15, 2007. The Company is currently evaluating the
impact of EITF Issue 06-4 on its financial statements.
  Reclassification
  Prior
year’s consolidated financial statements have been reclassified to conform to
changes in the current consolidated financial statement presentation. Such
reclassifications had no effect on the 2007 net income.
 
 54
 
 Notes
to Consolidated Financial Statements
  2.  Investment
Securities
  At June
30, the amortized cost basis and approximate fair values of investment
securities were as follows:
 2008Amortized
                  
                  
                  Gross
      Unrealized
                  
                  
                  FairCost
      Basis
                  
                  
                  Gain
                  
                  
                  (Loss)
                  
                  
                  Value(in
      thousands)Debt
      securities:US
      government and agency obligations:From
      one through five years
                  
                  $
                  3,079
                  
                  
                  $
                  16
                  
                  
                  $
                  -
                  
                  
                  $
                  3,095From
      five through ten years
                  
                  
                  2,232
                  
                  
                  
                  17
                  
                  
                  
                  (21
                  )
                  
                  
                  2,228After
      ten years
                  
                  
                  13,987
                  
                  
                  
                  174
                  
                  
                  
                  (12
                  )
                  
                  
                  14,14919,298
                  
                  
                  
                  207
                  
                  
                  
                  (33
                  )
                  
                  
                  19,472State
      agency and municipal obligations:After
      ten years
                  
                  
                  4,448
                  
                  
                  
                  99
                  
                  
                  
                  -
                  
                  
                  
                  4,5474,448
                  
                  
                  
                  99
                  
                  
                  
                  -
                  
                  
                  
                  4,547Corporate
      bonds and other obligations:Due
      within one year
                  
                  
                  2,971
                  
                  
                  
                  7
                  
                  
                  
                  (1
                  )
                  
                  
                  2,977From
      one through five years
                  
                  
                  8,045
                  
                  
                  
                  10
                  
                  
                  
                  (476
                  )
                  
                  
                  7,579After
      ten years
                  
                  
                  8,042
                  
                  
                  
                  47
                  
                  
                  
                  (1,431
                  )
                  
                  
                  6,65819,058
                  
                  
                  
                  64
                  
                  
                  
                  (1,908
                  )
                  
                  
                  17,214Mortgage-backed
      securities
                  
                  
                  156,063
                  
                  
                  
                  556
                  
                  
                  
                  (4,769
                  )
                  
                  
                  151,850Total
      debt securities
                  
                  
                  198,867
                  
                  
                  
                  926
                  
                  
                  
                  (6,710
                  )
                  
                  
                  193,083Equity
      securities:Preferred
      stock
                  
                  
                  19,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  19,000FHLB
      restricted stock
                  
                  
                  7,943
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,943Total
      equity securities
                  
                  
                  26,943
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  26,943Total
      available-for-sale securities
                  
                  $
                  225,810
                  
                  
                  $
                  926
                  
                  
                  $
                  (6,710
                  )
                  
                  $
                  220,026
 
 55
 PSB
Holdings, Inc.
  2.  Investment
Securities–(Continued)
 2007Amortized
                  
                  
                  Gross
      Unrealized
                  
                  
                  FairCost
      Basis
                  
                  
                  Gain
                  
                  
                  (Loss)
                  
                  
                  Value(in
      thousands)Debt
      securities:US
      government and agency obligations:
                  
                  $
                  17,446
                  
                  
                  $
                  -
                  
                  
                  $
                  (101
                  )
                  
                  $
                  17,345Due
      within one year
                  
                  
                  14,313
                  
                  
                  
                  -
                  
                  
                  
                  (120
                  )
                  
                  
                  14,193From
      one through five years
                  
                  
                  3,785
                  
                  
                  
                  11
                  
                  
                  
                  (22
                  )
                  
                  
                  3,774From
      five through ten years
                  
                  
                  9,482
                  
                  
                  
                  -
                  
                  
                  
                  (115
                  )
                  
                  
                  9,36745,026
                  
                  
                  
                  11
                  
                  
                  
                  (358
                  )
                  
                  
                  44,679State
      agency and municipal obligations:From
      five through ten years
                  
                  
                  1,363
                  
                  
                  
                  46
                  
                  
                  
                  -
                  
                  
                  
                  1,409After
      ten years
                  
                  
                  7,765
                  
                  
                  
                  208
                  
                  
                  
                  -
                  
                  
                  
                  7,9739,128
                  
                  
                  
                  254
                  
                  
                  
                  -
                  
                  
                  
                  9,382Corporate
      bonds and other obligations:Due
      within one year
                  
                  
                  2,978
                  
                  
                  
                  -
                  
                  
                  
                  (5
                  )
                  
                  
                  2,973From
      one through five years
                  
                  
                  9,880
                  
                  
                  
                  9
                  
                  
                  
                  (58
                  )
                  
                  
                  9,831After
      ten years
                  
                  
                  8,044
                  
                  
                  
                  226
                  
                  
                  
                  (137
                  )
                  
                  
                  8,13320,902
                  
                  
                  
                  235
                  
                  
                  
                  (200
                  )
                  
                  
                  20,937Mortgage-backed
      securities
                  
                  
                  137,530
                  
                  
                  
                  159
                  
                  
                  
                  (2,365
                  )
                  
                  
                  135,324Total
      debt securities
                  
                  
                  212,586
                  
                  
                  
                  659
                  
                  
                  
                  (2,923
                  )
                  
                  
                  210,322Equity
      securities:Preferred
      stock
                  
                  
                  5,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,000FHLB
      restricted stock
                  
                  
                  7,180
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,180Total
      equity securities
                  
                  
                  12,180
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  12,180Total
      available-for-sale securities
                  
                  $
                  224,766
                  
                  
                  $
                  659
                  
                  
                  $
                  (2,923
                  )
                  
                  $
                  222,502
 
 Gross
gains of $301,851 and $14,810 were realized on available-for-sale securities for
the years ended June 30, 2008 and 2007, respectively. Gross losses of $84,934
and $82,212 were realized on available-for-sale securities for the years ended
June 30, 2008 and 2007, respectively.
 
 At June
30, 2008 and 2007, debt securities with a fair value of $10,067,775 and
$7,420,265, respectively, were pledged as collateral to secure public deposits
and repurchase agreements.
 
 56
 
 Notes
to Consolidated Financial Statements
  The
following is a summary of the estimated fair value and related unrealized losses
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position at June 30,:
 2008
                  
                  Length
      of Time in Continuous Unrealized Loss
                    PositionLess
      than 12 months
                  
                  
                  12
      months or more
                  
                  
                  TotalFair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  UnrealizedValue
                  
                  
                  Loss
                  
                  
                  Value
                  
                  
                  Loss
                  
                  
                  Value
                  
                  
                  Loss(in
      thousands)US
      Government Agencies
                  
                  $
                  1,963
                  
                  
                  $
                  33
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,963
                  
                  
                  $
                  33Corporate
      bonds
                  
                  
                  6,688
                  
                  
                  
                  353
                  
                  
                  
                  6,447
                  
                  
                  
                  1,555
                  
                  
                  
                  13,135
                  
                  
                  
                  1,908Mortgage-backed
      securities
                  
                  
                  94,110
                  
                  
                  
                  4,722
                  
                  
                  
                  2,592
                  
                  
                  
                  47
                  
                  
                  
                  96,702
                  
                  
                  
                  4,769Total
      investment securities
                  
                  $
                  102,761
                  
                  
                  $
                  5,108
                  
                  
                  $
                  9,039
                  
                  
                  $
                  1,602
                  
                  
                  $
                  111,800
                  
                  
                  $
                  6,710
 
  2007
                  
                  Length
      of Time in Continuous Unrealized Loss
                    PositionLess
      than 12 months
                  
                  
                  12
      months or more
                  
                  
                  TotalFair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  UnrealizedValue
                  
                  
                  Loss
                  
                  
                  Value
                  
                  
                  Loss
                  
                  
                  Value
                  
                  
                  Loss(in
      thousands)US
      Government Agencies
                  
                  $
                  20,453
                  
                  
                  $
                  187
                  
                  
                  $
                  22,600
                  
                  
                  $
                  171
                  
                  
                  $
                  43,053
                  
                  
                  $
                  358Corporate
      bonds
                  
                  
                  5,921
                  
                  
                  
                  53
                  
                  
                  
                  7,834
                  
                  
                  
                  147
                  
                  
                  
                  13,755
                  
                  
                  
                  200Mortgage-backed
      securities
                  
                  
                  58,265
                  
                  
                  
                  812
                  
                  
                  
                  61,445
                  
                  
                  
                  1,553
                  
                  
                  
                  119,710
                  
                  
                  
                  2,365Total
      investment securities
                  
                  $
                  84,639
                  
                  
                  $
                  1,052
                  
                  
                  $
                  91,879
                  
                  
                  $
                  1,871
                  
                  
                  $
                  176,518
                  
                  
                  $
                  2,923
 
 The Bank
had 72 at June 30, 2008 and 112 at June 30, 2007, individual investment
securities in which the fair value of the security is less than the amortized
cost of the security.  Management believes that these unrealized
losses are temporary and are the result of interest rate
conditions.
 
 57
 PSB
Holdings, Inc.
  3.  Loans
Receivable
  The
composition of the Company’s loan portfolio at June 30 was as
follows:
 2008
                  
                  
                  2007(dollars
      in thousands)Residential
      mortgages
                  
                  $
                  181,978
                  
                  
                  $
                  168,126Commercial
      mortgages
                  
                  
                  55,406
                  
                  
                  
                  59,274Construction
      mortgages
                  
                  
                  3,223
                  
                  
                  
                  5,376Commercial
                  
                  
                  8,687
                  
                  
                  
                  6,449Installment
                  
                  
                  944
                  
                  
                  
                  1,022Collateral
                  
                  
                  298
                  
                  
                  
                  252Other
                  
                  
                  152
                  
                  
                  
                  165250,688
                  
                  
                  
                  240,664Unadvanced
      construction loans
                  
                  
                  (6,522
                  )
                  
                  
                  (8,264
                  )244,166
                  
                  
                  
                  232,400Deferred
      loan costs, net of fees
                  
                  
                  319
                  
                  
                  
                  258Deferred
      fees on purchased loans
                  
                  
                  1
                  
                  
                  
                  24Allowance
      for loan losses
                  
                  
                  (1,758
                  )
                  
                  
                  (1,780
                  )Loans
      receivable, net
                  
                  $
                  242,728
                  
                  
                  $
                  230,902Weighted
      average yield
                  
                  
                  6.10
                  %
                  
                  
                  6.51
                  %
 
 The
Company's lending activities are conducted principally in Eastern Connecticut.
The Company's investment in loans includes both adjustable and fixed rate loans.
The composition of the Company's investment in loans at June 30, was as
follows:
 2008
                  
                  
                  2007(in
      thousands)Fixed
      rate:Term
      to maturityOne
      month through one year
                  
                  $
                  5,853
                  
                  
                  $
                  5,760One
      year through three years
                  
                  
                  10,740
                  
                  
                  
                  11,525Three
      years through five years
                  
                  
                  17,475
                  
                  
                  
                  19,125Five
      years through ten years
                  
                  
                  26,361
                  
                  
                  
                  22,584Over
      ten years
                  
                  
                  79,104
                  
                  
                  
                  74,840139,533
                  
                  
                  
                  133,834Adjustable
      rate:Rate
      adjustmentOne
      month through one year
                  
                  
                  45,582
                  
                  
                  
                  44,378One
      year through three years
                  
                  
                  25,062
                  
                  
                  
                  19,665Three
      years through five years
                  
                  
                  21,758
                  
                  
                  
                  24,521Over
      five years
                  
                  
                  12,231
                  
                  
                  
                  10,002104,633
                  
                  
                  
                  98,566Total
      loans
                  
                  $
                  244,166
                  
                  
                  $
                  232,400
 
 58
 Notes
to Consolidated Financial Statements
    The
adjustable rate loans generally have interest rate adjustment limitations and
are generally indexed to the Company's cost of funds, prime rate, or to the U.S.
Treasury Bill rate.
 
 In
addition, the Company services loans for other financial institutions and
agencies.  These loans are originated by the Company and then
sold.  The Company continues to service these loans and remits the
payments received to the purchasing institution.  The amounts of these
loans were $27.1 million and $26.3 million at June 30, 2008 and 2007,
respectively.
 
 Transactions
in the allowance for loan losses accounts for the years ended June 30, were as
follows:
 2008
                  
                  
                  2007(in
      thousands)Balance
      at beginning of period
                  
                  $
                  1,780
                  
                  
                  $
                  1,582Provision
      for loan losses
                  
                  
                  51
                  
                  
                  
                  263Charge
      offs
                  
                  
                  (124
                  )
                  
                  
                  (112
                  )Recoveries
                  
                  
                  51
                  
                  
                  
                  47Balance
      at end of period
                  
                  $
                  1,758
                  
                  
                  $
                  1,780
 
 The
following table summarizes information on nonperforming loans:
 June
      30,2008
                  
                  
                  2007(in
      thousands)Nonperforming
      loans
                  
                  $
                  1,452
                  
                  
                  $
                  1,538Nonperforming
      loans accounted foron
      a nonaccrual basis
                  
                  
                  982
                  
                  
                  
                  1,538Amount
      of gross interest income that wouldhave
      been recognized if the loans hadperformed
      in accordance with original term
                  
                  
                  116
                  
                  
                  
                  98Amount
      of interest income recognized
                  
                  
                  12
                  
                  
                  
                  11Income
      contractually due but notrecognized
      on nonaccrual loans
                  
                  
                  104
                  
                  
                  
                  90
 
 At June
30, 2008 and 2007, the Company did not have any restructured or impaired
loans.  At June 30, 2008 there were outstanding commitments to lend to
borrowers with loans on which the accrual of interest has been discontinued in
the amount of $25,039. At June 30, 2007 there were no outstanding commitments to
lend to borrowers with loans on which the accrual of interest has been
discontinued.
 
 59
 PSB
Holdings, Inc.
  4.  Premises
and Equipment
  Premises
and equipment at June 30, are summarized as follows:
 2008
                  
                  
                  2007(in
      thousands)Land
                  
                  $
                  301
                  
                  
                  $
                  301Buildings
                  
                  
                  4,455
                  
                  
                  
                  4,486Equipment
                  
                  
                  3,157
                  
                  
                  
                  2,885Construction
      in progress
                  
                  
                  -
                  
                  
                  
                  1007,913
                  
                  
                  
                  7,772Accumulated
      depreciation
                  
                  
                  (4,059
                  )
                  
                  
                  (3,554
                  )Premises
      and equipment, net
                  
                  $
                  3,854
                  
                  
                  $
                  4,218
 
 Depreciation
expense amounted to $532,495 and $571,601, for the years ended June 30, 2008 and
2007, respectively.
 
 The
Company leases space for its Gales Ferry, Griswold, and Putnam Price Chopper
branch offices. The leases for the branch offices expire March 2009, October
2009, and August 2011, respectively. All leases contain renewal options at the
Company’s discretion. The Company also has miscellaneous equipment leases with
various terms. Rental expense totaled $169,236 and $166,556 for the years ended
June 30, 2008 and 2007, respectively.
 
 The
Company leases part of its Pomfret location to a tenant under a long term lease
with an expiration date of April 2009. Rental income was $16,350 and $26,925,
for the years ended June 30, 2008 and 2007, respectively.
 
 The
following is a schedule of future annual minimum rental income and payments
required under leases as of June 30:
 
 Rental
                  
                  
                  RentalExpense
                  
                  
                  Income(in
      thousands)2009
                  
                  $
                  162
                  
                  
                  $
                  142010
                  
                  
                  87
                  
                  
                  
                  -2011
                  
                  
                  55
                  
                  
                  
                  -2012
                  
                  
                  12
                  
                  
                  
                  -2013
                  
                  
                  1Thereafter
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  317
                  
                  
                  $
                  14
 
 60
 Notes
to Consolidated Financial Statements
 5.  Intangible
Assets
  Intangible
assets consist of goodwill and core deposit intangible which resulted from the
Bank’s purchase of three branches from another financial institution in October
2005.  Goodwill is evaluated for impairment on an annual basis. For
the year ended June 30, 2008 and 2007 no impairment was found.  The
core deposit intangible is being amortized on an accelerated basis over a ten
year period.
 June
      30,2008
                  
                  
                  2007(in
      thousands)Balances
      not subject to amortization:Goodwill
                  
                  $
                  6,912
                  
                  
                  $
                  6,912Balances
      subject to amortization:Core
      Deposit Intangible
                  
                  
                  857
                  
                  
                  
                  1,091Total
      intangible assets
                  
                  $
                  7,769
                  
                  
                  $
                  8,003
 
 The
amortization expense was $234,054 and $262,282 for the years ended June 30, 2008
and 2007, respectively. Expected future amortization expense is as
follows:
 
 For
      the yearsendedJune
      30,(in
      thousands)2009
                  
                  $
                  2062010
                  
                  
                  1782011
                  
                  
                  1492012
                  
                  
                  1212013
                  
                  
                  93Thereafter
                  
                  
                  110Total
                  
                  $
                  857
 
 61
 PSB
Holdings, Inc.
  6.  Deposits
  The
balances and the rates at which the Company paid interest on deposit accounts at
June 30, were as follows:
 2008
                  
                  
                  2007Weighted
                  
                  
                  WeightedAverage
                  
                  
                  
                  
                  
                  AverageAmount
                  
                  
                  Rate
                  
                  
                  Amount
                  
                  
                  Rate(dollars
      in thousands)Demand
      deposits
                  
                  $
                  37,195
                  
                  
                  
                  -
                  %
                  
                  $
                  43,493
                  
                  
                  
                  -
                  %NOW
      accounts
                  
                  
                  36,253
                  
                  
                  
                  2.37
                  
                  
                  
                  27,468
                  
                  
                  
                  1.83Regular
      savings
                  
                  
                  46,630
                  
                  
                  
                  0.60
                  
                  
                  
                  50,225
                  
                  
                  
                  0.74Money
      market accounts
                  
                  
                  13,426
                  
                  
                  
                  1.70
                  
                  
                  
                  18,250
                  
                  
                  
                  1.84Clubs
                  
                  
                  319
                  
                  
                  
                  4.17
                  
                  
                  
                  318
                  
                  
                  
                  4.17133,823
                  
                  
                  
                  1.02
                  
                  
                  
                  139,754
                  
                  
                  
                  0.88Certificate
      accounts maturing in:Less
      than one year
                  
                  
                  87,584
                  
                  
                  
                  3.70
                  
                  
                  
                  107,891
                  
                  
                  
                  4.59One
      year to two years
                  
                  
                  35,739
                  
                  
                  
                  3.70
                  
                  
                  
                  22,808
                  
                  
                  
                  4.79Two
      years to three years
                  
                  
                  6,990
                  
                  
                  
                  4.15
                  
                  
                  
                  7,070
                  
                  
                  
                  4.60Three
      years to five years
                  
                  
                  19,588
                  
                  
                  
                  4.84
                  
                  
                  
                  15,950
                  
                  
                  
                  4.99149,901
                  
                  
                  
                  3.87
                  
                  
                  
                  153,719
                  
                  
                  
                  4.66Total
      deposits
                  
                  $
                  283,724
                  
                  
                  
                  2.53
                  %
                  
                  $
                  293,473
                  
                  
                  
                  2.86
                  %
 
 The
aggregate amount of individual time deposits of $100,000 or more at June 30,
2008 and 2007, was $54.6 million and $49.3 million, respectively.  At June
30, 2008, there were no brokered deposits. At June 30, 2007, certificates
maturing in less than one year included $11.4 million of brokered deposits. Non
IRA deposit accounts are insured by the FDIC up to $100,000 each per insured
depositor. IRA deposit accounts are insured by the FDIC up to $250,000 each per
insured depositor.
 
 62
  
 Notes
to Consolidated Financial Statements
  7.  Borrowed
Funds
  At June
30, borrowed funds consisted of the following:
 2008
                  
                  
                  2007Amount
                    Due
                  
                  
                  Weighted
      Average
                    Rate
                  
                  
                  Amount
                    Due
                  
                  
                  Weighted
      Average
                    Rate(dollars
      in thousands)Short-term
      borrowingFHLB
      advances
                  
                  $
                  13,000
                  
                  
                  
                  2.39
                  %
                  
                  $
                  41,000
                  
                  
                  
                  5.35
                  %Repurchase
      agreements
                  
                  
                  6,406
                  
                  
                  
                  2.17
                  
                  
                  
                  3,974
                  
                  
                  
                  3.97Total
      short-term borrowings
                  
                  
                  19,406
                  
                  
                  
                  2.32
                  
                  
                  
                  44,974
                  
                  
                  
                  5.23Long-term
      FHLB advancesYear
      of maturity:2008
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  28,668
                  
                  
                  
                  5.402009
                  
                  
                  31,704
                  
                  
                  
                  3.96
                  
                  
                  
                  18,204
                  
                  
                  
                  5.002010
                  
                  
                  24,011
                  
                  
                  
                  4.78
                  
                  
                  
                  10,011
                  
                  
                  
                  4.942011
                  
                  
                  27,500
                  
                  
                  
                  3.51
                  
                  
                  
                  2,000
                  
                  
                  
                  4.222012
                  
                  
                  31,000
                  
                  
                  
                  4.70
                  
                  
                  
                  28,000
                  
                  
                  
                  4.722013
                  
                  
                  5,000
                  
                  
                  
                  3.24
                  
                  
                  
                  -
                  
                  
                  
                  -2017
                  
                  
                  10,000
                  
                  
                  
                  4.16
                  
                  
                  
                  10,000
                  
                  
                  
                  4.152018
                  
                  
                  8,000
                  
                  
                  
                  3.92
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      long-term borrowings
                  
                  
                  137,215
                  
                  
                  
                  4.17
                  
                  
                  
                  96,883
                  
                  
                  
                  4.93Total
      borrowed funds
                  
                  $
                  156,621
                  
                  
                  
                  3.94
                  %
                  
                  $
                  141,857
                  
                  
                  
                  5.02
                  %
 
 Federal
Home Loan Bank of Boston advances are secured by a blanket lien on qualified
collateral consisting primarily of first mortgages on residential property and
are at fixed rates.  The maturity schedule above reflects final
maturity; however, some are callable at earlier dates. Repurchase agreements
generally have terms of one day and are secured by government agency
securities.
 
 Additionally,
the Bank has a line of credit with Federal Home Loan Bank of Boston for
$2,354,000.
 
 63
 PSB
Holdings, Inc.
  8.  Income
Taxes
  The
components of the income tax expense for the years ended June 30, were as
follows:
 2008
                  
                  
                  2007(in
      thousands)Current:Federal
                  
                  $
                  693
                  
                  
                  $
                  390State
                  
                  
                  1
                  
                  
                  
                  11Total
      current
                  
                  
                  694
                  
                  
                  
                  401Deferred:Federal
                  
                  
                  406
                  
                  
                  
                  (228
                  )State
                  
                  
                  5
                  
                  
                  
                  181Total
      deferred
                  
                  
                  411
                  
                  
                  
                  (47
                  )Income
      tax expense
                  
                  $
                  1,105
                  
                  
                  $
                  354
 
 Deferred
income taxes reflect the impact of "temporary differences" between the amount of
assets and liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations.
 
 The Bank
established Putnam Bank Mortgage Servicing Company during the year ended June
30, 2007.  The subsidiary qualifies and operates as a Connecticut
passive investment company pursuant to legislation.  Because the
subsidiary earns sufficient income from passive investments and its dividends to
the parent are exempt from Connecticut Corporation Business Tax, the subsidiary
Bank no longer expects to incur Connecticut income tax expense or to recognize
its Connecticut deferred tax asset.  The Parent company is still
subject to the Connecticut Corporation Business Tax.
 
 The
principal reasons for the income tax expense differing from the amount of such
tax computed by applying the federal statutory tax rate of 34% to reported
income before income tax expense were as follows:
 2008
                  
                  
                  2007(in
      thousands)Tax
      on income at statutory rates
                  
                  $
                  1,419
                  
                  
                  $
                  775Increase
      (decrease) resulting from:State
      taxes net of federal benefit
                  
                  
                  4
                  
                  
                  
                  123Qualifying
      option expense
                  
                  
                  70
                  
                  
                  
                  -Dividends
      received deduction
                  
                  
                  (193
                  )
                  
                  
                  (356
                  )Bank
      owned life insurance
                  
                  
                  (88
                  )
                  
                  
                  (59
                  )Tax-exempt
      municipal income
                  
                  
                  (112
                  )
                  
                  
                  (135
                  )Other
      items, net
                  
                  
                  5
                  
                  
                  
                  6Income
      tax expense
                  
                  $
                  1,105
                  
                  
                  $
                  354Effective
      rate of income tax expense
                  
                  
                  26.5
                  %
                  
                  
                  15.5
                  %
 
 64
 
 Notes
to Consolidated Financial Statements
  The
components of deferred taxes included in the balance sheet at June 30, were as
follows:
 2008
                  
                  
                  2007(in
      thousands)Current
      tax (payable) receivable
                  
                  $
                  (13
                  )
                  
                  $
                  295Deferred
      tax receivable:Available-for-sale
      securities
                  
                  $
                  1,968
                  
                  
                  $
                  882Allowance
      for loan losses
                  
                  
                  598
                  
                  
                  
                  605Unrealized
      trading loss carryover
                  
                  
                  -
                  
                  
                  
                  79Contribution
      carryforward
                  
                  
                  120
                  
                  
                  
                  239Deferred
      compensation
                  
                  
                  203
                  
                  
                  
                  193Stock
      based compensation
                  
                  
                  313
                  
                  
                  
                  243Capital
      loss carryforward
                  
                  
                  -
                  
                  
                  
                  27Loans
      held for sale
                  
                  
                  2
                  
                  
                  
                  -Interest
      receivable on nonaccrual loans
                  
                  
                  65
                  
                  
                  
                  313,269
                  
                  
                  
                  2,299Deferred
      tax payable:Depreciation
      and amortization
                  
                  
                  (294
                  )
                  
                  
                  (3
                  )Deferred
      loan fees
                  
                  
                  (108
                  )
                  
                  
                  (88
                  )(402
                  )
                  
                  
                  (91
                  )Net
      deferred taxes receivable, before valuation allowance
                  
                  
                  2,867
                  
                  
                  
                  2,208Valuation
      allowance
                  
                  
                  (12
                  )
                  
                  
                  (28
                  )Net
      deferred tax receivable
                  
                  $
                  2,855
                  
                  
                  $
                  2,180
 
 SFAS No.
109 requires a valuation allowance against deferred tax assets if, based on the
weight of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.  The Company believes that
it is more likely than not that it will not realize all of its state tax
benefits related to realized and unrealized capital losses, and contributions;
therefore it has reserved that portion of its deferred tax assets.
 
 Retained
earnings at June 30, 2008 includes a contingency reserve for loan losses of
$2,284,000 which represents the tax reserve balance existing at December 31,
1987 and is maintained in accordance with provisions of the Internal Revenue
Code applicable to thrift institutions.  It is not anticipated that
the Company will incur a federal income tax liability related to the reduction
of this reserve and accordingly, deferred income taxes of $777,000 has not be
recognized as of June 30, 2008.
 
 65
 PSB
Holdings, Inc.
  9.  Regulatory
Capital
  The
Company, as a federally chartered holding company, is not subject to regulatory
capital requirements. The Bank is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank’s financial statements.
 
 The
Office of Thrift Supervision (OTS) regulations require savings institutions to
maintain minimum levels of regulatory capital. Under the regulations in effect
at June 30, 2008, the Bank was required to maintain a minimum ratio of tangible
equity capital to tangible assets of 1.50%; a minimum ratio of Tier 1 capital to
total adjusted assets of 4.00%; a minimum ratio of Tier I capital to
risk-weighted assets of 4.00% and a minimum ratio of total capital to
risk-weighted assets of 8.00%. As of June 30, 2008 the Bank meets all capital
requirements to which it is subject.
 
 At June
30, 2008 the Bank was considered “well capitalized” for regulatory purposes. To
be categorized as well capitalized, the Bank must maintain a minimum ratio
of tangible equity capital to tangible assets of 2.00%; a minimum ratio of Tier
1 capital to total adjusted assets of 5.00%; a minimum ratio of Tier I capital
to risk-weighted assets of 6.00% and a minimum ratio of total capital to
risk-weighted assets of 10.00%. There have been no subsequent conditions or
events which management believes have changed the Bank’s status.
 
 The
following is a summary of the Bank’s actual capital as computed under the
standards established by the OTS at June 30:
 
 2008
                  
                  
                  2007Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio(dollars
      in thousands)Tangible
      Equity Capital (to Tangible Assets)
                  
                  $
                  40,932
                  
                  
                  
                  8.34
                  %
                  
                  $
                  39,678
                  
                  
                  
                  8.22
                  %Tier
      I Capital (to Adjusted Total Assets)
                  
                  
                  40,932
                  
                  
                  
                  8.34
                  %
                  
                  
                  39,678
                  
                  
                  
                  8.22
                  %Tier
      I Capital (to Risk-Weighted Assets)
                  
                  
                  40,932
                  
                  
                  
                  15.58
                  %
                  
                  
                  39,678
                  
                  
                  
                  15.89
                  %Total
      Capital (to Risk-Weighted Assets)
                  
                  
                  42,680
                  
                  
                  
                  16.24
                  %
                  
                  
                  41,445
                  
                  
                  
                  16.60
                  %
 
 66
 Notes
to Consolidated Financial Statements
 
 The
Bank’s capital under generally accepted accounting principles is reconciled as
follows:
 
 Putnam
      Bank
                  
                  June
      30,2008
                  
                  
                  2007(in
      thousands)Capital
      under generally accepted accounting principles
                  
                  $
                  44,903
                  
                  
                  $
                  46,349Intangible
      assets
                  
                  
                  (7,769
                  )
                  
                  
                  (8,003
                  )Unrealized
      losses on available-for-sale securities
                  
                  
                  3,798
                  
                  
                  
                  1,332Tier
      I capital
                  
                  
                  40,932
                  
                  
                  
                  39,678Allowance
      for loan losses
                  
                  
                  1,748
                  
                  
                  
                  1,767Total
      Risk-Based capital
                  
                  $
                  42,680
                  
                  
                  $
                  41,445
 
 The
ability of the Company to pay dividends depends, in part, on the ability of the
Bank to pay dividends to the Company. The Bank will not be able to declare or
pay a cash dividend on, or repurchase any of its common stock, if the effect
thereof would be to reduce the regulatory capital of the Bank to an amount below
amounts required under OTS rules and regulations.
  10.  Benefit
Plans
  Defined
Contribution Plan
 The Bank
has a defined contribution plan that covers substantially all of the Bank’s
employees.  Contributions to the plan are discretionary and are voted
on annually by the Board of Directors of the Bank.   The Bank
recognized expense of $224,990 and $217,637 for the years ended June 30, 2008
and 2007, respectively.
 
 401(k)
Plan
 The Bank
has a 401(k) plan covering each eligible employee.  Employees must be
21 years of age, work at least 1,000 hours per year, and have at least one year
of service with the Bank to be eligible to participate. Employees may defer
gross compensation up to certain limits defined in the Internal Revenue
Code.  The Bank’s matching contribution is discretionary. For the
years ended June 30, 2008 and 2007 the Bank chose to contribute 25% of an
employee’s deferral on a maximum of 4% of the employee’s salary. The Bank
contributed $30,762 and $31,505, to the plan during the years ended June 30,
2008 and 2007, respectively.
 
 Employee
Stock Ownership Plan
  The Bank
established the 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 fund the purchase, the ESOP borrowed $2.6 million from the Company. The
borrowing is at an initial interest rate of 4.75% and is to be repaid on a
pro-rata basis in 20 substantially equal annual installments. The collateral for
the loan is the common stock of the Company purchased by the ESOP.
 
 67
  PSB
Holdings, Inc.
  10.Benefit Plans–(Continued)
  The
shares of stock purchased by the ESOP are held in a suspense account until they
are released for allocation among participants. The shares will be released
annually from the suspense account and the released shares will be allocated
among the participants on the basis of each participant’s compensation for the
year of allocation. As shares are released from collateral, the Bank recognizes
compensation expense equal to the average market price of the shares during the
period and the shares will be outstanding for earning-per-share purposes. The
shares not released are reported as unearned ESOP shares in the capital accounts
of the consolidated statements of financial condition. ESOP expense for the
years ended June 30, 2008 and 2007 was $122,196 and $135,908, respectively. At
June 30, 2008 and 2007 there were 47,248 and 34,009 allocated and 209,814 and
223,053 unreleased ESOP shares. The unreleased shares had an aggregate fair
value of $1.9 million.
 
 Stock-Based
Incentive Plan
  At the
annual meeting of stockholders on October 21, 2005, stockholders of the Company
approved the PSB Holdings, Inc. 2005 Stock-Based Incentive Plan (the Incentive
Plan).  Under the Incentive Plan, the Company may grant up to 340,213
stock options and 136,085 shares of restricted stock to its employees, officers
and directors for an aggregate amount of up to 476,298 shares of the Company’s
common stock for issuance upon the grant or exercise of awards.  Both
incentive stock options and non-statutory stock options may be granted under the
Incentive Plan.
 
 On
November 7, 2005, the Company awarded 319,800 options to purchase the Company’s
common stock and 129,281 shares of restricted stock.  Stock option
awards were granted with an exercise price equal to the market price of the
Company’s stock at the date of grant ($10.60) with a maximum term of ten
years.  Both stock option and restricted stock awards vest at 20% per
year beginning on the first anniversary of the date of the grant.
 
 On June
7, 2006, the Company awarded 18,000 options to purchase the Company’s common
stock and 6,000 shares of restricted stock.  Stock option awards were
granted with an exercise price equal to the market price of the Company’s stock
at the date of grant ($10.78) with a maximum term of ten years.  Both
stock option and restricted stock awards vest at 20% per year beginning on the
first anniversary of the date of the grant.
 
 On May
25, 2007, the Company awarded 29,000 options to purchase the Company’s common
stock and 9,500 shares of restricted stock.  Stock option awards were
granted with an exercise price equal to the market price of the Company’s stock
at the date of grant ($10.70) with a maximum term of ten years.  Both
stock option and restricted stock awards vest at 20% per year beginning on the
first anniversary of the date of the grant.
 
 Stock
options and restricted stock awards are considered common stock equivalents for
the purpose of computing earnings per share on a diluted basis.
 
 In
accordance with SFAS No.123(R), the Company has recorded share-based
compensation expense related to outstanding stock option and restricted
stock awards based upon the fair value at the date of grant over the vesting
period of such awards on a straight-line basis.  The fair value of
each restricted stock allocation, based on the market price at the date of
grant, is recorded to unearned stock awards.  Compensation expenses
related to unearned restricted shares are amortized to compensation and benefits
expense over the vesting period of the restricted stock
awards.   The fair value of each stock option award is estimated
on the date of grant using the Black-Scholes option pricing method which
includes several assumptions such as volatility, expected dividends, expected
term and risk-free rate for each stock option award.
 
 68
 
 Notes
to Consolidated Financial Statements
 In
determining the expected term of the option awards, the Company elected to
follow the simplified method as permitted by the SEC Staff Accounting Bulletin
107, which was issued to provide guidance on the implementation of
SFAS 123(R). Under this method, the Company has estimated the expected term
of the options as being equal to the average of the vesting term plus the
original contractual term. The Company estimated its volatility using the
historical volatility of other, similar companies during a period of time equal
to the expected life of the options. The risk-free rate for the periods within
the contractual life of the options is based upon the U.S. Treasury yield curve
in effect at the time of grant. The weighted-average fair value of stock options
granted using the Black-Scholes option pricing method and the assumptions used
to determine the weighted-average fair value of stock options granted were as
follows:
 
 November
      7, 2005 Grant
                  
                  June
      7, 2006 Grant
                  
                  May
      25, 2007 GrantDividend
      yield
                  
                  1.89%
                  
                  2.23%
                  
                  2.24%Expected
      volatility
                  
                  12.65%
                  
                  12.17%
                  
                  11.04%Risk-free
      rate
                  
                  4.56%
                  
                  4.95%
                  
                  4.86%Expected
      life in years
                  
                  6.5
                  
                  6.5
                  
                  6.5Fair
      value
                  
                  $2.00
                  
                  $1.97
                  
                  $1.84
  Information
pertaining to stock options outstanding at or for the year ended June 30, is as
follows:
 
 2008
                  
                  
                  2007Number
      of
                    Shares
                  
                  
                  Weighted
                    Average
                    Excise
      Price
                  
                  
                  Number
      of
                    Shares
                  
                  
                  Weighted
                    Average
                    Excise
      PriceOutstanding
      at beginning of year
                  
                  
                  299,562
                  
                  
                  $
                  10.62
                  
                  
                  
                  276,562
                  
                  
                  $
                  10.61Granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  29,000
                  
                  
                  
                  10.70Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  (29,815
                  )
                  
                  
                  10.62
                  
                  
                  
                  (6,000
                  )
                  
                  
                  10.78Outstanding
      at end of year
                  
                  
                  269,747
                  
                  
                  $
                  10.62
                  
                  
                  
                  299,562
                  
                  
                  $
                  10.62Options
      exercisable at end of year
                  
                  
                  131,394
                  
                  
                  $
                  10.62
                  
                  
                  
                  70,768
                  
                  
                  $
                  10.61
  At June
30, 2008, there was $684,210 of total unrecognized compensation costs related to
nonvested share based compensation. That cost is expected to be recognized over
a weighted average period of 2.5 years. The Company recorded share-based
compensation expense of $412,869 and $393,635 for the years ended June 30, 2008
and 2007, respectively in connection with the stock option and restricted stock
awards.
 
 69
 PSB
Holdings, Inc.
 
  11.  Other
Comprehensive Income
  The
Company’s source of other comprehensive income includes the unrealized gains and
losses on investment securities.
 
 The
components and the related tax effects allocated to other comprehensive income
for the years ended June 30, were as follows:
 2008
                  
                  
                  2007(in
      thousands)Net
      income
                  
                  $
                  3,068
                  
                  
                  $
                  1,924Other
      comprehensive income (loss):Unrealized
      holding (loss) gain on securities available-for-sale
                  
                  
                  (3,303
                  )
                  
                  
                  1,685Reclassification
      adjustment for (gain) loss recognized in net income
                  
                  
                  (217
                  )
                  
                  
                  67Other
      comprehensive income (loss) before tax expense
                  
                  
                  (3,520
                  )
                  
                  
                  1,752Income
      tax expense (benefit) related to items of othercomprehensive
      income (loss)
                  
                  
                  (1,086
                  )
                  
                  
                  682Other
      comprehensive income (loss) net of tax
                  
                  
                  (2,434
                  )
                  
                  
                  1,070Total
      comprehensive income
                  
                  $
                  634
                  
                  
                  $
                  2,994
  12.  Financial
Instruments
  The
Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financial needs of its
customers.  These financial instruments include commitments to extend
credit.  These commitments involve, to varying degrees, elements of
credit and interest risk in excess of the amount recognized in the balance
sheet.
 
 The
contract or notional amounts of outstanding commitments at June 30, were as
follows:
 2008
                  
                  
                  2007(in
      thousands)Commitments
      to extend credit:Loan
      commitments
                  
                  $
                  9,732
                  
                  
                  $
                  6,345Unadvanced
      construction loans
                  
                  
                  6,522
                  
                  
                  
                  8,264Unadvanced
      lines of credit
                  
                  
                  18,522
                  
                  
                  
                  15,133Standby
      letters of credit
                  
                  
                  2,050
                  
                  
                  
                  3,209
 
 The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments.  The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.  Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee.  Since some of the commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
 
 70
 Notes
to Consolidated Financial Statements
 The
Company evaluates each customer's creditworthiness on a case-by-case
basis.  The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit evaluation of
the counterparty.  Collateral held is primarily real
property.
 
 Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party.  The credit risk
involved in issuing letters of credit is essentially the same as that involved
in a loan commitment.
 
 Management
does not anticipate any material losses as a result of these
commitments.
 
 The
estimated fair values of the Company's financial instruments at June 30, were as
follows:
  2008
                  
                  
                  2007Carrying
                    Amount
                  
                  
                  Fair
      Value
                  
                  
                  Carrying
                    Amount
                  
                  
                  Fair
      Value(in
      thousands)Financial
      assetsCash
      and cash equivalents
                  
                  $
                  8,146
                  
                  
                  $
                  8,146
                  
                  
                  $
                  13,198
                  
                  
                  $
                  13,198Investment
      securities
                  
                  
                  220,026
                  
                  
                  
                  220,026
                  
                  
                  
                  222,502
                  
                  
                  
                  222,502Loans
      receivable
                  
                  
                  242,728
                  
                  
                  
                  243,284
                  
                  
                  
                  230,902
                  
                  
                  
                  226,321Loans
      held-for-sale
                  
                  
                  675
                  
                  
                  
                  675
                  
                  
                  
                  1,478
                  
                  
                  
                  1,478Financial
      liabilitiesDeposits
                  
                  
                  283,724
                  
                  
                  
                  284,995
                  
                  
                  
                  293,473
                  
                  
                  
                  293,380Borrowed
      funds
                  
                  
                  156,621
                  
                  
                  
                  159,492
                  
                  
                  
                  141,857
                  
                  
                  
                  141,197Mortgagors'
      escrow accounts
                  
                  
                  1,423
                  
                  
                  
                  1,423
                  
                  
                  
                  1,280
                  
                  
                  
                  1,280
 
 Commitments
to extend credit and standby letters of credit have short maturities and have no
significant fair values.
  13.  Subsequent
Events
  On
September 7, 2008, the U. S. Department of the Treasury placed Fannie Mae and
Freddie Mac under conservatorship and assumed an equity position in these
entities, which takes priority over both common and preferred
stocks.  As of June 30, 2008, Putnam Bank had preferred equity
investments in Freddie Mac totaling $4,000,000.  The Bank may record
an other-than-temporary impairment loss during the quarter ending September 30,
2008 on its Freddie Mac preferred equity investments, but cannot estimate the
amount of the impairment loss at this time.  However, even if the
Bank’s Freddie Mac preferred equity investments are ultimately deemed to have no
value and no offsetting tax benefit is available, the Bank would continue to
substantially exceed the capital ratios that must be maintained to be considered
“well capitalized” under the capital guidelines administered by the federal
banking agencies.
 
 71
 PSB
Holdings, Inc.
  14.  Parent
Company Only Financial Statements
  The
following financial statements are for the Company (PSB Holdings, Inc.) only,
and should be read in conjunction with the consolidated financial statements of
the Company.
 
 Statements of Financial
Condition
 
 June
      30,2008
                  
                  
                  2007(in
      thousands)ASSETSCash
      and due from depository institutions
                  
                  $
                  585
                  
                  
                  $
                  539Investment
      securities
                  
                  
                  1,798
                  
                  
                  
                  2,138Loan
      to ESOP
                  
                  
                  2,311
                  
                  
                  
                  2,379Investment
      in Putnam Bank
                  
                  
                  44,902
                  
                  
                  
                  46,349Other
      assets
                  
                  
                  448
                  
                  
                  
                  446Total
      assets
                  
                  $
                  50,044
                  
                  
                  $
                  51,851LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilitiesOther
      liabilities
                  
                  
                  607
                  
                  
                  
                  600Total
      liabilities
                  
                  
                  607
                  
                  
                  
                  600Stockholders'
      Equity
                  
                  
                  49,437
                  
                  
                  
                  51,251Total
      liabilities and stockholders' equity
                  
                  $
                  50,044
                  
                  
                  $
                  51,851
 
 72
 Notes
to Consolidated Financial Statements
  Statements of
Operations
 
 For
      the years ended June 30,2008
                  
                  
                  2007(in
      thousands)Dividend
      and interest incomeDividends
      from subsidiary
                  
                  $
                  2,000
                  
                  
                  $
                  -Interest
      on loan
                  
                  
                  185
                  
                  
                  
                  187Interest
      and dividends on investments
                  
                  
                  96
                  
                  
                  
                  188Total
      interest income
                  
                  
                  2,281
                  
                  
                  
                  375Interest
      expense on borrowed funds
                  
                  
                  22
                  
                  
                  
                  41Net
      investment security losses
                  
                  
                  -
                  
                  
                  
                  (69
                  )Noninterest
      expenseCompensation
      and benefits
                  
                  
                  53
                  
                  
                  
                  50Professional
      fees
                  
                  
                  64
                  
                  
                  
                  65Investor
      relations
                  
                  
                  27
                  
                  
                  
                  46Dues
                  
                  
                  32
                  
                  
                  
                  25Other
      noninterest expense
                  
                  
                  5
                  
                  
                  
                  6Total
      noninterest expense
                  
                  
                  181
                  
                  
                  
                  192Income
      before income tax expense andequity in undistributed net
      income of subsidiary
                  
                  
                  2,078
                  
                  
                  
                  73Income
      tax expense
                  
                  
                  30
                  
                  
                  
                  28Income
      before equity in undistributed netincome of
      subsidiary
                  
                  
                  2,048
                  
                  
                  
                  45Equity
      in undistributed net income of subsidiary
                  
                  
                  1,020
                  
                  
                  
                  1,879Net
      income
                  
                  $
                  3,068
                  
                  
                  $
                  1,924
 
 73
 PSB
Holdings, Inc.
  14.  Parent Company Only
Financial Statements–(Continued)
   Statements of Cash
flows
 
 For
      the years ended June 30,2008
                  
                  
                  2007(in
      thousands)Cash
      flows from operating activitiesNet
      income
                  
                  $
                  3,068
                  
                  
                  $
                  1,924Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Net
      amortization on available-for-sale securities
                  
                  
                  2
                  
                  
                  
                  17Net
      realized security losses
                  
                  
                  -
                  
                  
                  
                  69Equity
      in undistributed net income of subsidiary
                  
                  
                  (1,020
                  )
                  
                  
                  (1,879
                  )Deferred
      income tax provision
                  
                  
                  131
                  
                  
                  
                  45ESOP
      shares released
                  
                  
                  122
                  
                  
                  
                  136Net
      change in:Other
      assets
                  
                  
                  (153
                  )
                  
                  
                  (27
                  )Payable
      to Putnam Bank
                  
                  
                  191
                  
                  
                  
                  -Other
      liabilities
                  
                  
                  413
                  
                  
                  
                  378Net
      cash provided by operating activities
                  
                  
                  2,754
                  
                  
                  
                  663Cash
      flows from investing activitiesProceeds
      from sales ofavailable-for-sale
      securities
                  
                  
                  -
                  
                  
                  
                  3,927Proceeds
      from maturities ofavailable-for-sale
      securities
                  
                  
                  391
                  
                  
                  
                  1,745Principal
      payments received on loan to ESOP
                  
                  
                  68
                  
                  
                  
                  64Investment
      in subsidiary
                  
                  
                  -
                  
                  
                  
                  (4,000
                  )Net
      cash used by investing activities
                  
                  
                  459
                  
                  
                  
                  1,736Cash
      flows from financing activitiesNet
      change in short term borrowings
                  
                  
                  -
                  
                  
                  
                  (1,717
                  )Acquisition
      of treasury stock
                  
                  
                  (2,417
                  )
                  
                  
                  (408
                  )Dividends
      paid/declared
                  
                  
                  (750
                  )
                  
                  
                  (707
                  )Net
      cash provided by financing activities
                  
                  
                  (3,167
                  )
                  
                  
                  (2,832
                  )Increase
      (decrease) in cash and cash equivalents
                  
                  
                  46
                  
                  
                  
                  (433
                  )Cash
      and cash equivalents at beginning of year
                  
                  
                  539
                  
                  
                  
                  972Cash
      and cash equivalents at end of year
                  
                  $
                  585
                  
                  
                  $
                  539Supplemental
      disclosuresCash
      paid during the year for:Income
      taxes
                  
                  $
                  103
                  
                  
                  $
                  90Noncash
      activitiesDeclared
      dividends
                  
                  $
                  279
                  
                  
                  $
                  182
 74
  ITEM 8.
              Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
  None.
  ITEM 8A.
              Controls
      and Procedures
  Not
      applicable.
  ITEM
      8A(T).
                Controls
      and Procedures
 (a)  Under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange
Act of 1934) as of the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934, is recorded, processed, summarized and reported, within
the time periods specified in the SEC’s rules and forms. There has been no
change in the Company’s internal control over financial reporting during the
Company’s fourth quarter of fiscal year 2008 that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
  (b)  Management’s
annual report on internal control over financial reporting.
  Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting.
 
 The
Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted
in the United States of America, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and
directors of the Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company’s assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 Management,
including the principal executive officer and principal financial officer,
assessed the effectiveness of the Company’s internal control over financial
reporting as of June 30, 2008, based on the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal
Control-Integrated Framework.”  Based on such assessment, management
believes that, as of June 30, 2008, the Company’s internal control over
financial reporting is effective, based on those criteria.
 
 This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only the
management’s report in this annual report.
  ITEM 8B.
              Other
      Information
  None.
  75
  PART III
  ITEM 9.
              Directors,
      Executive Officers, Promoters, and Control Persons and Corporate
      Governance; Compliance with Section 16(a) of the
      Exchange
  PSB
Holdings, Inc. has adopted a Code of Ethics that applies to PSB Holdings, Inc.’s
principal executive officer, principal financial officer, principal accounting
officer or controller or persons performing similar functions. The Code of
Ethics can be accessed on PSB Holdings, Inc.’s website at www.putnambank.com.
The Code of Ethics is also filed as Exhibit 14 to this
Form 10-KSB.
  Information
concerning directors and executive officers of PSB Holdings is incorporated
herein by reference from our definitive Proxy Statement dated October 2, 2008
related to the 2008 Annual Meeting of Stockholders (the “Proxy Statement”),
specifically the section captioned “Proposal I—Election of
Directors.”
  ITEM 10.
              Executive
      Compensation
  Information
concerning executive compensation is incorporated herein by reference from the
Proxy Statement, specifically the section captioned “Proposal I—Election of
Directors.”
  ITEM 11.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
  Information
concerning security ownership of certain owners and management is incorporated
herein by reference from the Proxy Statement, specifically the sections
captioned “Voting Securities and Principal Holders Thereof” and “Proposal
I—Election of Directors.”
  ITEM 12.
              Certain
      Relationships and Related Transactions, and Director
      Independence
  Information
concerning relationships and transactions is incorporated herein by reference
from the Proxy Statement, specifically the section captioned “Transactions with
Certain Related Persons.”
  ITEM 13.
              Exhibits
  (a) Financial
Statements
  (A)
Management Responsibility Statement
  (B)
Report of Independent Registered Public Accounting Firm
  (C)
Consolidated Statements of Financial Condition
  (D)
Consolidated Statements of Operations
  (E)
Consolidated Statements of Changes In Stockholders’ Equity
  (F)
Consolidated Statements of Cash Flows
  (G) Notes
to Consolidated Financial Statements
  (b) Financial Statement
Schedules
  (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   People’s Savings Bank and Putnam Bank
      dated June 13, 2005**10.4
              PSB Holdings, Inc.
      2005 Stock-Based Incentive Plan***
 
  76
  14.
                Code of
    Ethics21.
                Subsidiaries of
      Registrant*23.
                Consent
      of independent registered public accounting firm31.1
                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 200231.2
                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 200232.
                Certification of
      Chief Financial 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
  *
              Incorporated
      by reference to the Registration Statement on Form SB-2 of PSB
      Holdings, Inc. (file no. 333-116364), originally filed with the
      Securities and Exchange Commission on June 10, 2004, as
      amended.
 **
              Incorporated
      by reference to Exhibit 10.1 of the current report on form 8-K of PSB
      Holdings, Inc. originally filed with the Securities and Exchange
      Commission on June 16, 2005.
 ***
              Incorporated
      by reference to Appendix B of the Company’s Definitive Proxy Statement
      dated September 20, 2005 as filed with the Securities and Exchange
      Commission on September 19,
2005.
 ****
              Incorporated
      by reference to Exhibit 14 of the Company’s Annual Report on Form 10KSB
      for year ended June 30, 2007, filed with the Securities and Exchange
      Commission on September 21,
2007.
  ITEM 14.
              Principal
      Accountant Fees and Services
  Information
concerning principal accountant fees and services is incorporated herein by
reference from our Proxy Statement, specifically the section captioned “Proposal
2-Ratification of Appointment of Independent Registered Public Accounting
Firm.”
  77
  SIGNATURES
  In
accordance with Section 13 of the Exchange Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
  PSB
      HOLDINGS, INC.Date:
      September 19, 2008
              
              By:
              /s/    THOMAS A. BORNERThomas
      A. BornerChief
      Executive Officer and Director
                (Duly
      Authorized Representative)
  In
accordance with the Exchange Act, this report has been signed by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
  Signatures
                
                Title
                
                Date/s/    THOMAS A. BORNER
                
                Chief
      Executive Officer and Chairman of the Board
                
                September
      19, 2008Thomas
      A. Borner
                
                (Principal
      Executive
      Officer)/s/    ROBERT J. HALLORAN, JR.
                
                President
      and Treasurer (Principal Financial and
                
                September
      19, 2008Robert
      J. Halloran, Jr.
                
                Accounting 
      Officer)/s/    CHARLES W. BENTLEY, JR.
                
                Director
                
                September
      19, 2008Charles
      W. Bentley, Jr./s/    JITENDRA
      K. SINHA
                
                Director
                
                September
      19, 2008Jitendra
      K. Sinha/s/    PAUL M. KELLY
                
                Director
                
                September
      19, 2008Paul
      M. Kelly/s/    RICHARD A. LOOMIS
                
                Director
                
                September
      19, 2008Richard
      A. Loomis/s/
      JOHN P. MILLER
                
                Director
                
                September
      19, 2008John
      P. Miller/s/    MARY E. PATENAUDE
                
                Director
                
                September
      19, 2008Mary
      E. Patenaude/s/    CHARLES H. PUFFER
                
                Director
                
                September
      19, 2008Charles
      H. Puffer